“The rise of sustainability reporting [Part 1]” by Clairma T. Mangangey and K. Sadashiv (May 31, 2010)

SUITS THE C-SUITE By Clair T. Mangangey and K. Sadashiv
Business World (05/31/2010)

(First part)

Sustainability reporting, non-financial reporting and corporate sustainability are buzzwords slowly creeping into the agenda of corporate meetings.

What exactly is “sustainability” and how does it apply to business?

Let us begin with an understanding of what sustainability really is.

Sustainability is almost always mentioned in the context of “sustainable development.”

However, defining sustainability is probably easier appreciated by defining what it is not!

To be “not sustainable” can be linked to a gamut of activities.

The most popular example is the lack of responsibility towards the environment. Very often, this is associated with the negative image of potentially “extractive and polluting” business practices that adversely affect the community where the business operations are based, and even beyond, for those businesses with significant supply chain relationships.

In these cases, support from stakeholders (customers, government, shareholders or the community) can become tenuous and affect continued operations and sustainability. Expansionary businesses need to balance their activities with their responsibility to preserve the environment and community.

The other potentially “exploitative” aspect is an organization’s attitude towards its employees and its customers. Examples include not providing equal opportunities to capable employees or not supporting them to achieve their highest potential. Similarly, providing products or services produced in an exploitative manner will not gain support from increasingly discerning customers. Finally, if a business is not behaving ethically and does not demonstrate proper governance, it is unlikely to be sustainable in the long run.

In essence, sustainability or sustainable development is about making decisions that maximize benefits to the natural environment and communities, while maintaining or enhancing financial viability.

It is becoming more evident that businesses that behave in an environmentally, socially and ethically responsible manner improve not only the sustainability of the environment but their very own sustainability.

Companies are also recognizing that carrying out a few “socially responsive” activities is just not good enough.

Embedding sustainability into strategy

Sustainability issues have evolved from being mainly the concern of environment engineers, safety and health inspectors, human resource development managers or heads of corporate communications.

They are now at the forefront — on the CEO’s table and his team of corporate strategists. Increasingly, a role is being carved out for the position of Sustainability Manager who, like the internal auditor, may report to the CEO or to an independent member of the Board.

More than ever, stakeholders are demanding to see the company’s non-financial performance record and plans. They are also evaluating corporate social responsibility (CSR)-related liabilities that may be inherent in a business acquisition or potential investment. Such CSR-related liabilities may take the form of penalties for a company’s failure to comply with greenhouse reduction obligations under the Kyoto Protocol.

As more and more Philippine corporations engage in cross-border activities, they are becoming more aware that
sustainability is essential to business viability.

As a matter of fact, recent developments on sustainability in the country include:

• The Board of Investments adopted a new CSR policy for companies registered under the 2007 Investment Priorities Plan (IPP) which requires these companies to implement CSR programs, to ensure that the fiscal incentives granted to them also benefit local communities.
• A member of the House of Representatives filed last year House Bill 6414, or the proposed “Corporate Sustainability Act of 2009,” which mandates corporations to take corporate social responsibility for the impact of their operations on customers, shareholders, employees, communities and the environment.
• The Securities and Exchange Commission requires public companies to include statements in their annual reports on their compliance with environmental laws and regulations.
• The Philippine Institute of Certified Public Accountants has established a special committee on “Sustainability Reporting and Assurance” which offers relevant training.
• The Management Association of the Philippines recognizes “the best annual report” each year, giving emphasis to transparency in reporting financial and non-financial information.
• The 2010 IPP, approved just last month, promotes investments in green business initiatives that will address the climate challenge towards a Green Philippines.

Currently, disclosures made by companies focus mainly on policies, code of conduct, governance structure and community impact and development.

Companies also tend to carry out sustainability initiatives through foundations associated with them.

With reporting on public disclosures becoming more important to shareholders, regulators, investors and analysts who are increasingly incorporating sustainability principles into their analyses, we expect to see an increase in disclosures and in companies embedding sustainability in their organizations.

Sustainability reporting and frameworks

In its simplest form, the sustainability report began as a mere compilation of non-financial initiatives and activities that companies undertake.

In the absence of local legislation on sustainability reporting, the most common reasons for producing a sustainability report include: the need to improve a company’s branding and corporate image; the need for companies to be more transparent with employees and to be more accountable; to gain competitive edge; and to improve relations with shareholders and potential investors.

In the late 1990s, the Global Reporting Initiative (GRI), an initiative of the UN Environment Programme, was formed, marking an important forward step in reporting framework.

Prior to the GRI, companies used their own reporting style. Globally, the GRI is one of the most widely used frameworks. The first two versions of the GRI sought to consolidate and standardize processes and criteria, while the third (and latest) generation GRI-G3 provides clear directions on the information to be included in a report, and the form it should take.

Much of that direction is about content: defining, benchmarking and ensuring the quality of information in the report. This includes showing clear answers for materiality and sustainability, making reports clear, concise and accurate, and ensuring strategies, management intentions and stakeholders concerns are addressed.

It is relevant to all organizations, irrespective of size, sector or location, and can be voluntarily, flexibly and incrementally adopted.

Sector supplements for selected industries are provided in addition to the core guidelines to capture unique sustainability issues.

Other non-financial reporting standard will be taken up in Part 2 of this article.

Clair T. Mangangey is a partner of SGV & Co., while K. Sadashiv is a partner of Ernst & Young Singapore. Both are part of Ernst & Young’s Climate Change and Sustainability Services.

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.