Credit: Catherine, CC BY 2.0

Sustainability reporting is often seen as a corporate social responsibility (CSR) tool to help a company polish its public image. But as the practice starts to mature, sustainability reporting is becoming increasing tied to company strategy and decision making as well as to manufacturing processes and daily operations. In some cases, the practice is actually the driver of company strategy.

According to Andrew Wilson, director of Corporate Citizenship, the London-based corporate responsibility consultancy, sustainability reporting, “as part of a wider communications process,” is becoming “an essential component in setting corporate strategy and building stronger relations with stakeholders.” Corporate Citizenship’s research finds that sustainability information “is being used more widely by analysts in assessing financial risk and identifying good corporate governance.”

In a new report, “Adding Value Through Sustainability Reporting,” Corporate Citizenship revealed results of its survey of 150 practitioners of sustainability reporting. Its survey found that a growing number of companies are going beyond the public-relations value of publishing such reports and are seeking ways to use environment performance measures to drive daily business practices.

An ArcelorMittal steel plant in Ukraine.

In fact, the survey showed that the most important audiences for sustainability reports are not external groups like the public or consumers but rather those that are closer to the enterprise: analysts and financial stakeholders and others internal to the company. The CSR head for steel manufacturer ArcelorMittal told researchers that “without internal audience buy-in, there won’t be a report at all” and that reporting is “an important prism to help push ownership of sustainability across the group and encourage functions to realize that transparency brings benefits at so many levels.”

How Sustainability Reporting Can Drive Strategy

One of the most common complaints about sustainability reporting is that it’s just a way to make yourself look better under public scrutiny.

Joseph Sarkis, professor of operations and environmental management at Clark University, in Worcester, Mass., in an interview with ThomasNet.com Green & Clean, said sustainability reporting is meant to “send signals to the marketplace … to help build legitimacy within communities and the markets.” He sees corporate sustainability reports as “typically more public-relations oriented rather than true measures of organizational sustainability performance.” He says, “Very rarely do you see these reports containing critical, competitive data that can be used to hurt the company’s image.”

Ron Loch, director of the sustainability consulting practice for Gibbs & Soell, based in New York City, says that if a company begins sustainability reporting “before they have organizational commitment and some degree of operational change to meet sustainability goals,” the result can be “a shallow report that may attract accusations of greenwashing or create an expectation for improvement that is never attained.”

Nevertheless, Loch says companies that go about their sustainability reporting intelligently can “better understand the risks, costs and opportunities involved with their operations, products and policies.” Says Loch: “You can manage what you can measure.”

Reporting, then, Loch says, “is all about measuring a company’s impact on the environment and society. Companies are finding this information useful in creating strategies to reduce operating costs, mitigate legal and regulatory risks, improve labor relations and enhance their brands.”

Corporate Citizenship’s report suggests that sustainability reporting is maturing and evolving. It describes companies that are more advanced in their reporting regimes as “third wave” and “fourth wave.” For third-wave reporters, sustainability reporting “has become more embedded into business practice … It is beginning to be understood that reporting drives performance — the report is not just a passive output but part of a dynamic system.”

A BMW auto plant in England. Credit: UK Department for Business, Innovation and Skills, CC BY-ND 2.0

Fourth-wave reporters take it even further, using “audience-enabled communications based on social media taking reporters from engaging with stakeholders to interacting with them.” Reporting becomes not so much a yearly event as a continual process: “Things happen and change all the time, and there are stakeholders who will always want to know the business’s response.” These advanced reporters “look to communicate in real time, and, in doing so, sustainability becomes an integral part of daily business practice.”

The consultancy’s survey points to a definite trend in sustainability reporting becoming bona-fide strategy. In identifying the principle audiences for the survey respondents’ sustainability reports, only 20 percent pointed to consumers, the community, or opinion-formers like advocacy organizations. Only 30 percent pointed to customers as a principal reporting audience. But 37 percent identified analysts and financial stakeholders as key audiences, and 40 percent said internal audiences were crucial — the highest-rated reporting audience. According to Corporate Citizenship, the high rating of internal audiences “suggests that reporting is increasingly becoming a more precise tool to stimulate internal change and value creation.”

Hervé Kieffel, who heads the Project Portfolio Optimization practice at global professional services firm PricewaterhouseCoopers, says one of the crucial elements for linking sustainability to company strategy is valuation, i.e., “bringing sustainability initiatives to the CFO table and being able to articulate the value of their benefits — both financial and non-financial.” Only through this way can “sustainability strategy and corporate strategy be aligned,” he says in an interview.

This means mapping out the “value drivers,” Kieffel says. For example, most companies start with the obvious one, “eco-efficiency … water, energy, fuel savings.” But, Kieffel adds, “more and more companies are expanding their definition of sustainability to include health and safety, social cost (as opposed to company cost) of environmental impact, employee satisfaction or brand perception.” The next step, he says, is creating “customized, measurable and specific metrics that allow you to track the impact of your sustainability initiatives against these value drivers.”

The hardest challenge, Kieffel admits, is translating such metrics into shareholder value. But this step is crucial. “How do we translate tons of carbon, letters of praise and critical press coverage, number of health and safety incidents and customer satisfaction surveys into value created for the company — in dollar terms?” he says. This isn’t easy, but “there are techniques to accomplish this, and they are well known and applied in certain sectors,” such as government and utilities.

Puma’s headquarters in Herzogenaurach, Germany.

Sportswear manufacturer Puma, cited in the Corporate Citizenship report, exemplifies the importance of translating sustainability into value. In 2011, the company established the Environmental Profit and Loss account (EP&L), which tracks “the full cost of environmental impacts and damages throughout Puma’s entire value chain.” This kind of valuation makes sustainability more “doable” for managers, who have to “base their decisions on financial figures,” the report emphasizes.

In discussing the connection between corporate strategy and sustainability reporting, a number of experts brought up the Global Reporting Initiative (GRI), a nonprofit organization that promotes a standardized framework for sustainability reporting. Given the growing profile of GRI, my next article will focus on the GRI framework, how it is shaping corporate sustainability reporting and how it is providing impetus for companies to make sustainability a core element of enterprise strategy.

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