Sustainability Reporting Evolves to Include More Water Risk, Supply Chain Disclosures

As the number of companies compiling sustainability reports grows, the content of those reports is evolving to include more focus on water impacts and supply chain information, according to corporate sustainability officials and consultants.

More companies are including information about environmental performance in their annual financial reports, partly due to pressure from institutional investors who want more disclosure of non-financial risks.

Sustainability reporting provides corporate disclosure on environmental, social, and governance performance and management, including strategies and goals.

95 Percent of Largest Companies Report

Ninety five percent of the world’s 250 largest companies report on their environmental and social performance, up from 80 percent in 2008, auditing firm KPMG said in report a released Nov. 7.

A total of 83 percent of the top 100 U.S. companies by revenue report on corporate responsibility, up from 74 percent in 2008, according to the KPMG International Survey of Corporate Responsibility Reporting, which looked at corporate responsibility reporting at 3,400 companies worldwide.

Corporate responsibility reporting “seems to have become virtually mandatory for most multinational companies,” the report said.

Reputation and brand consideration were the major drivers for reporting for two-thirds of the top 250 companies in Fortune magazine’s global rankings, while ethical considerations were cited by 58 percent, KPMG said.

Global Reporting Initiative is Gold Standard

The leading model for preparing sustainability reports is offered by the Amsterdam-based Global Reporting Initiative.

GRI guidelines cover a variety of environmental performance indicators, including water and energy consumption, greenhouse gas emissions, and waste generation and disposal. Other indicators apply to labor issues, including rates of worker injury, percentage of women on boards of directors, and incidents of discrimination.

“GRI is by far the standard,” said Jeff Erikson, senior vice president of SustainAbility, a corporate sustainability think tank and consultancy group based in London.

More than 1,800 companies worldwide prepared reports using the GRI framework in 2010, up 22 percent from 2009, according to GRI data.

For the United States, the 2010 total was 184 companies, up 31 percent from the previous year, according to Marjella Alma, manager of report services at GRI.

The United States was the global leader for the number of companies that followed GRI guidelines in their 2010 reports, representing 10 percent of the total.

GRI expects at least 2,200 companies worldwide to prepare GRI-based reports in 2011.

Still, there is plenty of room for growth since there are an estimated 45,000 publicly listed companies worldwide, said Sandy Nessing, managing director of sustainability at American Electric Power (AEP). The Columbus, Ohio-based utility, among the nation’s largest generators and transmitters of electricity, won one of the top awards for sustainability reporting from the investment advocacy group Ceres and the Association of Chartered Certified Accountants in May.

No U.S. Law for Sustainability Reports

The United States has no laws requiring sustainability reporting, although the Securities and Exchange Commission requires companies to disclose climate-related material risks.

Nessing said SEC’s February 2010 publication of interpretive guidance on applying climate-related risks to existing disclosure rules has prompted more companies to integrate non-financial information into their annual 10-K reports, which provide an overview of the company’s business and financial condition (17 DEN A-1, 1/28/10).

In addition to the SEC guidance, President Obama in October 2009 signed Executive Order 13514 on “Federal Leadership in Environmental, Energy, and Economic Performance.”

The executive order seeks to make sustainability an integrated strategy for federal agencies, and, with some exceptions, requires 95 percent of new federal contracts for products and services to be energy or water efficient, non-ozone depleting, or have non-toxic or less toxic alternatives, among other criteria (191 DEN A-7, 10/6/09).

Sustainability Rules in 30 Other Countries

Thirty other countries have regulations addressing sustainability reporting, according to a June 2010 report by KPMG, GRI, and two other organizations.

South Africa began requiring companies listed on the Johannesburg Stock Exchange to submit annual sustainability reports in 2003.

Denmark started requiring large companies to list policies related to the environment as well as human rights and other societal concerns in their annual financial reports in January 2009.

Meanwhile, France has plans to implement sustainability reporting requirements in 2012, according to Mike Wallace, U.S. network director for GRI.

Corporate sustainability officials say this global regulatory trend may eventually reach the United States, though it is not expected to happen soon. “I don’t know that we are going to get there very fast in this country,” Nessing said.

Investors Driving Reporting

Instead, investor groups such as the Principles for Responsible Investment, the Investor Network on Climate Risk, and the Carbon Disclosure Project are helping to drive increased reporting in the United States.

Investors look to sustainability reports to see how companies are prepared to manage risks, Nessing said. “In the wake of the BP disaster [in the Gulf of Mexico], there was a lot of push on companies to be transparent,” she said.

The KPMG report also found that companies were preparing reports due to investor interest.

“While corporate responsibility reporting was broadly considered an ‘optional’ activity only a few years ago, more organizations are generating CR reports to meet rising stakeholder demands for greater accountability, transparency and accuracy in assessing parts of the business that are not necessarily financial, but which contribute to the overall value of the company,” John Hickox, KPMG’s Americas leader for climate change and sustainability, said in a statement Nov. 7.

‘Water Is the New Climate Change.’

One growing area of focus for reporting is water, including its availability, use, release as wastewater, and the impact of company operations on surface water and groundwater.

The United Kingdom-based Carbon Disclosure Project, which represents 551 institutional investors and more than $70 trillion in investment capital, has shown increasing interest in corporate disclosures of water use and related risks.

The organization surveyed more than 400 companies in February 2011 on their water use, exposure to water stress in company operations and their supply chain, and water management plans. It plans to release the survey results by December.

“Water is the new climate change,” said SustainAbility’s Erikson. “Climate change was recognized 10 years ago as both a risk and an opportunity,” he said. “Water poses a risk to companies. Facilities could be shut down or go into limited production due to lack of water.”

Alma of GRI said the potential for rising energy costs also is among top issues for sustainability reports. “Many organizations find indicators related to energy and GHG emissions to be material,” she said.

Wallace agreed. “If energy gets more expensive, investors want to know how you are going to deal with it,” he said.

Supply Chain Concerns Grow

Investors also have shown increasing interest in transparency up and down the supply chain, Nessing said.

Erikson said, “Companies have recognized that supply chain risk is their risk,.” A company must consider not only supplier reliability, but also whether the supplier’s environmental footprint is good or bad for the company’s brand, he said.

For instance, Microsoft announced Oct. 13 that it would start requiring suppliers to report on their compliance with the company’s environmental protection, labor, human rights, and other standards in 2013.

The company said it will summarize supplier information in its annual sustainability report. Microsoft is pursuing the initiative in response to a shareholder proposal.

In 2009, Wal-Mart said its suppliers will have to answer a questionnaire about the environmental impact of goods sold in Wal-Mart stores, the first step in a larger attempt by the company to track the environmental impact of its products (141 DEN A-14, 7/27/09).

And in October this year, the World Resources Institute and World Business Council on Sustainable Development released standards to help companies measure, report, and manage carbon emissions along their supply chains and throughout their products’ life cycle through the Greenhouse Gas Protocol (212 DEN A-4, 11/2/11).

Move Toward Integrated Reporting

Investors also have driven more companies to prepare reports that combine financial details with non-financial information, including environmental performance.

“Institutional investors are interested in integrated reporting and there is a trend towards that,” said Michal Pelzig, manager of reporting at the Hess Corporation, a global energy company based in New York.

The 2011 KPMG report found that 27 percent of the 250 largest global companies and 20 percent of the top 100 companies in 34 countries included environmental and social information in their annual reports. Of those, 63 percent did so in a separate chapter, rather than integrating it throughout the report, according to KPMG.

KPMG’s 2008 study found that only 3 percent of companies worldwide were preparing integrated reports.

Nessing said AEP started preparing integrated reports after it noticed that the company’s investor relations team was taking copies of the sustainability report to meetings with investors.

Investors were interested in information related to climate policy and environmental performance that was not included in the financial or annual report, she said.

Framework for Integrated Reporting

The International Integrated Reporting Committee, a group of corporate, investment, accounting, and regulatory leaders, is currently developing a framework for integrated reporting.

The guidelines would unite standards for financial reporting, such as the International Financial Reporting Standards and the U.S. Generally Accepted Accounting Principles, with standards for sustainability reporting, like those developed by GRI.

The committee launched a pilot for the program in October, in which 40 companies will apply the draft IIRC standards for a year. Participating companies include the Coca-Cola Co., Microsoft Corp., AB Volvo, Deloitte LLP, and HSBC.

Cassandra Garber, senior manager of corporate external affairs at Coca-Cola, said the IIRC standards will help drive increased transparency among global businesses. For Coca-Cola, Garber said, preparing an integrated report “will allow us to demonstrate the idea of shared value, which is more than communicating profits and projects. It’s about linking the success of our business to the strength of the communities in which we operate,” she told BNA Nov. 7.

Companies listed on the Johannesburg Stock Exchange have been required to prepare integrated reports since June 2010.

Erikson said there are pros and cons to integrated reporting.

While integrated reports expose a larger number of investors to a company’s sustainability performance, they may not go into the same level of detail as a separate report. And integrated reports tend to focus more heavily on financial performance than on other aspects of operations, Erikson said, providing less of an opportunity to convey the full picture of sustainability efforts at a company.

Payoff for Companies: Internal Improvements

While sustainability reports are important to investors, their biggest value lies in increasing the efficiency of company operations, according to Erikson.

“Sixty to 70 percent of the value in sustainability reporting is internal improvements,” he said.

Nearly half, or 47 percent, of the Global 250 and one-third of the top 100 countries by revenue in 34 countries say their corporate reporting has led to financial gains, according to KPMG.

AEP started metering energy use at more than 400 of its office buildings when it started reporting and was able to reduce internal energy consumption by 17 percent, according to Nessing.

Corporate sustainability reports also can be used as a hiring tool.

“The majority of college grads consider corporate responsibility important when looking for jobs,” Erikson said.

Sustainability reports also help companies respond in a uniform way to outside questions about sustainability performance, Erikson said.

Article by Avery Fellow, appearing courtesy 3BL Media.

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