Back to basics (10): Sustainability - a new gene for the management DNA

If you compare the discussion in companies around sustainability with a decade ago one could agree that quite a lot has already happened. Tools that help to demystify the meaning of sustainability and decode its general principles into how-to guidance for operational management are available and regularly updated; adaptation to the deeper needs of specific industries, but also public authorities and NGOs are under development. The landscape for globally accepted and applicable tools (conduct principles, management system approaches and balanced scorecards, reporting guidelines, assurance standards, life cycle assessments, and the relevant IT tools supporting all this) becomes clearer. A new layer of internal transparency around problematic sustainability issues helps as an additional radar screen to reduce company risk and to foresee danger up on the horizon. And more often sustainability reports reveal that there is progress towards sustainable excellence and a closer understanding of the 3D reality surrounding these organizations; so far, so good.

But still two major obstacles prevent companies from moving faster: firstly, the difference between political talk and concrete political action in global and regional debates doesn’t give companies the feeling that they are able to act in reliable and fair market conditions; a “wait and see” attitude becomes logic. Well, we also know that some companies and their industry federations are often also causing or at least influencing these toxic environments in the political arena through their lobbying activities, very often to the disadvantage of the few proactive industry peers, some of them are quite disappointed that their industry companions are hiding behind their strong backs.

Secondly, maybe a reaction to the first obstacle, sustainability as a paradigm to come to new value creation opportunities hasn’t been taken seriously enough in board rooms; let the middle management struggle with it. What we miss are crystal clear top management commitments and related actions (top down) that could create enough trust at staff level (bottom up) to enthusiastically embrace the paradigm of sustainability as a fountain of youth for that sort of innovative products and services that would rapidly help solving the most burning problems of this planet. Some good examples are rather the exception to the rule and do not yet create the inspiration avalanches that are needed (how nice for the first movers!); most industries continue to fine-tune the existing product and service range and prefer to milk existing cash cows until the cow collapses. Simply, sustainability is not yet part of the management DNA. So here we are, rubbing our eyes and wonder why everything that has to do with sustainability happens in slow motion while the world is changing in rapid motion and our opportunities to pull the plug where the planet needs it reduces from day to day.

2008 could become the year where we might see some change. There is obviously an appetite to increase the speed for clearer commitment from top management to wake up the sleeping beauty “sustainability” and shift from risk reduction to opportunity and sustainable value creation. Here are two examples:

The first wake up call came from the World Economic Forum’s “Global Risks 2008” report that was published shortly before the January WEF in Davos (see www.weforum.org). This report categorizes economical, geopolitical, environmental, social and technological trends, issues of concern and risks. The report concludes with a call to action: “Leadership on global risk issues will be an increasingly precious commodity”. It remains to be seen if this call will be understood by enlightened industry leaders to embed sustainability into their business models. Of course, this call also went to politicians, but that’s only a side note.

The second wake up call has been published in a white paper that tackles the needed change in the overall management DNA to create the “sustainability revolution”. This white paper, called “A new mindset for corporate sustainability” (http://www.biggerthinking.com/en/sustainability/innovation.aspx), was sponsored by BT and Cisco and summarizes the evident strategic opportunity for management and offers a 10-step program to turning the company into a sustainability-driven innovator. No wonder that BT and Cisco were the initiators of this approach that brought together academic thought leadership in a virtual discussion space (no travel was needed to bring them together; the ecological footprint of this project was close to zero). BT is a regular award winner for their proactive sustainability program that enables them to quickly adapt to market needs and simply “gets it”; Cisco is a major supplier to BT and a willing companion in this project.

I was especially pleased to see “bring your stakeholders on board (actively encourage them to participate in your innovation and encourage them to develop sustainable opportunities themselves)” and “use people power (ensure that sustainability is a clearly stated value at every stage of your people management process)” as two of the 10 principles. These two steps are the really difficult ones because they are so much against the current plan and control management mainstream and this surprising belief that one can have a highly adaptable organization while the majority of staff are actually de-linked from the products, customers, relevant management information, most of the other colleagues and last but not least also from the owners of these organizations. How much real passion for the company vision can be expected from these people?

I personally believe that the really innovative companies that are able to successfully implement sustainability into their DNA will be those with less hierarchy and that are closer to all of their stakeholders and allow them influencing decision making. Furthermore those companies will be rewarded that allow all staff a time buffer to create mental space for “crazy ideas” how to connect company value with social value; this means a huge step back from the lean management hype (or do you think that staff that already have difficulties to manage a work/life balance and suffer from the "overflow error" symptoms will be in the mood to think creatively?). Charles Darwin already warned us: “It’s not the strongest of species that survives or the most intelligent; it’s the one that is most adaptable to change.” It will be those that integrate sustainability into their DNA.

Back to basics (9): The world is a "polder" - a parable for sustainability today

Welcome back in 2008! One of the things that I have been thinking about a lot in 2007 was the question “what is it that really and most effectively drives sustainable change”? After many years in the sustainability business my list has actually boiled down to four major drivers: legislation (let’s face it), competition, cost advantages and – maybe most important - education. There are definitely more, but these seem to be the most effective and high level ones (please let me know if you think differently).

Fair market conditions and a high level of transparency are prerequisites that these four drivers can actually flourish towards a more sustainable world; GRI plays a major role in increasing transparency about sustainability issue areas and provides a major instrument to allow structured discussion through the GRI Framework. While legal compliance, competition and cost advantage are quite well-known and managed in the corporate world, the overall and most important driver for me is actually education, meaning awareness about the interconnectivity of many sustainability problem areas and the ability of people and organizations to reflect on what their own impact is and how a certain history, religion, regional or company culture is influencing behaviour.

During the Christmas break I took the opportunity to read Jared Diamonds book “Collapse: how societies choose to fail or succeed” (Penguin books). If I could recommend books to start education and raising awareness about sustainability, Diamond’s book would be amongst the top 3. He looks into the past and what emerges is a fundamental pattern of environmental catastrophe which still exists today, globally and at higher level. In the last chapter Jared Diamond analyzes today’s political and market interconnectivity and develops a fragile picture of the world and concludes that the risk we face is of a worldwide decline.

As somebody living in the Netherlands I was especially touched by a picture painted by Diamond that explains “the world as a polder”: 1/5^th of the Dutch landmass is reclaimed from the sea, is up to 22 ft. below sea level and a complicated drainage system is pumping water back out into a river or the North Sea. This is why the Netherlands had so many windmills in the past (replaced today to steam, diesel or electric pumps). He quotes one Dutch friend who said: “You have to be able to get along with your enemy, because he may be the person operating the neighbouring pump in your polder. And we’re all down in the polders together. It’s not the case that rich people live safely up on tops of the dikes while poor people live down in the polder bottoms below sea levels. If the dikes and pumps fail, we’ll all drown together”.

Diamond concludes that most of the needed technology to not drown together already exists. But what is crucial is to also make the right choices towards long-term planning, and willingness to reconsider core values. He finishes his book by saying: “Thus, we have the opportunity to learn from the mistakes of distant peoples and past peoples. That’s an opportunity that no past society enjoyed to such a degree”.

So, let’s learn from the past, understand the value of transparency and make a real difference! Educating sustainability and finding the right parables to make people understand what is at stake is probably the biggest challenge we need to solve. 99% of the people of this planet still don’t have a clue.

Day 4: Transparency takes center stage

The keynote speaker today was Sir Michael Rake - former KPMG boss and four weeks into his chairship of the British telecomms giant BT.

Several months ago, in his position as aruguably the most influencial accountant in the world, Sir Mike started to stir up the business, accounting, and investment community by saying its time for a new sort of business reporting - and the past should not be used as a road map for the future. He called for a redesign in reporting standards, and the incorporation of metrics that show a more three dimensional view of a company - including economic, environmental, and social risks.

Sir Mike gave a thought provoking speech today at the conference - addressing a wide ranging number of topics such as how to rebuild trust in the corporate sector to how companies can use their products and services to gain buainess advantage while tackling some of the worst global development and environmental issues.

But I was glad to hear during the question answer period his reference to the GRI and the role that disclosure can play in building trust, and also to justify atttention and expenditure on social and environmental risks.

We want to work for the good guys

Graduates seek out socially responsible companies as employers, according to PWC research.

In a study of 2739 graduates from China, USA and UK published by PWC earlier this week, 86.9% of all the graduates questioned said that they actively seek out employers whose corporate social responsibility behavior reflects their own. 90% of the graduates from the USA agreed to this statement compared to 87.2% in China and 71% in the UK. The graduates were questioned as part of a larger study about their expectations of work and careers.

Employees and prospective employees are some of the most important audiences for sustainability reports. People want to work for companies that share the same values as they do. Although there have never been more people on earth as there are now, all reports say that finding and keeping great staff have never been harder.

There is a category in the GRI Readers Choice Awards for best report from the perspective of employees. Get online and score your employers report today!

Source: 'Managing Tomorrow’s People: The Future of Work to 2020’

Back to basics (4): Who reads sustainability reports?

Last week GRI launched the GRI Readers’ Choice Awards, giving readers a platform and a voice what they value most in sustainability reports and which reports they liked most because they addressed the material issues in a convincing way. We thought it was necessary to address the question “who is reading all these reports and is it really worth the effort?” This is of course exciting, and the first days after the website was launched the interest was already huge. But still, two things make me really wonder:

Firstly, I am always amazed how much capacity and money is available in nearly all companies that I have seen for their normal annual reporting process and print design, while sustainability reports still have to be produced with budgets that are “too much to die, but not enough to live”.

Of course, there are difficult, sometimes overwhelming legal requirements to fulfil when pulling together annual reports. And yes, strict assurance practices are necessary as well; all that has to be well prepared and does cost money. However, it is mainly a look into the rear mirror, addressed to one stakeholder group only and not really covering the long-term future needs (in that sense: sustainability) of the company. One could argue that all these efforts are necessary for the readers, but – let’s be honest – how many readers do annual reports really have apart from maybe 200 industry sector specialists, asset managers, ranking institutions, an probably some competitors and employees? How many printed short versions of annual reports have you personally thrown away into the bin without having taken one single look at them?

In contrast to this I have met so many companies where employees have learnt so much about their company (especially when they were large and/or multinationals) and have used sustainability reports as a reference document when visiting customers, shared them with friends and still have them at home, keeping every single version. I have seen students reading reports when figuring out which company could be a good employer, MBA students using the GRI matchmaker program to study sustainability reports in their MBA courses and discuss the question what a specific company should be responsible for and how they would react in case of a certain dilemma, digging deep into the problems and build understanding of the rationale behind a specific decision that had to be made. We see more and more of the usual suspects for annual reports consumption reading sustainability reports because they want to learn how to invest more sustainable and long-term, making investment decision with a real sense - while still making money. We see more and more suppliers reading sustainability reports because they expect to be asked next about their specific responsibility in the supply chain by their customers, and we see more and more communities and ministries really thinking about making sustainability information a requirement for their own procurement activities. So, is there anybody out there who likes to follow my bet that already more people really read sustainability reports than annual reports?

Clearly, I am not arguing that less money should be spent on annual reports if it’s absolutely necessary. But it’s definitely time to make sure that sustainability reporting processes get the budgets they deserve! If the budget for the preparation of a good sustainability reports remains low over time a clear story is told: it is not the lack of money, but the wrong prioritization of sustainability as a really important issue.

Secondly, isn’t the basic question asked not also a warning signal that stakeholder engagement is still not fully understood? While it is pretty clear that during the development of the sustainability report stakeholders need to be involved to define material issues, the question how to continue to involve stakeholders after the publication of the report still seems to be a weak spot. Or has the communication strategy suddenly ended with the launch of the report (maybe with an A5 card in the back as feedback form?) instead of making the launch of the report the starting point for even more stakeholder engagement (=input for the next report)? In summary the fact that we still ask ourselves the basic question about the readers of sustainability reports makes it clear that some inefficiency in the overall reporting and feedback process still exists. Answers are welcome; therefore please join the GRI Readers’ Choice Awards.

The value of sustainability information

The big buzz around here this week is the launch of the GRI Readers Choice Awards. These are not just awards for the sake of awards - they represent a whole new era for sustainability reporting.

Sustainability reporting will not become a mainstream practice unless a freeflowing market for such information develops. People who stand to benefit the most from sustainability information as disclosed by companies today either don't know this information exists, or it comes to them in a form that is not usable or optimal. Who are these current and potential beneficiaries of sustainability information? Journalists, employees or prospective employees, investors and analysts, board and management team members, NGOs, consumers, and broader civil society.

Until now GRI has focused on the information issuers by creating Guidelines and supporting materials for them to use as the basis for reporting economic, environmental, and social information. But now GRI is trying to create, stimulate, educate, and add value to the information users side. The Readers Choice Awards are designed to engage these information users/report readers directly and give them an avenue through which they can express their opinion.

Readers are invited to select the reports of interest to them, and then assign scores to each of these reports based on their assessment of the quality and usefulness of the report to them.

Reports that gain the highest scores in nine different categories will be declared the winner in a high profile ceremony in May 2008 - but really its the readers and the movement towards better accountability and transparency that will be the real winners.

We predict that the results of the scoring will lead directly to changes in the current practice of sustainability reporting. By getting a better understanding of what readers/users want and need, report preparers will thing about reporting differently.

Early signs look good - after only 48 hours online the Readers Choice website had nearly 2000 visitors from 70 countries and hundreds had registered and started to score reports. We certainly hope thousands and thousands will join these early participants. I will keep you posted as we progress in this big experiment!

Public sector still needs convincing

We were lucky enough to have Phil Hughes visiting us this week in Amsterdam. He traveled over from Melbourne to meet with various members of the GRI staff to reflect back on our three years of partnership and look ahead to the future. GRI helped to co-found the Centre for Public Agency Sustainability Reporting, which Phil now directs, with ICLEI-ANZ, City of Melbourne, and State of Victoria's EPA.

We were comparing notes on the rate of uptake of the GRI Guidelines among public sector organizations (such as municipalities, federal departments, other public agencies) and the rate of uptake among businesses. The practice has been slow to take hold in the public sector, and Phil surmises that it is (at least in part) due to the lack of recognition of the three dimensional role these agencies play, and the size and complexity of their impacts.

But I reflected that it was not that long ago that companies were in the same place. We seemed to have crossed over from that lack of awarness (whether purposeful or not!) to an understanding that companies do have complex impacts (postive and no-so-positive) on societies, economies, and the environment - and we are moving into an era of action. Maybe public agencies are a few steps behind, but Phil and I decided we had reason enough to remain optimistic that they would move along this curve some point soon as well.

Harvard Business Review asks how reporting helps manage climate risk

To round out a threesome of unprecedented media interest in GRI recently (see previous two posts this week) the Harvard Business Review was in touch to talk about what everyone is talking about - climate change.

The editor wondered how reporting could play a role in helping companies strategically manage risks and opportunities associated with climate change. Here were some perspectives I shared.

Lagging indicators: The starting point for navigating the risks of climate change is to first understand what impact the company’s operations, products and services are having on the environment. By knowing their own ‘carbon footprint’ with certainty, companies can start to take action to reduce their impacts. Benefits of measuring and reporting include realizing cost savings due to energy efficiency, to remain one step ahead of regulation, and to protect brand value by showing accountability and responsibility for environmental responsibilities.

Real time indicators: The climate change issue is so prominent that companies cannot afford to seem like they are not actively looking at their own impacts and helping to shape a more positive future. Benefits of reporting on these indicators include earning and maintaining a license to operate in the public domain, demonstrating a leadership position on one of the most pertinent issues of our time, and earning customers and clients by differentiating the company in the marketplace as responsible on this issue.

Leading indicators: Scientists tell us that climate change will alter our climatic patterns and our physical landscape. Reporting on forward looking indicators lets a company tell its story about how it is going to adapt and innovate to mitigate risk that climate change could cause – such as emerging risks to places where the company has operations, or risks to resources the company is dependant on (e.g., forests or agriculture), and risks associated with rising energy costs. Leading indicators also help the company show how it will capitalize on new market opportunities afforded by climate change – such as introducing new products and services that do not rely on fossil fuels, or engaging in carbon trading.

Search GRI indicators here.

Honesty note:
The Economist and Business Week contacted me this week, but I have to admit that the editor from Harvard Business Review contacted me about three months ago to talk about sustainability reporting and climate change. Since I am on a roll blogging big media interviews this week I couldn't resist adding it to the list. Look for the HBR interview in this October's issue.

Business Week asks why SMEs would report

Its been a big week for media interviews here at GRI. Today I heard from a journalist working on a story for Business Week on small and medium sized enterprises and sustainability. She was wondering why SMEs might start reporting. Here is the just of my response:

There seem to be two very different drivers for reporting based on where the company operates/originates (that we have detected!)

SMEs from USA, Canada, Australia, Western Europe: the driver for embracing sustainability and producing a report is usually a competitive differentiator when it comes to products and services – ie., these are companies that produce “green” or “sustainable” or “natural” products and services, and they use reporting to walk the talk on what they are doing. The value of reporting to these companies is brand enhancement and better communication channels with key stakeholders such as customers, communities, providers of capital, and employees. Of course this is a broad generalization - an exception I know of would be a group of Chilean fruit growers are trying to break into the UK and US organics marketplace, and they are finding that sustainability reporting is helping convince buyers that their product is genuinely “sustainable”.

Emerging markets SMEs (Africa, Asia, South America, Central and Eastern Europe) seem, for the most part, to be driven by efforts to enter – and be competitive – in the global marketplace. Buyers are forcing a plethora of ‘codes of conduct’ and other related initiatives (formal and informal) at them and they must show that they do adhere to sound environmental and labor/human rights practices in order to compete. As we have seen with the recent product safety and quality scandals in China – buyers are held responsible for what happens in their supply chains in the court of public opinion. This does seem ironic in a sense, as buyers have been shifting their contracts over the past decade or so to emerging markets where goods/services can be produced at lower cost – in part because the local governments do not impose stringent regulations when it comes to environment and social performance by the corporate sector. The regulation is still coming down the pipe – but in a different form and from a different authority – the international buyers (whether these be B2B or consumers directly). Companies with their eyes on the future are staying ahead of social audits and the like by getting a better idea of their social and environmental impacts and starting to manage potential risks.

The Economist asks whats ahead in '08 for sustainability reporting

I was quite honored this week when a reporter from The Economist contacted me to ask what I thought might be coming down the line for sustainability reporting in 2008. They are gearing up for their "Year Ahead: 2008" annual issue to be released in the next few weeks and I think its a great sign that they were researching sustainability reporting. Researching it doesn't mean that the topic will actually make it into the issue - but I still took it as a great sign!

Here was how I responded when asked for my perspective on interesting developments for 2008:

• The rise of sustainability reporting through supply chains. GRI is working with four multinationals right now as they roll out reporting among suppliers in ‘high risk’ emerging markets – ie. places where human rights, environment, corruption, or product responsibility issue are prone to arising mainly due to lack of legislation or enforcement in certain countries – reporting is one way for global companies to have more control and confidence in the conduct of their suppliers – which they are being called to account by investors and consumers. We will see a marked increase in B2B reporting and smaller enterprise reporting due to information demands in the supply chain in 2008.

• A marked increase in reports out of Russia and India to combat negative assumptions in the international community about corruption, labor standards, governance practices, and environmental impacts. Early movers, such as Jubilant Organisys in India, have been rewarded for reporting on these issues by being able to attract international capital and by being competitive in international acquisitions. This is helping to set the stage for others to follow.

• The US responsible investment community has mounted a campaign to increase the quantity and quality of sustainability information available for data analysis and decision making. Their goal is to have all 100 of the S&P 100 reporting based on the GRI Guidelines by 2008, if they achieve this they will move on to the S&P 500 by 2011. As per early 2007 they had noted a 20% increase in S&P company GRI reporting – accounting for about 50% of the S&P 100. At this rate they will achieve their ambitious goal of all 100 S&P companies issuing GRI reports by end of next year.

• XBRL on the rise? The financial reporting community has been toying with XBRL as a way to exchange data for the past few years, interest at the SEC is helping to fuel this – the GRI Guidelines are now available in this format. Will this have an impact on the volume, accessibility, comparability, and demand for information in the marketplace in 2008?

• Climate change and human rights emerging as main stream agenda issues that companies are expected to be doing something positive about. Accountability, transparency and reporting on these issues will become expected and will drive increased numbers of reports issued in 2008.

Korea: Trends in transparency

A research institute affiliated with Korea's main independant daily The Hankyoreh released the results of their look at sustainability reporting in that country.

The large South Korean multi-nationals, known as "Chaebol" have really made their name on the global stage as big consumer brands - Samsung, LG, Hyundai, and Korean Air as examples. Stockbrokers are surely pleased with the level of transparency about financial performance, but how do these companies stack up in terms of transparency on economic, environmental, and social performance?

The Hankyoreh researchers found that Korean companies are strongest when it comes to reporting on environmental performance and product responsibility. Their analysis reveals that the level of transparency on human rights.

On a scale of 100, the highest score went to Yuhan-Kimberly with 57. Korea South-East Power came second with 55, followed by POSCO and Daewoo Securities with 52 each, finally Samsung and Korea Electric Power rounded out the top cluster with 48 points. A total of 22 companies were ranked overall. Of the top scorers, all use the GRI Guidelines as the basis for reporting except Daewoo Securities.

The lead author Lee Won-jae thought the results were positive and although past benchmarks are not available, he commented that the shift to greater transparency and the fact that most Chaebol embrace the global norm for reporting is a good sign. This group will continue to monitor trends in reporting in Korea into the future.

Has an Aussie found the business case for sustainability reporting?

Thanks to Phil Hughes, the Director of the Centre for Public Agency Sustainability Reporting in Melbourne Australia for bringing an interesting tidbit to my attention.
He spotted a new report that reveals strong economic case for sustainability risk reporting to be adopted by Australian businesses.

On August 1st 2007, the Financial Services Institute of Australia (Finsia) released the first economic analysis to examine the costs/benefits to business and the economy of sustainability risk reporting in Australia.

The report, Tip of the Iceberg, found that benefits arise because companies with sustainability risk reporting benefit from lower corporate borrowing costs as a result of reduced risk, and higher labour productivity and sales from the boost to their reputation with employees and customers.

“In short, there is a strong economic case – to the tune of $1.2 billion GDP per annum and a significant profit gain of 2-3 per cent for medium and large companies that voluntarily report on sustainability risks”.

“Overall, the voluntary adoption of SRR [sustainability risk reporting] by more Australian businesses appears to be a worthwhile investment for them, as well as having wider economic benefits, and so should be encouraged by Australian Governments”.

The report also found that the proportion of Australian top 100 companies reporting of sustainability risks was likely to increase from 23 per cent to 60 per cent within three to five years.

Finsia commissioned the independent study conducted by Econtech, to determine the costs/benefits of environmental, social and corporate governance for sustainability reporting to business and the overall economy. They refer to this style of reporting as sustainability risk reporting (SRR).

The report is part of Finsia’s Tip of the Icebreg – investing for the long-haul campaign on sustainability risk reporting. The report was released at a sustainability summit in Sydney and is now available to download (large 7M paper).

The two "i"'s of business: innovate and integrity

A nifty little report landed on my desk today from Arthur D Little, the consultancy. It has a complex mathematical equation as its title:

Integrity + Innovation = Sustainable Performance.

It caught my eye at first because the opening paragraph of the report states that the growth of the number of companies that have produced a report based on the GRI Guidelines has grown from 20 to 1000 in a 7 year period. It was presented as being an indicator of the growing corporate committement to sustianability. So I read on to discover that "...while this activity is taking off, the familiar competitive pressures of business are not going away. Instead they continue to mount, compelling companies to keep finding new and better ways to deliver the goods and services that socity wants more efficiently and profitably."

ADL's solution for companies is a twofold committment to integrity and innovation. The equation is simple:

INTEGRITY: consistently fulfull stated business principles as an integral part of decision making, rather than managing "CSR" as an additional business activity.

INNOVATION: find successful new ways of value creation in response to the changing needs of markets, societies, and the environment.

The result: sustainable prosperity. They only have anacdotal evidence compiled at this point to try and illustrate the success of this equation, but they outline evidence from successful companies such as Novo Nordisk, BT, and GE - and present these in sharp contrast to those companies that have lost their integrity such as WorldCom, Enron, etc.

For better results, own your supply chain

Buried so deep in this weeks New York Times was a story on toy giant Mattel (maker of Barbie, Hot Wheels, among others). Unlike most retail manufacterers based in the US and Europe, Mattel actually owns the factories in China and elsewhere in Asia where most of its core products are produced. They do outsource non-core products and components to other suppliers, but only amounting to about 35% of total production.

This practice runs in sharp contrast to most other retailers who contract with factories in Asia for the low cost production. The article cited quality control, a committment to decent workplace conditions, and toy safety as the key reasons Mattel has opened its own factories in China - as opposed to outsourcing. I do recall the Dateline episode about 10 years ago when secret camera's entered one of Mattel's contract factories in Indonesia and revealed horrendous workplace conditions - in the lead up to the busy Christmas toy season this was disasterous for Mattel.

Prakash Sethi, an internationally renowned supply chain, ethics, and work place condition expert was hired to help Mattel get back on track after that expose. To this day he still has open access to any Mattel owned factory for surprise visits and is allowed to post his findings publicly. Now that is a true test of how confident the company is in its factory conditions!

From the perspective of sustainability reporting this bodes well for the company. Most companies struggle with their report boundary. The boundary for financial reporting is clear - it includes all entities that a company owns. But for sustainability the boundary is not as clear. The classic example is supply chain issues. A big brand retailer typically does not own the factories that produces its goods - and therefore it does not directly control the performance of that factory. It does exert some level of influence over that factory however - and it is via this influence that it can insist on improved conditions. This can be reported as policy or procedures - but performance results are often difficult to track. Mattel has the benefit of being able to control their factories directly - and therefore know the performance results.

Are we talking sustainability reporting or sustainability performance?

A reader recently inquired about whether or not I had seen any ranking or indexing scheme that rates companies on their actual sustainability performance - not just the quality of their reporting. My answer: surprisingly hard to come by!

The professional indicies such as the Dow Jones Sustainability Index and the FTSE4GOOD use sustainability reports and other data provided by companies on the list (or competing to get on the list) to make a valuation of their performance from a risk exposure and future value perspective. Often times the methodology is not made public because these of course are proprietary products. (Note: I am not sure if the two above-mentioned products make their methodologies public or not).

The only other performance evaluations I can think of are award schemes. There are publications like the former Business Ethics Magazine (now the CRO)that rank the 100 Best Corporate Citizens. Many industry associations also award their members or companies in the industry for performance. In the UK, the membership association Business in the Community (BiTC) runs a very high profile and competitive Corporate Responsibility Index annually.

Quality of reports often act as a proxy for performance. Take for example the bi-annual Global Reporter's survey done by SustainAbility, UNEP, and Standard & Poor's which ranks report quality. Check also the Roberts-McKenna Pacific Sustainability Index which ranks companies reports on a system that awards companies for the breadth and depth of issues they cover.

Why is it easier to find rankings of report quality than it is to find rankings of performance quality?

GRI Book Club: The Wal-Mart Effect

The Financial Times ran a news story yesterday with the headline "Wal-Mart postpones its green report." Seems that a draft circulated to its main stakeholders "was rejected as inadequate" according to the journalist. The world's largest company had originally promised a sustainability report by mid-2007 - a promise made back in 2005 when shareholders and advocacy groups put Wal-Mart under fire on their sustainability practices.

I see a real opportunity for Wal-Mart here - they have the chance to revolutionize the practice of reporting and make real strides towards understanding their sustainability footprint and reinforcing the global movement toward a common language for reporting. Fingers crossed they also see it that way.

No one really knows how Wal-Mart sees such things claims Charles Fishman - author of "The Wal-Mart Effect". Its an easy-to-read book which I am about 3/4ths of the way through. Mainly it's about the economic impact that Wal-Mart has on communities and its suppliers, but just last evening I came across a case study on the Chilean Salmon industry which highlights the power Wal-Mart could weild on workplace and environmental conditions if it so desired.

Fishman outlines the boggling growth in aquaculture in Chile, and the fact that about 1/3rd of that country's total output is bought by Wal-Mart. The problem is that this intensive fish farming is causing coastline damage and is polluting the sea beds underlying hundreds of pens jammed with millions of Atlantic Salmon (incidentially - the species is not native to Chile). Processing factories have sprung up and replaced subsistence agriculture as the main form of employement for people in the region. For the price to remain as low as $4.85 per pound of Salmon at Wal-Mart you can imagine that rehabilitating the environment or providing up-to-code working conditions for factory laborers are not on the priority list for these suppliers.

All I know is less than $5 a pound for Salmon sounds a bit fishy :-)

But imagine if Wal-Mart demanded low priced fish but produced via adherence to basic environmenal and labor rights codes? Fishman points out that "the result could be a completely new kind of Wal-Mart effect - Wal-Mart using its enormous purchasing power not just to raise the standard of living for its customers, but also for its suppliers."

Sustainability reporting: niche or mainstream?

The Global Reporting Initiative was founded on a simple premise: That greater transparency on the part of organizations about their economic, environmental, and social performance would result in a shift towards better performance in these areas over time. It is still too early to tell whether or not this premise which seems strong in theory is actually panning out in practice.

Since we don't yet have proof, this reporting-changing-behaviour question is the topic of much conversation and speculation in GRI circles. Just yesterday we had some guests in from ACCA (accounting association) and KPMG (accounting services) and sure enough, the conversation creeped in this direction.

It started when someone at the table said that there were an estimated 80,000 multinational enterprises in the world (UNCTAD estimates) and that only about 2000 at most had started with reporting. Hence, even if reporting did change behaviour we were looking at a drop in the bucket.

But someone else countered with a very different perspective. He claimed that the 500 largest companies on earth were responsible for generating 70% of the volume of the global economy. 75% produce some sort of sustainability report, and nearly all of the largest 100 do extensive reporting. If reporting is resulting in changed behaviour at these organiztions it can be said that reporting has already had an impact on sustainability due to the high volume of economic power they pack.

What is your perspective?

Sustainability reports database: next steps with Corporate Register

I just returned from a day in London where a colleague and I visited the small but lively office of corporateregister (www.corporateregister.com) - this is the group that brings you the free database of PDF reports, ReportAlert services, and now EventAlert services. Last October (in conjunction with the release of the G3 Sustainability Reporting Guidelines) GRI formed a partnership with corporateregister to merge our reports databases - and corporateregister would become the host of the GRI reports registry.

It's just over eight months since we shifted from hosting our own database to working with corporateregister to host it and it was a good time for a check in. In general we were really impressed with their ability to track reports - they monitor 7000 companies, of which only 3500 issue reports currently, so they can pick up new reports as soon as they come out. At least two sets of eyes at corporateregister look the report over before it is posted, and dozens of data points are gathered on each one. We feel pretty confident that the data they present are accurate and current.

A few technological challenges remain - such as how to ensure reports written in non-Latin scripts (ie. Russian, Chinese) can be featured or counted in the database. For technical and quality reasons corporateregister can't host these in their database, so we are going to actively look for solutions with partners likely in Asia to ensure we have a complete database. Great news is that corporateregister will work on adding some new sort and statistics features on the GRI register this summer. Our database visitors have been asking for these for some months, so we are excited that they will come online soon.

Let me know what resources you would like to see on the GRI register: http://www.corporateregister.com/gri/

Hungary: gearing up for privitaization

Since visiting Slovakia last week, my curiousity about Central and Eastern Europe has been peaked. It's 17 years now since the 'iron curtain' fell and some countries have been fairing better than others in their journeys to establish democracies and stable economies.

One that is slightly ahead of the pack is Hungary. I was speaking to some Hungarians that traveled over to Slovakia for the G3 Breakfast event we held last Friday and they had an interesting story to tell about how sustainability was playing a role in business suceess there. They warned me that we can expect 5-10 new sustainability reports this year out of Hungary. I asked why.

They answered that many Hungarian companies are gearing up for privitization after decades of public ownership and governmental control. Some of the country's most important utilities, service providers, and national brands are opening up for private investors - from within Hungary and from abroad. Many are producing a sustainability report as a part of the package they are preparing to attract the most competitive offers. Showing that they adhere to high standards of environment, health, safety, product responsibility, labour practices, anti-corruption, and governance seems to help improve the value of the company.

That's a concrete business case if I've ever heard one.

Slovakia: Just getting started

After two days here in Bratislava as the guest of Pontis Foundation and the Business Leaders Forum I can say that I think we have successfully infected the local business community with the sustainability bug!

The economy is booming - nearly 10% growth per year - yet all business people I met felt that even this rate was too slow and the country had much to do to catch up. With such rapid growth of Slovak companies, the introduction of multi-nationals (I met representatives from Orange, Daimler, HP, Tesco, etc) and urbanization on the rise, everyone is trying to ensure that all this growth doesnt happen at a cost to the future economic vitality of the country.

Yesterday's full day conference attracted over 120 participants who were engaged in sessions on everything from the business case for sustainability, the GRI, the Global Compact, community investment, cause related marketing, employee and gender issues, and philanthropy. This morning we gathered about 40 people where I walked them through a more in-depth look at the GRI Guidelines. Guests from Czech Coal and Denso Hungary who have used the Guidelines for a few years now were able to present their company's business case for reporting, along with the challenges and benefits that reporting has brought them.

The prognosis? I think we will start to see some country level reports here in Slovakia - many country units already contribute to the parent company report so putting something out for the national audience won't be a difficult first step. Important will be to engage and build capacity for smaller enterprises to start with reporting. This will happen as Slovakia is held to the same standards for environmental and social performance as its other counterparts in the European Community, and pressure will be on for greater disclosure.

All in all a great trip and a facinating first look at one of Europe's newest members and how sustainability is taking shape here.