By this time of year, most publicly traded companies have released their corporate reports for the previous year. The documents that companies issue vary in size and disclosure but tend to take the form of an annual report, an annual information form, a proxy report and a 10-K report. At the core of corporate reporting are financial statements and accompanying notes, usually supplemented with a corporate governance report and updated information on its board of directors. It's easy to find these documents on a company's website and investor relations managers are always eager to mail hard copies to perspective and current shareholders.
Over the past two decades, however, shareholders have come to expect additional information on a firm's social and environmental activities, published in a formal report format. Today, corporate sustainability reporting (CSR) is a mainstay of company disclosure, though quality still varies widely. Amidst the criticism (often deserved) that CSR reports can read like feel-good infomercials, there is mounting pressure for companies to understand their "footprint," and to provide an accurate snapshot of how that footprint integrates with their economic impact.
Today's most socially active companies are not just releasing glossy CSR reports; they're also winning awards for it. Since 2001, Ceres – a network of over 130 investment funds, environmental organizations, unions and interest groups – along with the Association of Chartered Certified Accountants have been conducting an international competition recognizing exemplary CSR reporting.
At the May 2010 Ceres Conference, 93 entries came in from across the U.S., Canada and Mexico and represented some of the best models for sustainability reporting.
Who won? The Timberland Company won for the best overall sustainability report. Ford Motor Company won first runner up while Seventh Generation won for the best small enterprise report. On the short list were Coca-Cola, General Electric and Suncor.
Though each company's reporting varies in style, content and evaluation methods, a closer look reveals that winning CSR reports have certain commonalities. If you can spot these elements, there's a good chance the company is pursuing worthwhile environmental, social and governance initiatives that extend beyond lip service.
1. Does the CSR report contain quantitative information?
Publicly traded companies are comfortable with the process of collecting, verifying and reporting financial data. Those just beginning to aggregate environmental, social and governance data may find it difficult to move past "commitment" statements, towards more quantitative data and methodologies to substantiate progress.
When looking at a company's CSR report, watch for "key performance indicators," or KPIs: industry-specific measurements that reflect the critical success factors of an organization. A KPI may include greenhouse gas measurements, injury rates or hazardous waste emissions. Furthermore, KPI metrics should be measured annually and tied to clear targets.
In its most recent CSR report, Ford Motors outlines its goal, "to reduce carbon dioxide emissions from its U.S. and European new vehicles by 30% by 2020, relative to a 2006 model year baseline." The company measures this progress every quarter according to tonnes of CO2 reduced.
2. Is the report externally verified?
The legitimacy of a CSR report is enhanced when internal and external data is assessed for comprehensiveness and accuracy. It is now standard for companies to engage auditors to evaluate internal controls related to CSR data.
The most popular stamp of approval is the Global Reporting Intitiative G3 reporting guidelines that provide a global, standardized framework and grading system for reporting on environmental, social and governance indicators. Other NGOs like the Carbon Disclosure Project enhance a company's report by approving that particular data is relevant and verified.
Using a third-party reporting framework can be helpful for a company of any size to identify what type of information is worth measuring for their business. Investors can rest assured that CSR reports published in accordance with third-party guidelines contain universal principles that define reporting quality.
3. Do the reported policies extend and connect?
Since a large portion of a company's operations affects its supply chain, customers and communities, it is important that efforts are made to ensure the company is working with stakeholders, to help manage its impact. It is one thing to have an emissions reduction policy, for example, but if it fails to extend to a company's suppliers, a major portion of operations is overlooked and thus any reported data is thus inaccurate.
Timberland, for example, has goals to reduce emissions throughout the entire company and along its entire supply chain. Using the Green Index system, the company monitors and reports on the size and scope of its supplier emissions on a quarterly basis. Coca-Cola has a program to return to nature and communities an amount of water equal to what it uses in all its beverages and its production.
These efforts aren't meant to be cure-alls to the inherent effects of business operations. But today's most active companies understand that sustainability practices should extend to and be measured throughout the entire line of operations so as to be built in with the overall business model.
Legitimate sustainability reporting is becoming a basic requirement for all companies wanting to operate with credibility, no matter their size or industry.
Though investors must still beware of window-dressing "commitments" and distractions, certain companies are publishing innovative CSR reports can positively change the way the investors engage with a company. Trust and reliability are now enforced through globally accepted standards and stronger, more relevant assurance processes. By understanding how to identify these qualities, a CSR report can be a powerful tool for investment-based decision making.
