Exploring Current Trends in Corporate Sustainability Reporting

by Natalia Krylova

  MASTER THESIS

  Exploring current trends in Corporate Sustainability Reporting

  with a specific focus on materiality assessment and waste management

  By Natalia Krylova

  Copyright 2015 Natalia Krylova

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  MASTER THESIS

  Exploring current trends in Corporate Sustainability Reporting

  with a specific focus on materiality assessment and waste management

  by

  Natalia Krylova

 

  Master in Standardization, Social Regulation and Sustainable Development

  University of Geneva

  June 2014

  Table of Contents

  Preface

  Abstract

  Introduction

  The New Role of Corporations

  Sustainability Concept

  Sustainability Reporting

  The Evolution of Sustainability Reporting

  Key Standards/Guidelines/Frameworks on Sustainability Reporting

  What is Happening Now?

  Background for Choosing the Topic

  Description of the Methodologies

  Analysis of the Findings

  General

  Materiality at the Core of the Report

  Waste

  Limitations of the Present Work

  Recommendations

  General

  Materiality

  Waste

  Conclusion

  Bibliography

  Annexes

  Annex 1

  Annex 2

  Annex 3

  Preface

  In the summer of 2013 I was involved in a project on 'sustainability reporting' with the World Business Council on Sustainable Development (WBCSD). The experience has sparked my interest in the field of non-financial reporting (NFR) in terms of content as well as from the communication and user experience point of view. Reporting on sustainability should lead to an improved management of these critical issues in the wide scope of nature's limits. Public reporting should make companies accountable for their actions, which in turn drives internal commitment to sustainability and improved business practices. However, one major criticism can be leveled at the reports is the authenticity of information disclosed. In my thesis I am exploring the means and good practices which may assist companies to better communicate their actions towards sustainable development and in a more structured way. Today it is crucial for companies to address sustainable development issues not simply to avoid public criticism but also the unavoidable exposure of bad practice. Various scandals have occurred over the years, to name a few: the detrimental effects of pesticides, poor labour conditions of workers, illegal dumping of hazardous waste and other instances of irresponsible management systems in place. The wide use of social media and advancement in technology manifests the unethical behavior quickly in a world where the boundary between public and private information is becoming increasingly blurred. It is therefore in the corporation's own interest to focus on the most relevant sustainability related issues in a systemic manner and be open about its operations. Business that integrate sustainability in the overall management gain recognition, improve the efficiency of performance whilst at the same time have a favourable environmental and social impact. Such actions should be adequately reflected in the annual stand-alone Sustainability Report or at least the Annual Report.

  'There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say engages in free and open competition without deception or fraud'

  Milton Freidman

  Abstract

  The objective of this work is to identify the key trends and areas for improvement in the field of non-financial reporting (NFR). I will start by looking at the capitalist approach to development and how it has influenced the present day unsustainable production and consumption processes. I will then introduce the concept of sustainability, which emerged mainly as a response to the detrimental effects that mass production continues to have on the environment. It is ultimately the corporations that define the current unsustainable ways of existence, therefore corporate sustainability reporting is encouraged to publicly disclose the management of operations. Various sustainability reporting frameworks are described, which aid companies to better report on their sustainability-related activities. In the analysis I will look at the leading companies from different sectors that drive global consumption. I will then perform an analysis focusing on the criteria, which in my view are prerequisites to sound reporting and efficient operations. Key trends will be identified that drive sustainability reporting internally within the company and also globally. Recommendations will then be provided on how any company can implement a comprehensive materiality assessment process and introduce an efficient waste management approach. By integrating and continuously improving these two aspects the company will be able to advance on sustainability, ensure good reputation, adhere to current and future regulations whilst at the same time improve its balance sheets and the welfare of the planet.

  Key words: capitalism, sustainable capitalism, sustainability, sustainability reporting, non-financial reporting (NFR), materiality, waste management.

  Introduction

  The new role of corporations

  It could be argued that we now live on the verge of transformation where the old systems can no longer support the functioning of today's societies. Capitalism's main objective, as a form of governance dominated by the forces of free market, is to ultimately generate profit as an end in itself (King and Roberts, 2013). This idea established mass production and mass consumption as the two main activities that have defined the world that we live in ever since the start of Industrial Revolution. "Industrialists wanted to make products as efficiently as possible and to get the greatest volume of goods to the largest number of people" (McDonough and Braungart, 2010). During Henry Ford's manufacturing revolution in 1908 he discovered a way to reproduce the same object, a car, with minimum costs and simultaneously generate maximum output. "Ford's model of consumer capitalism transformed the living standards of the people?" but also led to "?depleted natural resources, vulnerability of flooding, income inequality, persistent low pay, underemployment?" (Blowfield and Johnson, 2013). It is evident that mass consumption has increasingly damaging effects on the planet's resources and the nature's ability to sustain such growth. Carbon emissions, climate change, deforestation, pollution, rising sea levels are just some of the negative effects of capitalism that aggravate the planet's and people's welfare. Then one needs to ask himself: "do the emerging social, environmental, and economic challenges suggest that the current model of capitalism is no longer fit for purpose?" (Blowfield and Johnson, 2013). The 'rules of the game' mentioned in the opening quote by Freidman ought to change and should focus beyond financial gains!

  "Humanity confronts a daunting double challenge in the 21st century: meeting widely held aspirations for equitable human development while preserving the bio-physical integrity of Earth systems" (Gerst et al., 2013). The work by Johan Rockstr?m is of particular value here as he explores the subject of planetary boundaries scientifically asserting the overuse of na
tural resources (1). The underlying question is which course to take that will improve overall well-being whilst remaining in the planet's safe operating space (Griggs, 2013). "For the past twenty years, concerns around the environmental impact, the social responsibility, and the governance of corporations have been on the rise" (Ioannou and Serafeim, 2011a). Ultimately, it is the corporations that will drive sustainable change as they foster consumption through the use of natural resources. Unsustainable short-term 'business as usual' approach presents clear risks, which are becoming more apparent through the frequency of natural disasters and other anthropocene effects of development (DESA, 2013).

  The traditional theory of production is grounded on the idea that the economy is simply a system where inputs are transformed into outputs (Carlson, 1939). What is ultimately the preferred path of development is not just a mere transition to a new system but the transformation of the traditional capitalistic one. Whilst using the resources efficiently (input), desired sustainable products (output) should be produced for the society that is demanding value.

  Sustainability Concept

  In 1972, scientists from MIT created a computer model that analyzed global resource consumption and production. The results shocked the world and created a stirring conversation about global "overshoot," or resource use beyond the carrying capacity of the planet (Bardi, 2011). They strive to explain the interdependency of components - economic, political, natural, and social - and to raise awareness among the public that would promote new sustainability-focused policies (Meadows et al., 1972). In an update of this book, published 30 years later, they offer an analysis of present and future trends in resource use and assess a variety of possible outcomes presenting potential scenarios. The authors believe that humanity can still reverse some of its damage to the planet if it takes appropriate measures to reduce inefficiency and waste (Bardi, 2011).

  In the late 80s one can observe the development of new concepts that underline the importance of the environment and stress on the fact that progress must be sustainable. The concept of 'sustainable development' first appears in the Brundtland Report and is defined as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs" (Brundtland, 1987). The report is entitled 'Our Common Future' and was written by the World Commission on Environment and Development. Gro Harlem Brundtland was the Chairman of the Commission at the time deeply involved in the development of this highly influential document together with a long array of Commissioners from 'widely differing backgrounds'. It is somewhat astonishing that despite being published in 1987, policy makers, governments and the society still remain ignorant of the report's clear description of the sustainable development path to be taken.

 

  One can be optimistic by holding the belief that a " transition is possible and that business is key to changing this situation" (Blowfield and Johnson, 2013). An analysis by Gerst indicates that "there are plausible, diverse scenarios that remain within Earth's safe bio-physical operating space and achieve a variety of development targets" (Gerst et al., 2013). At the same time it is widely discussed that we have reached the limit of over production and our planet's resources can no longer support the escalating levels of consumption. The model of the three pillars further underlines this interrelationship between the social, environmental and economic aspects of development. According to the theory of John Elkington only by addressing these three pillars can society achieve sustainable development (Elkington, 2004). The idea is reiterated in the report by the UN Department on Economic and Social Affairs (DESA) which states that "the world is faced with challenges in all three dimensions of sustainable development - economic, social and environmental" (DESA Report, 2013). In the coming years 'global development agenda will have to facilitate transformation in the way goods and services are produced, in the way jobs are created, in global consumption patters, in the management of natural resources, and in the mechanisms of governance" (DESA Report, 2013). Ultimately, large asset owners - pension funds, mutual funds, insurance firms, and sovereign wealth funds - must adopt investment strategies aimed at maximizing long-term results, and other key players-asset managers, corporate boards, and company executives-will likely follow sui (Barton and Wiseman, 2014). There is a common justified feeling that companies maximize the short-term profits at the expense of the society, whereas these profits should benefit the society and not be a trade-off.

  Sustainability implies that society, and in particular the corporations, must use no more of a resource than can be regenerated (Aras and Crowther, 2009). Multinationals have the power to change the thinking and actions of their employees (notably 50 companies included in my analysis employ 6,224,088 employees), suppliers, customers and other stakeholders. At the same time, consumers have the power to change what corporations produce by influencing the production patterns when making ethical choices. Sustainability should be viewed as a systems concept and not an organisational concept, and ultimately as a global concept (Milne, 2007). This transformational change can be further enhanced by appropriate policies, laws and regulations. Coordinated effort from the public sector and the businesses is essential to the achievement of progress.

  The principle of shared value promoted by Michael Porter ("Creating Shared Value," n.d.) is the desired direction for any company - creating value to the society by producing the products that are truly desired and add value to the society. The business should focus on how it can create shared value in terms of profits but ultimately seeking to create value for the society with the mantra 'what is good for business is good for society' ("Creating Shared Value," n.d.). Efficient way of managing business would lead to money savings in terms of the eradication of leakage points at every step of the value chain.

  Sustainability Reporting

  The Evolution of Sustainability Reporting

  Sustainability reporting may be viewed as a response mechanism to changes in society and environment, that have led to increased monitoring and policing of companies by an increasingly concerned public that is demanding ethical behaviour (Stiller and Daub, 2007). Companies should also report to strategically manage reputational risks, because competitors are doing it and because of cost efficiencies (Palenberg et al., 2006). Arguably, if all corporations realised the large monetary savings that would result from innovative business models that focus on sustainability, the speed of sustainability evolution would increase.

  "Through the 1980s corporate responsibility was almost exclusively an American phenomenon associated primarily with external pressures by investors, consumers and activists on the US-based firms" (Perrini, 2006). "Less government intervention and the liberalization of markets in the 1980s resulted in higher levels of trade and investment; this in turn led to a societal and regulatory void in which NGOs were expressing their concerns about the negative impacts of globalization" (Kolk, 2008a). Arguably the infamous demonstration at the WTO meeting in Seattle sparked the increasing concerns of various stakeholders about the unethical behaviour by corporations. It is widely accepted that "non-financial reporting by large multinational enterprises definitely got off the ground in the 1990s" (Kolk, 2008a).

  "Sustainability reporting is the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance towards the goal of sustainable development. A sustainability report should provide a balanced and reasonable representation of the sustainability performance of the reporting organization - including both positive and negative contributions" (GRI, 2013). Social, environmental and sustainability reports are the tools companies commonly use to formalize a firm's position on CSR and to assist the firm in developing good business practices (Perrini, 2006). The auditing company KPMG defines CSR reports as those that "include quantitative and qualitative information on the company's financial/economic, social/ethical and environmental performance in a balanced way" (2013). However, the lack of transparency an
d common trend to present only the positive aspects of performance undermines 'the balanced way' in reporting.

  Despite the growing amount of companies that do report on non-financial information, the total is still small in comparison to the overall number of existing companies in the world including small and medium-sized enterprises (Stiller and Daub, 2007). However, numerous studies in the field point to the growing amount of reporters, which is only expected to increase in the future (KPMG, 2013; Palenberg et al., 2006). At present, the number of companies that produce non-financial reports has increased from less than 100 reports in 1992 to over 7,000 profiled reports in 2014 (Corporate Register, 2014).

  Various reporting frameworks are also influencing the increasing rate and quality of non-financial reporting. However, the release of many varying new standards and voluntary programs presents an impetus for practitioners to better understand the dynamic environment in which they operate and is one reason for researchers to investigate the relationship between Environmental Management Programmes (EMPs) and firm performance (Klassen and McLaughlin, 1996; Montabon, 2006). An important trend to explore in the future is whether good reporters improve performance over time? For example, the ISO 14001 Standard was released in the fall of 1996 augmenting pressure on some industry supply chains to address environmental performance through the use of environmental management systems (Zuckerman, 2000; Gordon, 2001; Montabon, 2006).