Reporting goes global

Even before the Global Reporting Initiative’s official launch in New York last month, more than a hundred companies had produced social and environmental reports following its draft guidelines. Ricardo Bayon talks to its fans, and critics

The timing of the official launch of the Global Reporting Initiative (GRI) couldn’t be better. While corporate accounting and reporting scandals are front-page news, an initiative designed to promote transparency and set standards for social and environmental reporting by companies is bound to be well received.

And so it has been. Ever since 1997, when the initiative was set up by the Boston-based Coalition for Environmentally Responsible Economies (CERES), it has been gaining steam: today it involves a broad-based coalition of non-profit organisations, labour unions, accounting firms, institutional investors, for-profit corporations and the UN. More than 100 national and multinational companies have prepared reports following the draft GRI guidelines on what environmental and social information companies should publish.

Nike: tough questions on overseas suppliers

Robert Massie, the executive director of CERES who helped found the GRI and now sits on its board, admits that the Enron scandal has given the GRI added impetus: “Before Enron, accountants, at least in the US, were sure their profession was fixed to perfection. Enron changed all that. Now I get the impression that the markets are open to re-thinking the valuation and description of a firm from the ground up.”

If the GRI has its way, these new valuations and descriptions will include substantial social and environmental components. Indeed, the latest draft guidelines issued by GRI include suggestions for reporting on a wide variety of indicators, ranging from how firms pay their employees, and how much energy they use (both directly and indirectly) all the way down to detailed information on policies towards bribery and corruption.

“There is no question that producing a GRI-compliant report is hard work,” says Deborah Zemke, director of corporate governance at Ford Motor Company in Dearborn, Michigan. Her company has already produced two GRI-compatible reports and is working on a third. “But we have found the process as a whole extremely useful,” she says. In particular, preparing a GRI report has helped Ford come to grips with how it collects, manages, and uses data on energy, waste, and effluents, she adds.

When Ford prepared its first GRI report, Zemke wasn’t expecting it to get much attention. But, because the report included some honest assessments of the company’s dilemma vis-à-vis Sport Utility Vehicles (namely, squaring its leading position in the growing market for these gas-guzzlers with its environmental ambitions), it not only garnered a tremendous amount of press interest, it even made the front page of the New York Times. This level of scrutiny of a corporate report, says Zemke, has helped further focus Ford’s interest in social and environmental reporting.

But how does a company such as Ford decide to undertake such a large, arduous, and potentially painful process? Zemke says the company began taking an interest in GRI at about the same time that Bill Ford took over as the company’s chairman. She says his leadership was instrumental in pushing the process forward, but notes that the Enron debacle helped further impress upon the company the importance of corporate transparency and disclosure. Now Bill Ford has become Ford’s CEO and the company remains committed to social and environmental accounting.

At Nike, another major company that has prepared a GRI-compatible report, leadership was also an important determinant in the company’s approach to reporting. But it wasn’t the only one. According to Sarah Severn, the director of sustainable development at the Oregon-based company, one of the main reasons for preparing a GRI-compatible report was to address, in one document, the many and increasingly burdensome requests for social and environmental information that the company was receiving on a daily basis.

In addition, Nike had recently come under intense pressure from advocacy groups to strengthen its policies related to sweatshops, labour standards and out-sourcing of product manufacturing. “I’m not sure our GRI report has taken any of this pressure off the company,” says Severn, “but it has clarified the range of things we are doing to address these problems. And I think in the end it will show that the story is not as one-dimensional as it is sometimes made out to be.”

Overall, Severn says that Nike has been very pleased with the GRI process. She says the way the GRI has gone about its work has been fair and transparent, and that the guidelines have helped Nike gather data, set targets and monitor performance. “The GRI has helped us bring discipline into our data gathering and measurement operations,” she explains.“And, as we all know, what gets measured, gets managed.”

Although Severn admits that setting up the right data-collection systems can be time-consuming, difficult and costly, ultimately she argues that the company and the shareholders benefit because they gain a much better understanding of their own internal operations.

Asked about the difficulties inherent in producing a GRI-type report, Severn responds that, for Nike, the biggest problem was how to define the ‘boundaries’ of the company. “Nike is a large company with a very large supply chain,” she says. “And there are huge differences between reporting on the social and environmental performance of our company and reporting on the social and environmental performance of our supply chain.” Severn cites the company’s record on water usage and carbon dioxide (CO₂) emissions: if you just look at Nike per se, she says, the company doesn’t use much water or emit much CO₂. But if you look further down the supply chain the picture can change considerably.

To address this problem, Nike has been working to re-consider how it relates to its supply chain and to better define the boundaries around its different levels of operations. Severn says that, in the long-term, Nike plans to look much more closely at its suppliers, but the enormity of the data collection issues means that, for the time being, the firm is reporting on its supply chain only for a select number of key variables. “It is partly because of all of these complexities,” she concludes, “that it took us over two years to prepare our first corporate responsibility/GRI report.”

If there is one complaint Severn has about the GRI process, it is that, until now, its focus has been on environmental indicators of performance at the expense of social indicators.

Ironically, this is the same complaint that is brought against the GRI by one of Nike’s staunchest critics, the Massachusetts-based labour and human rights non-profit, Verité. Heather White,Verité’s director, says that the initiative itself is useful, but that she hopes its new guidelines will address what she perceives as a serious weakness on social and labour issues. She says that part of the problem is that the end-users of GRI information non-governmental organisations and investors) haven’t played as big a role in the GRI design process as the accountants and the companies doing the reporting.

White is also worried that some companies – she mentions Nike – may be simply approaching the GRI process in terms of public relations. “In the case of most GRI-compatible reports,” she argues, “there is no way to verify the information being produced. And if there is no verification, then the information isn’t really meaningful. What is still missing [from the GRI] are some reliable mechanisms to ensure that reports are verified by credible third parties. Otherwise companies shouldn't be allowed to use the GRI name.”

CERES’s Massie agrees that the issue of verification is extremely important. “There is currently no requirement for verification in the GRI guidelines,” Massie says, “but I think that ultimately we will have to move in that direction.”

He feels that the GRI is taking a pragmatic approach to the issue: whereas it is aware that verification will be essential in the long-term, in the short-term the GRI is focusing on the standardised guidelines and metrics without which verification is not possible.

And how are the GRI reports being received by investors? Both Ford’s Zemke and Nike’s Severn say their reports have received excellent feedback from socially responsible investors (SRIs), but little or no feedback from mainstream investors. “There is definitely a gulf between SRIs and the general investment community,” notes Severn.

Part of the problem, says Karina Litvak, director of governance and SRI at London-based investment house Friends Ivory & Sime, is that the GRI is geared towards a wide variety of stakeholders, whereas ‘mainstream’ investors need very specific and very targeted information. “Ordinary shareholders are looking for information that will shed light on the ultimate financial prospects of a company,” she says. “They are looking for concise information on risk and return and how social and environmental factors affect these.”

Litvak believes that although the GRI has tremendous promise, it needs to pay closer attention to the informational needs of these investors. “The challenge is to communicate social, environmental and ethical information that fund managers can integrate into financial analysis – and that’s not easy,” she adds.

As an example of the ‘right’ sort of reporting, Litvak refers to a set of disclosure guidelines recently issued by the Association of British Insurers (ABI). She feels these guidelines are particularly relevant to the marketplace since the ABI comprises 97% of UK insurers and the insurance industry as a whole manages trillions of dollars invested in global stock markets. She says her company will soon be putting out a report following the ABI’s guidelines.

So,what now for the GRI? Massie says the GRI process is an evolutionary one, and that the new guidelines – which he calls “version 2.0” – will be a significant improvement on earlier versions. These will be supplemented by a series of sector-specific reporting guidelines (the first of which will be geared towards the financial services sector and is due in time for the UN Summit on Sustainable Development in late August).

“The world of today,” he concludes, “operates under very different rules than it did a few years ago. Today’s investor, particularly post-Enron, expects transparency and accountability.”

Beyond that, he argues that investors are concerned about both tangible and intangible assets and liabilities. He cites a study that found that an estimated $68 billion of Coca- Cola’s market capitalisation is based on the value of its brand. This just goes to show, he says, that good reporting on social and environmental issues is not only central to social responsibility, but goes to the core of the issue of value in today’s economy. EF