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.

The mindset gap in addressing sustainability context

The mindset gap in addressing sustainability context

 

Around two weeks ago we discussed the ‚sudden materiality shock’ here and received many comments and recognitions for the points discussed there. In addition, we spoke at various events and explained the need to make the connection between the importance of sustainability context for defining materiality and the need to develop a reporting mechanism that captures this specific performance that could eventually best be described as ‚micro-macro-linked’.

 

What became painfully clear through these last events is the considerable distance of people working in sustainability to be able to make that connection, several reasons to be discussed below. Obviously, we need to first address that ‚mindset gap’ that keeps us artificially busy and away from the ‚greater good’ – achieving a green & inclusive economy together – before getting down to the core of how to address sustainability context through purposeful and future-oriented disclosure in reporting, including feasible strategic discussions and – like it or not – a different sort or set of indicators as we have them right now. So why is there such a distance to seeing sustainability context in a corporation’s setting? Here are various observations:

 

1.      For too many in our community sustainability and strategy are still two different things or are still completely or partially disconnected. If sustainability managers tell that working in scenario teams or being closely involved in strategy development and subsequent R&D/innovation efforts is simply not what they are paid for, we are disappointed by the little mindset progress we made. Honestly, we hoped we went beyond the idea that the sustainability manager or head of sustainability simply just orchestrates compliance towards laws & regulation, standards or guidelines. What we still sense is a deep hesitation to overcome certain thresholds towards an integrated approach, using careful tactics to not ‚overstretch it’, deep fear to be seen as the ‚activist’, so better remaining the ‚lobbyist’ for what is good for the company and the individual position on short-term. As this has been a rather successful approach in the past, why change it? Most global problems are mentally and physically still far away, and most colleagues that do not work in sustainability wouldn’t want to understand them anyway (too complicated, scientifically not 110% proven, disturbing, etc.).  So, why bother about megatrends?

2.      We specifically observed how companies react to the macro-based information out there, ranging from the work TEEB did, the Global Footprint Network produced, The Global Nature Fund collected, and to the dozens of reports that are produced and macro scenarios that are presented by institutes, issue groups and initiatives. The basic response is close to denial, using the argument that the way this information is presented doesn’t help companies to translate this into concrete tooling, so in the end they couldn’t do more than just to take note, and that’s it. When we then asked why certain companies seem to be able to use this information and work with these data, denial level two kicks in: either these were special companies with a specific or fitting product/service portfolio, or they would have a size not too big, so that working with these data wouldn’t be too complex for them. Also, this sort of work shouldn’t be done by a single company anyway since level playing fields would be needed when introduced on broader scale, but these wouldn’t exist today. Puma’s e-p/l is great, but hardly any other company tried it out since Puma came out with it in 2011, the number of excuses to not dig into it is too long, and the argument ‚it will come one day, so better be prepared’ (playing the risk managemnt card) doesn’t work either. Too much workload, too short the horizon, too low the incentives, too high the fear to stick out the neck. And that leads directly to the next point:

3.      Fortunately, not all companies are like that, and that has to do with leadership. We see a constant pattern that only those companies that have an enlightened leader or leadership group get to a level of commitment that these – let’s call them ‚experiments’ – are wanted, a certain ‚trial-and-error’ attitude is giving some breath to sustainability managers involved. Also, those leaders actually encourage cross-functional project groups around long-term performance targets based on scenarios and the idea of an integrated strategy. It is interesting to see that these companies in most cases don’t have a sustainability strategy, they just have ‚a’ strategy. Dealing with context information in these companies is a no-brainer and the necessary tools are normally ‚created’ right there and not ‚delivered by others’. These companies see external advisors as a positive stretch and challenge to their own knowledge base and encourage infusions, external advisors can even become a separate stakeholder group. The triangular project setup that includes a company, an NGO and a consultant in a team setting seems to work, as well as the willingness to work with other companies in cross-industry learning environments, initiatives, labs, etc.

4.      Another constant part of that ‚mindset gap’ is that many sustainability strategies are based on effects of (not closer discussed) root causes. Doing work with leaders we first try to observe the whole set of often intermingled action areas, something that one can actually already start from the existing materiality matrix of issues that companies use in their reporting. Sustainability strategy areas are normally based on the GRI Guidelines aspects or industry-specific action areas, and many of them derive from root causes like environmental degradation, demografic effects, world trade shifts, urbanization, technological developments and transparency gains, but none of these root causes are addressed in the G4 Guidelines and therefore remain out of focus of the sustainability personnel, so going back that one step to the root cause level actually falls out of the scope of sustainability experts (supported by what was discussed under point 2).

5.      As a consequence, this reduced approach just based on the existing GRI Guidelines leads to ‚less bad’ target setting, and very often disconnected with the main impact through products and/or services. Have a look at the GRI Guidelines and ask yourself how often the Guidelines talk about products and/or services, apart from product stewardship in the social section!?! One can argue that this would actually be the job of sector disclosures, but then there would be the need to focus work on a complete set of them more throroughly, an approach not followed by GRI for several years now. A sustainability regime based on effects or symptoms instead of the real root causes mentally restricts to go ‚to the real core’ and making the connection to the real opportunities a company has in sustainability. Instead, there is a more risk-based tendency to reduce harm, and not to increase positive impacts. That is the real reason that an idea like ‚becoming a net-positive impact’ company is still lightyears away for the majority of companies, they find a million reasons and ‚yes, buts...’ instead of accepting that working on this ultimate business case for sustainability should be started today, and not one day later.

6.      In consequence the G4 content principle on sustainability context is the most neglected one, while the wording there clearly defines the need to address context from a root cause base, think about opportunities, ambitions and positioning of the company’s strategy vis-à-vis these root causes, and only then define the necessary boundaries to decide which impact reduction strategies actually make sense in the light of a positive impact focus.

7.      A further cause for relaxed thinking about sustainability context is the smooth way IIRC has taken on the idea of the six capitals that are part of the Framework Version 1. While we personally commend the IIRC to sticking to this generic model (called the ‚octupus’) from the moment it presented its first discussion paper, we were hoping for a way more rigid use of the idea of the capitals. In our view the capitals form a great link to and present a great structure of introducing proper context and value-creation ‚docking stations’ for the above presented approach of starting from root causes to strategy development. Instead, we face a situation where IIRC mentions the capitals as an area ‚for inspiration’ in order to ‚not forget potential impact areas’. That is too weak and doesn’t sound like ‚important’, so again not too much time is spent on assessing the capitals. The work of the 100-companies-strong IIRC pilot group has focused mainly on ‚integrated thinking’, wheras ‚holistic thinking’ would have been way more appropriate. If the capitals model isn’t taken serious we will remain on symptoms and effects level instead of addressing the real route causes.

8.      To finish off, the work of the Thriveability Consortium (of which Ralph is one of the founders) has been an eye-opener over the last two years with regard to the levels of human consciousness for the development of a ‚world view’ within an individual or corporate mindset. The idea of ‚spiral dynamics’ that emerged over the last 20-30 years clearly differentiates various levels of human consciousness development, and also differentiates between first and second tier awareness, decribing their ability or disability to create the world we need. Only second-tier individuals and organizations will be able to really develop the idea of a world view through the inherent different ways of interconnectedness and organizing codes and principles needed in a sustainable world. We are generally positive that we will be able to level up more companies to the second-tier level. Those organizations will see the ‚macro-micro link’ as a no-brainer. Those companies will be winning, but for a big group of tier-one ompanies life will become tough.

 

We are on a journey. It is not enough to approach the abyss with 40 miles per hour instead of 60 miles per hour; we need to find the brake and turn around the vehicle. Awareness of the need for that turnaround, timing still available and definition of a new direction will become essential. There is no useful sustainability reporting or integrated reporting without this information, defined for the individual business case per company. Sustainability context is therefore an absolute core. The more companies get out of the avantgarde and into the mainstream , the sooner we will get there. ‚It’s time to be steered by the stars, and not by the light of each passing ship’, said Omar Bradley decades ago. Today this is more true than ever.

 

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

The sudden ‚materality shock’

Spring 2014 seems to be the moment in time where ‚materiality’ suddenly appeared on the screen of corporate sustainability reporters. At least one could wonder why within a couple of weeks countless workshops popped up around the world, webcasts were announced and books were published just on this one single issue of the sustainability reporting agenda. One author even declared a calm ‚war on materiality’. But wait a minute, the issue of defining what is material in sustainability reports isn’t by far new, so what’s the reason for this sudden shake-up? Several reasons could be mentioned:

 

1.      Since the publication of GRI’s G4 Guidelines in May 2013 materiality went to the forefront of communication items around the new Guidelines. The reports based on G4 should show ‚what matters, where it matters’. For that reason GRI visualized the application of the four report content principles as one seamless workflow. But is this new?

The answer is no, because the same process was already pulled together in a resource document in 2010, but now got finally included in the main document, the G4 Guidelines, without considerable changes. Also, GRI’s certified training process presented a five-step process since its inception years ago that followed this logic, and thousands of practitioners around the world were trained for doing exactly that – defining what is material.

The reason for the extra attention lies elsewhere: the combination between impact definition, boundary setting, transparent stakeholder dialog and the level of disclosure that GRI is demanding in this thematic triangle adds rigour and demands a much more crisp process. Gone are the times when a mentioning of stakeholder dialog was enough, a materiality matrix could be presented without further process description on how this was pulled together, and the legal shortcut of 50%+1 share was enough to cut off responsibility in reporting due to the one boundary chosen by the legal counsellor. So, for some ‚what matters, where it matters’ now suddenly means ‚what hurts, where it hurts’, especially for those that define sustainability as an additional topic that needs to be addressed through a separate report, and where the strategy isn’t much connected with sustainability thinking.

2.      Another reason for the new level of attention can easily also be detected when looking through the outcomes of KPMG’s 2013 international report quality survey amongst the biggest 250 companies, many of them call themselves leaders in sustainability. Just a couple of numbers to clarify the problem: 13% of the reports do not identity megaforces that affect business at all, and from the other 87% at least some megaforces are identified, with climate change only affecting 55% of businesses, ecosystem degradation is a just a problem for 18% of the G250. One can only wonder how identifying ‚what matters, where it matters’ is at all possible if so little sustainability context analysis is done in the beginning of the materiality definition process.

When looking at information how often companies do assess materiality, 58% do not give any indication and 19% indicate a limited assessment of materiality. That means that just 23% of the G250 have a thorough process in place to assess matariality. This is shocking evidence.

Stakeholder inclusiveness is another painful area to look at. For only 45% the process link between stakeholders and the materiality process is clear, for the majority stake of 55% the process is not yet clear (34%) or not explained at all (21%).

Finally looking at target setting one might expect that material issues would also lead to clear targets, but the opposite is true. 13% of the G250 haven’t declared any targets, 28% of the reports carry some targets with no clarity on how they relate to material issues. 23% of the reports carry information that links to less than 50% of material issues, and finally 36% carry targets that relate to more than 50% of the material issues.

The shortcomings of these data explain very clearly why the pocess of cutting through from sustainability context information through stakeholder dialog to material issues now needs to get more rigour. Companies just did what needed to be done, just little of them did more than absolutely necessary. We leave it up the reader to contrast this information with the many CEO speeches that tell us how much sustainability is the genes and DNA of their organization.

3.      A new level of recognition of materiality is surely also due to the growing number of frameworks and guidelines around corporate reporting. Whereas GRI addresses materiality from the perspective of all stakeholders, the IIRC clearly defines materiality from the point of view of the providers of financial capital. SASB just replicated the definition of the U.S. Supreme Court, focusing on shareholders only. And that whole array of different definitions seems to be confusing, especially as many users see these documents as standards. It is therefore time to step back and again recognize that none of these documents are ‚standards’ or ‚cooking books’. They are recommendations as they present guidance and framing. Not more, not less. Furthermore they are still all voluntary instruments to trigger thinking about the inclusion of sustainability into an organization’s core – the business model and the strategy. If this is managed well we think the discussion on materiality will by definition become a no-brainer.

4.      Lastly, there is new fuel to the fire of mandatory sustainability reporting through the positive vote of the European Parliament to amend the European Transparancy Directive and make sustainability reporting compulsary for roundabout 6.000 listed companies in Europe, with a size of more than 500 employees. The Directive passed the European Parliament on April 15, 2014. The Directive needs to be translated into member-states laws and regulation, so that the application is only expected to start in 2017 for reporting year 2016, maybe even one year later. In short, material issues of importance need to be reported in annual reports or sustainability reports on corporate level. Discussion arises mostly on the point of the EU’s definition of CSR, saying it entails all voluntary action of companies above and beyond what is legally already demanded for. In our view this definition is counterproductive of the real meaning of materiality, and therefore misleading to help describe the core of the issue. Nevertheless, the fact that many companies are now demanded to report on their sustainability risks and opportunities, covering a range of issues that is nearly 100% overlaping with the UN Global Compact 10 core principles, has put new emphasis on the materiality discussion in companies.

 

In our view there is only one useful way of dealing with the issue of materiality, and that is to step one step back from the idea of standards that would tell us what clearly has to be done. We see materiality in the closest of all possible meanings: all areas in which the company affects or is affected by those areas of sustainability it can influence by its existance and through its doing, through products, services, as enablers and advocates of positive change. The measurement of ‚Net Positive Impact’ will therefore become the future litmus test of the right to exist for companies. It would be good for companies to already follow in the footsteps of those frontrunners that aim doing exactly this ambitious step.

 

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