– By Ralph Thurm, A|HEAD|ahead, and Nick de Ruiter, Sustainalize –
The Global Reporting Initiative published their G4 Guidelines in May 2013, but at the same time announced that G3/G3.1 reports and the application level check services would be accepted until the end of 2015. In consequence, companies that want to continue reporting based on the requirements of the GRI Guidelines have time until 2016 to declare either core or comprehensive ‚in accordance’ with the G4 Guidelines. Does this indicate that companies would have ample time to transition towards G4 and more than 2 years still to go with G3/G3.1?
In our view this is a dangerous perception, both based on the different – and sharpened – requirements G4 poses and a critical reflection of the time needed to build the necessary understanding, internal buy-in and systems readiness to be able to comply. Also, an incorrect application of G4 makes that your report becomes too broad, too thick and lacks in relevancy. Here’s a variety of 10 reasons why we think there is no time to waste – working on the transition needs to start now!
- Understanding materiality is crucial. A company’s impact, related boundaries and focus on materiality are much more strongly emphasized in G4, some of them described in more depth below, but the consequences of that push by GRI go much deeper. While GRI G4 is out now and the requirements become slowly clearer (G4 is nicely designed, but still no easy read), companies need to ‚delearn’ G3/G3.1 first. Ignoring materiality could quite easily lead to an irrelevant and a report which is too broad. The flexibility of interpreting and reporting on certain indicators, the lax regime on the use of omissions, the 3 applications levels, and the comfortable, reductionistic and legalistic boundary setting, these days are gone.
- Sustainability needs to be part of your strategy. In order to better understand a company’s impact(s) – which in consequence will help to define boundary setting and material aspects for reporting– there needs to be a willingness of top management to look at sustainability in a more strategic way. For existing businesses we know that this can be a layered, multi-year process, and is demanding a personal openness of top managers and a willingness of letting go of certain mental stereotypes. Some of them are
- Short-termism driving hectic actionism for quick successes;
- Sustainability as merely risk management, thereby ignoring the fact that sustainability can be positioned as a means to distinguish yourselve from competitors;
- the avoidance of mid- to long-term (SMART) target setting including a clear positioning of the legacy and right to exist (today and in the future);
- data and performance become a goal in itself. The lack of the ability to accept that relationships will drive success and not over-ambitious targets that lead to customer dissatisfaction, stressed-out employees, and – in the worst case – neglect of aspects like human rights, environmental protection, and anti-corruption.
- You need to analyse and understand your impacts. While top-management commitment is necessary and needs to go further than just words, the ability to understanding a company’s impact needs to include various actions, amongst them
- understanding impact based on root causes, including environmental degradation, demographic effects, technological changes, world trade developments, urbanization and transparancy development and how the company is affected by this nexus as well as how the company itself affects others and these root causes. Many sustainability strategy development projects visibly have not gone through this important step, e.g. a simple ‚reduction of CO2 emissions’ target without a program of how to tackle different route causes will remain on the symptoms level and risks any effectiveness, and more dangerously could lead to wrong decisions, think of simple outsourcing of effects into the supply chain and where effects can even be worsened.
- the willingness to work on various scenarios that can describe a company’s reaction to the effects identified and where they occur in the value cycle (that in contrast to the value chain which is a concept based on a throughput economy). This includes an active exchange or even shared work with partners up and down the value cycle.
- The willingness to gather data about impacts and therefore prepare a readiness to discuss with stakeholders from an informed perspective.
- The number of disclosures have been expanded. While the abovementioned steps are in our view necessary actions to define a sustainability strategy, GRI G4 is urging to also make early decisions about the ‚in accordance’ level. While both levels – core and comprehensive – put a materiality focus on top, there is a huge difference in disclosures. If a reporter is aiming for comprehensive reporting, the level of information that needs to be ready is considerably higher and should be reported for multiple years. Examples are disclosures on governance and remuneration, supply chain, anti-corruption, GHG emissions as well as ethics & integrity. It is therefore necessary to prepare the necessary data spectrum early on and define necessary ‚owners’, both with regard to responsibility as well as for the disclosures.
- Boundary setting has been changed. The G4 Guidelines have also changed the approach to boundary setting. While G3/G3.1 still allows a rather legalistic-reductionist approach based on ownership structures, G4 now asks for the definition of boundaries based on the underlying impacts. This is the reaction to the neglection of impacts down the supply chain – most companies never got beyond a policy level in their interaction with suppliers in the quest of reduced impact – and is now a major challenge internally in terms of data availability and enforcement of targets and policies.
- The stakeholder dialogue becomes more important. It is to be expected that the stakeholder dialogue process will see a change in depth and quality due to the new requirements of G4. Not only does the reporter have to clarify how the involvement of stakeholders was organized, but also how the dialogue has lead to the selection of material aspects. Obviously the company needs to be well prepared for this dialogue. It is recommended to use the sustainability context insight derived from a thorough impact-based assessment as a necessary precondition to have an informed and effective dialogue about the material aspects. This means that a proper stakeholder dialogue is less of a simple ‚negotiation’ between the company and its stakeholders, but a shared and joint point of view and therefore less confrontative, but more collaborative.
- Understanding the sustainability context is essential. Meaningful reporting demands a clear view in how far a company contributes – positively and/or negatively – to the most urging problem areas on this planet (or aspects in the language if GRI G4). The G4 guidelines demand certain disclosures, but many of them simply describe efficiency increases (in relation to earlier reporting periods), relative changes or compliance and quality in following a certain due dilligence (audits done, shortcomings recorded, mitigation measures taken). Overall, many of the indicators do not give the reader the impression that what a company has done is at least ‚good enough’ in the light of the global urgencies. This shortcoming in G4 (which also existed in G3 already) has been called the ‚sustainability context gap’ and refers to the requirements of the sustainability context principles in G4. Every company needs to have a good view on their micro-performance against a macro dataset (e.g. the ecological footprint, data from TEEB, etc.). This enables companies in setting focused strategies, it makes communication about real impact possible and facilitates readers in reviewing and understanding the actual performance.
- There will be less room for omissions. Another point to start working on the transition to G4 now, is the use of omissions as common in the GRI 3/3.1 Guidelines. GRI G4 has put a halt on the use of number of omissions as well as not allowing any omission without proper reasoning. With just 4 specific ones that are allowed (indicator not applicable and why, confidentiality constraints, legal prohibitions, and unavailability of data with a reference until when the company expects to have the data available). The use of a larger number of omissions may lead to a ‚invalidation’ of the claim for core or comprehensive in accordance reporting. It is not yet clear what process the GRI will adopt in the light of the new regime, but it is to be expected that companies claiming a certain level will at least need to notify GRI about it.
- Sector specific information is integrated in the reporting requirements. Sector supplements will be become an integral part of the reporting requirements both for core and comprehensive in accordance with GRI G4. This means that a reporting approach needs to take that fact into account from the start of the reporting process design. The luxury to just use feasible sector supplement indicators to obtain the highest grading (A/A+ in GRI 3/G3.1) will disappear.
- There are more frameworks, ratings and guidelines evolving. Additional frameworks like IIRC’s Framwork for Integrated Reporting, sector specifications as proposed by SASB (the Sustainable Accounting Standards Board) and GISR (Global Initiative of Sustainability Ratings) and the consequences of their focus, logic, requirements and information enlarge the plethora of reporting requirements. IIRC’s capital model, SASB’s industry-specific indicators, and at a later stage the recommendations by GISR on how to safeguard quality in ratings are maturing and will become evident in the coming two years (well within the timeline until GRI G4 will require in accordance statement by reporters). Together with all abovementioned reasons we think there is no time to waste to start using the combined set of requirements for the design of a continuously improving reporting regime.
Authors: Ralph Thurm is the Founder & Managing Director of A|HEAD|ahead, Nick de Ruiter is partner at Sustainalize. This is their first joint blog post and is posted on both blog sites.