“The rise of sustainability reporting [Part 2]” by Clairma T. Mangangey and K. Sadashiv (Jun 7, 2010)

SUITS THE C-SUITE By Clair T. Mangangey and K. Sadashiv
Business World (06/07/2010)

(Second of two parts)

Last week, we talked about linking sustainability or sustainable development with corporate decisions that maximize benefits to the environment and communities where a business operates, while at the same time maintaining and enhancing its financial viability. We discussed the concept of sustainability reporting which stakeholders are increasingly expecting from corporations.

This week, we will give an overview of another generic non-financial sustainability reporting that is fast gaining global acceptance — AccountAbility AA1000 Principles Standard 2008 (AA1000APS).

Principles of non-financial reporting

We previously discussed the Global Reporting Initiative (GRI-G3) as a reporting standard. AA1000APS provides a framework for organizations to develop a principles-based approach to non-financial reporting, and gives guidance on identifying opportunities as well as managing non-financial risks and compliance.

A sustainability report should address all material (i.e., relevant and significant) issues affecting stakeholders. Both GRI-G3 and AA1000APS provide a selection of principles to be considered when reporting on sustainability. These include:

• Inclusivity — AA1000APS states that “inclusivity is much more than a stakeholder engagement process.” It is the commitment to be accountable to stakeholders that the organization impacts, and those who have an impact on it. It also enables their participation in identifying issues and finding solutions. “It is about collaborating at all levels, including governance, to achieve better outcomes.”
• Materiality — An issue is considered “material” if it will influence the decisions, actions and performance of an organization or its stakeholders. GRI-G3 defines materiality as “the topics or indicators reflecting an organization’s economic, environmental and social impacts that would influence the assessments and decisions of stakeholders.” AA1000APS defines materiality as “the analysis of information which takes into consideration sustainability drivers, and accounts for the needs, concerns and expectations of the organization and its stakeholders.”
• Responsiveness — This is defined in AA1000APS as “how an organization demonstrates its response and accountability to its stakeholders.” A responsive organization addresses its material issues and responds to its stakeholders in a comprehensive and balanced manner.
• Stakeholder inclusiveness — Similar to responsiveness, the GRI-G3 states that “the reporting organization should identify its stakeholders and explain how it has responded to their reasonable expectations and interests.”
• Completeness — According to GRI-G3, “completeness is the coverage of the material topics, the GRI-G3 indicators and the definition of the report boundary which sufficiently reflects economic, environmental and social impacts, enabling stakeholder assessment.” While completeness is no longer an explicit AA1000APS principle in the revised 2008 edition, it remains a key concept to the extent to which materiality, inclusivity and responsiveness have been achieved.

Assurance

As with financial reporting (where it is a statutory requirement), having independent assurance over a non-financial report can enhance the report’s credibility. AA1000 Assurance Standard (AA1000AS 2008) explains that “reporting organizations and their stakeholders increasingly accept that robust, independent external assurance is a key way of increasing the credibility and effectiveness of their reporting, and ultimately their performance.”

For assurance providers, the most widely used sustainability reporting assurance standards are:

• The International Standard on Assurance Engagements (ISAE 3000), which sets out guidance for the provision of assurance over engagements other than audits or reviews of historical information.
• AA1000AS 2008, which provides guidance for evaluating the adherence of a reporting organization to the principles of inclusivity, materiality and responsiveness, as well as the reliability of associated performance information.

In line with accounting standards for financial reporting, ISAE 3000 and AA1000AS 2008 outline two types of assurance approaches that can be undertaken by assurance providers for non-financial reports.

The differences relate to the way the opinion or conclusion is expressed:

• Limited (or moderate) — The assurance provider’s conclusion is generally expressed in a negative form, indicating that the information subject to the review has not been found to be materially incorrect and that “nothing has come to their attention” based on the limited scope of procedures. Therefore, a moderate level of assurance has been expressed.
• Reasonable (or high) — The assurance provider’s opinion is generally expressed in a positive form, indicating that the information subject to the audit is materially correct and a high level of assurance has been expressed. “Reasonable assurance” is less than absolute assurance. Reducing assurance engagement risk to zero is rarely attainable or cost-beneficial.

The reporting company and the assurance provider should agree on the terms of the engagement at the start, specifying clearly whether the nature of the assurance engagement is reasonable or limited.

While sustainability reporting and its assurance may be a relatively new idea in the Philippine context, leading companies that are concerned with their long-term sustainability are recognizing that there are indeed opportunities in this area to gain competitive advantage and investor confidence.

Sustainability reporting is never an overnight exercise. It will require genuine buy-in at all levels of the organization, a thorough review across the broadest and deepest spectra of business activities, and strong commitment to ensure accountability of a company’s non-financial performance.

Sustainability reporting is a journey — the earlier companies embark on it, the sooner they will reap its benefits.

(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.