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Integral Thinking & True Materiality – Part 3/7: Purpose Defines Connectedness

This 7-part series has been first published on Sustainable Brands between late January and early March 2016 as a 6-part series and a follow-up by Bill Baue, co-founder of Convetit and the Sustainability Context Group. It captures the essence of my thinking I was able to gather through the extraordinary work of the Reporting 3.0 Platform, GISR and the ThriveAbility Foundation in 2015. What came out is a structure that I called a ‘new impetus embracing purpose, success and scalability for thriving organizations’. I am reposting the original 6 parts here and add a part #7 with reflections of others. This is part 3/7.

In Part One of this series, Diagram 1 showed an overview of the three main areas of the proposed change need for integral thinking and true materiality; Part Two explained why we need this new impetus. Part Three now tackles the upper section of the triangle – the need for chrystalizing purpose to better show connectness to the problems that need to be solved in interrelated ways.

Bildschirmfoto 2016-03-08 um 10.37.37Diagram 3: Integral thinking and true materiality need a renewed focus on the purpose of the organization and connectedness to the economy we want to live in.

It has been interesting to see how the discussion about ‚the purpose’ of an organization or an economy has moved into the forefront in the last 1-2 years. The 2015 numbers of the Global Footprint Network (GFN) or from UNDESA on population, consumerism and the environment [insert link] are just telling one striking story: as a species, we humans are on a slow death path.

The fact that the ‚human’ role in sustainability now gets back into the focus simply shows that it dawns on us that we forgot to take people on board of the sustainability journey, in companies as well as in private circumstances. Sustainability is not exciting for the majority of human beings. We see constant shoulderclapping about reports in which we are told how much less bad a reporting entity became, without any ‚North Star’ that could tell us what is ‚minimally good enough’, or what would lead to an envisioned future beyond just having a ‚zero negative impact’; this was sucked up by our frugality of installing sustainability departments that took care of policies, management systems, reporting and assurance. The ‚three gap problem’ as discussed in Part Two of this series led to a reduced understanding of sustainability in which essential aspects of sustainability like ‚people, planet and prosperity’ became ‚people, planet and profit’ and intergenerational equity fell by the wayside.

In consequence, Sustainability Context still remains the most neglected Content Principle of any GRI-based sustainability report. Seldom does a reader understand the ‚world view’ of a company, its leadership advocation to change the economic system towards serving a green & inclusive economy, and how the product & service spectrum offered makes a positive contribution (instead of less negative impact), alone or in collaboration / co-creation with others.

It is amazing to see how disconnected sustainability or integrated reports are with ‚the whole’ which we are contributing to (or not). Reporters typically claim it’s too complex to envision a different economic model, exploring a new level playing field in which market mechanisms can automatically work towards an aimed-at state of being regenerative and inclusive. Isn’t that what scenario analysis was invented for?

We developed our current economic model as one set of conventions, and it is up to us to change that for the better. Haven’t we already decided to aim for a green & inclusive economy at Rio+20 in 2012? So where are we with that? There are indeed some positive prompters here:

  • There is a whole set of macro datasets that show the ‚global pulse’ of our continued negative pathway, which means a better understanding of the interconnectedness of our doing and its effects on the planet is more and more possible. Various IT networks, data providers and technology firms work on making ‚the whole’ visible, up to artificial intelligence (AI) approaches (see a variety of these in the Reporting 3.0 2015 conference report, http://www.reporting3.org). The main issue here is to translate that into data clusters that corporations can use for their ‚micro-macro’ impact interpretation.
  • A variety of companies and development organizations work with the idea of Creating Shared Value (CSV) as proposed and vividly defended by Porter and Kramer for years. While definitely a good learning approach, CSV doesn’t yet prove to be able to either move the concept beyond the ‚feelgood’ areas of collaboration and co-creation; the nasty issues aren’t really solvable since they need new ‚rules of the game’, a normative approach to global change. And secondly, CSV aims at optimizing within an existent frame of economic system boundaries. We won’t get to a sustainable or regenerative economy without also tackling those economic system boundaries to create new level playing fields in which industries can transform. Porter and Kramer, it seems, remain in the 1990s thinking of enlarging competitive advantage with creating (extra) shared value.
  • The Sustainable Development Goals are an interim step towards learning to understand thresholds in a context-based sense, leading to less-bad impact, probably a planet of ‚Zeronauts’ (to stress John Elkington’s brilliant book from 2012). The translation to apply and measure contributions in the corporate world, in local and regional circumstances as well as globally, is still to be developed. A plethora of initiatives are underway to find out, and hopefully it will be a training area to explore the possibility of thriveable, gross positive impact as the greatest innovation boost ever. Each company needs to define where they stay in the continuum that the ThriveAbility Foundation has offered, see the following diagram:

Bildschirmfoto 2016-03-10 um 11.13.50Diagram 4: The strategy continuum to assess a company’s position in a world that needs to leapfrog from surviving to thriving (Source: A Leader’s Guide to ThriveAbility, page 18).

  • Kate Raworth’s ‚Doughnut’ model, showing environmental ceilings and social floors, has given us a 2-dimensional picture of interconnectedness, but only good enough to get us from suffering to struggling – it misses the ‚operating system’ to create real thriving. This model needs adaptation to become 3-dimensional, adding the component of human transformation to accelerate positive change. This is what the ThriveAbility Foundation recommends to get us from stage 1-3 of the above diagram to stages 4 and 5, and in consequence appeals to a change from an ‚ESG Push’ towards a ‚GSE Pull’, addressing authority, decision-making and accountability in one stringent approach. This needs leadership in ways that until now only a Ray Anderson (Interface), Paul Polman (Unilever), Sir Ian Cheshire (ex-Kingfisher) and some other corporate leaders have shown. Only through this advocacy will we get to economic system boundaries change addressing the ‚macro-micro change area’, mainly though the combined integration of external effects into cost accounting, translation into pricing mechanisms, and counterbalancing those effects by a drastically changed tax and subsidies regime on a global scale. The work of Trucost, the True Price Foundation, Ex’tax and others in this area are therefore essential to get this masterplan done over time, together.

So, imagine a sustainability and/or integrated report that showcases a reporting organization’s contribution through a chapter on purpose and connectedness. What would a reader expect to see answered? The below are examples of what I personally would find substantial in that area.

On Contextualization:

  • Does the company have a ‘World View’ and a long(er)-term idea of positioning in the continuum from ‘Compliance’ to ‘Thriving’ when it comes to impacts and outcomes across the multiple capitals? Where does it want to be in the future?
  • Is there one strategy, or does the company have a separate sustainability strategy (which should be avoided, as it signals sustainability as a side issue)?
  • Is the corporate strategy based on affecting the root causes of global non-sustainability, or is the strategy just based on curing symptoms of non-sustainability (like the majority of companies do at this moment)?
  • Are there various scenarios in which the company is testing its possibilities to impact and gets addional insight into its long-term positioning?

On Leadership:

  • Is the socio-cultural leadership gap addressed (part of the three-gap problem)?
  • Are company leaders assessing the transformation blockages in the sustainability gap (also part of the three-gap problem)?
  • How is sustainability visible in the organizational hierarchy? Is sustainability integrated in strategy and governance so that the sustainability team could veto non-sustainable corporate decisions?
  • To what extent is the leadership group aware about a responsibility for sustainability above and beyond the legal construct of the organization?
  • What does the company contribute to asks or campaigns to change the unsustainable boundaries of our current economic system, e.g. trade barriers, unsustainable subsidies, political lobbying, testing new ‘level playing fields’ through the combination of true costing, true pricing, true taxation?

On Ambition Level:

  • What’s the company’s view on growth? How does it differentiate sustainable from non-sustainable growth?
  • How does the company define its ambition level and how are short-term targets derived from succeeding its long-term ambition level (e.g. through back-casting)?
  • How are all employees included in defining the purpose and connectedness of the corporate strategy to sustainability?
  • How does the company differentiate efficiency gains, productivity gains and their respective rebound effects vis-à-vis the need for sustainable innovation?

It is these questions that build the ‚glue’ and segway into the vision of performance beyond just doing the minimum needed. It would add to the idea that current approaches don’t add up altogether and that technology alone won’t cut anything without the humans on board. This is tough work in hierarchical structures and even tougher in multinational companies. But it honestly the only way we can deliver. It is time for new conventions.

 
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Posted by on March 10, 2016 in Thriveability

 

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Integral Thinking & True Materiality – Part 2/7: The Need for a New Impetus

This 7-part series has been first published on Sustainable Brands between late January and early March 2016 as a 6-part series and a follow-up by Bill Baue, co-founder of Convetit and the Sustainability Context Group. It captures the essence of my thinking I was able to gather through the extraordinary work of the Reporting 3.0 Platform, GISR and the ThriveAbility Foundation in 2015. What came out is a structure that I called a ‘new impetus embracing purpose, success and scalability for thriving organizations’. I am reposting the original 6 parts here and add a part #7 with reflections of others. This is part 2/7.

Those of us who have been working in the areas of corporate sustainability and integrated reporting struggle to reconcile the gap between our aspirations for a world we envision, and the current world that falls short of sustainability and integration. More precisely some of the following aspect have also lead to the raison d’être of the three initiatives that I presented in Part 1. Here are the most important ones:

  • the fact that existing standards (GRI, IIRC, SASB, etc…) fall short of enabling if and when an organization will actually be ‚sustainable’. We call this the Sustainability Context Gap, which the Sustainability Context Group has been addressing with the major standard setters for years. Many Sustainability Context Group members are actively engaged in Reporting 3.0 as well as the Sustainable Brands community of practitioners.
  • the failure of linking corporate performance with social floors and environmental ceilings in ways that lead to organizational transformation and pioneering leadership. The ThriveAbility Foundation calls this a ‚three gap problem’, and, if not tackled all together, there is little chance of success that the reporting entity will ever be sustainable.

Bildschirmfoto 2016-03-09 um 11.07.01

Diagram 2: The 3-Gap-Problem defines the lack of ‚integral thinking’ (Source: A Leader’s Guide to ThriveAbility, page 33).

  • the still diverse understanding of materiality. Allen White, co-founder of GRI described this in a recent virtual dialogue, held to prepare the 2015 Reporting 3.0 conference: ‘Corporate reporting must keep pace with the realities of an economically and ecologically interdependent world. The narrow scope and short-term horizon of financial reporting is increasingly detached from the complexities and multiple performance drivers of 21st century organizations. It is a moment for leading initiatives to find common ground, synergies and win-win situations in laying the groundwork for the next decade of innovation and mainstreaming a new form of corporate reporting. It is time to remove the artificial distinctions between internal and external materiality’. In other words, companies need to address both what’s material when considering the interests of their own organization, and what’s material when considering broader societal interests.
  • the contracted notion of what is now called integrated reporting. This way of applying what the IIRC advocates for as ‘integrated thinking’ lacks two main components. First, integrated thinking is mainly used to increase the collaboration of departments within an organization and often still lacks fluid interaction with various sets of external stakeholders around the multiple capitals, which is traditionally addressed through old-fashioned dialogue, but has become less and less prevalent and truly functional as of late; and secondly, this sort of thinking misses out on two of the three gaps as described by the ThriveAbility Foundation, namely really instigating organizational transformation and pioneering leadership. Integrated thinking as articulated by IIRC falls short on these fronts, and thus fails to be truly ‘integral’.
  • the fact that accounting isn’t yet ready to shift toward multi-capital bookkeeping (even in trial pilot form). The litmus test of ‚integral’ approaches in accounting needs to showcase that financial capital hasn’t been built on the back of any other capital (natural, maufactured, social, human, relational, intellectual). Based on that the ThriveAbility Foundation offers the idea of ‚True Future Value’ as a new business equation of success, to be discussed in part 4 of this series.
  • the fact that many organizations pursue sustainability as a goal isolated from other aspects of the business. For example, most organizations focus on negative footprint reduction, and have yet to learn how to increase their positive impacts (handprints) and how to scale them up through their products and services, through collaboration, through advocation of their leaders, and by organizing their own operation around flexflows instead of hierarchies. Scalability of what works well and how it can be combined through yet unknown possibilities are often far out of sight.

In consequence of this list of struggles, strategy, organizational dynamics, data management, accounting and finally reporting need a new impetus if we want to tap the ‚transformational potential’ to become thriving organizations. We need trust, innovation and resilience as the outcome of a combined approach to renew the discussion around purpose, success and scalability, as shown in diagram 1 in Part 1 of this series. Part 3-5 will pick up on each element – purpose, success and scalability, while part 6 will look at the wanted effects – trust, innovation, resilience. Together, they define the future agenda of reporting as a trigger for sustainability – to create the future we envision.

 
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Posted by on March 9, 2016 in Thriveability

 

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Comparability of sustainability information – slaughtered on the altar of materiality?

This is the third of four installments of a blog series covering crucial sustainability reporting issues on materiality, sustainability context, comparability and stakeholder inclusiveness.

The GRI content principles – sustainability context, materiality, stakeholder inclusiveness and completeness – are forming a balanced set to give guidance on how to define what a ‚good’ sustainability report should cover. The focus of work pulling G4 together was on making that balance and the process of how to get to such reporting even more clear and crisp. While our last blogs were digging deeper into the need of putting real teeth into step 1 – defining sustainability context better – another principle from the report quality section, namely comparability, has started to be discussed. The reason for that is that most communication of GRI under the banner ‚what matters, where it matters’ zooms heavily into materiality, and questions start to arise on what that means for the other important reasoning for standardized reporting – producing information that can actually be compared. This discussion has a strong connection with our earlier plea on getting more clarity around sustainability context and working on micro-macro-linked indicators. The discussion around a potential lack of comparability is making painfully clear that not having worked on these potential indicators in the G4 development process will most likely break open a whole plethora of uncomparable information. We have enough experience how certain information was presented in sustainability reports so far: take SOMO’s 2013 study on energy companies disclosure, Transparency International’s 2012 study on reporting on anti-corruption indicators, or Deloitte’s 2012 study on zero impact growth strategies that examplified dozens of ways in which companies described their CO2 target-setting. Either information was presented in many different absolute or relative ways, or different information than asked for was published (should we call this pretending?), or no information was published at all, or no context was given on what was published (how would we call that then?). Our view here is: without micro-macro-linked indicators comparability will heavily suffer. The loop to our sustainability context plea and the need for ‚different’ indicators as we have them right now becomes clear when we consider the text in the Guidelines around comparability, the core sentences here are: „Comparisons between organizations require sensitivity to factors such as differences in organizational size, geographic influences, and other considerations that may affect the relative performance of an organization. When necessary, report preparers should consider providing context that helps report users understand the factors that may contribute to differences in performance between organizations.“ Together with the wording of the sustainability context principle we really doubt that consistency in reporting can be delivered in a way that comparability will at all become realistic with the current indicator set. In total, we think that the dilemma between focusing on materiality on the one hand, and delivering comparable information on the other hand, can’t be solved without micro-macro-based indicators. The existing indicators will not cut it, we have seen this all before! Work on micro-macro-based indicators will be necessary, the denominators of these indicators will need to help defining comparability, not the voluntary, company-by-company target setting (whose long-term basis is normally not disclosed – most likely because it doesn’t exist at all?). This status quo has several consequences and effects, and it is interesting to look at least at some of them:

  1. The work of rating & ranking organizations will continue to produce more confusion. As we continue to have information about how organizations became ‚less bad’, the more than 120+ different rankings & ratings will continue to produce ‚best-in-class’ champions, for none of them we know what that really means, since we don’t know what is feasibly ‚good enough’. We have seen first attempts of rating organizations to get out of this dead-end-street, e.g. Climate Counts or Inrate who themselves start to make the link to macro-based goals by simply setting them. As GISR also puts sustainability context clearly into the focus of ‚good’ ratings, the need to also consider macro-based information on global, regional and/or local level will also continue here. More comparability will most likely be the outcome.
  2. The lack of focus on micro-macro-based indicators will produce competition for GRI. A whole set of organizations already work on such indicators, first and foremost the Natural Step-based approach on the ‚Future-Fit-Benchmark’, an approach that includes Bob Willard and a set of sustainability reporting veterans. The Sustainability Context Group, around 120 members strong, has several members that actively work on other alternatives of context-based indicators, their plea to work on them together with GRI has been noted down there, but with no outcome so far. WBCSD has started to team up with the Stockholm Resilience Centre (and the various other players connected to them) to see how Vision 2050 can be supported by an Action 2020 and how ‚values-based reporting’ can be set up. Worthwhile to mention here is that this approach also includes tooling and accounting methods, so gets to a deeper level than to just think about reporting indicators, but also how to create the processes. WRI, CDP and WWF now work on ‚science-based target setting’ and has invited to several workshops. Also here, an increase in comparable information will be a foreseeable outcome.
  3. At this moment we also observe the development of the Sustainable Development Goals, to be presented in 2015. It will be interesting to see how they will develop further; as it stands right now they seem to be more sort of ‚corridors’ of change in 16 different issue areas, and it is not yet sure how interdependencies (nexus effects) will play out on this variety of areas. In our view it would be much more effective to take a step back and first develop a set of principles (based on the probably most important ‚North Star’ question: what will really make up a succesful green & inclusive economy?) and then define action areas with a special view on interconnectedness of effects to define clear and actionable roadmaps or adaptation plans on how to get there. Targets could be defined per region, taking into account the various cultural and mindset calibrations as well as timelines necessary to measure progress. These could be built into a comparability approach for defining indicators of change with actionable items where each company can define a positive impact (instead of concentrating on the reduction of negative impact). See it a bit like the approach Unilever took when they connected their mid-term target setting with main sustainability issue areas. It is no wonder to us that Unilever’s approach scores extremely well in certain ratings, e.g. the latest GlobeScan and SustainAbility Leaders Survey, published just a couple of days ago.
  4. As a side effect the lack of comparability also creates a revival of the discussion around what was supposed to be called ‚Beyond GDP’. First of all there is the question if GDP should be used as a denominator in order to increase comparability in micro-macro-based monetary and relative comparisons, but much more important there is also again increasing discussion about the usefulness to use GDP at all as a means to measure a valueable contribution of a single company. In our view this is a must-have discussion that will sparkle ideas on what ‚success’ really means for a society at large, it seemed to get stuck around the idea of happiness in the last couple of years, which in our view is a very individual mindset and difficult to standardize. Hence, there is a glimpse of hope, and it is good to see that GRI is also one of the partners in one of these projects, called ‚Measure what matters’, with amongst others the Green Economy Coalition, Accounting for Sustainability (who are the initiators of many good developments, e.g. IIRC as well), the Stockholm Environment Institute (SEI) and IIED.
  5. We are still amazed to see how little companies are interested in defining what a ‚green & inclusive economy’ or ‚resilient economy’ actually means for themselves. That is mainly due to the lack of real comparison opportunities to give this vision real meaning. And it will remain like that as long as we don’t define the expected minimal and/or positive contribution per company and stakeholder. We refer to our last blog on the ‚mindset gap’ for further depth there. Comparison and target setting will be the most interesting pathways for competition in the future, so again ask yourself what all that focus on materiality will help if comparability possibilities will suffer from that in this heavily interconnected world in which nexus effects will be part of the comparability agenda, to be analyzed when thinking about sustainability context.

Overall, we expect that the discussion about comparability will become as vital as the one on materiality today, simply because more materiality will not automatically lead to more comparability of information (we fear even less), and more comparability focus will not simply lead to more materiality. There needs to be a balance as both are of critical importance to understand, define and act on these urgently needed adaptation plans towards the economic blueprint of the future, the ‚green & inclusive economy’. Authors: Ralph Thurm is the Founder & Managing Director of A|HEAD|ahead, Nick de Ruiter is partner at Sustainalize.

 
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Posted by on May 27, 2014 in Sustainability Reporting

 

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The mindset gap in addressing sustainability context

This is the second of four installments of a blog series covering crucial sustainability reporting issues on materiality, sustainability context, comparability and stakeholder inclusiveness.

Around two weeks ago we discussed the ‚sudden materiality shock’ here and received many comments and recognitions for the points discussed there. In addition, we spoke at various events and explained the need to make the connection between the importance of sustainability context for defining materiality and the need to develop a reporting mechanism that captures this specific performance that could eventually best be described as ‚micro-macro-linked’.

What became painfully clear through these last events is the considerable distance of people working in sustainability to be able to make that connection, several reasons to be discussed below. Obviously, we need to first address that ‚mindset gap’ that keeps us artificially busy and away from the ‚greater good’ – achieving a green & inclusive economy together – before getting down to the core of how to address sustainability context through purposeful and future-oriented disclosure in reporting, including feasible strategic discussions and – like it or not – a different sort or set of indicators as we have them right now. So why is there such a distance to seeing sustainability context in a corporation’s setting? Here are various observations:

  1. For too many in our community sustainability and strategy are still two different things or are still completely or partially disconnected. If sustainability managers tell that working in scenario teams or being closely involved in strategy development and subsequent R&D/innovation efforts is simply not what they are paid for, we are disappointed by the little mindset progress we made. Honestly, we hoped we went beyond the idea that the sustainability manager or head of sustainability simply just orchestrates compliance towards laws & regulation, standards or guidelines. What we still sense is a deep hesitation to overcome certain thresholds towards an integrated approach, using careful tactics to not ‚overstretch it’, deep fear to be seen as the ‚activist’, so better remaining the ‚lobbyist’ for what is good for the company and the individual position on short-term. As this has been a rather successful approach in the past, why change it? Most global problems are mentally and physically still far away, and most colleagues that do not work in sustainability wouldn’t want to understand them anyway (too complicated, scientifically not 110% proven, disturbing, etc.). So, why bother about megatrends?
  2. We specifically observed how companies react to the macro-based information out there, ranging from the work TEEB did, the Global Footprint Network produced, The Global Nature Fund collected, and to the dozens of reports that are produced and macro scenarios that are presented by institutes, issue groups and initiatives. The basic response is close to denial, using the argument that the way this information is presented doesn’t help companies to translate this into concrete tooling, so in the end they couldn’t do more than just to take note, and that’s it. When we then asked why certain companies seem to be able to use this information and work with these data, denial level two kicks in: either these were special companies with a specific or fitting product/service portfolio, or they would have a size not too big, so that working with these data wouldn’t be too complex for them. Also, this sort of work shouldn’t be done by a single company anyway since level playing fields would be needed when introduced on broader scale, but these wouldn’t exist today. Puma’s e-p/l is great, but hardly any other company tried it out since Puma came out with it in 2011, the number of excuses to not dig into it is too long, and the argument ‚it will come one day, so better be prepared’ (playing the risk managemnt card) doesn’t work either. Too much workload, too short the horizon, too low the incentives, too high the fear to stick out the neck. And that leads directly to the next point:
  3. Fortunately, not all companies are like that, and that has to do with leadership. We see a constant pattern that only those companies that have an enlightened leader or leadership group get to a level of commitment that these – let’s call them ‚experiments’ – are wanted, a certain ‚trial-and-error’ attitude is giving some breath to sustainability managers involved. Also, those leaders actually encourage cross-functional project groups around long-term performance targets based on scenarios and the idea of an integrated strategy. It is interesting to see that these companies in most cases don’t have a sustainability strategy, they just have ‚a’ strategy. Dealing with context information in these companies is a no-brainer and the necessary tools are normally ‚created’ right there and not ‚delivered by others’. These companies see external advisors as a positive stretch and challenge to their own knowledge base and encourage infusions, external advisors can even become a separate stakeholder group. The triangular project setup that includes a company, an NGO and a consultant in a team setting seems to work, as well as the willingness to work with other companies in cross-industry learning environments, initiatives, labs, etc.
  4. Another constant part of that ‚mindset gap’ is that many sustainability strategies are based on effects of (not closer discussed) root causes. Doing work with leaders we first try to observe the whole set of often intermingled action areas, something that one can actually already start from the existing materiality matrix of issues that companies use in their reporting. Sustainability strategy areas are normally based on the GRI Guidelines aspects or industry-specific action areas, and many of them derive from root causes like environmental degradation, demografic effects, world trade shifts, urbanization, technological developments and transparency gains, but none of these root causes are addressed in the G4 Guidelines and therefore remain out of focus of the sustainability personnel, so going back that one step to the root cause level actually falls out of the scope of sustainability experts (supported by what was discussed under point 2).
  5. As a consequence this reduced approach just based on the existing GRI Guidelines leads to ‚less bad’ target setting, and very often disconnected with the main impact through products and/or services. Have a look at the GRI Guidelines and ask yourself how often the Guidelines talk about products and/or services, apart from product stewardship in the social section!?! One can argue that this would actually be the job of sector disclosures, but then there would be the need to focus work on a complete set of them more throroughly, an approach not followed by GRI for several years now. A sustainability regime based on effects or symptoms instead of the real root causes mentally restricts to go ‚to the real core’ and making the connection to the real opportunities a company has in sustainability. Instead, there is a more risk-based tendency to reduce harm, and not to increase positive impacts. That is the real reason that an idea like ‚becoming a net-positive impact’ company is still lightyears away for the majority of companies, they find a million reasons and ‚yes, buts…’ instead of accepting that working on this ultimate business case for sustainability should be started today, and not one day later.
  6. In consequence the G4 content principle on sustainability context is the most neglected one, while the wording there clearly defines the need to address context from a root cause base, think about opportunities, ambitions and positioning of the company’s strategy vis-à-vis these root causes, and only then define the necessary boundaries to decide which impact reduction strategies actually make sense in the light of a positive impact focus.
  7. A further cause for relaxed thinking about sustainability context is the smooth way IIRC has taken on the idea of the six capitals that are part of the Framework Version 1. While we personally commend the IIRC to sticking to this generic model (called the ‚octupus’) from the moment it presented its first discussion paper, we were hoping for a way more rigid use of the idea of the capitals. In our view the capitals form a great link to and present a great structure of introducing proper context and value-creation ‚docking stations’ for the above presented approach of starting from root causes to strategy development. Instead, we face a situation where IIRC mentions the capitals as an area ‚for inspiration’ in order to ‚not forget potential impact areas’. That is too weak and doesn’t sound like ‚important’, so again not too much time is spent on assessing the capitals. The work of the 100-companies-strong IIRC pilot group has focused mainly on ‚integrated thinking’, wheras ‚holistic thinking’ would have been way more appropriate. If the capitals model isn’t taken serious we will remain on symptoms and effects level instead of addressing the real route causes.
  8. To finish off, the work of the Thriveability Consortium (of which Ralph is one of the founders) has been an eye-opener over the last two years with regard to the levels of human consciousness for the development of a ‚world view’ within an individual or corporate mindset. The idea of ‚spiral dynamics’ that emerged over the last 20-30 years clearly differentiates various levels of human consciousness development, and also differentiates between first and second tier awareness, decribing their ability or disability to create the world we need. Only second-tier individuals and organizations will be able to really develop the idea of a world view through the inherent different ways of interconnectedness and organizing codes and principles needed in a sustainable world. We are generally positive that we will be able to level up more companies to the second-tier level. Those organizations will see the ‚macro-micro link’ as a no-brainer. Those companies will be winning, but for a big group of tier-one ompanies life will become tough.

We are on a journey. It is not enough to approach the abyss with 40 miles per hour instead of 60 miles per hour; we need to find the brake and turn around the vehicle. Awareness of the need for that turnaround, timing still available and definition of a new direction will become essential. There is no useful sustainability reporting or integrated reporting without this information, defined for the individual business case per company. Sustainability context is therefore an absolute core. The more companies get out of the avantgarde and into the mainstream, the sooner we will get there. ‚It’s time to be steered by the stars, and not by the light of each passing ship’, said Omar Bradley decades ago. Today this is more true than ever.

Authors: Ralph Thurm is the Founder & Managing Director of A|HEAD|ahead, Nick de Ruiter is partner at Sustainalize.

 
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Posted by on May 13, 2014 in Sustainability Reporting

 

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The sudden ‚materiality shock’

This is the first of four installments of a blog series covering crucial sustainability reporting issues on materiality, sustainability context, comparability and stakeholder inclusiveness.

Spring 2014 seems to be the moment in time where ‚materiality’ suddenly appeared on the screen of corporate sustainability reporters. At least one could wonder why within a couple of weeks countless workshops popped up around the world, webcasts were announced and books were published just on this one single issue of the sustainability reporting agenda. One author even declared a calm ‚war on materiality’. But wait a minute, the issue of defining what is material in sustainability reports isn’t by far new, so what’s the reason for this sudden shake-up? Several reasons could be mentioned:

  1. Since the publication of GRI’s G4 Guidelines in May 2013 materiality went to the forefront of communication items around the new Guidelines. The reports based on G4 should show ‚what matters, where it matters’. For that reason GRI visualized the application of the four report content principles as one seamless workflow. But is this new? The answer is no, because the same process was already pulled together in a resource document in 2010, but now got finally included in the main document, the G4 Guidelines, without considerable changes. Also, GRI’s certified training program presented a five-step process since its inception years ago that followed this logic, and thousands of practitioners around the world were trained for doing exactly that – defining what is material.The reason for the extra attention lies elsewhere: the combination between impact definition, boundary setting, transparent stakeholder dialog and the level of disclosure that GRI is demanding in this thematic triangle adds rigour and demands a much more crisp process. Gone are the times when a mentioning of stakeholder dialog was enough, a materiality matrix could be presented without further process description on how this was pulled together, and the legal shortcut of 50%+1 share was enough to cut off responsibility in reporting due to the one boundary chosen by the legal counsellor. So, for some ‚what matters, where it matters’ now suddenly means ‚what hurts, where it hurts’, especially for those that define sustainability as an additional topic that needs to be addressed through a separate report, and where the corporate strategy isn’t that much connected with sustainability thinking.
  2. Another reason for the new level of attention can easily also be detected when looking through the outcomes of KPMG’s 2013 international report quality survey amongst the biggest 250 companies, many of them call themselves leaders in sustainability. Just a couple of numbers to clarify the problem: 13% of the reports do not identity megaforces that affect business at all, and from the other 87% at least some megaforces are identified, with climate change only affecting 55% of businesses, ecosystem degradation is a just a problem for 18% of the G250. One can only wonder how identifying ‚what matters, where it matters’ is at all possible if so little sustainability context analysis is done in the beginning of the materiality definition process. When looking at information how often companies do assess materiality, 58% do not give any indication and 19% indicate a limited assessment of materiality. That means that just 23% of the G250 have a thorough process in place to assess matariality. This is shocking evidence. Stakeholder inclusiveness is another painful area to look at. For only 45% the process link between stakeholders and the materiality process is clear, for the majority stake of 55% the process is not yet clear (34%) or not explained at all (21%). Finally looking at target setting one might expect that material issues would also lead to clear targets, but the opposite is true. 13% of the G250 haven’t declared any targets, 28% of the reports carry some targets with no clarity on how they relate to material issues. 23% of the reports carry information that links to less than 50% of material issues, and finally 36% carry targets that relate to more than 50% of the material issues. The shortcomings of these data explain very clearly why the pocess of cutting through from sustainability context information through stakeholder dialog to material issues now needs to get more rigour. Companies just did what needed to be done, just little of them did more than absolutely necessary. We leave it up the reader to contrast this information with the many CEO speeches that tell us how much sustainability is in the genes and DNA of their organization.
  3. A new level of recognition of materiality is surely also due to the growing number of frameworks and guidelines around corporate reporting. Whereas GRI addresses materiality from the perspective of all stakeholders, the IIRC clearly defines materiality from the point of view of the providers of financial capital. SASB just replicated the definition of the U.S. Supreme Court, focusing on shareholders only. And that whole array of different definitions seems to be confusing, especially as many users see these documents as standards. It is therefore time to step back and again recognize that none of these documents are ‚standards’ or ‚cooking books’. They are recommendations as they present guidance and framing. Not more, not less. Furthermore they are still all voluntary instruments to trigger thinking about the inclusion of sustainability into an organization’s core – the business model and the strategy. If this is managed well we think the discussion on materiality will by definition become a no-brainer.
  4. Lastly, there is new fuel to the fire of mandatory sustainability reporting through the positive vote of the European Parliament to amend the European Transparancy Directive and make sustainability reporting compulsary for roundabout 6.000 listed companies in Europe, with a size of more than 500 employees. The Directive passed the European Parliament on April 15, 2014. The Directive needs to be translated into member-states laws and regulation, so that the application is only expected to start in 2017 for reporting year 2016, maybe even one year later. In short, material issues of importance need to be reported in annual reports or sustainability reports on corporate level. Discussion arises mostly on the point of the EU’s definition of CSR, saying it entails all voluntary action of companies above and beyond what is legally already demanded for. In our view this definition is counterproductive to the real meaning of materiality, and therefore misleading to help describe the core of the issue. Nevertheless, the fact that many companies are now demanded to report on their sustainability risks and opportunities, covering a range of issues that is nearly 100% overlaping with the UN Global Compact 10 core principles, has put new emphasis on the materiality discussion in companies.

In our view there is only one useful way of dealing with the issue of materiality, and that is to step one step back from the idea of standards that would tell us what clearly has to be done. We see materiality in the closest of all possible meanings: all areas in which the company affects or is affected by those areas of sustainability it can influence by its existence and through its doing, through products, services, as enablers and advocates of positive change. The measurement of ‚Net Positive Impact’ will therefore become the future litmus test of the right to exist for companies. It would be good for companies to already follow in the footsteps of those frontrunners that aim doing exactly this ambitious step.

Authors: Ralph Thurm is the Founder & Managing Director of A|HEAD|ahead, Nick de Ruiter is partner at Sustainalize.

 
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Posted by on April 26, 2014 in Sustainability Reporting

 

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Transition from GRI 3.1 to G4 – 10 reasons why there is no time to waste!

– 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!

  1. 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.
  2. 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
    1. Short-termism driving hectic actionism for quick successes;
    2. Sustainability as merely risk management, thereby ignoring the fact that sustainability can be positioned as a means to distinguish yourselve from competitors;
    3. 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);
    4. 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.
  3. 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
    1. 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.
    2. 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.
    3. The willingness to gather data about impacts and therefore prepare a readiness to discuss with stakeholders from an informed perspective.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.

 
 

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Context, please! Ralph’s column in edition 3/2013 of ‘forum Nachhaltig Wirtschaften’

Here’s the pdf of the (German) article ‘Kontext bitte’ of the ‘forum Nachhaltig Wirtschaften’, edition 3/2013.

FNW_2013_03_Thurm

Why is Novo Nordisk’s newest integrated annual report tackling growth? Because they have to, it’s the context to their business model, and embracing the idea of a ‘Grenn & Inclusive Economy’ is core to them. Why is the Shell report missing enough context and get a clear ‘warning signal’ by their External Review Committee (while being famous for their scenarios)? Because they still don’t get how much is at stake in a rather short amount of time and they just neglect that a ‘Green & Inclusive Economy’ needs to be built without fossils; defenders of a certain faith just move as much as they’re absolutely forced to, unfortunately. So, will GRI G4, the IIRC and the approaches of SASB and GISR (to name a couple of new kids on the block) catalyze some of that change towards more context in reporting? Chances are they could be part of the solution as macro-micro benchmark information will become the ultimate litmus test of useful, context-based and satisfying information for all stakeholders. We need to start asking for that information. What is your right to exist today, and in the future? Did you ever have the idea that this – most important – question has been answered in a sustainability or integrated report you read recently? Novo Nordisk is close, Shell not, so my investment strategy is clear…

 

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