15 April 2010

CSR/Sustainability Reporting: 6 recent myths


Huge progress is being made in CSR (Corporate Social Responsibility) and Sustainability reporting, and even more importantly in business behavior and planning. Companies are coming to understand that sustainability provides a strategy for increasing revenue, cost containment or reduction, risk management and mitigation, employee empowerment and positive social impacts, all within a context of achieving business objectives. And that is the key; CSR and Sustainability are now seen as a key element in enabling achievement of business objectives.

But there are also a number of myths to CSR and Sustainability, especially in relation to reporting. This article discusses what I think are six myths, though certainly not the only myths, surrounding CSR and Sustainability reporting today. These myths include, and are discussed in detail below:

1.       SEC Mandates CSR/Sustainability reporting
2.       SEC Endorses a CSR/
Sustainability standard
3.       SOX Internal controls over CSR/
Sustainability reporting
4.       GRI equals CSR/
Sustainability reporting
5.       Sustainability Indices list sustainable companies
6.       CSR/Sustainability reporting in XBRL

This is a longer post than most, but hopefully it will be informative and keep your interest.

SEC Mandates CSR/Sustainability reporting

There has been a lot of discussion over the past couple of months around the interpretive release approved by the SEC in January 2010. I have heard people say in presentations that ESG or Sustainability or CSR or even GRI reporting is now required by the SEC. The good news is that the SEC has said that companies should be considering these issues as part of their regular risk assessment and reporting. The SEC has not mandated CSR or Sustainability reporting.

Fundamentally the SEC has said that they require nothing new or additional. Page 27, section V (Conclusion) states "This interpretive release is intended to remind companies of their obligations under existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors. " (http://www.sec.gov/rules/interp/2010/33-9106.pdf).

In doing so the SEC has reaffirmed what we already know - there are a range of CSR and sustainability related issues that cause risks and that can negatively impact companies' performance outlooks, and that such risk must be included in the MD&A.

This is a vindication of my long held view that Climate Change and CSR / Sustainability issues rise to the level of "known trends" or "uncertainties" that must be discussed, where the reporting company believes there may be the potential to impact liquidity or operations.

The areas that may trigger a need for companies to include additional disclosures include:

A. Impact of legislation and regulation.
B. International accords.
C. Indirect consequences of regulation or business trends.
D. Physical impacts of climate change.

On the negative side, if a company, even a power company, truly believes (and is willing to face the commission or the plaintiff's bar) that there will be zero impact on their business from climate change, new regulation or legislation, etc, then that company actually does not need to provide any additional disclosures or discussion of CSR or Sustainability type risk.

SEC Endorses a CSR / Sustainability Standard

The SEC has not endorsed any CSR or Sustainability reporting standard. In the SEC's interpretive guidance, they reference the Global Reporting Initiative (GRI), but do not endorse or mandate the use of any framework. The SEC simply notes that GRI is one of the widely used frameworks for reporting CSR and Sustainability. It is my view that without substantive changes to the GRI framework, that the framework will not be endorsed and certainly not mandated by the SEC for reporting of CSR or Sustainability information in SEC filings.

While the SEC does specifically talk about the GRI, it also mentions the EPA (Environmental Protection Agency) and the CDP (Carbon Disclosure Project) as sources of information in addition to information already provided in SEC filings.

The SEC said "These and other reporting mechanisms can provide important information to investors outside of disclosure documents filed with the Commission. Although much of this reporting is provided voluntarily, registrants should be aware that some of the information they may be reporting pursuant to these mechanisms also may be required to be disclosed in filings made with the Commission pursuant to existing disclosure requirements." (page 10: http://www.sec.gov/rules/interp/2010/33-9106.pdf )

If anything, this is a warning from the SEC that if a company produces a CSR report, they should ensure that their filing tells the same story. That is good news for CSR and Sustainability reporting, but is not the same as a mandate.

SOX Internal controls over CSR/Sustainability reporting

Recently I have also been hearing people say that SOX (Sarbanes-Oxley) controls and overheads are applicable to CSR and Sustainability reporting. SOX specifically required assessment of and confirmation of the effective functioning of the system of internal controls over financial reporting. CSR and Sustainability reporting today is not "financial reporting".

Once CSR and Sustainability reporting is providing information impacting the financial statements, for example when companies start to report the financial impact of changes in value of Carbon Credits, or the price paid for Carbon Credits, then SOX internal control and audit procedures will apply to the recording and reporting of such information.

When a company decides to install waterless toilets to reduce overheads and water use and waste, there are no SOX implications that would not already apply. A financial decision on where to site of a datacentre to reduce electricity use, recycling programs, or other sustainability initiatives are simply not covered by SOX.

Even the economic benefits achieved and reported are not subject to any additional SOX compliance overheads. If the company reports in a CSR report that they believe the have saved $5 million from their sustainability program, there is no SOX requirement to audit or to verify that number.

Of course those saving will have been realized through moneys spend on programs that result in reduced costs, moneys not spent on electricity, or even on increased revenues from sustainable or "green" products and services. But the recording of those costs, cost savings and revenue figures will already be reported through existing systems following existing processes, subject to existing internal controls, i.e. already subject to SOX internal controls audit requirements.

GRI equals CSR or Sustainability reporting

The Global Reporting Initiative (GRI) is one of the most visible standards for the creation of CSR marketing reports. I say that because the standard is specifically structured to allow the creation of reports based on the indicators that best reflect the reporting company’s situation or the messages that they want to convey. The mandatory elements of the GRI framework represent information that in most cases are already provided in other corporate reports and are not unique to the CSR report.

The concept of Application Levels (AL) allows a reporting entity to select what they will report, thus letting the company demonstrate compliance with a CSR standard, yet provide meaningless information from a true sustainability perspective.

I equate using a GRI report for investment decision making with looking at a product pamphlet to make an investment decision. There simply is not the information in the reports to actually demonstrate that the reporting entity is anything other than media savvy.

The only exception I would make to this is Application Level A and A+ reports. Application Level A reports include the requirement for the reporting entity to report against all indicators. That is a good start. Application Level A+ represents reports that have covered all the indicators, and have external assurance. Of course, the external assurance provided should not be confused with the level or rigor of assurance provided in a financial statement audit, but at least external assurance is provided.

The other Application Levels (B and C, with or without the +) allow the reporting company to fudge what they report.

Of the total of 1363 GRI reports (as listed by the GRI) for 2009, only 284 claim an Application Level of A+, representing 21% of the total. Expanding to include all Application Level A reports also, and the total for 2009 is 396, or roughly 305 of all reports. In the United States, only 6 of over 10,000 listed companies that must report to the SEC actually provided an Application Level A+ report in 2009.

Furthermore, GRI is very clear that they do not comment on the nature of companies that produce GRI compliant companies, thus providing the opportunity for any type of company to use the GRI framework as a smokescreen for the business practices or products.

Lets not forget that the GRI is a great step forward, and does provide companies with a framework for reporting, but today it is a marketing standard. When regulators begin to mandate the provision of GRI reports to Application Level A+, then it will be a, and perhaps the, CSR and Sustainability reporting standard.

Sustainability Indices list sustainable companies

Every week there seems to be another release of the winners, or top-100, or top-something list of sustainable businesses. There are also the various indices such as the FTSE4Good, Dow Jones Sustainability Index, or any number of mainstream sustainability indices. And every time I look at the lists, they are populated with companies that have produced great CSR reports, not "sustainable" businesses.

As a classic example, in 2009 a press release touted a list of the top 100 global sustainable companies. "The Global 100 includes companies from 15 countries encompassing all sectors of the economy that were evaluated according to how effectively they manage environmental, social and governance risks and opportunities, relative to their industry peers." Thank goodness they declared that this was in comparison to their industry peers.

After all, who would consider Air France to be one of the top 100 sustainable businesses in the world? It is an airline for goodness sakes, a mass producer of high altitude CO2 and high consumer of fuel, in an industry that survives in part on major subsidies such as exemptions from fuel taxes. However, I guess they must be pretty good, when compared to their peers in their industry. But that does not make Air France a “sustainable” business.

CSR and Sustainability reporting in XBRL

There is talk of the use of XBRL for CSR reports. There is no doubt that the provision of sustainability information in XBRL tagged reports will increase the usability of the information by the analyst community. In fact, XBRL (eXtensible Business Reporting Language) is being used to provide business reports to regulators in a number of countries (examples include the US, Belgium, UK, Netherlands, China, Singapore, France, Spain and others). In the United States, the XBRL reports are public documents and are available for the investor community.

There is an acknowledgement that the investor community desires more CSR and Sustainability information. Unfortunately XBRL is not being used to produce any reports delivering CSR or Sustainability information to the investor community.

While there has been lots of lip service paid to CSR & XBRL, there is no realistic delivery as yet. In Spain they have developed a multi-standard CSR taxonomy (a taxonomy is the dictionary of allowable elements that can be used to "tag" information in XBRL). The GRI has talked about XBRL - and said how important it is - for a number of years. Unfortunately they have done nothing beyond the first draft version of a GRI taxonomy that was developed for them by volunteer labour from one of the major accounting firms in 2006. They continue say how important XBRL is, and continue to hint that they will develop the next version, sometime.

One of the most interesting potential standards that could be used as the foundation for a Sustainability taxonomy is the DVFA/EFAS set of KPIs for ESG (environmental, social and governance) metrics for investment analysts. DVFA is the German Institute of Investment Analysts. One of the innovations of the DVFA KPIs is the inclusion of a category known as "long term valuation" metrics.

It will be good to see real progress in the provision of CSR and Sustainabiltiy metrics and content in the XBRL format. Unfortunately, there is little capability today to create and deliver CSR and Sustainability information in the XBRL format.

07 April 2010

It is time for XII and XUS to "eat their own dog food"

It is a great expression: "eating your own dog food". It conveys that wonderful idea that if it is good enough for others, it should be good enough for you. It is also a litmus test of the validity of a concept or idea. Imagine if Oracle used SAP for its internal and external reporting, supply chain management, etc. Imagine if doctors refused to take the drugs  they prescribe.

Imagine saying that something is easy and will improve transparency, yet then not using it yourself. Wow, imagine already being required to provide all that information in another format, lets say an IRS Form 990, yet not even bothering to provide the same information in the standard that you create. Not even to prove that you can.

Come on guys, we keep telling the markets that XBRL (eXtensible Business Reporting Language) will deliver significant business reporting benefits to the creators of the reports, and to the consumers of the reports in XBRL. How long will it be before the markets question the validity of our assertions that this will improve business reporting efficiency, effectiveness, quality and speed, if two of the key groups advocating for XBRL do not (cannot?) even do it themselves?

The last time XII produced their financial statement in XBRL was for the 2004 results. So, did XII find it too difficult? I hope not; it is their standard. XBRL US inc has never published their results in XBRL. And doing it once, they can both look forward to an easy second, third etc round of XBRL creation, needing to do little more than change the contexts and the numbers next time.

Isn't it time that XBRL International (XII) and XBRL US inc (XUS) actually ate their own dog food?

04 April 2010

iXBRL: UK companies have a Great Opportunity

Very soon all companies in the United Kingdom are going to be producing iXBRL versions of their financial statements and providing those to HMRC (Her Majesty's Revenue and Customs - the tax department). This provides UK companies, especially all listed companies, with a fantastic opportunity to increase the quality of reporting they provide to investors.

As the iXBRL will be required, it seems to me that there would be little additional effort required to make those iXBRL versions of financial statements available on company websites.

One of the benefits of XBRL is the ability to directly consume the information into computer systems to avoid manual re-keying. This is particularly important if a company wants the analyst community to either cover the company, or at a minimum to include the company as a comparator to a covered company. Any need to re-key information would impose time and error costs on analysts, and will 'de-select' that company from the list of comparators, if it is possible to simply import the information provided by another company in the same industry segment.

Therefore, while there is no requirement for companies to post their iXBRL financials on their website (the SEC requires companies providing XBRL to the SEC to also post the XBRL files on their website), to do so is both simple and provides the investor community with additional information, quickly and at almost no additional cost to the company.

What a great opportunity for UK (LSE and AIM) listed companies to get their message out. Don't put the iXBRL in the logical desk drawer, post the iXBRL financial statements on the company website.