Why create a CSR report?

Why create a CSR report?

Why should a company create a CSR (Corporate Social Responsibility), sometimes known as a Sustainability report, or even a “Triple Bottom Line” report? What are the drivers? Is CSR a fad, a real reporting opportunity, or a requirement? The answer to that question depends on who you are, your markets and clients, your competitors, and those you report to external to the company.

It is easy to suggest that it is a fad, and we've all seen fads come and go. But it is also easy to see that if it is a fad, it is a fad that is being driven as much by consumers as by companies themselves. Companies across industries are touting their corporate responsibility on their websites. Why? Why would they spend the money and time to create reports, unless they actually believe there is a return for such reporting?

The very fast response is that they believe there is going to be a return, a real ROI, either through reduced costs or increased revenue, or both.

Drivers

So what are the key drivers? The can be summed up as including:
•    Investors
•    Market expectations
•    Competitors
•    Regulators
•    Employees
•    Communities

And each of these drivers has at its core either increasing revenues, or reducing costs. After all, if a program does not accomplish one or the other, then why should a company incur the associated costs?

In CSR circles, these drives are called "stakeholders", and frequently direct outreach to stakeholders is an important element of creating a successful CSR report. Strangely, for most companies that "stakeholder engagement" has already take place, in one way or another, and the information needed to create the CSR report already exists.

So lets look quickly at each of these drivers.

Investors

Why should a company produce any report? Fundamentally reporting should serve the purpose of improving internal decision-making, influencing external parties, or responding to regulator mandates. As CSR reports are external facing in nature, the question then is "who do we want to influence". At the front of the pact should be the investors or potential investors. And this means that the CSR report should provide the information needed for that group - information to demonstrate to investors (and analysts whose results are of interest to investors) that the company understands and is proactive in meeting is "responsibility" imperatives.

Investors want both short- and long-term rewards, and management's program must balance the two. The CSR report should, coupled with or even integrated with the annual and financial report, provide the data that delivers comfort to investors that the company understands and is focused on achieving short-term rewards in a manner that ensures achievement of long-term rewards and goals. Almost sounds like the classic definition of Sustainability - enough for today without stealing from tomorrow (my paraphrase).
 
Market Expectations

Markets, both B2B and B2C (and every other x2x) are becoming much more aware of the relationship between a supplier's corporate responsibility and the quality of product, acceptance of the product, and reduction of long term costs.

Equally, companies have come to understand that, as Warren Buffet said best "it takes 20 years to build a reputation and 5 minutes to ruin one". Corporate responsibility is not about always doing good, but about being able to prove to yourself and communicate to your customers that always try, honestly, to do good (within a business context of needing to make a profit).

Many companies are now including a requriement for suppliers to specifically address their CSR credential in proposals. One bank in Vancouver includes responses in it ranking of potential service providers. Other companies around the world are now looking for this information in bids.

You should be asking for a copy of any potential suppliers CSR reports before entering into any major contract. Companies that provide such reports are significantly more likely to understand the issues and to work to ensure that they are “responsible” businesses. Companies that cannot demonstrate their CSR credentials may cost you, and cost you big. Too often a failure to report is not because the company is not aware of the issues, but because addressing potential issues (child labor, carbon-intensive production or energy, pollution) can add costs that will eat into the suppliers’ profits. Competing against “responsible” businesses without carrying associated costs can be profitable business. But today, any tourist or activist with a cellphone could destroy your reputation, linking you to irresponsible companies in your supply chain.

Competitors

Companies should take a very good look at their competitors’ websites and the messages that they are sending.

Working with clients, I make a habit of looking at their competitors’ websites. It comes as a little surprise that many tout their sustainability or responsibility credentials. Sometimes in vapid and empty phrases, or with pictures of windmills, daisies, and little girls smiling in the sunshine (these I almost immediately discount). Others back up their statements with reports, online or in PDF format, sometimes with a GRI Content Index to help find various bits of information.

Then there are the majority - the companies that do not have CSR or Sustainability reports of position statements. I also like to point these out to my clients, asking if demonstrating the company’s credentials might actually provide a competitive advantage. Equally, if the company is already competing of a "level playing field", how level will the field be when their competitors do start showing their credentials?

Regulators

Ahhh, regulators, the gorilla in the room. Why are they a driver for creating a CSR or Sustainability report? The first reason is to show them that you are already a "responsible" business and therefore, as they say on the police shows - "Move along, nothing to see here". The second reason is to prove that there is no need for all that nasty regulation that they are considering, because you are already "responsible", as demonstrated in you report.

Of course, the first reason the more effective, because for the second to matter, your peers will need to be demonstrating that they are responsible businesses also.

So, the CSR or Sustainability report should be taking informaiton that your company already produces, and complies it into a quality report that all can see, not just the regulators who are already receiving those detailed reports.

A great example is the commercial property and construction industries. Many companies in these industries produce very nice CSR reports. A careful read of the reports, especially their health and safety sections (frequently described as "Caring for our People and our Communities" or words to that effect) can be boring, and sound like boilerplate. At there core is a simple message - "We comply with all health and safety laws". But that is not nearly as interesting as reporting a reduced accident rate, increased training, onsite safety briefings for all visitors (“because we care”), etc.

Employees

Employees like to have pride in their company. It is part of them. And a company’s image reflects on the employees. Ask any employee of a "Top 100 Places to Work" (in the US) or virtually any employee of a company like the Co-Op in the UK, and you will see their pride.

And pride in your employer translates directly into reduced unplanned turnover, reduced hiring costs and payroll, and increased productivity. We know that people work for money - but we also know that people chose where they work for many reasons beyond money.

Some companies are intentionally structuring the "responsibility" message with a view to attracting and retaining employees (even in this economy). Some look at their employees as long term assets that require investment. Others understand that the recovery, as it unfolds, will change the employment picture, and companies with a poor reputation will get their pick of the second-level candidates.

Communities

Finally, and possibly most importantly, all companies have a "license to operate" that is in no small part predicated on how the local and wider community views that company. Good employers, innovative products and services, and a respect for the environment and society all factor into that "license to operate". Abuse that license and society will turn against the company.

Therefore reports are being written specifically to highlight the value and respect that companies have for their communities. For the multinationals, they report to demonstrate their respect for and support for the varied cultures and communities in which the work and deliver products and services.

The support of companies for their communities is not something that happens because it is in a glossy CSR report. The CSR report highlights the support that the company provides to its communities.

Where does the content come from?

So, I've highlighted the drivers for CSR reporting. But where does all the information contained in such a report come from? The range of information, the number of people that maintain and hold that information within a company can be quite difficult to map. And mapping the sources of that information is important.

The good news is that there are ways to improve access to and collating all that information, filtering out the important from the merely interesting.

This is a subject for a different article, but clearly tools exist or are coming onto the market that will make the collection, collation and selection of already existing information and content much easier. This will facilitate the rapid creation and updating of CSR / Sustainability reports, regardless of the reporting standard used.

What reporting standards should be followed?

Today there are a few reporting standards, and the standard selected should be based on the primary audiences. If you are looking to create a pool of data for analysts, I would recommend you take a good hard look at the KPIs for ESP produced by the DVFA (German Investment Analysts Association) and endorsed by EFFAS. If your primary audience is marketing, consumers, and employees, then the GRI's G3 standard provides a range of reporting levels (they call them "Application Level") that allows you to produce a tailored report, and to grow the range of reported information over time.


The UN Global Compact probably has the "easiest" and "fastest" standard to comply with, and is a good "starter" report. But if a company is going to be serious about meeting the information needs of the widest range of audiences, the UNCG will not be adequate.


The work of the newly formed (August 2010) IIRC (International Integrated Reporting Committee) will be worth following, as the primary objective there is to create reporting standards that integrate sustainability reporting into tranal business reporting (annual reports, etc) and providing a sound accounting base for the reported information.

Congratulations to the GRI - now in NYC

Congratulations to the GRI (Global Reporting Initiative) on the opening of their NewYork office. The United States remains the largest economy in the world, yet also lags behind in CSR / Sustainability reporting. Certainly there are pockets, and certainlly the very largest companies all produce reports, many following the GRI guidelines.

But as long as the GRI was viewed as "something European" there was going to be push-back. The lack of a national standard for sustainability reporting in the US, and the lack of a clearly defined mandate from the SEC (for listed companies) has also allowed business to avoid CSR and Sustainability reporting as "just another overhead, another reporting burden".

That of course is changing, as companies understand the financial benefits of both being sustainable, and of communicating that sustainability progress to their stakeholders.

It is also interesting to note the Big-4 are all helping.

"Each of the ‘Big Four’ accounting and professional services firms in the United States – Deloitte, Ernst & Young LLP, KPMG and PwC U.S. – has agreed to provide donations to sponsor GRI’s new Focal Point USA for the first two years."

Some time ago I reported that the GRI was making the rounds to the Big-4 asking for $200,000 each. Subsequently I received confirmation that the GRI was probalby going to get support. It looks like they got it, or some other support in kind.

Ignoring the Big-4 connections for a moment, the news of the GRI opening their NYC office is very good news. Located in New York, the GRI will have far greater access to business. And while New York is not Washington, a presence in the United States cannot but help the GRI's efforts to have the standard mandated by the SEC.

While the GRI has, either directly or through proxies, lobbies the SEC to mandate the G3 standard, their efforts to date have had limited effect. The SEC's "interpretive release" at the beginning of the year (2010) only reinforced company's responsibility to report issues where the company considers them to be material - or potentially material. This is a long way from a mandated standard. The SEC pointed out that companies already have a requirement to report on a wider range of issues, and in the CSR / Sustainability area the SEC highlighted:

• Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
• Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
• Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
• Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

So the GRI's presence in New York will help further establish the standard in the US, and provide a platform for communicating with the SEC and other regulators.

HBR Case Study; Should Sustainability Have a Seat in the C-Suite?

Harvard Business Review has the best case studies, but then I guess we should expect that. I know that I read their case studies, and say "Well, of course" in answer to their question. But like most really good questions, the answers are never "yes" or "no". There is a real pleasure in thinking through the problem.

This month it was no different.  Their question was: Should Sustainability Have a Seat in the C-Suite? My gut reaction is "Well, yeah, how else are they going to be, and be seen to be serious about this?" But a close reading of the case, a mythical computer and electronics company called Narinex, made me rethink my automatic response. They are losing bids, not all the time, and not all the big ones, but enough to make them look closer. And one of the key differentiators is their competitor's (in the situation highlighted) sustainability record. At least, it seems to be their record.

Closer reading shows that it is not the sustainability record, but in part the presentation of that record through the appointed CSO (Chief Sustainability Officer) at one of their competitors.

I won't rehash the case here, you can read it at the link above. But I do want to mention two of the comments submitted by readers.

Elaine Cohen, as usual, is clear in her argument - "I believe the question at this point is not whether to hire a CSO but what is the sustainability reality for the Narinex company. The focus on sustainability is not going away, and is now a minimum expectation of businesses." She then goes on to recommend a Sustainability Mapping Study, with result provided to leadership for decision making.

She ends by saying "Sooner or later, in my experience, if a company is serious about sustainability, a CSO is a necessary asset. However, in the first stages, moving forward step by step may require broader expertise that one CSO can deliver and it might be better to establish some initial good practice through engaging the management team in their own functional areas, but only if there is someone in the business who is prepared to champion this as a short-medium term assignment."

The other comment that I really liked was from Erik Thomsen, who approached the problem from a slightly different point of view. Erik focuses on the availability of information for clear future decision making. He says "This is because the financial metrics traditionally used in the C-Suite are inherently backward looking and fail to capture critical environmental and social factors that are the drivers of medium to long-term financial performance. "

He's right. The information provided, and modeling performed remains based on well worn paradigms, one of which is that a zero price input today will remain a zero price input in the future. The pricing of externalities, if not in fact then certainly in projections, is critical to corporate success.

While I favour hiring a CSO, Erik has a different view: "What’s more, hiring a Chief Sustainability Officer implies that the rest of the C-Suite is too busy to be concerned with sustainability. This would implicitly de-position sustainability, putting it into a box other members of the C-Suite don’t have to think about."

He finished by saying "Finally, addressing the VP of Sales’ concerns -- who is going to generate more buzz, a Chief Sustainability Officer talking about issues that could be handled by someone in marketing and communications? Or the CFO, COO and CEO talking about the strategic business decisions that will ensure the company’s future profitability in an environmentally and socially sustainable way?"

Both Erik and Elaine are right, even through their suggestions in the end are different, I think they are both right. I think they should hire a CSO. Yet Erik makes the point well, who better than the entire leadership team to make the point that sustainability has become part of the DNA of the company?

It will be interesting to see how this evolves.

Real Pink Falmingos - near Alres, France

Is XBRL like Blood?

This is the second year of the SEC's three-year phase-in of XBRL for listed companies in the US. So far one would have to say that the process has been remarkably smooth, considering that this is a new reporting technology for filers, and for the SEC. But it remains an "experiment" and sometimes experiments fail. Especially experiments that provide benefits to the downstream recipients, while imposing costs of the providers. The options are to ensure there are adequate benefits for the provider, and that provider costs are minimized.

To use a crude example, there is a chronic shortage of blood donors. Why? After all, it only hurts a little, and you get a nice cup of tea (has anyone but me noticed that "cup of tea" is almost always preceded by "a nice", as if there exists no alternative) and a really warm feeling inside that you've done the right thing. I would argue that the primary reason there is a constant shortage of blood donors is that most of the benefits accrue to the downstream recipients of the blood. Certainly the person receiving the blood is a major beneficiary. But looking further, easily the greatest beneficiaries are the for-profit hospitals and medical establishments.

So there should be little surprise that there remains an almost constant shortage of supplies of donated blood.  Provider pays, recipient benefits.

Now lets look at XBRL.

Today companies are given the opportunity (well, it was an opportunity, now it is a mandate) to spend their money and time to produce reports in the new reporting technology, only to have the benefits accrue to the downstream users of the data - the SEC and the analyst community (through free, high quality data).

Therefore, we should not be surprised to hear of directors of external financial reporting complaining that "it is too complex, with 16,000 elements and new software", not to mention either consultants or the external printers each taking their cut. And this is before any costs for assurance. I know, assurance is not required - but the SEC does say that filers must be able to demonstrate a "good faith effort" to provide clean and error-free data. So who wants to be the test case for what a "good faith effort" means in the XBRL world?

Fundamentally what is needed is cheap, easy-to-use software that removes the complexity burden, and radically reduces the cost of production of XBRL. Also needed is almost ubiquitous training to bring the reporting community up to a minimal standard of understanding. Face it, if close to 50% of all errors in filings (in the United States) are due to a negative number being entered with a leading "-" minus sign, when the element is already a debit item and therefore assumes a negative number - is that the fault of the financial reporting people, the fault of an overly complex standard, or the fault of software that does not help the user avoid that mistake?

Should a filer really need to spend additional money on a "consistency suite" to catch those errors, and to ensure that they selected the same elements as their peers? Surely that should be a public-good provided by the SEC as part of their validation checks.

So, maybe the SEC and the analyst community should be funding the XBRL validation software, to reduce or remove where possible any costs of creation of XBRL. After all, if they benefit, shouldn't they be carrying the cost of that benefit.

So again, if the "experiment" is going to be successful, three things are desperately needed:

1. Inexpensive software that intuitively helps the filer create their XBRL report, as "just another output format"
2. Ubiquitous training to build the baseline understanding required to reduce the potential for errors. Should the SEC be funding such training?
3. Validation software provided by the SEC to absolutely reduce the risk of error prone XBRL submissions.

What does this really boil down to? Reduce the cost to the provider. As long as the provider of the benefit does not receive the benefit, there will be push-back. Blood and information flow easier from provider to recipient when the costs and benefits are shared.

Amazing Europe - Don't you just love a great revolution?

Don't you just love a great revolution? The banners, the marching in the streets, the riots and sniff of teargas, the decapitations (well, I am in France), and yes of course, the incredible feeling that the old order is being swept away before your very eyes.

Sadly, the people who do the best revolutions, the Europeans, seem to be engaged in a terribly boring revolution. Non-the-less, an old order is being swept away before our eyes, and XBRL marches through the capital cities, sweeping away the forces of conservative (not political party) business reporting.

On September 21st, XBRL EU held a meeting in Paris. Not only was the meeting in Paris (already a good start), but the range of projects discussed, across countries and industries, was quite amazing. Some time ago I wrote about "Spain, the quiet achiever". I have to amend that to "Europe, the quiet revolutionaries".

Gilles Maguet, Director General of XBRL Europe, opened the session and gave a fascinating overview of the range of programs underway across Europe. He presented a slide (link) that shows projects by industry/category and by country. Certainly the table is not complete, but it is impressive to just how much is happening.

Probably the most impressive sector is the Business Register sector, in which 2.5 million companies across four countries are providing their accounts in XBRL. In France the filing is still paper based and the local Business Register (Infogreffe) is converting all the files in XBRL to put them at disposal of the consumers. The next step in France will be to allow companies to file directly in XBRL. In the UK, Companies House (the business register) is able to create XBRL versions of company records, and in the Netherlands the system remains voluntary under the SBR programme (formerly the NTP: Netherlands Taxonomy Project).

In the Revenue and Tax Filing sector, six countries have XBRL related projects underway, or discussions for future projects, with the UK's mandatory iXBRL program being the highest profile, coming into force in April 2011.

Then there is the Banking sector, with COREP-FINREP projects in place in most countries. In some countries, there are projects that go beyond COREP-FINREP.

The European Commission remains engaged in the discussions, and as has been seen on the XBRL-International mailing list, continues to be a topic for engagement. Four specific EU consultation documents specifically mention XBRL, and EU officials have officially participated in XBRL conferences.

The full set of presentations can be found here: http://www.xbrl.org/eu/20100921Paris/index.html

Summary:

When I specifically highlighted the progress in Spain, I was only just scratching the surface of all the progress that is being made. Much, well most, driven by regulators, but the number of projects and the depth of engagement is really quite impressive. Congratulations to XBRL EU and each country jurisdiction for the projects. 

(I would like to thank Gilles Maguet for his assistance in ensuring that I have my facts right - but of course, any errors are mine alone)

Is CO2 material?

Let me set the context for this question - CO2 released into the atmosphere is the primary cause of global Climate Change, which is real, and is primarily being caused by human activity.  The question - "is CO2 material?" asks about the materiality of CO2, if priced, to the average corporation. Here of course I'm taking the view of "materiality" frequently used by the auditing community to mean of an amount or value that will materially impact the companies performance or reported results. Frequently this level is, somewhat arbitrarily, set at 5% of revenue.

So in this context, is CO2 "material" to the average business, and what are the implications of any answer? Very probably not. In fact, considering the range of inputs (and outputs) for virtually all services based companies, CO2 (as a product of energy use) will be negligible from a financial materiality perspective.

First, for something to be "material" it must have a price. So an associated question is, at what price per ton of CO2 does it become material to a business?

Clearly for some businesses, primarily energy companies, extractive industries, transportation industries, and primary producers such as steel factories, the raw energy inputs (and consequent CO2 content) increase the probability that CO2 is material to their business, if a price is placed on the CO2.

Also, any suggestion that CO2 is "not material" is not the same as saying that there does not, desperately, need to be limits (be they market driven or regulator imposed) on the production and dumping of CO2 into the atmosphere. After all, I cannot imaging cyanide ever being "material" to a person when measured by the 5% definition, when something very far less than 0.1% would kill that person.

The question becomes important when auditors look at a company's financial statements, and when the company (if publicly listed on a US exchange) has to produce their MD&A (Management Discussion and Analysis) as part of their filing with the SEC. In these cases, the "materiality" threshold becomes important, that where CO2 falls below that threshold, there is no reporting requirement.

So there are two key barriers today to mandated reporting of CO2 by companies.

1. There is no price for CO2. Until there is a price, it cannot be "material". So, CO2 must have a price, through a Carbon Tax or through a Cap & Trade. Of course, the benefit fo a Cap & Trade system would be to allow the markets to create a price. The alternative benefit of a Carbon Tax (a sort of Tobin Tax) would be to create a revenue stream for governments that could be used to support "green" technology and infrastructrue investment - but I dream.
2. The concept of "material" in relation to CO2 must be modified to be closer to what would be a "material" level of cyanide in a person, than the 5% level used to determine that something "material" financially.

Certainly the SEC released additional guidance earlier this year on reporting of CSR (Corporate Social Responsibility) and Climate Change related information. Unfortunately the nature of that guidance was simply a reminder filers that they must report "known trends" and "uncertainties". Sadly I expect that guidance will be inadequate.