June 21, 2004
Auditing Sustainability Reporting
by William Baue
As sustainability reporting increases in significance, so too does the auditing of it.
Sustainability reporting, or corporate disclosure on social, environmental, and economic issues
that make up the triple bottom line, is relatively young--only about a decade old, according to
Julie Gorte, director of social research at the Calvert Group. An expert on the subject, Dr. Gorte sits on
the judges panel for the North American Sustainability Reporting
Awards, sponsored by the Association of Chartered Certified Accountants (ACCA) and the Coalition for Environmentally Responsible
Economies (CERES). Auditing of sustainability
reporting is even younger, but as such reporting becomes more commonplace, independent, third-party
verification stands to grow concomitantly in importance.
"The current state of
auditing of sustainability reports produced by corporations is best described by analogy: it's
probably graduated from kindergarten, but it hasn't yet got an official diploma," Dr. Gorte told
SocialFunds.com. "But it isn't an infant, either."
Dr. Gorte describes the progression to
sustainability reporting auditing as a four-step process. First, corporations produce
sustainability reports using whatever information can be gathered. Second, they develop systems to
gather the relevant information more comprehensively. Third, they audit the information-gathering
systems and the data internally. A third-party audit is the fourth step.
stakeholder engagement is the prequel, or occurs before the first report," Dr. Gorte. "There are a
great many companies all over the globe that haven't even read the dust jacket of the prequel yet,
and there is a small, but growing, cadre of companies that has passed step four."
Andrew Savitz, a partner in the
sustainability services group at Pricewaterhouse Coopers (PwC), calls the auditing of sustainability reporting a
"leadership activity," opted for only by companies that are corporate social responsibility (CSR)
leaders. PwC audits the sustainability reports of such CSR leaders as Sony (ticker: SNE) and Shell (RD), as well as
auditing the process by which Sustainable Asset Management (SAM) rates companies on the Dow Jones
Sustainability Index (DJSI).
PwC audits sustainability reporting in two different but related ways, according to Mr.
Savitz. First, it audits the processes by which companies report their information, and sometimes
it takes the second step of auditing the data itself through site visits, interviews, and document
"We use the same objective, verifiable standards that we use in financial
reporting," said Mr. Savitz. PwC employs sustainability experts to guide the certified public
accountants (CPAs) who do the bulk of the work--the actual auditing. "An auditor might ask,
'what's a ton of carbon?'--they're not familiar with these metrics, so we provide the substantive
expertise about what these numbers mean."
This example illustrates how financial
accounting standards translate imperfectly to sustainability reporting auditing.
no generally accepted reporting standard for corporate social responsibility--there's no equivalent
to the financial side's GAAP," said Mr. Savitz, referring to the
generally accepted accounting principles that guide financial accounting and auditing.
Dr. Gorte concurs, but clarifies that there is no dearth of sustainability reporting
guidelines: "there are many, and the pinnacle is the GRI," said Dr. Gorte, referring to the Global Reporting
Initiative. GRI and other standards organizations, such as the International Organzation for
Standards (ISO), are
working on developing suitable GAAP-like standards for sustainability reporting auditing, she
"We just did the verification of the 2002 sustainability report by 3M [MMM], and they made
reference to AA1000, an independent standard for obtaining triple bottom line information, so we
had a standard to benchmark against," said Mr. Savitz. AA1000 was developed in 1999 by AccountAbility, an international
membership organization that promotes social and ethical accountability. "However, we wouldn't say
whether this is the right standard or the best-in-class standard, because there's no objective
definition of what best-in-class means."
PwC can, however, make recommendations directly
to its clients, if they ask for advice.
"We're pretty strong advocates of integrating
financial and non-financial reporting--for example, we just worked with PepsiCo [PEP] on their sustainability
report, which is part of their financial report, and we think that's a best practice," said Mr.
Savitz. "The future of reporting, we believe, is that there will be more and more non-financial
reporting actually included in financial reporting."
The future also holds promise for the
growth in importance of sustainability reporting auditing, according to Mr. Savitz.
mainstream investors begin to make investments based on corporate social responsibility, they're
going to want to know that the information, and processes by which the information has been
gathered, can be relied on, so verification and auditing will become increasingly important," said