It’s all about the money: Turning non-financial indicators into financial impact

‘Accountants will save the world’ was what Peter Bakker, president of the World Business Counsel for Sustainability (WBCSD) in 2013[1] stated about how companies should measure and compare their sustainability performance. Although he didn’t say how, he was right. This is reflected in an upcoming trend; the emergence of different methods to measure and compare non-financials such as the environmental and social impact of organisations. These methods are often based on quantifying the outcomes of an organisation in financial terms, better explained or popular named as the monetisation of impacts. Considering the early development phase in which these methods are currently positioned, a variation in design is apparent, and no ‘dominant design’ has evolved yet. Therefore, to get a clear view on these developments, this blog outlines the current state of monetisation methods and will explore why monetisation of impacts is important to organisations.

Why monetise impact?

Valuing impact can create several opportunities to organisations, as they gain insight into the organisation’s impact on society and the environment:

• Better overview of risks, which can be foreseen in an earlier stage.  This can prematurely mitigate potential problems and greatly improve decision making.
• Comply with the growing demand from stakeholders that increasingly ask for a larger focus on non-financials.
• It can reduce costs because of a better understanding of the internal processes (e.g. allocating resources and the impacts of safety and energy reduction), and could foster new innovations.
• From an external perspective, there is an opportunity for improved communication as society requests more transparency. 
• Consumers and future employees are increasingly appealed to buy and work for ‘responsible’ and/or ‘sustainable’ organisations.

Integrating Impact

Our world is full of societal and environmental challenges, and it seems obvious that we are in need of a system that is able to provide us with insight into the actual impact of our choices. This is also echoed by the International Integrated Reporting Council[2], which states that the value that an organisation creates is based on four stages. Namely, the input-, business model-, output- and outcome stage (more information on this value creation model is provided in our last blog on Integrated Thinking[3]). These four stages eventually result in the impact an organisation has on the environment and society. But how can organisations translate different impacts into a monetary value? A lot of organisations are experimenting with methods to monetise their impacts. Although there is no leading method yet, monetisation seems to have great potential for organisations to improve their performance. Therefore, some assistance is needed. At this moment, only several experts are able to provide this service. Albeit the market for providing this service is still relatively small, it is growing and shows a promising future. Should your organisation be on the sideline waiting for this market to move forward or engage in an active manner by experimenting with this method?

Best practices

Several organisations are experimenting with new methods of monetising impacts. Currently, they differ largely on their scale of application, namely by product, project, region or organisational scale. PUMA was one of the first organisations that monetised the environmental impact of its product. They used a method that calculated the true costs producing a pair of shoes by incorporating environmental costs into its production costs. Based on this information PUMA has made drastic changes and now aims to find alternative substitute leather types. The PUMA case dates back to 2011, however other have followed since then, such as Natuurmonumenten. This is the largest nature conservation society in the Netherland. The organisation monetised its impact of societal services such as CO₂ storage, particulates storage and natural water purification. With this method they found out that nature conservation does not halt economic development but instead is an important carrier for economic recovery, which strengthened the organisation’s license to operate. On a more regional scale, Heineken aimed to quantify the effects of its activities by performing socio-economic impact studies in several East African countries. This greatly helped the organisation’s management to make better business decisions based on actual facts on the impact it has on society. This study also gave insight in how Heineken could help to increase the yields of small-scale farmers, which indirectly improved their sales and income. These organisations have benefited from monetising impacts, but we believe many more organisations can benefit from this approach.

Monetization will repay your efforts

The main goal of impact monetisation for organisations is to better allocate resources in order avoid or decrease negative impacts and/or to increase the positive impacts. This is endeavoured by taking into account the different values of these impacts in different contexts, and thereby gaining a more comprehensive view of the total impacts of an organisation on society. It should however, be noted that monetising and valuing an organisations impact is not an ‘one size fits all’ approach, is organisational specific and requires a high level of insight in an organisation’s impact. Nevertheless, despite the initial effort that the monetisation of impacts requires for organisations, these are in our opinion most definitely outweighed by the benefits.

Nick de Ruiter is a partner at Sustainalize and has produced several Integrated Reports. He is also a specialist in CSR strategy setting and performance monitoring.

Mart van Kuijk is intern at Sustainalize. He is writing his master thesis on impact measurement and impact monetization.

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[1] https://hbr.org/2013/03/accountants-will-save-the-worl/

[2] IIRC, 2014 (http://integratedreporting.org/wp-content/uploads/2015/03/13-12-08-THE-INTERNATIONAL-IR-FRAMEWORK-2-1.pdf)

[3] Integrated thinking: how to smartly visualise your unique selling points (http://cr-reporting.blogspot.nl/2015/10/how-to-smartly-visualise-your.html, 2015, 2015

Integrated thinking: how to smartly visualise your unique selling points

Recent developments in integrated thinking aim to strengthen the emphasis on the unique qualities of an organisation. Business strategies containing merely a standard set of social, environmental and economic aspects fail to add real value. The International Integrated Reporting Council (IIRC) and the Global Reporting Initiative (GRI) nudge organisations to include aspects which are material and have an actual impact on the organisation. Besides including material aspects in the strategy and report, it is important to establish the actual added value of your organisation.

Integration is key

When it comes to sustainability the focus is often put on the (integrated) report. Although the report is an excellent tool to communicate to your stakeholders, it is merely a tool and not the goal. As the IIRC explains, the purpose of integrated reporting is “to explain to financial capital providers how an organisation creates value over time”[1]. In order to actually reap the benefits of integrated reporting and creating actual value, an integrated strategy is required. Organisations should be able to clearly answer the following questions: how does your organisation distinguishes itself, how does it add value to your stakeholders, and how will your business model sustain in the future. Answering these questions and defining the value creation process can help your stakeholders to understand your value proposition, legitimises your business and smoothens the process of strategy setting.

The struggle continues

Many organisations however struggle with the value creation process. A common practice is to solely add a visual of the value chain in the report. Unfortunately, this approach fails to fully capitalise the value creation process into an integrated, profitable long-term strategy. Not to mention that it ignores to provide stakeholders with the ‘bigger picture’. In the end, the current practice might have the opposite effect of what was intended to be a helpful tool to strengthen businesses.

As the struggle continues this raises the question, how to integrate the process of value creation optimally? Below we describe a couple of important actions which are helpful in creating and integrating the process of value creation in the decision making process of an organisation:

·         If you reflect on the inputs,…

Which inputs are essential to your organisation, what do you need to keep your organisation running? Financial instruments are the first aspects that come to mind, but usually these are only a small fraction of the total inputs. A financial institution such as ING, depends most on human and financial assets. A chemical manufacturer such as AkzoNobel, on the other hand, dependents utmost on natural resources and innovation. Most organisations employ several assets simultaneously (both tangible and intangible). By further specifying and, if possible, quantifying these inputs (e.g. the number of employees, the financial investments or the amount of materials bought), the organisation will be able to internalise the first step of the process of value creation.

·         …describe the business activities and the unique properties of your organisation,…

Once established which inputs are needed to keep your business going, it is time to reflect on the business model. The aim is to describe the business model by identifying what distinguishes your organisation from its competitors. In order to do so, one should be able to reflect on the unique properties of the organisation. In other words: what makes your organisation unique? ROCKWOOL for example uses product differentiation by providing a high quality product with better results than competing products, namely non-flammable stone wool as isolation material. Another example is Interface, it differentiates itself by its Mission Zero, which sets out that Interface is to be the first company that is fully sustainable. Interface aims to achieve its mission through innovative thinking such as producing sustainable yarn, using methods to recycle yarn and reinventing its service by also leasing carpets.

·         …the outputs and outcomes follow naturally.

Essentially, what goes in, must come out. Thus explaining the outputs i.e. key products and services provided by your organisation. The assets as described in the first (input) stage are retrieved and translated into outputs. Subsequently, these outputs should be converted into outcomes. Outcomes describe the actual (positive and negative) impact the organisation has on its surroundings. This also includes internal and external consequences, and preferably outcomes which are quantified or even monetised. Both TenCate (page 20-21) and Avalex (page 12) provide valuable examples of a translation into (qualitative) outcomes in their latest annual reporting.

·      Integrating these insights increases the potential of an organisation

As described above the process of value creation and the corresponding value chain should be internalised and custom made to your organisation. The aim is to specify what distinguishes your organisation from its competitors, and how your business adds value to both its stakeholders and yourself. By focusing on the unique strengths and areas in which your organisation has the most important impact, it can improve its decision making process. Namely, the organisation is better informed on the relevant financial and non-financial indicators. Moreover, being fully aware of the value your organisation creates, will help to create a competitive advantage, may improve the resilience of your organisation as it improves the awareness of its strength and weaknesses, potentially increases sales, and boosts your reputation because now you have a coherent and clear story to tell.

Nick de Ruiter is a partner at Sustainalize and has produced several integrated reports. He is also a specialist in CSR strategy setting and performance monitoring.

Alissa Daurer is consultant at Sustainalize and is a specialist in value creation, the assessment of materiality and GRI G4.

Sustainalize (www.sustainalize.nl) is a global CSR consulting firm that specializes in CSR, CSR reporting, CSR strategy, performance monitoring and external AA1000 assurance. Sustainalize’s client base consists of larger corporations across all sectors.

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[1] Source: The IIRC. (2015). “Get to grips with the six capitals”. Retrieved from: http://integratedreporting.org/what-the-tool-for-better-reporting/get-to-grips-with-the-six-capitals/

Better government decisions through the integration of non-financial information

Although much has been said about the public sector lagging behind in terms of integrated reporting, research shows that integrated information and stakeholder engagement enable public sector pioneers to make better decisions, attune strategy to society’s needs and consequently create more public value or a better balanced budgeting system.

Integrated reporting was one of the topics of the conference on THE ROLE OF PROVINCIAL/REGIONAL AND LOCAL GOVERNMENT IN MAKING GOVERNANCE MORE EFFECTIVE, ACCOUNTABLE AND INNOVATIVE, held by the School of Public Leadership, Stellenbosch University, South Africa, August 19-21, 2015. 

Public need for understanding the creation of public value 

In many governmental organizations, much effort has been made to improve the quality of public administration. Attempts from different perspectives, but with the same underlying goal. In order to improve governance, much effort is aimed at developing organizational structures and leadership role models to support improvements in policymaking and decision-making. The increasing importance of governance has been a trend for several years. Linking outcomes to organizational activities as a basis for effective governance is a complex matter. It is often referred to as “an ongoing challenge" to be able to demonstrate a logical and explanatory relationship between public sector activities and societal outcomes. Simply linking outcomes and activities is not sufficient for a comprehensive understanding of the creation of public value. 

Integrated information improves the creation of public value 

With case studies and practice reviews, Hans Bossert (School of Public Leadership, University of Stellenbosch) and Lianne Dijkstra (Sustainalize) substantiated that integration of non-financial information improves government decisions. Their study confirmed the hypothesis that integrated information leads to better government decision-making, i.e. decision-making that is more focused on the process of public value creation and stakeholder engagement.  Use of information on the effectiveness of the organization’s strategy and policies as well as its efficiency and legitimacy leads to more efficient and productive allocation of capital for public value creation. 

Improved management decisions through stakeholder engagement 

Bossert and Dijkstra’s case studies regarding the 2014 annual reports of Avalex and the NOM also showed that stakeholder involvement in the reporting process plays a crucial role. For one, involvement will result in better management decisions, due to a better understanding of what stakeholders expect of government organizations’ creation of public value. In addition, providing stakeholders with integrated information facilitates better understanding and articulation of governments’ strategies, which in turn will improve stakeholder engagement.

Integrated reporting enables government organizations to better attune strategy to society’s needs 

Comparative case reviews of subnational government pioneers in integrated reporting show a clear correlation between the business model, the outcomes and the impact on society. In their annual reports, the cities of Melbourne, Warsaw and Johannesburg claim that by managing and disclosing both their financial & non-financial performance data, their strategies will be better attuned to society’s needs. Furthermore, the case reviews show that (subnational) government organizations apply leading protocols and standards on governance and integrated reporting (King III, GRI-G4, IR) in order to link outcomes to their business strategies and provide internal and external stakeholders with insight into how they intend to address sustainability issues.

Conclusion: the results of the study call for (subnational) government organizations to follow in the footsteps of public sector pioneers and private sector organizations in terms of integrating non-financial information and being transparent and accountable regarding their public impact.

Lianne Dijkstra is consultant at Sustainalize (www.sustainalize.nl). A globally active consulting firm that specializes in Integrated Reporting, CSR, CSR Reporting, CSR Strategy and performance monitoring in the private and public sector. 

Bavaria: well on their way

Company:

Bavaria is the biggest independent brewery in the Netherlands, and the only brewery with its own source of natural mineral water. Bavaria is a 100 percent family-owned business, and currently run by the 7^th generation of the Swinkels family. Its roots date back to 1680. Bavaria produces 6 million hectoliter of beer a year, of which 65 percent is exported to more than 120 countries. Besides beer, Bavaria also produces malt, soda, cereal extract and water. Its net sales exceed €500 million and Bavaria employs about 1,000 employees. Bavaria’s headquarters is situated in Lieshout, the Netherlands, and it has 4 subsidiary companies in Spain, France, Italy and the UK.

Content:

At first sight, Bavaria’s 2013 CSR report looks good, especially as it is well organized and easy to read. It is clear that Bavaria is aware of its impacts on the (business) environment, and takes a proactive approach. A good example is the project “Boer Bier Water”, for which Bavaria works closely together with local parties, such as farmers, to address local issues like draughts. Although I applaud Bavaria’s good intentions to demonstrate the importance of stakeholders, it is a bit unusual to elaborate on the stakeholder engagement even before introducing the company and the report itself. I do not know whether this was done intentionally, but it seems a bit superfluous, as Bavaria shows its stakeholder dedication throughout the entire report.

Although I believe that the report is already quite far developed, I feel there are some opportunities to help bring the report to an even higher level. One point for improvement ceould be the completeness of reported data. Bavaria chose to solely report data of Dutch operations, since it only brews its beer in the Netherlands. However, as a globally active company, one could imagine that this scope can be expanded. Take for example the new developments in Ethiopia, where Bavaria bought a 54% share in a new brewery called Habesha. What is interesting about this arrangement, is that the other 46% belong to almost eight thousand local investors. It would be nice if Bavaria were to report on these kinds of topics in their next report.

Bavaria explains that it is currently working on a new “Master plan” for its sustainability strategy. This plan includes further development of its ambitions and goals, and, among other things, incorporating a materiality analysis. Firstly, such an analysis can bring the strategy (and report) to a higher level by strengthening its focus on key issues. Furthermore, even though I believe that Bavaria is already addressing most of the important issues, a materiality analysis can produce surprising new topics. Moreover, the materiality analysis can stimulate Bavaria to make choices with regard to its objectives, especially as out of the 8 current themes, Bavaria developed 29 objectives. Managing that many objectives automatically results in a loss of focus. In addition to a materiality analysis, I would encourage Bavaria to include more information on its value chain, and in particular to add a visual of this value chain. Describing the value chain would depict what Bavaria’s business model is and how added value is generated for stakeholders. Also, reporting on the value chain would also result in closer alignment to the principles of GRI G4 and the International Integrated Reporting Council (IIRC).

Communication:

Finding the Dutch report online proved to be easy, unfortunately this is not the case if someone is looking for the English report. The fact that the report seems to be only available in Dutch appears odd, considering that Bavaria is active in over 120 countries.

While the report is easy to read, my impression is that it consists mostly of ´dry´ text. I would recommend Bavaria to add more visuals throughout the whole document. Visuals increase the attractiveness of the report. They invite the reader to read the actual text, while at the same time clearly show what is most important. Moreover, although Bavaria presents several overviews with figures in the appendices, not all of these figures are of great relevance. The materiality analysis can also help with this aspect, by selecting the most relevant issues and reporting on Key Performance Indicators (KPIs).

Credibility:

Bavaria has engaged Lloyd´s Register Quality Assurance (LRQA) for the assurance of its sustainability data. I particularly enjoy the fact that the assurance statement is written as an advisory report, because this is easier to understand for the general public. However, some confusion arises by the verification approach, which is compiled of principles and best practices of: AA1000AS, ISAE3000 and the Dutch NIVRA 3410n. As a combination of three standards is used, it is rather difficult to retrace the actual verification approach. The CSR report also raises several other questions regarding the transparency and completeness. For example, the fact that CO₂ and NO_x emissions data were excluded from LRQA’s verification and verified by another consultant.

Recommendations:

• As a globally active company, consider expanding the scope of the report by including the other countries of operation as well;
• It is our recommendation to bring further focus in the report by performing a materiality analysis;
• We would suggest to include information on and  a visual of Bavaria’s value chain;
• Bavaria could ask LRQA to improve the transparency of the verification approach.

Nick de Ruiter is a partner at Sustainalize (www.sustainalize.nl), a global CSR consulting firm that specializes in CSR, CSR reporting, CSR strategy, performance monitoring and external AA1000 assurance.

‚Unsubscribe dialog – subscribe collaboration’

To survive, stakeholder dialog needs to transform to stakeholder collaboration and make use of new forms of IT

Stakeholder Inclusiveness is one of the four core principles in the GRI G4 Guidelines that help to define report content that is material to the reporting organization and its stakeholders. Since GRI introduced the logic flow of how and when to use these four principles in the reporting process (first done in a Technical Protocol in 2011 and then only slightly amended for G4) it became clear that stakeholder inclusiveness means an ongoing and unstoppable process – in parallel and supporting the use of the other three report content principles. Clearly, stakeholder dialog would not be useful for only creating an organization’s sustainability report.

 

And here lies the problem: exactly THAT is done in many reporting organizations. This is due to various reasons, some of them are:

·         There are other existing feedback instruments like customer or employee satisfaction surveys. Sustainability seldomly gets included there; these survey services are often offered by external third parties and the sample of topics can’t be changed. Getting varying sustainability issue feedback through those surveys is difficult and the internal owners of these instruments are hard to convince that they should be changing or adding to what is ‚theirs’ and already ‚cast in stone’.

·         New product or service testing is mainly done when prototypes are out for market trials. Before that R&D is still mainly working behind closed doors, sustainability aspects are – if existing - mainly built in through regulation, internal design standards or specifications; potential customer reactions are only due when testing starts. Crowdsourcing is still in its infancy for many of those organizations that have built R&D fortresses and it’s hard to conquer the walls of overestimation of one’s capabilities, the billions of dollars invested in know-how, brains and internal think tanks weren’t in vein, weren’t they?

·         Investor relations still doesn’t take sustainability into their analyst briefings and bulletins, and why should they? Nobody’s asking! These colleagues have to entertain a very specific stakeholder group, engrained in their own mental stereotypes of how markets function and reward. Dozens of sustainability indicators? Well, spare me the white noise, give me one or two!

·         Top management wants information rather quick: if somebody is asking difficult questions in an interview (the questions are mostly precooked) or if top management needs input for a speech, turnover time to serve with answers is often less than 48 hours, so better have handy all necessary data and sound bites in or through the sustainability team.

·         Finally we hear so often that sustainability team members need to be careful, need to create step-by-step approaches, need to draw a fine line, have to be politically correct, need to know ‚the game’ or ‚how it works’ inside the company. Risk-averse approaches are the consequence. Being one of the most important internal strategy or board advisors – a role we would wish for the sustainability department to have – is much different. Go ask some companies how often the head of sustainability meets the board or the head of strategy! Prepare yourself for some disturbing answers.

 

These descriptions may sound a bit overexagerating for some, but feedback from dozens of organizations we spoke to internationally in the last year or so paint a rather difficult picture of how especially internal stakeholders react to demands by sustainability departments to include sustainability into their daily working instruments, surveys and dashboard. Of course, there are organizations in which ‚integrated thinking’ as proclaimed by the IIRC for integrated reporting works better in the meanwhile, but for the majority of companies we still doubt it.

 

One consequence of these rather unsatisfying conditions is that a stakeholder dialog process is often done just through the sustainability department and – even more disturbing – just for the report that comes out. That again is input for some of the known rankings and ratings. Many sustainability department staff know the routine as they are both inviting and invitees (in other company’s dialog processes): once per year data is collected through existing niche software (or through some ERP system modules) or certain identified colleagues (issue owners) get an excel sheet into which they have to add data they are responsible for. Thank you, and until next year! Parralel to that a questionnaire is sent out to identified external stakeholders (often also from other companies), and of course the other usual supects, including some internal stakeholders. After a max. 30 % feedback rate some statistics are pulled together. Usually, these are presented in one or several roundtables, sometimes in various countries (in the case of multinationals). Together with additional weighing factors a materiality matrix is then drawn up. Programs are set in motion to decrease the most negative impacts, and there goes your report and the shoulder clapping.

 

We expect that this sort of stakeholder dialog process will be dead in about 2-3 years. There are many indications for that:

·         Can this process convince to support and carry out reliable stakeholder input to really find out what the material issues are? In our view, it can show tendencies or possibly trends, but would you truly tell your top management that this is a proper assessment of the reality out there? As the availability of software and data is less and less of a threshold, one can demand a different quality and amount of data involved.

·         Hardly any sustainability department has organized stakeholder inclusiveness in a way that it is an ongoing process. There is anecdotal evidence at certain moments during the year and some have tried out standing stakeholder expert committees or panels to bridge that gap, but will that be seen as enough? Members of these committees are changing over time, so how stable is that interim solution?

·         Most corporate representatives are frustrated: having received many invitations to such rounds of questionnaires and roundtables from other companies, there is little excitement to go there more than once. Seen it, done it, had it, too little benefit to be involved. It also dawns on them that their own process will most likely face the same problem.

·         NGO representatives already face an ‚overflow error’ syndrom. Think about potentially up to 6.000 calls that Greenpeace will receive in 1-2 years based on the EU’s new Corporate Reporting Directive. No way! Same with most other NGOs, apart from the fact that they also already face the same frustration as mentioned above. Too little do they know what happened to their input and how far it lead to any transformation.

 

What will be the alternatives? Sure, there’s one big vision already on the horizon: the possibilities of Big Data for stakeholder involvement. In the coming years new data and information-based technologies will contribute to the development of new ways to collect, analyze and visualize bigger and so far unconnected sustainability data. Smart cities, infrastructure, sensors, the Internet-of-Things, portable and cognitive technologies, as well as new business models around Big Data will contribute to this development. Additionally, new interfaces between earth system science, satellite-based data and personalized technologies will emerge. IBM’s Watson and Smarter Planet are first examples of how enterprises prepare themselves for these changes. A bridge too far for the moment for most of us, we would say.

 

But there are also intermediate solutions to start already now. It all begins with a change of mindset. Like already mentioned we can be sure that stakeholders will more and more unsubscribe from the current approaches, simply because that sort of stakeholder ‘dialog’ is not fulfilling. In combination with a) the growing data availability and b) a further integration into corporate strategy development, stakeholder dialog needs to be replaced with ‘stakeholder collaboration’. That in our view is only possible if the different parts of the organization, those that are not yet connected (or willing to connect, see above), will tune in. Here’s how:

·         Employee and customer satisfaction insight need more than questionnaires with some extra questions on sustainability. We need offers to contribute instant feedback, ideas, openings to focused discussion forums. It is clear that stakeholders want quick feedback, want to know what happened to their input, and how it was used to support change. That data can very well be used to indicate material sustainability issues.

·         Crowdsourcing and crowdfunding are important, yet underestimated feedback instruments, not just to develop products & services, they are also indicators for the reputation of the organization on many fronts, the willingness to co-create and re-think by stakeholders, and the buy-in for potential new products and/or services developed and used by stakeholders. Best new recruits could stem from those sources.

·         Investors need new and aggregated data that can quickly show the ‚ThriveAbility’ of a company, both for investment decisions and for their own reputational buffer. The ThriveAbility Foundation (www.thriveability.zone, going live soon) has started the development of an aggregate ThriveAbility Index as well as a ThriveAbility Assessment (designed to check organzational capabilities to being thrival) and ThriveAbility Pathways (a tool to assess leadership capabilities for becoming thrival). Thrival in short means the ability to instigate a net positive value creation process, the future precondition to have a right to grow and to get fresh capital.

·         Top management can get infomation instantly if new software tools like e.g. VERSO Workbook (www.verso.info) are used, to our knowledge the first holistic plan-do-check-act support tool that covers data aggregation, workflow management, facilitated discussion on issue-specific communities, communication and publication of sustainability information as well as coverage and use of all mainstream social media tools for stakeholder involvement. Think about your top management having access and all relevant information just 2-3 clicks away?

·         Sustainability departments can strengthen their role and need to be embedded in corporate strategy. The development of new qualities of materiality matrixes will be a growing field, but needs to be done differently. Virtual dialogue and online engagement platforms will increasingly fill this need, given the cost and carbon-intensity of in-person engagement, the scheduling nightmare of multi-party conference calls and webinars, and the inefficiency and isolation of individualized outreach to stakeholders. Convetit (www.convetit.com), the online stakeholder engagement platform co-founded by Bill Baue and Tom O'Malley, helps solve these problems by hosting asynchronous online dialogues. Most recently, Convetit introduced an interactive Materiality Matrix tool that enables stakeholders to plot the importance of material issues on a matrix that the platform then aggregates and averages to paint a collective picture of stakeholder sentiment.

 

Other new tools using Big Data approaches will be arriving on the market soon and will have promising propositions: Take e.g. the startup eRevalue (www.erevalue.com) that analyzes external sources from the internet and provides business intelligence to companies. Through objective output analysis – screening sources that were published by third parties - companies can make an informed decision as to what issues to focus on. This depends per sector, per region, per operational structure, supplier locations etc.. Their software will help determine which sustainability issues are most relevant to a particular business. It uses a set of key topics ("semantic ontology") related to environmental issues, social issues and corporate governance. This set of key topics creates a common language for companies to use for strategic decision-making.

 

It is time to get real on the new realities stakeholder collaboration demands. The earlier the new possibilities are used, the quicker we will see results. The technology is there, it will be polished, fine-tuned and upgraded by the growing amount of users. Together with the Big Data developments that we will be seeing within just a couple of years, old-fashioned stakeholder dialog for sustainability reports as we knew it will be history. If you are interested to get to know all these and even more players, don’t miss the 2nd International Annual Reporting Conference in Berlin, October 6/7, www.reporting3.org.

 

Authors: Ralph Thurm is the Founder & Managing Director of A|HEAD|ahead, Nick de Ruiter is partner at Sustainalize. Transparancy disclaimer: Ralph is involved in VERSO and in that role has contact to a whole array of new tools for stakeholder collaboration. He is also curating the Reporting 3.0 Platform and is a Co-Founder and Technical Director of the ThriveAbility Foundation.

Comparability of sustainability information – slaughtered on the altar of materiality?

The GRI content principles – sustainability context, materiality, stakeholder inclusiveness and completeness – are forming a balanced set to give guidance on how to define what a ‚good’ sustainability report should cover. The focus of work pulling G4 together was on making that balance and the process of how to get to such reporting even more clear and crisp. While our last blogs were digging deeper into the need of putting real teeth into step 1 – defining sustainability context better – another principle from the report quality section, namely comparability, has started to be discussed. The reason for that is that most communication of GRI under the banner ‚what matters, where it matters’ zooms heavily into materiality, and questions start to arise on what that means for the other important reasoning for standardized reporting – producing information that can actually be compared.

 

This discussion has a strong connection with our earlier plea on getting more clarity around sustainability context and working on micro-macro-linked indicators. The discussion around a potential lack of comparability is making painfully clear that not having worked on these potential indicators in the G4 development process will most likely break open a whole plethora of uncomparable information. We have enough experience how certain information was presented in sustainability reports so far: take SOMO’s 2013 study on energy companies disclosure, Transparency International’s 2012 study on reporting on anti-corruption indicators, or Deloitte’s 2012 study on zero impact growth strategies that examplified dozens of ways in which companies described their CO2 target-setting. Either information was presented in many different absolute or relative ways, or different information than  asked for was published (should we call this pretending?), or no information was published at all, or no context was given on what was published (how would we call that then?). Our view here is: without micro-macro-linked indicators comparability will heavily suffer.

 

The loop to our sustainability context plea and the need for ‚different’ indicators as we have them right now becomes clear when we consider the text in the Guidelines around comparability, the core sentences here are: „Comparisons between organizations require sensitivity to factors such as differences in organizational size, geographic influences, and other considerations that may affect the relative performance of an organization. When necessary, report preparers should consider providing context that helps report users understand the factors that may contribute to differences in performance between organizations.“ Together with the wording of the sustainability context principle we really doubt that consistency in reporting can be delivered in a way that comparability will at all become realistic with the current indicator set. In total, we think that the dilemma between focusing on materiality on the one hand, and delivering comparable information on the other hand, can’t be solved without micro-macro-based indicators. The existing indicators will not cut it, we have seen this all before! Work on micro-macro-based indicators will be necessary, the denominators of these indicators will need to help defining comparability, not the voluntary, company-by-company target setting (whose long-term basis is normally not disclosed – most likely because it doesn’t exist at all?).

 

This status quo has several consequences and effects, and it is interesting to look at least at some of them:

 

1.      The work of rating & ranking organizations will continue to produce more confusion. As we continue to have information about how organizations became ‚less bad’, the more than 120+ different rankings & ratings will continue to produce ‚best-in-class’ champions, for none of them we know what that really means, since we don’t know what is feasibly ‚good enough’. We have seen first attempts of rating organizations to get out of this dead-end-street, e.g. Climate Counts or Inrate who themselves start to make the link to macro-based goals by simply setting them. As GISR also puts sustainability context clearly into the focus of ‚good’ ratings, the need to also consider macro-based information on global, regional and/or local level will also continue here. More comparability will most likely be the outcome.

2.      The lack of focus on micro-macro-based indicators will produce competition for GRI. A whole set of organizations already work on such indicators, first and foremost the Natural Step-based approach on the ‚Future-Fit-Benchmark’, an approach that includes Bob Willard and a set of sustainability reporting veterans. The Sustainability Context Group, around 120 members strong, has several members that actively work on other alternatives of context-based indicators, their plea to work on them together with GRI has been noted down there, but with no outcome so far. WBCSD has started to team up with the Stockholm Resilience Centre (and the various other players connected to them) to see how Vision 2050 can be supported by an Action 2020 and how ‚values-based reporting’ can be set up. Worthwhile to mention here is that this approach also includes tooling and accounting methods, so gets to a deeper level than to just think about reporting indicators, but also how to create the processes. WRI, CDP and WWF now work on ‚science-based target setting’ and has invited to several workshops. Also here, an increase in comparable information will be a foreseeable outcome.

3.      At this moment we also observe the development of the Sustainable Development Goals, to be presented in 2015. It will be interesting to see how they will develop further; as it stands right now they seem to be more sort of ‚corridors’ of change in 16 different issue areas, and it is not yet sure how interdependencies (nexus effects) will play out on this variety of areas. In our view it would be much more effective to take a step back and first develop a set of principles (based on the probably most important ‚North Star’ question: what will really make up a succesful green & inclusive economy?) and then define action areas with a special view on interconnectedness of effects to define clear and actionable roadmaps or adaptation plans on how to get there. Targets could be defined per region, taking into account the various cultural and mindset calibrations as well as timelines necessary to measure progress. These could be built into a comparability approach for defining indicators of change with actionable items where each company can define a positive impact (instead of concentrating on the reduction of negative impact). See it a bit like the approach Unilever took when they connected their mid-term target setting with main sustainability issue areas. It is no wonder to us that Unilever’s approach scores extremely well in certain ratings, e.g. the latest GlobeScan and Sustainability Leaders Survey, published just a couple of days ago.

4.      As a side effect the lack of comparability also creates a revival of the discussion around what was supposed to be called ‚Beyond GDP’. First of all there is the question if GDP should be used as a denominator in order to increase comparability in micro-macro-based monetary and relative comparisons, but much more important there is also again increasing discussion about the usefulness to use GDP at all as a means to measure a valueable contribution of a single company. In our view this is a must-have discussion that will sparkle ideas on what ‚success’ really means for a society at large, it seemed to get stuck around the idea of happiness in the last couple of years, which in our view is a very individual mindset and difficult to standardize. Hence, there is a glimpse of hope, and it is good to see that GRI is also one of the partners is one of these projects, called ‚Measure what matters’, with amongst others the Green Economy Coalition, Accounting for Sustainability (which are the initiators of many good developments, e.g. IIRC as well), the Stockholm Environment Institute (SEI) and IIED.

5.      We are still amazed to see how little companies are interested in defining what a ‚green & inclusive economy’ or ‚resilient economy’ actually means for themselves. That is mainly due to the lack of real comparison opportunities to give this vision real meaning. And it will remain like that as long as we don’t define the expected minimal and/or positive contribution per company and stakeholder. We refer to our last blog on the ‚mindset gap’ for further depth here. Comparison and target setting will be the most interesting pathways for competition in the future, so again ask yourself what all that focus on materiality will help if comparison possibilities will suffer from that in this heavily interconnected world in which nexus effects will be part of the comparability agenda, to be analyzed when thinking about sustainability context.

 

Overall, we expect that the discussion about comparability will become as vital as the one on materiality today, simply because more materiality will not automatically lead to more comparability of information (we fear even less), and more comparability focus will not simply lead to more materiality. There needs to be a balance as both are of critical importance to understand, define and act on these urgently needed adaptation plans towards the economic blueprint of the future, the ‚green & inclusive economy’.

 

Authors: Ralph Thurm is the Founder & Managing Director of A|HEAD|ahead, Nick de Ruiter is partner at Sustainalize.