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October 01, 2010
Corporate Reporting on Key Performance Indicators Should Be Industry Specific
    by Robert Kropp

Building on the universe of indicators established by the Global Reporting Initiative, a new report argues that a targeted list of issue areas would help stakeholders assess the sustainability performance of companies.


A recently published report, entitled From Transparency to Performance: Industry-Based Sustainability Reporting on Key Issues, does not hesitate to make its case as early as the second sentence of its Executive Summary. "We believe that mandatory reporting by US corporations on their impacts on society and the environment is not only desirable, but inevitable," its authors—Steve Lydenberg, Chief Investment Officer of Domini Social Investments, Jean Rogers of Arup, and David Wood of the Initiative for Responsible Investment—state.

Lydenberg spoke with SocialFunds.com about the importance of mandatory reporting, saying, "As a matter of general principle, mandatory reporting is essential. There's been a great deal of progress in getting corporations to look at, measure, and report, but the sheer number of companies reporting is a huge obstacle to voluntary reporting. If you're going to compare companies within a given industry, you need more than two or three of the biggest companies. Also, voluntary initiatives come and go."

Given what the authors describe as the inevitability of mandatory reporting by US-based corporations, the question then becomes, what are the most material issues facing corporations, and what is important for them to report? In 2006, the
Global Reporting Initiative (GRI) issued its G3 Sustainability Reporting Guidelines, which outline core content for reporting and a disclosure framework for corporations to adopt.

However, as the GRI itself states, its guidelines "are relevant to all organizations regardless of size, sector, or location." Lydenberg said, "While the GRI has done an exceptional job in identifying the issues that are relevant for a broad spectrum of stakeholders, the number of issues is very large. The challenge is to come up with a relatively targeted list of issue areas that companies and stakeholders should concentrate on."

"The purpose of mandatory reporting is to allow for apples-to-apples comparison by industry, but the issues that are of greatest relevance to different industries are different," he continued. "There are two ways of solving that problem. Either every industry reports on every indicator, and you pick and choose and make your comparisons; or, you identify the key performance indicators (KPIs) that will differ from industry to industry."

To address the issue, From Transparency to Performance "proposes a method for identifying key performance indicators (KPIs) on the sustainability—or social and environmental—impacts of US corporations in specific industries."

"While the GRI has done an exceptional job in identifying the issues that are relevant for a broad spectrum of stakeholders," Lydenberg said, "The number of issues is very large. The challenge is to come up with a relatively targeted list of issue areas that companies and stakeholders should concentrate on."

At present, the GRI is in the process of updating its Sustainability Reporting Guidelines to include Sector Supplements for 15 industries. According to the GRI, the development of a Sector Supplement "provides a platform for collaboration between those working in a sector and their stakeholders to define the new reporting guidance."

Asked if he saw KPIs as deriving from the universe of indicators provided by the GRI, Lydenberg said, "I think that's an excellent starting point."

However, Lydenberg cautioned, "This report is about a process. It doesn't identify the KPIs for the industry, but how identification might be done."

The method for establishing KPIs outlined in the report addresses the needs of a host of stakeholders, according to the authors. Regulatory bodies can use the method to improve reporting requirements for specific industries, and corporations themselves can use it to improve the integration of sustainability information into their financial reporting. Investors can use it improve their analyses of the performance of companies relating to environmental, social, and corporate governance (ESG) issues.

"One of the goals of corporate reporting is to promote meaningful change at corporations," Lydenberg said, "And limiting the KPIs to the issues that are most material gives corporations direction on what issues are important to stakeholders."

In their report, the authors "propose a six-step method for assessing the materiality of a broad range of sustainability issues by industry." The method includes the establishment of a definition of materiality relating to non-financial issues, the application of the definition to the universe of indicators to determine their applicability to specific sectors, and the development of a specific set of indicators for specific industry sectors.

"Because sustainability disclosure is useful to governments and societies as they manage the impacts of corporations," the report concludes, "We recommend that …parties concerned with the best way to increase the availability of corporate ESG data, cooperate in the development of a fullblown method and governance structure for identifying and providing guidance to corporations regarding KPIs."

Furthermore, the report continues, "By establishing mandatory reporting on sustainability KPIs for publicly traded corporations in the United States, competition on important dimensions of sustainability can be encouraged and entire industry sectors channeled towards the creation of a more just and sustainable society."

As more companies report on sustainability issues—according to
CorporateRegister.com, more than 3,000 global corporations reported on sustainability issues in 2008—the call for greater materiality of what is reported has led to the emergence of the concept of integrated reporting, which according to the recently formed International Integrated Reporting Committee (IIRC), seeks to create "a framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format."

According to the report, "Integrated reporting helps to inform companies' decision-making by identifying potential financial and non-financial risks and rewards within their operations and allowing investors and other stakeholders to understand how sustainability issues play out in the day-to-day decision making about the basic operations of a company."

"Integrated reporting is important," Lydenberg said. "Within the context of the investment community, integrated reporting makes a lot of sense. The distinction between financial and nonfinancial information is largely an artificial one, as the two overlap."

My qualification," he continued, "Is that environmental and social information is useful to stakeholders beyond the investment community. The goal of integrated reporting is a worthy goal for the financial community, but what's the proper forum for getting the information out to other stakeholders? Integrated reporting would be a big step forward, but only one of several that we have to take."

 

 
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