The time may have come in China for “sustainability” or “non-financial” reporting: the disclosure to society of information on companies’ social, economic and environmental management and performance. Recent scandals to do with product quality, such as the melamine-in-milk scandal, are important reasons to adopt such practices. In today’s global economy, the mistakes of some can impact the market prospects of many.
Although sustainability reporting has been practised globally for around 20 years, it is relatively new to China, whose first sustainability report was issued in 1999 by Shell China. Nevertheless, this type of reporting has grown rapidly, to the extent that in 2006, 18 Chinese companies produced sustainability reports.
So how does China measure up? For 15 years, SustainAbility’s “Global Reporters” programme has published a biannual survey of sustainability reporting that assesses how well major companies across the world disclose information regarding sustainability management and performance. Globally, we have seen enormous growth in sustainability reporting, with nearly 3,000 reports published in 2007. These reports increasingly come from emerging markets. While in 1998, Asia, Africa and Latin America only published a few reports, by 2007, countries like Brazil, China, India and South Africa published almost 10% of all reports globally. In Brazil, sustainability reporting has risen exponentially, having tripled in the last five years to roughly 80 reports published in 2007. China seems set to replicate this reporting boom, but at an even faster rate.
Partly as a result of these changes, SustainAbility has shifted the focus of its “Global Reporters” programme away from broad international surveys and towards exploring specific issues, sectors and countries. Our first report written along these new lines for the Brazilian Foundation for Sustainable Development, entitled The Road to Credibility, rates the quality of sustainability reporting by 10 leading companies in Brazil.
Clearly, the findings of The Road to Credibility cannot be directly applied to China, as the drivers behind sustainability reporting are context-dependent. For example, Brazilian reporting is driven by various issues, including the increasing exposure of companies to the transparency demands of stock markets, and the rise of sustainability indexes such as the Sao Paulo stock exchange’s Corporate Sustainability Index (ISE). The Global Reporting Initiative (GRI) and pressure from NGOs are the two other factors. In China, although the GRI is having significant influence, the government has been the key driver behind encouraging the uptake of corporate social responsibility (CSR) by Chinese companies. Indeed, it is still the case that most of the companies reporting in China are state-owned enterprises.
Nevertheless, The Road to Credibility offers lessons on best practice and potential pitfalls that are relevant for other countries going through an evolution in sustainability reporting. Although Brazilian reports achieved what appears to be a low-average score of 47% in the assessment methodology, this is not far behind the global average of 57% calculated in our 2006 international survey. However, a clear gap remains between the top-ranked company in our Brazilian survey, Natura (a leading cosmetics company), which scored 54%, and British Telecom, our top international scorer in 2006 with 80%. The Brazilian leaders are still three or four years behind the global leaders.
What accounts for this difference? For one thing, global leaders are much better at focusing their reports on “material” issues – those environmental and social issues where the company has a disproportionate impact, either positive or negative. Brazilian reports also have a tendency to report too much information without any clear prioritisation. For example, the ten reports we analysed, averaged a forest-unfriendly 161 pages in length.
A further issue is that while Brazilian reporters are good at articulating their commitment and ability to contribute to sustainable development, they are much weaker when describing systems to implement this vision or disclosing performance in a meaningful way. This suggests that for businesses in Brazil, sustainability reporting remains an extra-commercial CSR consideration rather than an integral component of the business itself.
Finally, the central challenge for Brazilian companies — reflected in the title of our report — is how to get readers to see sustainability reports as sincere and credible, as well as reflective of a real commitment to sustainability. This “credibility gap” is substantial in Brazil and is linked to the following factors: an overwhelming tendency to emphasise the good news and ignore the bad; a lack of hard indicators and business targets; an absence of credible stakeholder voices in reports; and a lacking sense of true leadership commitment.
Extrapolating from these findings, our advice to Chinese companies looking to start sustainability reporting or improve their existing approach is three-fold: first, “less is more”. Although it is understandable that reporters wish to ensure that readers have all the information that interests them, a sustainability report overburdened with information actually impedes understanding. Instead, reports should identify the most significant issues – often no more than four or five – and concentrate on these.
Second, although providing information on corporate giving and philanthropy is useful, demonstrating how sustainability is being practically integrated into business activities in both the immediate and longer term is ultimately more convincing and compelling. Furthermore, this will separate your company as a leader ahead of the pack.
Finally, do not be afraid to report challenges, failures and dilemmas. Stakeholders know these exist and basic credibility demands an honest explanation of the challenges that arise from implementing the company’s sustainability vision. If the report fails to mention these obvious difficulties, stakeholders will wonder what else might be hidden. Other factors that raise credibility include having a sense of true leadership commitment, which is often achieved by an inspirational top management letter; the inclusion of stakeholder opinions; and the use of quantitative indicators and targets.
These recommendations are challenging for Brazilian and Chinese companies alike, making the road to credibility a long and bumpy one. However, for companies that aspire to become leaders of the sustainability agenda, building trust with and support from society is a journey that cannot be avoided.
John Elkington is co-founder and director at SustainAbility (www.sustainability.com) and at Volans Ventures (www.volans.com).
Jodie Thorpe is director of SustainAbility’s Emerging Economies Programme.
The Road to Credibility is available at www.sustainability.com/roadtocredibility.
Homepage photo by romeo