This is the fifth blog in a series of seven focusing on sustainability reporting practices in the chemical industry. It is based on research I´ve conducted on sustainability reports submitted to GRI from the chemical sector in 2014 i.e. containing 2013 data.
With a 151 reports at my disposal, I analysed 102 reports after removing reports that was not submitted in English and excluding more than one report from the same company. In the latter case I restricted my analysis to one report per company where the corporate report had preference over the subsidiary.
My research focus was to evaluate reports on transparency, management disclosure and assurance practices. Transparency was broken down into three sub-criteria: how materiality is determined, how stakeholder engagement practices are conducted and how sustainable business goals are set. Management disclosure was evaluated by focusing on another three sub-criteria: the management approach of the executive committee or board of directors, whether reporting was balanced and transparent in terms of risks, opportunities, challenges and successes and the third sub-criteria evaluating sustainable business strategy. Assurance practices looked at whether reports are validated internally and to what degree it is verified externally.
Sustainability reporting is extremely unbalanced. Evaluating sustainability reports one soon comes to the realisation that organisations favour almost exclusively positive disclosure. It is rare to find a report that includes information on ambitious targets not met or failures in executing the sustainability strategy or admission of missed opportunities. Yet, such reporting will capture my attention. Why? Because failure is good and probably also mean that you set an ambitious target in the first place. Like they say, failure is the first step to success. Failure forces organisations to rethink their approach, reallocate resources and starting to manage a programme or goal worth pursuing.
Transparency remains elusive. Let me explain this by illustrating how organisations report on environmental fines or litigation due to non-compliance to environmental laws and regulations. The vast majority of organisations I´ve evaluated have implemented ISO 14001 for more than a decade now – in some cases already in its third decade. Reporting on environmental fines should therefore not be new, yet only 53 per cent of chemical companies reported whether they paid fines over the reporting year. This percentage included organisations making clear statements that they had no significant fines over the same period. When it comes to litigation, this percentage is even lower at 16 per cent. Again, this percentage includes organisations explicitly stating that they had no pending litigation issues. This is surprising as companies should also report on this issue in their annual financial reports.
Transparent reporting on sustainability risks, opportunities, successes and challenges is not adequately reflected in reports. Organisations are more likely to report on risks than opportunities, but only one in four reports discloses this. This percentage drops to 14 per cent for mentioning any significant material successes and challenges. And this gets worse. Only a mere seven per cent of organisations detail how they intend to turn failures around and seize opportunities. Thus a real opportunity exists for sustainability leaders to differentiate their sustainability report from their competition. Let alone the rest of the sustainability reporting community.
Risk reporting is not new. It is an established practice within the financial and insurance departments of multinational companies. It should therefore be easy for companies to incorporate sustainability risks into this assessment process. But, this is not what I found in my research.
Risks almost always focus on describing the process of risk management. But it is the outcomes of this process that should be provided, contextualised in the report and informing the reader what the company intends to do about it. This is what investors would like to know when assessing companies. If you can then also identify the flip-side of risks i.e. opportunities, then you are starting to create value and competitive advantage and be on a path where you use sustainability to differentiate yourself from your competitors. Sustainability reports have to address risks, opportunities, successes and challenges in a more balanced way, be more transparent about it and focus on content so that the reader gains more insight into the organisation´s sustainability ambitions.
My research has uncovered a fairly dim state of affairs. However, similar trends have been observed in another publication. The World Business Council for Sustainable Development (WBCSD) releases an annual report on how their members are improving their sustainability reports and the trends they observe. Reporting Matters (the 2015 release) provides insight into how their members are improving their sustainability reports. In the report a statement is made that a report must reflect positive as well as negative performance over the reporting period to enable a complete and unbiased assessment by the reader. I couldn´t agree more. Apart from effective reporters actually disclosing their sustainability risks, effective and credible reports also disclose progress on performance.
Substantial challenges remain in getting to balanced and transparent reporting. After more than a decade of sustainability reporting, red lights start to flash. We have to get the basics right. It is not acceptable that we publish reports telling only one side of the story. We have to be brave and tell the other half. Nobody is denying that sustainability is really tough to manage, let alone lead. But, any crisis provides an opportunity and having a turnaround plan or better yet, a turnaround strategy which will be a powerful signal to the market and your direct stakeholders that you are managing and leading your company towards the next era of responsible and integrated sustainability and business leadership.
Getting the basics right means that all reporters have to disclose fines, litigation, risks, opportunities, successes and failures and pay special attention to how they word this in their report. Both sides of the story need to be told. This will go a long way in convincing your audience that you are indeed leading the way. It cannot be that a mere seven per cent get it right. What is the excuse for the other 93 per cent of companies?