New G4 reporting guidelines

GRI sustainability

Corporate sustainability reporting has been one of the greatest achievements when it comes to fostering corporate accountability and transparency. While a myriad of voluntary and mandatory sustainability reporting frameworks exist, the Global Reporting Initiative (GRI) is generally cited as the front-runner. With its performance reporting guidelines, the GRI is seeking to make sustainability reporting standard practice. The goal is to achieve a sustainable global economy where organizations manage their economic, environmental, social and governance performance and impacts responsibly and report transparently. According to the GRI, at the end of 2012, there were close to 3,500 reporters of sustainability performance, up from a mere 25 a decade ago. While the rate of uptake has been remarkable, have reporting entities lived up to the expectations of transparency? One grey area that remains is how entities report on their outsourced manufacturing activities. Save for a few instances where companies have reported on supplier audits, environmental, social and health & safety performance at the supplier level almost never makes its way to the reporting entity’s sustainability performance publications.

The factory collapse in Bangladesh back in April this year is an interesting example. That factory was supplying garments to several major clothing retailers around the world. Those suppliers have a material impact on a (retailing) company’s operations, with labour issues always representing a serious reputational risk. In the wake of that catastrophe, how would this hit the sustainability books of the retailer?

The newly-minted Global Reporting Initiative’s 4th generation guidelines, G4, may provide some answers. Departing from its previous iterations, G4 emphasizes the concept of materiality. This is defined as any issue – environmental, social and/or economic that is significant enough to influence the decisions of various stakeholders – both internal and external to the organization. Material issues usually pose significant risks for the organization, which expose them to tremendous short-term and long-term financial impacts. Indeed, that very factory collapse in Bangladesh caused at least one of the factory’s clients to pay a hefty sum to compensate for the loss of lives. According to the G4, sustainability reports are to contain information on performance regarding the most material aspects. So, if we accept the fact that sustained supplier operations do have a material impact on a retailer’s business, based on this principle, we would expect retailers to start reporting more extensively on the environmental, social and health & safety issues touching those suppliers. Furthermore, G4 now has an expanded list of indicators when it comes to reporting on labour practices. For example, indicator LA15 requires the disclosure of significant actual and potential negative impacts for labor practices in the supply chain and actions taken.

The other dramatic change brought forth by G4 is the way in which the reporting organization’s boundaries will be determined – part of what G4 calls “completeness”. Previously, an organization’s boundary was defined by the extent of the organization’s control or influence over a given entity – examples include a joint venture, a subsidiary or a contractor. If a given entity was beyond the reporting organization’s boundary as described above, performance reporting would generally not consider the figures from these entities. Under G4, boundaries are now determined by looking at where the material impacts occur throughout the whole supply chain. Therefore, if labour practices at the supplier level are a material issue for the reporting company, one would expect that it would be included in the reporting company’s sustainability report.

While all these developments are encouraging, we should remain realistic to the fact corporate sustainability reporting remain largely voluntary, with limited levels of assurance on the performance data being reported. Corporations tend to be transparent only to the extent that positive stories are told; the negative side of things are usually toned down if not omitted completely from corporate publications. The revised concepts of materiality and the determination of boundaries being more principles-based leave the door open to various subjective interpretations as to the applicability of one or more aspects to different reporters within the same industry. Furthermore, the G4 guidelines are a reporting framework and do not inform the reporting entities nor their stakeholders as to where the entity is at in terms of its journey towards sustainability – something that a standard or benchmark for sustainable business performance would be better equipped to handle.

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