Integrated Sustainability Reporting

Integrated Sustainability Reporting Reana Rossouw Next Generation Consultants

Sustainability A term which has been redefined and now supersedes the term Social Responsibility; has become a crucial business focus globally, across the private, public and NGO sectors in developed and developing countries alike.

Theoretical Model www.naturalstep.com

The Sustainable Enterprise “ As we face a sustainability crises that could ultimately even threaten our very existence as a species, we need to know how our companies are positioned to rise to the challenges, provide solutions and adapt to coming changes” Ernst Ligteringen, CEO, GRI

The roadmap to sustainability’s biggest priority by far is performance . Companies must produce tangible results that put them on a truly sustainable path. Performance will be the ultimate measure for evaluating a company’s progress towards achieving sustainability. Richard Locke Deputy Dean and Professor of Entrepreneurship, MIT Sloan School of Management

Sustainability Reporting Sustainability Reporting is the practice of measuring, disclosing and being accountable to internal and external stakeholders for organisational performance against specific environmental, social and governance goals and metrics that support sustainable development, and for how sustainability is incorporated into the company’s overall strategy and policies.

It’s not all about reporting… It’s about management and business practices

Integrating Sustainability Go Deep Integrate and embed sustainability into the company strategy and standard operating practices Go Wide Engage and leverage the value chain Go Long Short-term focus – long-term objectives Go Local Shared responsibility that needs local action and Commitment Model: UN Global Compact

In South Africa the new Companies Act 2008 is expected to be effective later this year King III applies to all entities regardless of the manner and form of incorporation and establishment King III recommends that sustainability reporting should: be focused on substance over form and should transparently disclose information that is material, relevant, accessible, understandable and comparable with past performance be formalised as part of the entity’s reporting processes have independent assurance

South Africa King III calls for Integrated Reporting. It’s a JSE listings requirement from June 2010. “ A key challenge for leadership is to make sustainability issues mainstream. Strategy, risk, performance and sustainability have become inseparable …It is vital that companies focus on integrated performance.” “ Those who prepare integrated reports should give readers the forward-looking information they want. Today’s stakeholders also want assurance on the quality of this forward-looking information.” “ Integrated Sustainability Reporting and Assurance.” paper by J. Mammatt, E&Y

King III and Integrated Reporting “ Integrated report ” consists of: Annual financial statements; and Integrated sustainability (economic, social and environmental) information Integrated report should be prepared annually Integrated reporting should be balanced between positive aspects and challenges facing the business Integrated report should also provide forward-looking information Integrated report should contain a board statement on the effectiveness of the company’s internal financial controls Board may delegate responsibility for, and review of the sustainability information to either the risk committee, sustainability committee or audit committee

Integrated Reporting Holistic and integrated presentation of company’s finances and sustainability Financial results must be contextualised Reporting should be integrated across all areas of performance Audit Committee to recommend assurance on material sustainability/ non-financial issues King III requirements for audit committee: Review sustainability reporting for reliability and consistency with financial information Recommend the need to engage an external assurance provider

In essence… Sustainability reporting describes performance: Where you are, where you have been, and where you are going Sustainability reporting involves measurement: To describe progress the report must indicate where you are, where you have been, and where you hope to go Sustainability reporting is a recurring process: Over time the story emerges by reporting regularly against consistent indicators

From annual reporting to sustainability reporting It is now widely recognised that financial statements capture only a portion of corporate risks and value creation potential , some say as little as 20%: with the balance deriving from intangible factors such as strategy, product innovation, customer acquisition and retention, talent attraction and retention, brand and reputation management, energy/resource efficiency, commercial risk reduction (e.g. bribery, corruption, occupational accidents) and environmental and social risk reduction. These intangible factors are now measured and explained by sustainability reporting.

The Link between Sustainability and Financial Reporting Sustainability reporting complements financial reports with forward-looking information and the understanding of key value drivers, such as human capital formation, corporate governance, management of environmental risks and liabilities, and the ability to innovate Shows an understanding of the external environments (products, labour and capital markets and regulatory structures) in which the company conducts its business Assesses the elements that underpin the company’s competitive advantage (through cost leadership and product/service differentiation and the formation of intellectual capital) Discloses known future uncertainties (risks) and trends that may materially affect financial performance

Challenges for suppliers and users of reports The rapid evolvement of sustainability reporting metric frameworks The number of available metric frameworks Lack of uniform definitions Lack of consistent application and measurement standards Producing variable and unreliable measurement and disclosure results Emergence of national and regional legislation and regulation which has not yet been integrated into and synchronised with these frameworks

Key Drivers of Sustainability Reporting (1) Materiality The information in a report should cover topics and Indicators that reflect the organisation's significant economic, environmental, and social impacts, or that would substantively influence the assessments and decisions of stakeholders. Materiality is the threshold at which an issue or Indicator becomes sufficiently important that it should be reported.

Key Drivers of Sustainability Reporting (2) Financial Market Forces Institutional investor demand driven by risk management fiduciary duty Individual investor demand driven by sustainability interest Asset manager demand Sustainability investment performance track record Sustainability driven corporate competitiveness and profitability UN Principles for Responsible Investment (UNPRI) South African Code for Responsible Investment (PIC)

Key Drivers of Sustainability Reporting (3) Stakeholder Market Forces Voluntary sustainability initiatives Stakeholder pressure for mandatory disclosure Stakeholder pressure for mandatory pension fund disclosure UN Environmental Programme Finance Initiative (UNEP FI), UN Global Compact, UN Millennium Development Goals, Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP), World Business Council for Sustainable Development (WBCSD), Coalition for Environmentally Responsible Economies (CERES)

Key Drivers of Sustainability Reporting (4) Regulatory Forces Environmental, financial, global and national disclosure and measures National and International governmental action plans for a sustainable global economy Mandatory Reporting on Greenhouse Gases Rule (US), JSE Listing Requirements, Draft OECD Guidelines for Pension Fund Governance, Sarbanes-Oxley Act, King III, New Companies Act

GRI Guidelines Organisations whose sustainability reports are based upon the GRI Guidelines Disclose outcomes and results that are occurred within the reporting period in the context of the organisation’s commitments, strategy and management approach.

The GRI family of documents The GRI Guidelines Sector supplements – providing guidance that captures sustainability issues faced by specific industry sectors, e.g. financial services, telecommunications, auto manufacturing, mining Technical protocols – providing detailed measurement methods and procedures for reporting on indicators contained in the core guidelines e.g. energy indicators providing definitions (e.g. direct vs. indirect energy) and measurement methodologies (e.g. conversions, units) National annexes – providing national (local) country perspectives and particular influences, nuances and contexts to sustainability i.e. South Africa – BEE Legislation Issue guidance documents – on topics such as ‘diversity’ and ‘productivity’

The GRI Standard Disclosures There are three different types of measures that can be used to express strategic approach, management goals, and performance results. Profile disclosures set the overall context for understanding performance - such as strategy and governance. Management Approach disclosures explain how specific sustainability issues are managed, including goals and targets. Performance Indicators elicit comparable information on economic, environmental, and social performance.

Reporting Principles * * GRI G3 Guidelines Defining Content Materiality Topics and indicators that reflect social, environmental, economic impacts that would influence stakeholder assessments and decisions Stakeholder Inclusiveness Identify stakeholders and explain how responded to their expectations Sustainability Content Performance in the wider context of sustainability Completeness Material topics, indicators and definition of reporting boundary to reflect impacts Defining Quality Balance Reflect both positive and negative aspects of performance Comparability Issues and information should be selected, compiled and reported consistently Accuracy Information sufficiently accurate and detailed for stakeholders to access performance Timeliness Reporting occurs on a regular schedule and information is available in time to make informed decisions Clarity Information presented in a manner that is understandable and accessible Reliability Information and processes used to prepare report should be gathered, recorded, compiled, analysed and disclosed in a way that could be subject to examination Boundary Setting The Sustainability Report should include the entities over which the reporting company exercises control or significant influence both in and through its relationships with various entities upstream (e.g. supply chain) and downstream (e.g. distribution & customers)

Working Group Media First Draft Airports Construction & Real Estate Event Organizers Final Draft Food Processing NGO Oil & Gas Pilot Apparel & Footwear Automotive Logistics & Transportation Public Agency Telecommunications Final Electric Utilities & Financial Services Sector Supplement obligatory to obtain level A from 1 January 2010 Mining Sector Supplement required to obtain GRI Application level A from 31 December 2011 Sector Supplements

Application Levels G3 Profile Disclosure G3 Management Approach Disclosures G3 Performance Indicators & Sector Supplements Performance Indicators Report on 1.1 2.1 – 2.10 3.1 – 3.8; 3.10 – 3.12 4.1 – 4.4; 4.14 – 4.15 Not Required Report on all criteria listed for Level C plus: 1.2 3.9; 3.13 4.4 – 4.13, 4-16 – 4.17 Report on a minimum of 20 Performance Indicators, including at least one from each Economic, Environmental, Human Rights, Labour, Society, Product Responsibility Core + Additional Indicators Management Approach Disclosures for each indicator Category Report on a minimum of 10 Performance Indicators, including at lease one each of Economic, Social and Environmental Core Indicators Report on each core G3 and Sector Supplement Indicator with due regard to the Materiality Principle by either: a) Reporting on the Indicator or b) Explaining the reason for its omission Not applicable is not valid – Must explain i.e. not material, no data, no commitment, proprietary information Management Approach Disclosures for each indicator Category Same as requirement for Level B Report Application Level C C+ B+ B A A+ Report Externally Assured Report Externally Assured Indicator Guidelines: 1. Depend on what level of report (A, B, C) you are aiming for 2. Always core, then additional, then sector supplements, then others (industries, new, other) Report Externally Assured

Reporting Structure 1. Strategy & Analysis Statement from CEO about the relevance of sustainability to the organisation and its strategy. Description of key impacts and opportunities This should be a concise section of a few pages in length. This is about the impacts of the organisation BUT is also about how sustainability trends affect the organisation RG 1.1 – 1.2 Governance, commitment and engagements Governance External Initiatives Stakeholder Engagement This section explains how the reporting organisation is governed, who the decision makers are, and how stakeholders have been engaged. It also describes how external initiatives are supported RG 4.1-4.17 3. Report Parameters Report Scope and Boundary This section includes a description of how the report content has been determined, the prioritization of topics and a list of the stakeholders that are expected to use the report RG 3.1 – 3.11 GRI Content Index Table identifying the location of all standard disclosures RG 3.12 Assurance This section covers the policy with regard to any external assurance of the report RG 3.13 2. Organisational Profile Organisational Background information RG 2.1 – 2.10 5. Management Approach and Performance Indicators This provide a brief overview of how the organisation manages aspects under the indicator categories – economic, environmental and social (labour, human rights, society and product responsibility) separately RG 25-36 Environmental Disclosure on Management Approach Goals and Performance Organisational Responsibility Training and Awareness Monitoring and Follow-up Additional contextual information Performance Indicators RG 25-36 + Protocols Economic Disclosure on Management Approach Goals and Performance Policy Additional Contextual Information Performance Indicators RG 25-36 + Protocols Social Disclosure on Management Approach Goals and Performance Policy Organisational Responsibility Training and Awareness Monitoring and Follow Up Additional Contextual Information Performance Indicators RG 25-36 + Protocols Application Level Grid For a report to be recognised as GRI-based, self declaration of a level is required

In closing: Reporting is not an end in itself. Even good reporting does not necessarily result in improved sustainability.

Thank You Please note: This presentation is part of a larger body of research and knowledge. For more information: [email_address] www.nextgeneration.co.za

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