CSR/Sustainability reporting: the coming explosion

The next three years will see CSR/Sustainability reporting transition from a "nice to have" to a "Cost of Entry". Companies will find themselves less able to win contracts, upstream supply chain participants will expect reports, and banks will demand to see the CSR report just as they require a set of (audited) financial statements (I'll talk about "audited" in another post).

Today the creation and maintenance of a CSR report can be expensive and time-consuming, and there doesn't seem to be the demand.

Cast your mind back to the darkest reaches of history - say - 1995. The Internet was reasonably well established, and you could search for sites, sort of. If you knew the website of a company (or someone's e-mail address, not everyone had one) you could type in the www then the e-mail address after the @ but before the ".com", and if you were lucky, or the company was really really big, you could find a website.

Companies around the world knew that being on the web mattered, and certainly the leaders had some pretty fantastic sites.

A century or two later, sometime around 1998, I don't remember when exactly, I did the little dance of the cut-and-paste to search for a company website... and for this search, there was no site. I rang my contact at the company and asked "I'm surprised your company doesn't have a website. Why not?"

The answer I got was "Creating and maintaining a website is expensive and time-consuming, and there doesn't seem to be the demand." Sound familiar?

So what changed to make websites truly ubiquitous?

The cost of creation plummeted, tools became available to help build sites, large numbers of people played with HTML and other web technologies. But most important, people; me, and you, began to expect to find a website. Companies without websites dropped in our estimation as "serious" companies. 

Did the websites need to be sexy, smart, absolutely current as of this morning? No. But there had better be a site.

The coming explosion

CSR/Sustainability reporting is at that cusp. the big companies, regardless of industry, have CSR reports. Thousands of companies provide reports to the CDP (Carbon Disclosure Project), over a thousand are producing GRI (Global Reporting Initiative) compliant reports and/or GRI Content Indexes. Today I go to websites and wonder if I do not see Corporate Responsibility, or CSR, or Sustainability. I'm reaching the point where I wonder what they are hiding.

And I ask "I'm surprised you don't have a sustainability policy or a CSR report. Why not?" Well, you know the answer that I'm getting.

But that is about to change, and change pretty radically. Demand creates innovation. Innovation drives adoption. Adoption feeds innovation and demand.

I am confident that there will soon be tools and processes that will make the creation of CSR reports "easy", inexpensive, and ubiquitous. And when that happens, centuries will have passed in an instant, and we will be living in a world in which CSR/Sustainability reporting is simply assumed. That regardless of the size of the company, if it is a "serious" company, wanting to attract and retain clients, staff, and frankly needing to demonstrate that it understands the importance of the societal/corporate "contract", CSR/Sustainability reporting will be a core element of communications and corporate reporting. Just like a website for (audited) financial statements are today.

Earthquake in Christchurch, NZ

Christchurch, New Zealand suffered a 7.1 earthquake yesterday. It appears, remarkably, there there have been injuries but no fatalities. Christchurch is a lovely city on the Canterbury Plains next to the Pacific Ocean. I have found memories of many visits to the city, and have close friends living there. We have been in contact and other than bad damage to their house and the neighbours, all are safe and uninjured.

GNS Science, a New Zealand government-owned research organisation released the following Media Release.

As background, the Hawke's Bay earthquake of 1931 killed hundreds, and raise the port of Napier far enough that the port was too shallow for ships and it silted over. There is now an airfield over what was a port. In addition, the rebuilding that took place in Napier after that quake followed the style of the day, making Napier a center of Art Deco buildings.

Christchurch will recover (quickly), and will continue to be a beautiful city on the plains of the South Island.

At the same time, this is a reminder to all New Zealanders of the importance of earthquake preparedness. Especially in Wellington!


===========================

MEDIA RELEASE

4 SEPTEMBER 2010

CANTERBURY QUAKE THE MOST DAMAGING SINCE 1931

The magnitude 7.1 earthquake that hit Canterbury early today is expected  to be the most damaging since the 1931 magnitude 7.8 Hawke's Bay  earthquake.

The earthquake, which jolted Cantabrians awake at 4.35am on Saturday, was  located 30km west of Christchurch near Darfield at a depth of 10km. It was  felt throughout the South Island and as far north as New Plymouth. Damage  to buildings and infrastructure in Christchurch and surrounding areas is  considerable.

Dozens of aftershocks occurred in the first few hours after the quake and  it is likely they will continue for weeks.   GNS Science duty seismologist, John Ristau, said typically the largest  aftershocks occurred within the first 48 hours of a large earthquake. They  generally declined in frequency and size over time.

"A rule of thumb for a large earthquake at a shallow depth such as this is  that the largest aftershock will be about one unit of magnitude lower than  the main shock," Dr Ristau said.   Seismologists say a foreshock of about magnitude 5.4 occurred a few  seconds before the main shock. Both shocks occurred in slightly different  locations. Seismic energy from the two shocks became entangled making it  difficult to pinpoint the size, location, and depth of the main shock.   There are several known active faults under the Canterbury Plains and in  the Canterbury foothills, but at this stage it appears the earthquake has  not occurred on a known fault.   Scientists from GNS Science, Victoria University of Wellington and  Stanford University in the US have joined colleagues from Canterbury  University to deploy about 40 portable earthquake instruments to record  aftershocks over the next few weeks.

The GNS Science contingent hopes to have most of their portable  instruments deployed around Canterbury by Sunday night. This will mean  approaching landowners and seeking permission, as they hope to place some  of the instruments on private land.   They will concentrate their deployment on the areas where most of the  aftershocks have already occurred.

 The battery-powered instruments will be left unattended for about three  weeks to record aftershocks. Seismologists study aftershock sequences to  find out more about the mechanics of the main shock and rupture, and to  ascertain if stress in the earth's crust has been transferred onto other  faults in the region.

Scientists will also study satellite data to investigate surface  deformation in Canterbury as a result of the earthquake. Geologists from  GNS Science have travelled to Canterbury to investigate the geological and  environmental impacts of the quake, and to undertake a detailed ground  study.   Engineering seismologists from GNS Science will join colleagues from the  Building Research Association of NZ and Canterbury and Auckland  Universities to investigate the impacts on buildings and infrastructure in  Canterbury to find out how different construction types performed.

The information they gather will be fed into the engineering community to  help ensure structures are built appropriately to cope with stresses  caused by strong ground shaking. It will also help as older buildings and  structures are retro-fitted to improve their ability to withstand  earthquake shaking.

Much of the scientific response to the earthquake is being coordinated  under the GNS Science-led Natural Hazards Research Platform, set up by the  government a year ago to provide long-term funding for natural hazards  research.   Manager of the Platform, Kelvin Berryman, said post-earthquake  reconnaissance was one of the roles of the Platform, as well as developing  quantitative estimates of earthquake, volcano, landslide, tsunami, flood,  snow, and wind hazards in New Zealand.

"We have an obligation to learn as much as we can from this event to help  improve our understanding of earthquakes and their impact on society, and  to help ensure that New Zealand is well prepared for future earthquakes,"  Dr Berryman said.   To see more information on the earthquake go to our GeoNet site.

http://www.geonet.org.nz/ Specific information on the Darfield quake can be found here.

http://www.geonet.org.nz/news/article-sep-4-2010-christchurch-earthquake.html

What would you pay to use the GRI standard?

Recently Stewart Mckie in a blog posting (http://holistic.tripos.biz/about/gri-and-software-certification/) pointed out that the GRI appears to have changed the wording of its copyright notice with regard to use of the GRI content in software solutions. It is now "Illegal" to use GRI text, indicators or content in software systems without paying a license to the GRI.

The GRI (Global Reporting Initiative) is one of the more widely known and used CSR/Sustainability reporting standards. It was developed using the contributions of members and government grants.

Now the GRI is asserting that if you use software to create a GRI compliant report (i.e. actually use the GRI Indicator label and text) and the software provider did not have the GRI's permission (and pay them a fee), a crime will have been committed. While we've heard a fixed price for the license, I cannot imagine that the GRI would charge a small firm the same as they would charge a very large software provider. It certainly would be a great deal for SAP or Oracle, but not for smaller market participants. And does a flat annual license make sense when one provider's software might facilitate the creation of 100 reports, while another provider's software might facilitate the creation of 1000.

This means that preparers of a GRI compliant report will pay for use of the (free) standard through the license fee that the software provide must remit to GRI. This includes companies that may have contributed to the development of the standard or membership in the GRI as Organizational Stakeholders (OS).

Could the GRI go to the producer of a report with a GRI Index, and ask what software was used to feed the content of that report? What if a company chooses not to disclose their service provider? Is the reporting company then a party to the illegal use of the GRI standard?

Will companies simply stop providing GRI Indexes, and instead simply state "Prepared in the spirit of the GRI G3 standard". The report provider could then simply provide an index. You know, the good old fashion kind with a list of word and concepts, pointing to the page where the information can be found.

Regardless, what does the need to monetise the standard point to, and what might be the unintended consequences of such a move?

Risk of Fraud in CSR / Sustainability reports (the "Balloon")

Risk of Fraud (the balloon)
 

No one should believe that CSR / Sustainability reports will be Fraud-Free zones. Where there is a need or desire to provide reported outcomes that differ from actual outcomes, there will be mis-staement and fraud. Corporate officers are now required (under the US Sarbanes-Oxley law – “SOX”) to certify that the reported results are accurate. These officers face criminal and civil penalties if they knowingly certify inaccurate information in the reports.

While this has reduced the opportunity for direct financial statement fraud and misstatement, the concept of the balloon comes into play. Squeeze the balloon in one place, and it pops out in another. Misstatement of business information with the objective of misleading regulators, investors and analysts is a bit like the balloon. Tighter controls over financial reporting decreases the risk of misstatement of this information, but increases the danger of misstatement of unaudited information.

The fact of greater controls does not mean that the number of individuals willing, able or motivated to "fudge the numbers" has decreased, only that the opportunities have decreased.

Let us consider for a moment the reasons that information is misstated in the first place. Managers and executives in companies are given metrics and objectives that they need to achieve. These metrics could be operational, or could include improvements in share price or other external metrics. To commit fraud there need to be three factors; opportunity, reward and rationalization. Increased internal control quality under SOX has reduced the opportunity, but has done nothing to remove the other two motivations. Where the desire is to influence observers of a company's reported value in order to protect or increase personal reward, those who might have manipulated financial statements will find other externally visible measures they can manipulate. Unaudited information such as CSR/Sustainability information provides such an opportunity.

The investment analyst community use information well beyond the audited reports; non-financial or extra-financial information, projections, unaudited segment information, competitor profiles and performance and industry comparisons, to name a few. Unintentional reporting of inaccurate unaudited information can skew investor models, and intentionally misstated non-financial or extra-financial information could be used to intentionally alter analysts perceptions of a company.

Therefore we should not expect the tightening of systems of internal control and the introduction of penalties for the reporting of knowingly inaccurate information in audited reports to automatically reduce the volumes of intentionally misstated information.

To give an example, imagine a situation in which a company commits, at least in a CSR/Sustainability report, to reduce waste water by a given percentage or volume. Senior managers may have parts of their remuneration tied to achievement of these objectives. In such a case there is an incentive to influence reported results. As this information is not audited, but it is reported externally, senior management could decide to manipulate the results for both positive public relations and to meet personal targets and therefore protect bonuses and other remuneration. The resulting reports, while not audited, certainly are provided into a market place with the intent of influencing valuations of the company.

It should also be noted that we expect this risk to have a relatively short life, as we expect CSR/Sustainability information to become part of SEC and other regulatory reporting over the coming years. In the case of SEC registrant companies, the inclusion of CSR/Sustainability measures into mandated reports could result in this information becoming audited information under the reporting responsibility of the CFO or Finance Director. More importantly this information will become subject to two key sections of Sarbanes-Oxley; 302 and 404.

Under section 302 the CFO and CEO need to certify that the reported results are accurate, with penalties for knowingly reporting inaccurate information. Inclusion of CSR/Sustainability information under this section will result in this information coming under significant additional internal scrutiny, and review by the external audit community.

Should CSR/Sustainability information be considered part of the "Financial Statements" (or equivalent) then the creation of that information will become subject to section 404, and management will be required to both document and test the controls over the production of that information. In this scenario CSR/Sustainability information creation will become far more formalized and process driven, with correspondingly greater depth and quality, resulting in consumers of the information having greater confidence in that information.

Forgetting is not an option

Last weekend I visited Monparnasse Cemetery in Paris. In section 28 there is a family tomb. The top name is familiar to me (and to many others). Subject to false accusations of treason, convicted on false evidence, his sword broken before him and his epaulets torn from his shoulders before being transported to a prison island. Finally rehabilitated, retired from the French Army and died in 1935.

 

Now look at the name directly below. Look at her age. Then read the line directly above that: "Disparue A Auschwitz". 

Now, look at this picture. Potokari cemetery in Bosnia.

 

Does it matter what religion? What country, or time?

Forgetting is not an option.

So the fizzy white wine stays in the bottle for now...

Well, it looks like we were all enthusiastic just a moment too soon. No sooner does it look like a XBRL in the United States was making a huge leap forward - at least in terms of mandating - then the rug gets pulled out from under. It seems the "Data Standard" amendment has been dropped from the financial reform legislation.

And through the weekend I actually thought that the biggest danger was a stalling of the whole vote due to the illness of Senator Byrd (the longest serving member of the US Senate - the "Upper House" of the American congress). Senator Byrd (now deceased as of 3am US time this morning) was a **Republican** (No he wasn't - thank you Bob for pointing that out so quickly, and my apologies to all who read this and believed my error. Here is from CNN "Byrd, a nine-term Democrat, was known as a master of the chamber's often-arcane rules and as the self-proclaimed "champion of the Constitution," a jealous guardian of congressional power.")  and one of only 4 who were voting with the Democrat on the overall law that was being propose. With him being taken ill, the worry was that the law would stall if there were not enough Republicans voting in favour.

With his death, the Governor of West Virginia (his state) will select his replacement to serve out the remainder of his term in office. As the Governor is a Democrat, we can expect a Democrat to be appointed, yet there will still be a delay.

Well, that was my worry, until the e-mail from the CEO of XBRL US Inc. Pity.

Then again, as pointed out in his earlier e-mail, there was still some way to go through the process of "reconciling" the two versions of the law that were before Congress. The American system requires a single version of a law to be passed by both the House of Representatives (the "lower house") and the Senate (the "upper house"). This makes for an arcane world of deals and counter-deals. Swapping favours and influence, and in the process buying votes - both in Congress and from the electorate. It also allows various constituencies see how hard congressional representatives are working for their various constituencies.

It seems in this case that the XBRL constituency was trumped by something bigger.

So the fizzy white wine stays in the bottle for now, and Moet stays in the cellar. Hopefully we'll see both bottles come out again soon.

"Bugga" is about all I can say