New Bottom Line Volume 14.2 – CSR reporting and company performance: How closely are they correlated?

Monday, February 28, 2005

With so many companies worldwide producing “corporate social responsibility” (or citizenship or environmental or sustainability) reports, it’s relevant to ask both “how good are they?” and “what do they really tell us?”

SustainAbility, the British consultancy, addresses the first question in its biennial benchmark of CSR reporting. “Risk & Opportunity: Best Practice in Non-Financial Reporting” (released late last year in partnership with UNEP and Standard & Poor’s) reviews and rates the top 100 corporate responsibility reports from around the world.

Working in cooperation with SustainAbility, Natural Logic addressed the second question:
– How do the leading reporters compare with the leading performers?
– Is quality of reporting an indicator of better management and performance, or of communications resources?

To examine those questions, we analyzed the publicly reported data using our web-based KPI (key performance indicators) system, Business Metabolics™. In a moment, what we found for one sector — the eight Technology and Telecommunications companies covered in the report. (You can fly through the data yourself — and read an illustrated version of this article — using our interactive demo.) But first, some background.

SustainAbility found that companies have made a “huge leap forward” in overall reporting quality, since publication of their “Trust Us” report in 2002, with “new highs in transparency and disclosure.” Significantly, half of the top 100 in 2004 are newcomers, suggesting that leadership in corporate reporting is far from static, and that existing leaders will have to work hard to maintain position.

In contrast, the 2004 benchmark found that reports still fail to fully engage stakeholders, particularly financial analysts who continue to struggle to identify the data needed for their analyses of corporate performance. The report also finds that “most companies still fail to identify material strategic and financial risks and opportunities associated with the economic, social and environmental impacts captured by the ‘triple bottom line’ agenda.” SustainAbility suggests that corporate governance, board leadership and integrity are at the heart of the challenge facing business if corporate responsibility is to have real impact on business planning and decision making.

CSR Reporting – Performance Perspective

Business Metabolics makes quick work of charting and comparing CSR performance at facility, company or industry level — with automatic data acquisition, robust and flexible data structure, and an intuitive user interface. A wide variety of easily generated charts make performance comparisons fast an easy. The inconsistency of metrics reported by each company, however, made interpretation difficult, since the companies are often reporting different substances, with different definitions and different system boundaries. This underscores the importance of comparability, and transparency with regard to boundaries, in terms of both what’s reported and how it’s reported. With that caveat, here’s some of what we found.

Greenhouse Gas Emissions (GHG)

Some companies (Deutsch Telecom, Sony, tied for #45) show steady improvement in this core sustainability indicator, others show little change (British Telecom, #4, Ricoh), and others are inconsistent (Philips, #39).

We find that indicators are more informative when also viewed in relation to other relevant factors — for example by normalizing the indicator to a traditional measure of business activity or value (e.g., sales, profit, production, material throughput, etc.) If we add context by comparing GHG with Sales, the quality of reporting does not point to better performance, lower ranked reporters Sony and Philips seem to be doing exceedingly well, while some leading reporters, like BT, are now at the bottom of the pack. On the other hand, the two companies reviewed in this sector that didn’t make the top 50, IBM and Ricoh, appear to rank near the bottom of the pack on this measure, while HP (#10) also does very well. Reporting quality may be an indicator of how well sustainability issues are managed, but other factors are clearly involved.

Comparability is especially elusive with regard to GHG reporting, however. Some companies report on several types of GHGs, while some just track CO2. Low performers might simply be accounting for more of their operations more inclusively, and collecting better data; high performers might have outsourced more of their manufacturing — a growing trend with technology companies — and are not reporting impacts that have now been offloaded onto their suppliers. The graphs alone don’t tell the story. Meanwhile, as comparability and boundary standards evolve through the Global Reporting Initiative (GRI) and other frameworks, reporters should clearly specify the boundaries and assumptions underlying their analyses, so their readers have a better chance at meaningful comparisons; and readers should read and interpret carefully.

Sony, for example, is the only company in the group that reported GHG emissions in a life cycle framework, disclosing that the bulk of their reported GHG emissions — more than 97% — came from the use of their products in the world, not from their own operations. The GHG impact of their contract manufacturers is not reported, so the “life cycle” framework is not complete. But even so, this argues for a strong focus on product efficiency — a goal declared, but not reported on, by HP; Sony has been far more successful, so far, in reducing GHG from operation of their facilities than from operation of their product “fleet”.

Non-Product

Sony was also the only company in the group to report on product yield — the percentage of material throughput that’s turned into product. This Product to Non-Product Ratio — which Sony reports as exceeding 85%, and improving — is so valuable for focusing management attention on the sustainability value proposition that we’ve built it into Business Metabolics as our Throughput Pie™. (It’s disabled in the Global Reporters demo, since Sony was the only company whose data supported the calculation. But we hope to see more companies providing this data in the future — and currently find it more prevalent in Japanese companies’ reports.)

Water

The data show modest reductions in total water use at most of the companies we examined, with substantial reductions at Philips and BT, substantial increases at Matsushita (#34), and a modest increase at HP (once again raising the question of possible shifting boundaries).

As one might expect, the “value to resource” ratio for the telecomm companies (BT, Deutsch Telecom) is better than for the manufacturing-focused technology companies. The exception is HP — which has largely outsourced its manufacturing. Ricoh, Sony and Philips sit in the middle of the pack, with Matsushita and IBM distinctly trailing. Once again, these differences may reflect reporting boundaries, outsourcing (HP), more manufacturing intensive operations (IBM, Matsushita), or true performance differences.

NonHazardous Waste

High ranked BT and lower ranked Deutsche Telecom sit in the middle of the pack for NonHazardous Waste, between larger (but rapidly declining) generators Philips and HP, and smaller generators Matsushita, Sony, IBM and Ricoh. All eight companies improve over time on this metric; Sony and Matushita leadership may be expected due to greater acceptance of incineration in Japan. Note again that IBM and Ricoh, the smallest generators, got relatively low reporting grades, with neither in the Top 50.

But while one would expect the telecomm companies to be more productive than the manufacturers — measured as Sales/NonHazardous Waste — top ranked BT lags well behind lower ranked Deutsche Telecom. Among the manufacturers, lower ranked Sony & Matsushita come in well ahead of HP — which along with Sony shows the most dramatic improvement trend — and the others.

Conclusions

What have we learned from this initial analysis?

To fly through our analysis yourself, visit our interactive demo at http://www.businessmetabolics.com/GR. (Note: not all functionality is enabled in this demo. Only the Technology and Telecommunications sector are shown at this time.) To learn how Business Metabolics can help your organization reduce the costs and increase the business value of its CSR reporting, to arrange a complete personal demo with your team, or to request a custom analysis of your industry, contact us at demo at business metabolics dot com, or call Natural Logic at +1-510-849-5467.

Next month, I’ll report the results of our recent survey of CSR reporters, conducted in collaboration with greenbiz.com.

(Special thanks to Natural Logic’s David Jaber, who coordinated this analysis, and contributed to this issue of New Bottom Line.)

(c) 2005 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

May be posted intact–including this notice–in any non-commercial forum.
Please inquire at “reprint_rights at natlogic dot com” before reproduction in any commercial forum.