Ernst R. Ligteringen
Chief Executive, Global Reporting Initiative (GRI)

Expert opinions included on this web site have not been edited by GE.
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These days, it is hard to imagine a large company not producing a yearly sustainability report. Reaching this point has been incredibly fast — the concept of CSR and sustainability reporting was virtually unheard of 15 years ago, whereas now it is almost taboo to ignore it. Indeed more than half of S&P 500 companies issue such reports. And, of late, sustainability reporting has come to be regarded as an essential tool for internal management and engaging external stakeholders.

As the uptake increases, sustainability reporting is also evolving and periodically it reaches a point where it takes another step in its evolution. We are at one such point now.

The strengths and weakness of current reporting lie with the comprehensiveness of each report. On the one hand, reports need to provide a broad spectrum of information, but report-users also need to be able to clearly see an organization’s priorities and patterns in its performance over time. To date, reports have been strong on providing a solid base of information for users to understand an organization’s performance. They have been weaker on painting a clear picture. Common complaints about sustainability reports include:

• The amount of effort given to certain topics is not linked to their relative importance.
• It can be very hard to see how sustainability strategy links to overall organizational strategy.
• Often anecdotal cases of an organization’s sustainability efforts are plentiful in reports, but there is often little systematic connection to the organization’s core activities.
• It can be hard to see the link between financial value and sustainability performance — many companies are aware of this gap, but are not sure how to fill it.

These shortcomings tend to get wrapped into a bundle under the call for more material reporting. They are also the challenges that drive the need for reporting standards and other tools to provide better guidance on the process of prioritization for organizations. The Global Reporting Initiative (GRI), with support from the GE Foundation, is launching a project on this topic, the details of which can be found on the GRI web site.

However, whilst improvements for guidance on determining materiality are needed, not all of the answers will come from a change in report style. The utility of a report also depends on the readers’ process for analyzing reporting. There is no fixed formula on defining sustainability performance and much depends on decisions by the reader about what is important and how they want to analyze an organization. Getting value out of a report depends, in part, on the clarity of readers’ own thinking and ability to sort through a report to pull out the parts that are meaningful for their model of sustainability.

Expectations of materiality in sustainability reporting need to be put in a wider context. If you take annual financial reporting as an example, companies release tremendous amounts of financial data. Analysts need to go through this information — much of which is not material to their decision-making — and extract the items that are important for their approach to analyzing a company. Why should sustainability reporting be different?

It is also worth noting that ensuring materiality of one report sometimes depends on having non-material disclosures from several other reports, particularly when dealing with quantitative data. No number on its own has meaning. Numbers always have meaning in relation to sector averages or other benchmarks. However, to create sector averages, everyone needs to agree to disclose a set of numbers in a consistent way. Take an example of 7kg of waste per ton of product. What does that mean? Not much if the sector average is 20kg and perhaps immaterial to a report. However, if you don’t have all the small producers and large producers releasing their information, then you have no frame of reference for deciding what is big and small.

Additionally, the specific question of the link to financial and sustainability performance is difficult. Over a long-enough time horizon, there should not be a disconnect between economic value and financial value of a company. All environmental costs will eventually be absorbed into a market in some form over a long enough period of time. However, we live in a short-term world where links can be intuitively felt, but not always measured. Materiality concepts therefore need to help create new ways to think about, talk about, and link value with sustainability in “market” vocabulary.

In conclusion, the time is ripe to step back and review the trends that have been established by the sustainability reporting community. The strong base of experience built over the last 15 years can tell us what sustainability reporters are offering to their readers, what benchmarks report-readers feel are missing, and what the most effective methods are in linking economic value with sustainability in reports. Fresh guidance on the materiality of content for reports is on the way!