carrots and sticks report

KPMG’s GLOBAL SUSTAINABILITY SERVICES AND UNITED NATIONS ENVIRONMENT PROGRAMME (UNEP)

CARROTS AND STICKS

FOR STARTERS

Current trends and approaches in Voluntary andMandatory Standards for Sustainability Reporting

2 KPMG’s Global Sustainability Services and United Nations Environment Programme (UNEP)

ContentsForewords

1 Executive Summary 4

2 Introduction 6

3 Voluntary and mandatory reporting standards 83.1 Voluntary standards and self-regulation 103.1.1 Advantages of self-regulation 113.1.2 Disadvantages of self-regulation 113.2 Mandatory standards 123.2.1 Advantages of mandatory reporting 123.2.2 Disadvantages of mandatory reporting 15

4 Overview of selected standards 164.1 Voluntary standards 164.2 Mandatory standards 224.3 Global and national assurance standards 28

5 Case Studies from five regions 305.1 Brazil 315.2 Denmark 345.3 European Union 375.4 India 405.5 Japan 435.6 South Africa 445.7 United States of America 47

6 Conclusion: Where to start… 54

7 References 60

8 Disclaimer and Acknowledgments 62

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KPMG’s Global Sustainability Services and United Nations Environment Programme (UNEP)) 3

ForewordsKPMG is pleased to present this report as a collaborative effort with UNEP, which through avariety of initiatives is one of the leading promoters of sustainability and sustainabilityreporting.

Sustainability reporting has now become mainstream amongst leading corporations, asconfirmed by the KPMG International Survey of Corporate Responsibility Reporting 2005,published in collaboration with the University of Amsterdam. This survey found that morethan half of the top 250 companies in the Fortune 500 list issue separate sustainabilityreports.

With 75% of companies citing economic reasons for producing reports, it is also clear thatsustainability reporting is strongly linked to business drivers. It is a key element ofsustainability management and a powerful driver of internal change.

Not surprisingly, sustainability reporting has attracted the attention of regulators, and avariety of different regulatory approaches has evolved, mostly voluntary, and somemandatory. The debate on these different approaches will continue to evolve, taking intoaccount regional priorities.

External assurance on reports is an important ingredient in this context. It provides comfortto stakeholders and to management and directors in mitigating potential business risksposed by sustainability issues. Assurance approaches and standards also continue to evolveand move towards global harmonization.

Sustainability reporting is thus not anisolated activity, but part of the largerchallenge of integrating corporateresponsibility into business strategy andoperations.

We hope that this report will be a guide tocompanies and governments in their nextsteps on this unfolding journey in a rapidlyglobalizing economy.

George Molenkamp, Chairman

KPMG’s Global Sustainability ServicesTM

As the G3 version of the Global Reporting Initiative (GRI) framework for sustainabilityreporting is being launched, we enter a new era in the quality of non-financialreporting. The rate at which leading companies world-wide took up sustainabilityreporting over the last ten years have been impressive. A majority of the top 100companies in financial capitals in Europe, Japan, United States and Canada publishsustainability reports today. In growing numbers they explicitly acknowledge the GRI.

The debate on the “ideal” sustainability report and its users continue amongstseasoned reporters. Still, we have some basic, foundational work to do in introducingto thousands of large companies the value of systematically quantifying non-financialperformance, using it as a management tool and communicating about it publicly. Indeveloping economies, the challenge remains building capacity. This was clear fromdiscussions when UNEP hosted government officials in a workshop discussion on thistheme in 2005.

Do we need more regulation to dramatically increase the numbers of reportersglobally and ensure some universal level of consistency, reliability and comparability?While debates on corporate governance and transparency have led to heightenedregulatory interest in non-financial disclosure, it is clear that regulation by itself cannotprovide all the answers. It needs to be balanced by market measures and voluntaryaction.

There is both a public and a business case for non-financial disclosure andsustainability reporting in particular. Triple bottom line reporting is not a goal in itself.Its value lies in mobilising better informed managers and employees in cleaning upand improving. Its value also lies in supporting better communication between themand external stakeholders about what markets and society expect.

I thank KPMG for its contribution in thispublication, developed in a partnershipwith UNEP. It presents a valuable overviewfor both public officials and corporatecitizens of the market place.

Achim Steiner, UN Under SecretaryGeneral and Executive Director,United Nations Environment Programme


This report provides an overview andanalysis of current trends and approaches inmandatory and voluntary standards forsustainability reporting.

1. Executive Summary

It summarises arguments in favour ofboth voluntary and mandatoryapproaches, and suggests keyconsiderations for public and privatesector decision-makers in addressingdifferent regulatory approaches andpossible policy mixes. It also providesa listing of reporting and relatedstandards in mainly OECD countries,including the European Union (EU), aswell as the emerging marketeconomies of Brazil, India and SouthAfrica. The report does not providelegal advice or legislativerecommendations. Rather, theintention is to inform further discussionand decision-making at a time whenthe future direction of sustainabilityreporting and its private / public useremains a lively debate. Ultimately,decision-makers in government andprivate organisations will have to makedecisions based on their specificcontexts and input from localstakeholder groups.

In brief, the report presents thefollowing:

■ A summary of arguments in favourof voluntary and mandatorystandards. Some of the mainarguments in favour of voluntarystandards are that sustainabilityreporting is young and evolving andwill therefore require time tomature. Mandatory standards willstifle innovation and not ensure

moral buy-in. In addition, publicregulators are often not acquaintedwith company or industry issues ormight avoid difficult issues forpolitical reasons. Some of the mainarguments in favour of mandatory standards are that not enough companies are taking up voluntary approaches, that the use of regulated guidelines and codes can add to the credibility of reports and help ensure a minimum level of disclosure. It is also argued that voluntary reports tend not to disclose negative information, and that mandatory reporting will ensurethe development of a central and comparable source of data for use by investors and other stakeholders;

■ A summary of mandatory and voluntary reporting and related corporate social responsibility (CSR)standards from the selected countries, as well as a selection of global and national assurance standards (whilst some key assurance standards are listed, theyfall outside the scope of this report);

■ An overview of selected initiatives, standards and experiences in the following OECD countries / regions and emerging market economies: Brazil, Denmark, European Union,India, Japan, South Africa and the United States of America;

■ Suggestions on key considerations for public and private sector decision-makers in addressing different regulatory approaches and possible policy mixes as they explore how reporting initiatives canbe initiated or expanded. It is suggested that governmental decisions should be informed by, amongst others, the following:

– A familiarity with sustainability reporting, including the main drivers for reporting as well as the current consensus on what would constitute best practice;

– An understanding of the main global standards that are currently driving reporting processes. The GRI has clearly established itself as the main reference in terms of providing a reporting framework, and is supported by other complementary standards such as AA1000. A new ISO 26000 standard on Social Responsibility,currently under development, may also recommend communication in the form of sustainability reporting.

– A realisation that reporting is only the tip of the iceberg and that – for both reporter and legislator – the emphasis should be on performance; and

– The knowledge that the voluntary versus mandatory debate does not imply an “either / or” position, but rather finding a balance between regulation in certain high risk or high impact areas,and allowing industry associations or individual companies to make decisions in other areas.

It is suggested that the following actions could be considered by public officials:

■ Detailed review of existing legislation and other regulatory requirements with reference to the following:

– Comparison with GRI sustainability reporting requirements (principles, disclosure items and sustainability indicators, stakeholder engagement and due process);

– Distinction between duty to disclose information to government and public disclosure;

– Evaluation whether existing company law encourages onlyconventional, historical cost accounting or also encouragesforward-looking, strategic reporting on business prospects (trends, factors affecting future performance), business drivers and risks; and

– Current practice with regards to external auditing / verification / assurance.

■ Detailed review of quantity and quality of sustainability reporting in the specific country, as well ashelping to ensure that relevantgovernment departments remainup to date with the latestdevelopments in the field ofsustainability reporting;

■ Consideration of draft legislation: governments that contemplate introducing some form of legal requirement for sustainability reporting have many options available, including the following:

– Stipulating a basic minimum requirement of sustainability reporting and making such reporting compulsory througha “comply or explain” arrangement;

– Delegating the responsibility to make decisions in this regard to stock exchanges and / or industry associations;or

– Introducing incentives for corporations to issue sustainability reports.

Suggested prerequisites for balancedregulation highlight the importance of apublicly recognised set of performanceindicators (of which the GlobalReporting Initiative provides a globalreference framework), independentverification, stakeholder engagement,the role of government in enforcing alevel playing field and the importanceof incentives. The conclusions alsohighlight the importance ofinternational cooperation and collectiveaction, avoiding a proliferation andfragmentation of national levelguidelines.

KPMG’s Global Sustainability Services and United Nations Environment Programme (UNEP) 5

How strange a thing

How strange a thing this Art ofWriting did seem at its firstInvention, we may guess by the latediscovered Americans, who wereamazed to see Men converse withBooks, and could scarce makethemselves to believe that a Papercould speak…There is a prettyRelation to this Purpose, concerningan Indian Slave; who being sent byhis Master with a Basket of Figs anda Letter, did by the Way eat up agreat Part of his Carriage, conveyingthe Remainder unto the Person towhom he was directed; who whenhe read the Letter, and not findingthe Quantity of Figs answerable towhat was spoken of, he accuses theSlave of eating them, telling himwhat the Letter said against him.But the Indian (notwithstanding thisProof) did confidently abjure theFact, cursing the Paper, as being afalse and lying Witness. After this,being sent again with the likecarriage, and a Letter expressing thejust Number of Figs, that were to bedelivered, he did again, according tohis former Practice, devour a greatPart of them by the Way; but beforemeddled with any, (to prevent allfollowing Accusations) he first tookthe Letter, and hid that under a greatStone, assuring himself, that if it didnot see him eating the Figs, it couldnever tell of him; but being nowmore strongly accused than before,he confesses the Fault, admiring theDivinity of the Paper, and for thefuture does promise his best Fidelityin every employment.

From The Secret and Swift Messenger (1641) byJohn Wilkins, quoted in Eco (1990:1)


Whilst people would agree today that a written letter cannot, by itself, countfigs and give an account of the exact number (see excerpt on previous page),many people would probably be of the opinion that some pieces of writingcould reflect reality accurately and objectively.

2. Introduction

Sustainability reporting is one exampleof such writing that is intended toprovide an objective account of theeconomic, social and environmentalperformance of an organization. Thisreport supports the view that –ultimately – such an objective accountis impossible. Sustainability reports –whether based on voluntary ormandatory standards, externallyverified of not, issued to fulfil the letteror the spirit of a legal or corporategovernance requirement – can neverprovide an unadulterated, “pure”version of an organisation’sperformance. It will always beinformed by a particular context,existing organisational positions,policies and perceptions, and will againbe read by readers with differentagendas who will quite often arrive atconflicting interpretations of the same“factual information”. At the sametime, the position that classifies allsustainability reports as “greenwash”and therefore, as fundamentallyflawed, subjective, manipulative anduntrustworthy, is opposed.

Reporting debates in the United States(USA) and in Europe in the 1960s and1970s were ignited by a newawareness of external responsibilitiesunfulfilled by governmental institutionsand ones that business needed toaccount for. Early experiments withsocial reporting – Sozialbilanz or bilansocial (a legal requirement in Francesince 1977 and practiced in theNetherlands since the 1960s) – pavedthe way for the introduction of theenvironmental report or Ökobilanz in

countries such as Germany, Austria,Denmark and Switzerland (Hibbitt,2004). During the 1980s ethicalinvestment funds in the UK and USAstarted screening companies based ontheir social and ethical performance.Following the 1989 Exxon Valdezdisaster, the US-based Coalition forEnvironmentally ResponsibleEconomies (CERES) developed TheCERES / Valdez Principles on behalf ofthe Social Investment Forum. Theseprinciples introduced a tough set ofenvironmental reporting guidelines.The 1990s saw increased reportingwith more comprehensive coverage.This was epitomized for example bythe Body Shop International’s firstValues Report (1995), in which itreported on environmental, animalprotection and social issues. In 1997,CERES and UNEP launched the GlobalReporting Initiative (GRI) process todevelop guidelines for reporting on thetriple bottom line: economic,environmental and social performance.The aim was to elevate sustainabilityreporting to the same level and rigor asannual financial reporting. As amultistakeholder global process, theGRI has been described by some as anexample of a “global public policynetwork” or a form of “civil regulation”,a concept preferred to the concept of“voluntarism”, which stands accused ofencouraging an unhelpful “either/or”opposition between “voluntary” and“mandatory” approaches (Sabapathy,2005: 248).

Surveys in the Anglo-Saxon world ofreporting trends in the 1990s showed

that up to that time most companiesfocused on disclosure of humanresource issues. Human resourcereporting was much more predominantthan environmental reporting, sincemuch disclosure in this terrain wasmandatory rather than voluntary(Hibbitt, 2004: 79). Environmentalreporting increased due to moregovernments focusing on heavypolluting industries and introducingcompulsory registration of materials (aform of green accounting) andinventory of toxic releases. Also, thedevelopment of new environmentalmanagement standards such as theEuropean Eco-Management and AuditScheme (EMAS) encouraged reporting.

Developments in reporting ranged fromlegalistic and technical requirementsunder company law and accountingrules to managerial innovations andnew demands by stakeholders, all ofwhich resulted in the birth of theconcept of the comprehensive“corporate sustainability report” in the1990s. It was a decade that wasdescribed by the London-based thinktank SustainAbility as the“Transparency Decade”, when a seriesof major incidents forced earlypioneers to “come clean” and issueeconomic-social-environmental reports(SustainAbility and UNEP, 2002: 6).

SustainAbility has suggested that thefirst decade of the 21st century mightbecome the “Trust Decade”. Thisdecade was to be based on ever-increasing transparency, accountabilityand reporting. The most important

changes that have been identified overrecent years are the growth in thenumber of reporting companies, theshift from environmental to integratedsustainability reporting and the rapidincrease in the volume of information(both printed and online). However,with an estimated total of more than50,000 multinational corporations inthe world, even 2,000 reportingcompanies still constitute a smallpercentage. While the growth rate innumbers of reporters has slowedrecently, early uptake in sustainabilityreporting has been impressive – inparticular considering the companiesproducing them. The database ofCorporateRegister.com suggests thatthe number of corporate non-financialreports has grown from less than 50 in1992 to 1906 in 2005. Early growth hasbeen strongest in the USA, UK andJapan. Impressive growth has beenseen in France more recently, relatedto the introduction of mandatoryreporting legislation.

Today the debate on the future ofsustainability reporting is to a largeextent a debate on who the targetaudience or key user groups are.Challenges identified by SustainAbilityand UNEP relate to the followingissues: the need to link sustainabilityissues with brand and corporateidentity, the continuing disinterest ofmost financial institutions and the so-called “carpet-bombing” syndrome ofbombarding readers with moreinformation, rather than more insight(SustainAbility and UNEP, 2002: 6). The2004 edition of the biennial GlobalReporters Survey of CorporateSustainability Reporting bySustainAbility and UNEP does mentionthat there is more interest from thefinancial community and that corporategovernance has been put more firmlyon the agenda. At the same time itraises concerns about the ability of

reporters to identify material andstrategic risks, as well as the ability tolink financial and non-financial aspectsof corporate reporting (SustainAbility,UNEP and Standard & Poor’s, 2004).

Debates on target audience andpurpose have also sharpenedconsideration of the value of reportingnot only as an accountabilitymechanism but also as a managementtool for which there is a business caseto be made. The benefits ofsustainability reporting from a companypoint of view include improved financialperformance (there is a growing bodyof empirical evidence that indicates apositive link between social andfinancial performance), enhancedstakeholder relationships, improvedrisk management because of anincreased understanding of non-financial risks, as well as improvedinvestor relations (institutional investorsare increasingly focusing on non-financial performance when they makeinvestment decisions, and there is aglobal increase in ethical investmentfunds). For regulators, the expectedvalue in sustainability reporting lies inthe contribution by better performingcompanies to sustainable developmentgoals and the value of transparentcommunication of performanceinformation, good and bad, in astandard format to enable monitoringand benchmarking progress.

The next section provides a summaryof arguments in favour of bothvoluntary and mandatory standards forsustainability reporting. Thesubsequent chapter provides anoverview of reporting standards in 19selected countries and the EuropeanUnion, and a few case studies basedon a closer examination of standards inselected countries. Finally, theconclusion presents suggestions forpublic and private organisation

decision-makers and consideration onhow governmental reporting initiativescould be expanded. The report doesnot provide legal advice or legislativerecommendations. Rather, theintention is to inform further discussionand decision-making at a time whenthe future direction of sustainabilityreporting and its private / public useremains a lively debate. Ultimately,decision-makers in government andprivate organisations will have to makedecisions based on their specificcontexts and input from localstakeholder groups.

To conclude this introductory section, itis important to highlight the differencesbetween performance and reporting.Even if based on advanced sustainabledevelopment management andinformation systems, a sustainabilityreport is always a secondary accountof the actual performance of anorganisation. Within the context of thisreport, the role of government can betwofold:

■ To legislate in terms of sustainabilityperformance with some requirements for disclosure; and

■ To legislate in terms of reporting – such reporting can be specific, e.g. to report on specific indicators linked to an individual piece of legislation, or can be broad-based, referring to the need for a general account of sustainability performance.

It is difficult to divorce these twocomponents from each other, and allreferences to mandatory standards inthis report should be viewed in thiscontext. However, it should be notedthat it is possible to have legislationrelating specifically to reportingpractices, rather than to performanceper se.



3. Voluntary andmandatory reportingstandardsMindful that the “mandatoryversus voluntary” oppositionis criticised by many as anunhelpful ‘either/or’assumption, and that idealsolutions lie in some policymix of the two, our followinganalysis sets out the pro’sand con’s of both in order toprovide a clear point ofdeparture. This is why wespeak of “carrots and sticksfor starters”. Thesustainability reportingregulation debate is stillyoung, the main course stillhas to be prepared.

Our research for this report revealedmore than a 100 reportingrequirements and standards in theselected – mainly OECD – countriesthat address one or more componentsof a sustainability agenda. Of these,approximately half can be classified asmandatory standards. However, theserequirements remain largelyfragmented and in most cases do notfit an integrated strategy to regulatesustainability reporting. Quite oftenlaws were promulgated without anyreference to sustainability reporting,yet – after the fact – such laws can beclassified as a “legal requirement” forsustainability reporting because of thenature of the issue addressed.

Various approaches can be undertakento encourage sustainability reporting.

On the one hand the legislator can bepassive and leave it to market forces orsupranational bodies to driveorganisations to report on sustainabilityissues or they may support variousnon-governmental initiatives in theirattempts to promote reporting. On theother hand the legislator can choose tointroduce one or more of the following:

■ Mandatory regulations with an obligation to report;

■ Incentives for companies to report;

■ Voluntary rules or guidelines relatingto performance; or

■ Transfer the regulatory power to self regulating authorities like theNYSE or a stakeholder panel whosestatutes can either be voluntary or mandatory.

A number of stakeholders have calledfor sustainability reporting to be amandatory requirement aimed atincreasing corporate accountability, theargument being that most companieswill generally not report of their ownaccord or, when they do, suchreporting will be incomplete and rarelymaterial to stakeholder interests(Doane, 2002).

Probably the most comprehensiveexample of a mandatory approach isFrance’s Nouvelles RégulationsEconomiques (NRE, operative since2003), which require all companiesquoted on the stock exchange to issue

social and environmental informationwith their annual reports. Yet the effectof such legislation on the quality ofreporting and its ability to influenceperformance is thus far uncertain. Anexamination by the Paris-basedconsulting firm Utopies found thatmost small caps and 20 companies onthe SBF 120 Index (the 120 mostactively traded stocks listed in Paris),ignored the requirements altogether,that two thirds of the companies onthe SBF 120 Index reported on lessthan 40% of the required indicators,and that only 10 blue chip companiestried to comply with the spirit of thelaw (Utopies, SustainAbility & UNEP,2003 and 2005).

With reference to mandatoryenvironmental disclosure in the USAand Canada it has been suggested that“because of materiality levels, verylittle detail is provided on theenvironmental issues governed byaccounting standards. Also, accountingstandards relating to environmentalmatters are so narrowly focused thatassurance about conforming to themis not very meaningful” (Buhr, 2003).Elsewhere, environmentalmanagement standards seem to drivereporting. Mandatory disclosure onenvironmental issues through local orsite-level reporting has beenintroduced with environmentallegislation during the mid-1990s in theNetherlands, Sweden, Denmark andBelgium.

The assumptions behind command andcontrol regulation are that it can beclearly defined, breaches rarely ariseand can be easily uncovered whenthey do arise. Furthermore, theimposition of a sanction must providea deterrent to non-compliance. If oneor more of these assumptions do nothold, the regulation will begin to fail.To make the regulation work it iscritical that the necessary control,inspection and prosecution processesare in place. In order to avoid thesecosts regulators try to find other waysto regulate through tools like voluntary

agreements, incentives and “comply orexplain” regulations (Bebbington et al,2003).

The debate between proponents ofvoluntary and mandatory reportingstandards is a complex one. Vestedinterests and perceptions often lead toconflicting positions. Corporationsusually argue strongly in favour ofvoluntary standards. NGO’s, pressuregroups and trade unions often demandmandatory standards, since they donot believe that corporations willdisclose material information

objectively unless they are required todo so by law. Pertinent here is the lackof trust that the public and differentstakeholders have in largeorganisations. Also relevant arequestions concerning the responsibilityof the director towards eithershareholders or a broader range ofstakeholders.

In the remainder of this chapter variousarguments in favour of both positionsare discussed briefly.

To further explore the debate aboutmandatory and voluntary regulation itis important to define what regulationmeans. Regulation is often narrowlydefined as that which is enshrined inlaw. Yet from a legal perspective,

regulation should be seen as acontinuum ranging from traditionalcommand and control type regulationto industry codes of conduct oragreements and non-enforceablecontracts with regulators (Bebbington

et al, 2003). They can be listed along aspectrum of “regulatory instruments”,following Gunningham and Grabosky(1998) as in the table below whichindicates the position of sustainabilityreporting within the broader context:



3.1 Voluntary standards and self-regulation

Many corporations support the GRI process – voluntary but with anintergovernmental endorsement - and its main output, the GRI SustainabilityReporting Guidelines. The business lobby and companies in general argue againsta legal duty to report against certain standards, stating that it is crucial that thereremain different standards – already in existence – by which social andenvironmental reporting can be measured. In practice this multitude of standardsenables businesses to consider the applicability of any particular standard andchoose to follow the most suitable practice. Accordingly, they argue there is noneed to consolidate or introduce another standard.1 Furthermore, it has beenargued that uniform procedures would affect the substance found in reports.Standardisation, either directly through regulation or indirectly throughcertification procedures, might stunt creativity and level activities to an average,as well as entailing high bureaucratic costs.

It is further argued that mandatory external verification does not necessarilyincrease the credibility of reporting. Third parties can verify formal aspects suchas figures and procedural conformity, but accountability for the “real”performance rests with the company and its own credibility. The option toconsult a third party for advice or auditing should perhaps be left to the discretionof companies.

Many companies acknowledge that guidelines are evolving, yet claim thatsustainability reporting is a relatively new area and will take considerable timeand effort if it is ever to be considered as valuable and credible as financialreporting. The notion of it being mandatory is opposed on the basis that thiswould obstruct much of the good work currently in progress: businesses shouldbe allowed to develop guidelines, work out how to interpret sustainabilityinformation and elevate it to the same level as financial reporting. It is arguedthat only when this has been achieved will such reports require independentverification, since accountants and auditors need to be familiar with the criteriaused to compile them.

A further argument against mandatory or standardised reporting is that theinvestment world does not necessarily demand standalone, standardised reports.Mainstream investors, socially responsible investment (SRI) funds, analysts andmain stakeholder groups have their own questionnaires, criteria and needs foradditional specific information. Even with common reporting protocols they arguethat investors are likely to request additional information.2

Voluntary – including negotiated – action is one of the fundamental principles ofCSR. Voluntary measures and initiatives give businesses the opportunity todevelop appropriate company- or sector-specific approaches and models of social

responsibility. Approaches that aredeveloped inside companies andsectors are better accepted thanrequirements imposed from outside.This realisation is reflected in existinginitiatives – for instance on socialcodes of conduct, at the level of theInternational Labour Organisation (ILO)and the United Nations – which are allbased on the principle of voluntaryimplementation of responsibilitytogether with economic success.3 Asthe largest global corporate citizenshipinitiative in the world, the UN GlobalCompact requires participatingcompanies to produce an annual“Communication on Progress”,encouraging use of the GRIsustainability indicators when reportingon their activities. This requirement isboth an integrity measure and tool forpromoting learning, while joining theinitiative in the first place is a voluntarydecision (Van der Lugt, 2005).

Closely linked to the concept ofvoluntary standards is that of self-regulation. The remainder of thissubsection summarises theadvantages and disadvantages ofself-regulation.

1 For example, see the response of GlaxoSmithKline to the GreenPaper of the EU. For an overview of all responses made to the EUGreen Paper visit http://europa.eu.int/comm/employment_social/soc-dial/csr/csr_responses.htm which has more than 200 opinions fromindividuals, NGO’s governments business initiatives, churches andcompanies.

3 This is the opinion of the Economic and Social Committee on theEU Green Paper: Promoting a European framework for CorporateSocial Responsibility.

2 One of the problems that rating organisations, investors and NGOsface is that information required for benchmarking is often notpresented in a form that analysts can readily use. As there is nostandard sustainability report format or content, questionnaires areinvariably issued to obtain the required data, and these are notgenerally well received. Questionnaires are often dismissed becausethey are time consuming and received too frequently. BT for examplehas noted an explosion in the number of questionnaires received overthe last three or four years and estimates that it is currently spendingaround £25,000 annually completing questionnaires on CSR. In April2004, the London Stock Exchange announced that it is collaboratingwith UKSIF to reduce the growing burden of surveys andquestionnaires from rating organisations. As a result there is a growingdemand for a more efficient channel of communication with which tostandardise reporting and establish issues of material interest tostakeholders, ideally in the form of a single, uniform questionnaire. Formore information, visit http://www.londonstockexchange.com/en-gb/products/irs/cre/). In the USA, a possible solution to the problem ofsurvey fatigue has been found by SRI World Group Inc, in the form ofOneReport, a global electronic reporting network through whichcompanies make their social, environmental, economic and corporategovernance information available to all interested parties. Participantsalready number 22 Fortune 100 companies, including DuPont and Shell(ICAEW 2004: 52).

In addition to the question of how orwhether to regulate sustainabilityreporting, it should be asked whoshould regulate and at what level:

■ Governmental regulation or self-regulatory authorities?

■ At the international level, or at national level?

Issues to be addressed include howself-regulation should be applied, theconditions under which self-regulationis appropriate, and if appropriate, howself-regulation should be structured tomaximize its advantages and minimizeits disadvantages.4

3.1.1 Advantages ofself-regulation

Listed below are a number of potentialadvantages that self-regulation offer inthe realm of corporate regulation.Although these refer to the broad areaof regulation, within the context of thisreport they should be applied to thespecific debate about sustainabilityreporting.

Proximity Self-regulatory organisations aregenerally rooted in the industry beingregulated, enabling access to moredetailed and current industryinformation which can be especiallyhelpful in rapidly changing sectors. Bycomparison, government regulators areoften playing “catch up.” Being closerto the action, self-regulators are bettersituated to identify potential problems.

FlexibilitySelf-regulatory organisations can actwith greater flexibility thangovernment regulators: they are notsubject to the same procedural anddue process hurdles or politicalconstraints as government.Governmental regulators are often notinclined to deal with politicallyunpopular or highly complex issues, sothese issues may be more suitablydelegated to self-regulatory bodies.

Compliance Self-regulation may generate a higherlevel of compliance. The greater theinvolvement of industry in setting therules, the more reasonable the rulesare likely to appear to individual firms.Self-regulation may also generate rulesthat solve regulatory problems in afashion that is more sensitive toindustry practices and constraints, andhence it may be easier for firms tocomply with them.

Collective Interests of Industry Self-regulation can harness thecollective interests of the industry. Thismay be another way that self-regulation promotes compliance, ascompetitors can effectively “police”each other.

3.1.2 Disadvantagesof self-regulation

Although self-regulation has importantadvantages, there are a number ofidentified drawbacks: Conflicts of InterestThe same proximity that can help theself-regulator acquire usefulinformation can be a disadvantage

because of conflicts of interest.Knowing an industry better does notmean that a self-regulator willnecessarily have the proper incentivesto regulate it more effectively.

Inadequate SanctionsThe greater flexibility afforded to self-regulatory organisations also meansthey may have the discretion toadminister only modest sanctionsagainst serious violators.

Under-enforcementConflicts of interest and flexibility mayalso make it more likely thatcompliance will be insufficientlymonitored. If industry interests are inconflict with societal interests,enforcement by self-regulators mightbe less than optimal overall.

Global CompetitionIn a global marketplace, an industry’scollective interest may be defined bycompetition with foreign markets. Ifforeign markets are not equallyburdened with regulation, thenaggressive self-regulation coulddisadvantage domestic firms. Thisprovides yet another reason toquestion whether self regulators willmake decisions that will benefitsociety.

Insufficient ResourcesAlthough the funding of self-regulatorybodies may not be susceptible to thewhims of legislatures, underlyingconflicts of interest could leave self-regulatory bodies with less thansufficient funding.


4 The following section draws mainly on conference proceedingsfrom “The Role of Government in Corporate Governance,” held by theCentre for Business and Government, John F. Kennedy School ofGovernment, Harvard University in 2004.


3.2 Mandatory standards

The most vocal call for mandatory action on corporate sustainability issuescomes from the NGO community. In an official response to the final report of the2004 EU Multi-Stakeholder Forum, some of the leading and most influentialNGOs stated their opinion on what public policies they would expect in Europe(http://www.foeeurope.org):

“Our common goal is to improve business practices to increase positive impactsand reduce negative impacts on society and the environment. Voluntaryinitiatives are not enough to reverse the unsustainable impacts of corporateactivities or to meet the standards set by existing agreements such as the ILOdeclaration, OECD guidelines, the Millennium Development Goals and humanrights treaties … Ensuring corporations are legally accountable to theirstakeholders is essential. Only binding legal measures will establish a generalincentive for responsible corporate behaviour that matches their general incentiveto be profitable. This requires rights for stakeholders to hold companies toaccount for their impacts and duties on companies and their directors. It alsoneeds effective monitoring and verification of business performance.Furthermore, only those approaches to responsible behaviour elaborated inconcert with all stakeholders will bring sustainable results.”

With regards to reporting it is stated:

“Accountability requires high and consistent levels of transparency aboutbusiness activities and products which cannot be achieved by voluntarism only.Stakeholders need meaningful disaggregated information about the impacts ofcompanies and products on human rights, society and the environment. Thisimplies mandatory social and environmental reporting, disclosure of paymentsand lobbying to public authorities, and provision of comprehensive point of saleinformation about products and services. Reports must be based on commonreporting standards for all companies and there must be public access toinformation on company and product CSR performance.”5

3.2.1 Advantages of mandatory reporting

The following outlines the most common arguments in favour of mandatoryreporting.

CredibilityThe use of recognised practices and tools, or the publication of a sustainabilityreport or equivalent that has been prepared using recognised guidelines shouldenhance the credibility of information provided in response to stakeholderconcerns and interests.

5 From “NGOs call on Commission and Council to shift gears after Multi-Stakeholder Forum: European CSR process must move from dialogue toaction”, 2004 (http://www.foeeurope.org).

Legal certaintyIn addition to NGOs and individualscalling for mandatory reportingrequirements, business has oftencalled for government intervention to“level the playing field”. An emerginglitigious risk over alleged marketingclaims in public reports (e.g. Kasky vs.Nike – see box) has led to calls insome quarters for a “safe harbour” for

executives from unreasonable legaldisputes that threaten the very futureof corporate reporting. In the UK therehave been efforts to redefinemateriality under the reform ofcompany law. In the end the Operatingand Financial Review (see next sectionfor a discussion) replaced the concept‘materiality’ with the need to report onnon-financial issues ‘to the extentnecessary’.

The Nike v Kasky caseThe case filed against Nike by Marc Kasky, a Californian activist, over claims thatstatements the company made in letters to newspapers and press releasesrelating to work conditions in some of its suppliers’ factories were ‘misleadingadvertising’, raised considerable interest and concern around the potential legalprecedent that could be set. It was to be determined whether companystatements on human rights and other public policy issues – in reports, labels orother forms or communication – should be considered ‘free speech’ and thusprotected under freedom of speech guarantees, or ‘commercial speech’, thus notfalling under the US First Amendment and subject to regulations on falseadvertising. Lower courts sided with Nike but the California Supreme Courtoverruled them in May 2002. The California Court ruled that any communicationswith an audience that might include Nike product purchasers was ‘commercialspeech’, including statements of important public policy positions. Nike appealedto the US Supreme Court which refused to rule on this point, and Nike agreed tosettle the lawsuit and pay US$1.5 million to the Fair Labour Association – anindependent coalition that seeks to improve factory conditions and monitoring. Inresponse, Kasky has agreed to withdraw the suit. It is argued that the Nike casecould deter companies from reporting, for fear of being sued, or that it mightundermine the ability to insist on accurate reporting. It is also argued that the casecould rapidly accelerate the take-up of agreed standards on reporting. The casesettlement has left the legal merits of both sides untested. Nike has advocatedthe need to level the playing field through the implementation of standards anduniversally applied processes for accountability and reporting. It is interesting tonote that Domini Social Investments submitted an Amicus brief to the SupremeCourt in support of Kasky, arguing that social disclosure should be subject to thesame legal requirements as financial disclosure(www.domini.com/common/pdf/Amicus-Brief-4-03.pdf).

(Source: ABC of the main instruments of Corporate Social Responsibility, Industrial relations and industrialchange European Commission, Directorate-General for Employment and Social Affairs, 2004 Employmentsocial affairs)


Changing the corporate cultureMandatory requirements fosteropenness and transparency withrespect to sustainability issuespreviously lacking in corporate culture.Mandatory requirements would placeCSR issues, and social andenvironmental issues in particular,squarely on the agenda ofcorporations.

Incompleteness of voluntary reportsVoluntary reports often fail to addresscertain issues, notably on fundamentalhuman rights issues and key aspectsof a company’s environmentalperformance.

ComparabilityThere is no standardisation of theinformation found in reports becauseof the varying choices and approachesof different companies. It is oftenargued that the voluntary nature,progressive character and number ofstandards envisioned in initiatives suchas the GRI and other national andinternational initiatives, are unlikely toresult in the standardisation ofsustainability reporting practices.

Non-disclosure of negativeperformance:Positive information and messagestend to be emphasised in mostsustainability reports. The reports arealso time and event specific. Firmsmay disclose information when it suitstheir interests, but not when it maynegatively influence perceptions, orrelate to future earnings and potentialcash flows negatively (Walden andSchwartz, 1997).


Market failures – theory of regulationThe argument for CSR is that socially responsible corporate behaviour leads tosuperior returns for the company and social welfare for all in the long term. If thisis true the reporting and disclosure of material sustainability issues is relevant forinvestors. It could therefore be assumed that market forces will drive companiesto report on their sustainability performance. A rule of law requiring sustainabilityreporting or at least the public disclosure of information on CSR issues wouldthus only be advisable where the market for the information to be disclosed ischaracterized by market failures (Baums, 2004). In this case, an appropriate stateintervention in the market process could lead to an increase in social welfare.Market failures can arise because of externalities, asymmetric information, thedominant position of a market participant, or the production of “public goods”.

If there is asymmetric information concerning the status of a company or amarket, an investor will only be willing to make an investment if he is adequatelypaid for bearing the remaining risk. It could therefore be assumed thatcompanies will report and disclose information in the interests of maximizingprofits and returns. Adequate, voluntary disclosure resulting from market forcesseems, at least in the short to medium term, unlikely, given the often conflictinginterests of management. The pressure from shareholders, creditors andfinancial institutions to disclose information on sustainability issues is unlikely tobe anything like the pressure there is to disclose financial information, and istherefore unlikely to encourage the emergence of sufficient voluntary reporting.

Reduction of non diversifiable market risk – free rider problemSufficient disclosure by all companies is even more important in a marketcharacterized by diversified investors (Macey, 2002), as the general market riskcannot be reduced by diversification and therefore diversification does noteliminate the need to disclose company data. Therefore, if all companies seekingcapital on a market refrained from disclosing relevant investment information ona regular basis, the investors would either refuse to invest in the market ordemand a high-risk premium. As a result at least some companies – evenwithout regulatory disclosure requirements – would disclose the relevantinformation. Other companies, in contrast, would attempt to hide risks and get a“free ride” on the risk reduction provided by the reporting companies (free riderproblem). All companies would be punished with a corresponding risk premium,which they would have to pay instead of increased disclosure costs. Yet the“dishonest” companies would benefit from the reputation of the “honest”companies up to a certain point; hence the market will attribute equal risks toboth (Baums 2004).

Cost savingsIt is advisable to gather public information at a central source for distribution toinvestors. In the absence of mandatory disclosure, investors might engage induplicative and inefficient searches for information about public companies.

The German Corporate GovernanceCode (GCGC) provides that:

“The company’s treatment of allshareholders in respect of informationshall be equal. All new facts madeknown to financial analysts and similaraddressees shall also be disclosed tothe shareholders by the companywithout delay.”(GCGC, supra note 32, at no. 6.3).

As has been mentioned before, careshould be taken not to reduce agovernment’s ability to intervene as achoice only between support formandatory standards or voluntarystandards. Governments can play animportant role in terms of creating anenabling environment for companies toreport. Governments can encouragereporting through participation indebates about reporting, issuingcountry specific reporting guidelinesand conducting national peer reviews.

3.2.2 Disadvantagesof mandatoryreporting

Arguments against mandatoryregulation and a mandatory approachto sustainability reporting often cite thefollowing shortcomings that theapproach is likely to show (based onGunningham and Grabosky, 1998:44 – 47):

Knowledge gap between regulatorsand industryThe mandatory approach requiresregulators to have comprehensive andaccurate knowledge of the workingsand capacity of the industry.

Once size does not fit allThe mandatory approach willundermine tailored responses tostakeholder demands, seeking to forceindustries of very different natures,sizes, capacities and local contextsinto the same box.

Inflexibility in the face of change andcomplexityThe mandatory approach fails to keeptrack with rapidly changingcircumstances and changingtechnologies, and in this relatively earlystage of sustainability reporting – acomplex and changing subject – theintroduction of mandatory legislation ispremature.

Lack of incentive for innovationThe mandatory approach willundermine innovation and take awaythe incentive to go beyond compliance,forcing a re-active, tick-box approachthat would result only in morebureaucracy and filing ofdocumentation.

Constraints on efficiency andcompetitivenessThe mandatory approach runs the riskof adding costs whilst underminingefficiency and competitiveness,introducing different national levelrequirements and indicators that willplace a tremendous burden oncompanies that operate in anincreasingly global businessenvironment.

However, as the OneReport initiativehas demonstrated, this couldpotentially also be achieved throughself-initiative.

StandardisationThe economic literature names anotheradvantage of required disclosure thatonly arises if the legislator promulgatesmandatory rules: the advantage ofstandardization. (Adams, 2002). Thisrelates to dependability, often cited asone of the advantages of command-and-control regulation, namely theability to specify expected behaviour.An investor must compare a number ofinvestment alternatives before decidingon an investment. It is to the investor’sadvantage if the information relevantfor the investment decision ispresented in a standardised formatthat can be readily compared.Standardised formatting savesinvestors, communities, consumersand employees’ time and money, andexplains why listing prospectuses orannual reports should follow identicalguidelines (Baums, 2004).

Equal treatment of InvestorsAnother argument in favour ofmandatory sustainability reporting isthe equal treatment of investors.Legally required corporate disclosureencourages equal treatment ofinvestors with regard to theinformation disseminated pursuant tolaw. If certain groups of persons areprivileged in the disclosure ofinformation, other groups will beprejudiced. The equal distribution ofinformation to investors has also beensupported and demanded by severalcorporate codes.



This section summarises key reporting guidelines, initiatives andregulations with reporting requirements, relevant corporate socialresponsibility standards, as well as voluntary and mandatoryassurance standards.

4. Overview ofselected standards

The tables are based on desk researchand do not represent a comprehensivelist. Not all of them refer to integrated,comprehensive sustainability reporting.In the case of mandatory standards,many are linked to a single issue withlimited disclosure requirements.

Country/Region

International

Standards, Codes and Guidelines

■ The Global Reporting Initiative (GRI) provides themost recognized global standard with its framework forsustainability reporting. The GRI describes itself as amulti-stakeholder process and independent institutionwith the mission to develop and disseminate globallyapplicable Sustainability Reporting Guidelines. ItsGuidelines are for voluntary use by organizations forreporting on the economic, environmental, and socialdimensions of their activities, products, and servicesbased on reporting principles. The third revised or G3version of the Guidelines is complemented by sectorspecific supplements that provide, among others,sustainability indicators specific to the needs ofsectors such as tourism, finance, telecommunications,mining, logistics, apparel and the public service. TheGRI Secretariat, based in Amsterdam, is a UNEPCollaborating Centre. www.globalreporting.org

■ The AA1000 guidelines from AccountAbility providesguidance on how to establish a systematic stakeholderengagement process that generates the indicators,targets and reporting systems needed to ensure itseffectiveness in impacting on decisions, activities andoverall organizational performance. This process modelis complemented by the AA1000 Assurance Standard(see next section). www.accountability.org.uk

■ The International Standards Organisation (ISO) hasdeveloped over 15000 standards to date. With the ISO9000 (quality) and ISO 14000 (environmentalmanagement) series, ISO has entered the terrain ofmanagement and organizational practice. ISO 14001on environmental management systems recommendsreporting, as opposed to the EMAS standard (seebelow) that requires reporting. ISO14063 on“environmental communications” offers guidance onwhat should be considered in developing anenvironmental communication program. The ISO iscurrently in the process of developing a guidancestandard on Social Responsibility (ISO 26000).

4.1 Voluntarystandards


Country/Region Standards, Codes and Guidelines

Its guidance on ‘communications’ may haveimportant implications for sustainability reportingworld-wide. www.iso.org

■ The Association of Chartered Certified Accountants(ACCA) has published a Guide to Best Practice inEnvironmental, Social and Sustainability Reporting onthe World-Wide Web (ACCA & CorporateRegister.com,2001). The ACCA global sustainability reporting awardshave been replicated in many national level equivalents,advancing the quality of reporting world-wide.www.accaglobal.com

■ The Organisation for Economic Co-operation andDevelopment (OECD) Guidelines for MultinationalEnterprises include Section III on “Disclosure”, whichencourages timely, regular, reliable and relevantdisclosure on financial and non-financial performance.www.oecd.org

■ The largest global corporate citizenship initiative todate, the UN Global Compact provides a network ofUN agencies, business, labour, NGOs and publicinstitutions working to promote companies internalizingten principles in the areas of human rights, labour,environment and anti-corruption. Since 2004, theinitiative expects its company participants to annuallysubmit Communications on Progress (COPs), usingreporting indicators such as those of the GRI. Asimplified COP template has been created for useby small and medium-sized companies (SMEs).Supported by the GRI, the Global Compact alsopublished a practical guide on COPs. www.globalcompact.org

■ A global initiative of the International Council ofChemical Associations (ICCA), Responsible Care is alongstanding initiative of the chemical industry toimprove health, safety and environmental performance,and to communicate with stakeholders about theirproducts and processes. The new Responsible CareGlobal Charter, launched in 2006, includes provisionsfor improving monitoring and communication on progress against performance commitments bymember companies. www.responsiblecare.org



■ The guideline SA8000 of Social Accountability is auniform, auditable standard for social accountability(labour standards in the supply chain) with a third-partyassurance system and is based on the coreconventions of the International Labour Organization (ILO). www.cepaa.org

Europe ■ EMAS - The EU Eco-Management and Audit Scheme(EMAS) is a management tool for companies and otherorganizations, requiring them to evaluate, report andimprove their environmental performance. The schemehas been available for participation by companies since1995 (Council Regulation (EEC) No 1836/93 of June 29,1993) on a voluntary basis. Following a site-basedapproach, EMAS requires companies to setenvironmental goals, to report on their site-levelperformance against these goals and to have theirreporting (“environmental statement”) examined andexternally verified by an accredited environmentalverifier.http://ec.europa.eu/environment/emas/index_en.htm

■ New guideline for Intellectual Capital Statements is a key to knowledge management.www.videnskabsministeriet.dk

■ The Social-ethical Accounts is a guideline for privateand public companies that wish to draw up a report ontheir social and ethical initiatives. www.bm.dk

Australia

Denmark

■ Australian Minerals Industry Framework forSustainable Development "Enduring Value" - Minerals Council of Australia guidelines for sustainabledevelopment requiring a commitment to publicsustainability reporting on an annual basis frommembers, with reporting metrics self-selected fromthe Global Reporting Initiative (GRI) Mining and MetalsSector Supplement or self-developed. A commitmentto independent verification of reports is also required.www.minerals.org.au

■ Triple Bottom Line Reporting in Australia - A guide toreporting against environmental indicators, publishedby the Department of Environment and Heritage,consistent with the Guidelines of the Global ReportingInitiative (GRI). www.deh.gov.au

■ Greenhouse challenge program - Industry memberscommit to preparing emissions inventories andforecasts, identifying and undertaking abatement plansand reporting progress against the action plan annually.They also agree to their progress being subjected toindependent verification where appropriate.



■ The Etikbasen / CSR Scorecard 2002 is a publicdatabase on the internet where companies can reporton their CSR initiatives and performance.www.csr-scorecard.org

■ The Social Index is a tool for measuring a company'sdegree of social responsibility on a score from 0 to100. It requires external verification and certification touse the Social Index for external reporting.www.detsocialeindeks.dk

Finland ■ The Finnish Accounting Standards Board (FASB)issues guidelines that deal with the disclosure ofenvironmental expenditures and environmentalliabilities as a part of the legally required financialaccounts.

India ■ Corporate Responsibility for EnvironmentalProtection (CREP), a charter promoted by the CentralPollution Control Board of India, an initiative whichrequires compliance by leading resource intensiveindustries. www.cpcb.nic.in/Charter/charter.htm

Italy ■ The Study Group for Social Reporting (GBS)provides social reporting standards.www.gruppobilanciosociale.org

■ The Associazione Bancaria Italiana/Istituto per ilBilancio Sociale Guideline” (ABI) has publishedguidelines for social reporting in the financial sector.www.abi.it

■ The CSR-SC project enables organizations tovoluntarily participate and adopt a ‘social statement’according to pre-defined guidelines and a set ofindicators.

Japan ■ Environmental Reporting Guidelines have beenissued by the Ministry of the Environment.www.env.go.jp

■ Environmental Performance Indicators Guidelinesfor business issued by the Ministry of the Environment www.env.go.jp

Norway ■ The Confederation of Norwegian Enterprise (Næringslivets Hovedorganisasjon) has developedtwo checklists: for social responsibility (“Sunn vekst”)and for human rights based on international humanrights conventions and standards. www.nho.no


Country/Region

South Africa


■ The Second King Report on Corporate Governance (King ll) is a non-legislated code on good corporate governance. It includes a detailed section on integratedsustainability reporting. www.iodsa.co.za

■ The launch of the Johannesburg Stock Exchange(JSE) Socially Responsible Investment Index (SRIIndex) encourages companies in the FTSE/JSE AllShare Index that choose to participate to report publiclyon sustainability related issues. www.jse.co.za/sri

The Netherlands ■ The Assurance Standards Committee (RJ) providesguidelines for the integration of social andenvironmental activities in the financial reporting ofcompanies. Furthermore, the RJ provides a frameworkfor the publication of a separate report on theseactivities.

United Kingdom ■ In 2006 the Department for Environmental, Food &Rural Affairs (DEFRA) published their ‘EnvironmentalReporting Guidelines – Key Performance Indicators(KPIs)’, designed to assist companies with newnarrative reporting requirements relating toenvironmental matters, as contained within the‘Contents of Directors Report’ of the Company LawReform Bill. http://www.dti.gov.uk/bbf/financialreporting/business-reporting/page21339.html

■ Announced by the UK Prime Minister at WSSD in2002, the Extractive Industries TransparencyInitiative aims to increase transparency in transactionsbetween governments and companies withinextractive industries. It requires disclosure ofinformation on payments by companies and revenuesreceived by the governments concerned.www.eitransparency.org

North America:United States ofAmerica, Canada

■ The Global Sullivan Principles of SocialResponsibility is a code of conduct to encourageparticipating companies and organizations workingtoward the common goals of human rights, socialjustice and economic opportunity. Encouragingreporting, the principles conclude with the statement: “We will be transparent in our implementation of these Principles and provide information which demonstrates publicly our commitment to them.” www.thesullivanfoundation.org/gsp/default.asp

Sweden ■ The Swedish Accounting Standards Board(Bokföringsnämnden) provides guidelines onenvironmental information in the Directors’ reportsection of the annual report. www.bfn.se



■ The Coalition for Environmentally ResponsibleEconomies (CERES) developed the CERES (previously“Valdez”) Principles following the 1989 Exxon Valdezdisaster. This ten-point code of conduct also introducedspecific environmental reporting guidelines. Embeddedin the code of conduct was the mandate to reportperiodically on environmental management structuresand results. A driving force behind the launch of the GRIprocess in 1997, CERES continues to encouragecorporate environmental responsibility through workingwith endorsing companies on meeting theircommitment and reporting along the GRI SustainabilityReporting Guidelines. http://ceres.org

■ One of the early initiatives, the Public EnvironmentalReporting Initiative (PERI) was established in 1993 bya group of nine North American companies. PERIissued reporting guidelines to help organizationsimprove their environmental reporting.


Country/Region

European Union


■ The EU Modernization Directive (2003/51/EC)requires organizations seeking a stock market listing todisclose risks associated with capital assets andrequires financial regulators to assess those risks (inline with Commission Recommendation 2001/453/EC).Setting minimum mandatory standards for EUcountries, the Accounts Modernization Directive (2003)requires all large companies (not just quoted ones) and medium-sized ones to include in their annual reports afair review of the development and performance of thecompany’s business and its position, including - “to theextent necessary for an understanding” - informationon environmental and employee matters. Largecompanies are also expected to produce non-financialkey performance indicators. The EU demandssustainable development disclosures from all membercountries since January 2005. So far 23 countries havetransposed the law to national level.

■ The application of the International AccountingStandards (IAS) at EU level (EC regulation no.1606/2002) requires organizations to account forchanges to asset values stemming from environmentalfactors if they are financial (e.g. trading permits).

■ Based on the Integrated Pollution Prevention andControl Directive (IPPC), Member States are requiredto register emission data from large companies (socalled IPPC installations) and report data to theCommission.

Australia ■ Corporations Act 2001 requires companies that prepare a director’s report to provide details of theentity’s performance in relation to environmentalregulations. On July 1, 2004, the Corporate LawEconomic Reform Program (Audit Reform & CorporateDisclosure) Bill 2003 (CLERP 9), extended this to theoperations and financial position of the entity and itsbusiness strategies and prospects (Section 99A [1]). In2005 both the parliamentary Joint Committee onCorporations and Financial Services (PJC) andCorporations and Markets Advisory Committee(CAMAC) undertook enquiries into CSR and thedesirability of mandatory requirements for companiesto report on the social and environmental impact oftheir activities. CAMAC has produced a detailed CSRdiscussion paper (November 2005) with an overview ofregulatory requirements.

4.2 Mandatorystandards



■ Financial Services Reform Act 2001 was promulgatedin March 2002 and requires fund managers andfinancial product providers to state “the extent towhich labour standards or environmental, social orethical considerations are taken into account in theselection, retention or realization of the investment.”

■ National Pollutant Inventory requires industrialcompanies to report emissions and inventories forspecific substances and fuel to regulatory authoritiesfor inclusion in a public database.

■ ASIC Section 1013DA Disclosure Guidelines,Australian Securities and Investments Commission- guidelines to product issuers for disclosure aboutlabour standards or environmental, social and ethicalconsiderations in Product Disclosure Statements(PDS). The guidelines complement the FinancialServices Reform Act mentioned above.

■ New South Wales (NSW) Greenhouse GasAbatement Scheme - Electricity utilities and certainlarge end-users of electricity (e.g. metal refineries) inthe state of NSW are required to comply withgreenhouse gas emissions benchmarks, and to reportannually on their compliance. Annual external auditsare also required. www.greenhousegas.nsw.gov.au

Belgium ■ Article 4.1.8 of VLAREM II stipulates that certaincompanies have to issue an annual environmentalreport (only applicable for the region of Flanders).

■ The Bilan Social requires organizations’ reporting ofdata on the nature and the evolution of employment(e.g. training).

Denmark ■ The Green Accounts Act requires certain listedcompanies to draw up green accounts and include astatement from the authorities.

Canada ■ The Securities Commission requires publiccompanies to report the current and future financial oroperational effects of environmental protectionrequirements in an Annual Information Form.

■ The Bank Act requires banks and other financialinstitutions with equity of US$1 billion or more topublish an annual statement describing theircontributions to the Canadian economy and society.



■ The Danish Financial Statements Act requiresreporting on intellectual capital resources andenvironmental aspects in the management report if itis material to providing a true and fair view of thecompany's financial position.

Finland ■ The Finnish Accounting Act requires companies toinclude material non-financial issues in their directors'report of the annual/financial report and refers to thepreviously mentioned guidelines for good practice.

Germany ■ The Bilanzrechtsreformgesetz (BilReG) - New lawthat extends reporting duties of German companies tonon-financial performance indicators such asenvironmental or employee issues.

India ■ Sec 217 (1) of the Companies Act states thatthere shall be attached to every balance-sheet laidbefore a company in general meeting, a report by itsBoard of Directors, with respect to issues such asconservation of energy, technology absorption andforeign exchange earnings.

France ■ Law n°2001-420 related to new economicregulations / Nouvelles Régulations Economiques(NRE operative since 2003) - Art. 116: environmentaland social reporting is mandatory for publicly quotedcompanies, which are in many cases holdingcompanies. The mandatory requirement on CSRreporting was introduced through an amendment inthe New Economic Regulation Act. The amended NREindicates that listed companies will be required toreport on social and environmental performance intheir financial statements. More detailed requirementsfollowed in the enforcement order, issued a year later. The requirements are based on a list of fortyindicators, many of them inspired by the GRIperformance indicators. Some indicators were alsotaken from the “French social report”, a list of socialdata required from all companies to show compliancewith labour regulation.

■ “La note de cadrage” (framework memo) and“L’étude d’impact” (impact study). These documentsaccompany the 2001-420 law and provide guidelines tohelp companies implement the legal requirements.

■ The CJDES Bilan Societal is a tool for internal andexternal information exchange. By means ofcompleting a questionnaire, companies can report ontheir social profile and performance.



Spain ■ The ‘Resolución de 25 de marzo de 2002’ (elInsitituto de Contabilidad y Auditoría de Cuentas)states that organizations are obliged to includeenvironmental assets, provisions, investments andexpenses in their financial statements.

■ In addition, the National Accounting Plan for theElectricity Sector specifies environmental issues inmore detail.

Sweden ■ The amendment to the Annual Accounts Act(Årsredovisningslagen) states that certain companieshave an obligation to include a brief disclosure ofenvironmental and social information in the board ofdirectors’ report section of the annual report.

The Netherlands ■ The Environmental Protection Act includes a sectionon environmental reporting for the ‘largest polluters’ ofthe country. To date, over 250 companies each publishtwo reports a year: one public report and onegovernmental report. However, since deregulationthis requirement has been simplified and the publicreport is no longer required.

South Africa ■ National Black Economic Empowerment Act (No. 53of 2003): Sets out a national framework for thepromotion of black economic empowerment (BEE) –this act requires progress reports to be submitted togovernment.

■ Employment Equity Act (No. 55 of 1998): Seeks toeliminate unfair discrimination in the workplace andimplement affirmative action for “designated groups”:black people, women, or people with disabilities. Annual reporting on progress is required.

Japan ■ The Law of Promotion of EnvironmentallyConscious Business Activities requires “specifiedentities”, to publish an environmental report every year.

■ The Pollutant Release and Transfer Register Lawconcerns reporting of releases to the environment ofspecific chemical substances and promotingimprovements in their management.

■ The Norwegian Accounting Act (Regnskapsloven)requires the inclusion in the Directors’ Report ofseveral social, environmental and health and safetyissues and the implementation of measures that canprevent or reduce negative impacts and trends.

Norway


Country/Region

United Kingdom


■ The Business Review is a legal requirement for all UKlisted companies to provide a narrative within theirAnnual Report on the company’s strategies,performance and risks. This is a requirement of the EUModernisation Directive. The Business Reviewrequirement was initiated instead of a mandatoryOperating and Financial Review (OFR), which remainsa voluntary standard. The result of a lengthy publicdebate over the last three years, the OFR text requiresdirectors to consider factors such as environment andcommunity issues (factors and trends) insofar as theseare relevant for understanding not only the past butalso future performance of the business.

■ As part of the UK listing requirements, the CombinedCode requires businesses to report on governance andinternal control. The Turnbull guidance provided furtherdetails on the requirements for reporting on internalcontrol. This was updated in 2006 by the Flint Review.

United States ofAmerica

■ The EEO-1 Survey requires annual filing by the USEqual Employment Opportunity Commission regardingemployment records, including the racial and genderprofiles of employees.

■ The Sarbanes-Oxley Act (formally the Public CompanyReform and Investor Protection Act, 15 USC 72457256, 2002) imposed several new reportingrequirements for US-listed companies to increasecorporate transparency (mainly corporate governance).Its Section 404 requirements for top executives to signoff on detailed internal controls, have been accused ofimposing too heavy a regulatory burden on companies,for example, by not explaining the scope of internaland external checks required.

■ The Securities & Exchange Commission (SEC):Under Regulation S-K, the SEC requires “appropriatedisclosure…as to the material effects that compliancewith Federal, State and local provisions which havebeen enacted or adopted regulating the discharge ofmaterials into the environment, or otherwise relating tothe protection of the environment, may have upon thecapital expenditures, earnings and competitive positionof the registrant and its subsidiaries.”



In addition, disclosure is required for any materialestimated capital expenditures for environmentalcontrol facilities and for select legal proceedings onenvironmental matters. For foreign issuers in theUnited States, Form 20-F requires companies to“describe any environmental issues that may affect thecompany’s utilization of the assets.”

■ The Toxic Release Inventory (TRI) requires companieswith more than 10 full-time employees to submit dataon emissions of specified toxic chemicals to theEnvironmental Protection Agency. In addition, the SECrequires disclosure on legislative compliance, judicialproceedings and liabilities relating to the environmentin Form K-10.


Country/Region

International


■ The International Standard on AssuranceEngagements (ISAE) 3000: Assurance Engagementsother than Audits or Reviews of Historical FinancialInformation was developed by the InternationalAuditing and Assurance Standards Board (IAASB)of the International Federation of Accountants(IFAC). IFAC is the body responsible for issuinginternational accounting and auditing standards for theaccounting profession. ISAE 3000 came into force inDecember 2003 and is now being used by accountingfirms to guide their assurance engagements onsustainability reports.

■ In March 2003, the UK-based AccountAbility issuedthe AA1000 Assurance Standard (AA1000AS).AccountAbility used a phased multi-stakeholderprocess to develop AA1000AS, a standard that coversthe full range of an organization’s disclosure andperformance based on the three core principles of“materiality”, “completeness” and “responsiveness” tohelp ensure that reporting and assurance meetsstakeholders’ needs and expectations. www.accountability.org.uk

National standards

Australia, NewZealand

■ Standards Australia has published the StandardDR03422: General Guidelines on the Verification,Validation and Assurance of Environmental andSustainability Reports. Work on this Standard wascarried out by the joint Standards Australia andStandards New Zealand Committee QR-011Environmental Management Systems. A markeddifference between this Standard and the AA1000,AUS and ISAE 3000 standards is the definition and useof the terms verification and validation. DR03422 hasbeen issued as an Interim Standard for a period of twoyears, after which it will be reviewed.

4.3 Global andnational assurancestandards



■ Australian Auditing Standards (for accounting firms) canbe applied to the audit and review of sustainabilityreports. AUS102.44 states that “Australian Auditing andAssurance Standards, while developed primarily in thecontext of financial report audits, are to be applied,adapted as necessary, to all audits of financial and nonfinancial information, to all other assuranceengagements, and to all audit related services”.

Germany ■ The German Institute of Chartered Accountants (IDW)has developed a Standard for AssuranceEngagements of Sustainability Reports.

Japan ■ The Japanese Institute of Certified PublicAccountants (JICPA) published the “EnvironmentalReport Assurance Services Guidelines (Interim Report)”in 2001.

Sweden ■ The Swedish Institute for the Accountancy Profession(FAR, www.far.se) issued a draft recommendationIndependent Assurance on Voluntary SeparateSustainability reports in February 2004. An updatedversion of the recommendation, in compliance withISAE 3000 and with references to AA1000AS will belaunched in December 2006.

The Netherlands ■ The Royal Dutch Institute for Registered Accountants(NIVRA) issued an Exposure Draft Standard RL 3410Assurance Engagements relating to SustainabilityReports early 2005. The Exposure Draft is designed tocomply with ISAE 3000 while incorporating theprinciples of AA1000AS and drawing on the GRISustainability Reporting Guidelines.


The following case studies have beenprepared with contributions from KPMG’snational Sustainability practices as well asRever Consulting in the case of Brazil.

5. Case Studiesfrom five regions

Each brief case provides aslightly different approachand focus area. Thefollowing countries andregions were selected:

■ Brazil: an emerging marketeconomy that has been prominentin the global sustainabledevelopment debate. Whilst notshowing substantial activity interms of sustainability reporting,the Brazilian experiencenevertheless provides valuableinformation and experience onprogressively introducing reportingfrom a community engagementfocus to core business focus.

■ European Union (EU): a complexand regulated entity, with itsAccounts Modernisation Directivebut also many other pieces oflegislation that could be interpretedas requiring components ofsustainability reporting.

■ Denmark: a Nordic country that hasmade commitments to sustainabledevelopment and has backed thisup with mandatory reportingstandards.

■ United States of America (USA): amajor economy with extensiveregulation that apply to a variety of

issues related to sustainabledevelopment. Because of listing aswell as legal requirements in theUSA, and the fact that the largeUSA-based multinationalcorporations have operations inboth the developed and developingworld, these requirements arerelevant and should be taken intoconsideration worldwide.

■ Japan: One of the strongesteconomies in the world, Japan hasbeen using its manufacturing,information and communicationstechnology sectors not only to leadin areas such as quality andenvironmental management. It is also leading the sustainabilityreporting trend in Asia, with over130 GRI reporters from the Japanese corporate world.

■ South Africa: an emerging marketeconomy from Africa whose transition to democracy has beenaccompanied by a lively CSR debateand much activity in the field ofsustainability reporting. SouthAfrica provides an interestingcombination of mandatory requirements based on legislationon issues related to sustainabledevelopment as well as mandatory(“comply or explain”) requirementslinked to its corporate governancestandards.

■ India: With an economy that hasseen a boom in businessprocessing, information technologyand manufacturing, India presents avaluable example of the introductionof new management tools such assustainability reporting in adeveloping world context. Thishappens against the background ofa tradition of corporate philanthropy,and current debates on how tointernalise social responsibility anddistribute the benefits of economicgrowth more widely.

5.1 Brazil(This section was contributed by Rever

Consulting, Brazil)

The roots of the present movement ofsocial reporting and corporate socialresponsibility in Brazil go back to thelate 1980s, ignited by a series of socialand political developments as thecountry struggled to establish ademocracy and fight corruption. Withthe socio-political experience emergeda growing consensus on theimportance of the business sector tothe country’s social well-being. By the1990s, various foundations, institutes,think tanks and civil societyorganizations with strong ties to thebusiness community focused onprivate-sector conduct, ethics andsocial responsibility. The FundaçãoInstituto de DesenvolvimentoEmpresarial e Social (FIDES)introduced a voluntary model forreporting and a few companies beganto systematically publish informationregarding community involvement,environment and the treatment ofworkers. The widespread practice of

publishing a “balanço social” onlygained significant momentum in 1997,thanks to the leadership of socialactivist Herbert de Souza in a targetedcampaign to mobilize the businesssector. This led to a model developedby the Instituto Brasileiro de Análises

Sociais e Econômicas (IBASE; morebelow).

Legislation for Social Reporting

Requirements for social reportingemerged as early as 1975 under themilitary regime with the Decreto Lei no76.900 – the Annual Report of SocialInformation (Rais in Portuguese). Thiswas an obligatory reportingrequirement for all companies,regardless of size, to release basiclabour statistics and consolidatednumbers concerning company staff. Itis still valid today.

It was only in the 1990s that thegrowing momentum of social reportingled to a political initiative to makereporting mandatory. In May 1997 theFederal Congress RepresentativeMarta Suplicy (PT/São Paulo)introduced the bill Projeto de Lei Nr3.116/97 to the Federal Congress. Thisforeseen law was to require allcompanies with over 100 employees topublish a “balanço social” using criteriataken from the French social reportinglegislation.

The preamble to the bill stated therationale for making reportingmandatory. It was argued thatelaborating a social report serves tostimulate reflection by the companyconcerning its social impact. It wasalso felt that the social report would

facilitate assessment of the use offiscal incentives and otherexpenditures related to workers.Finally, the preamble argued that itwould help identify effective humanresources policies, and serve as areference for effective action amongcompanies of different sectors as wellas action on social policy (Law ProjectNr 3.116/97, Federal Congress, Brasilia,May 14th 1997). The three membersof congress that supported the bill,however, were not re-elected and werenot able to see the bill through tobecome law. In 1999 the initiative

re-emerged, supported by CongressRepresentative Paulo Rocha (PT/Pará).Today the initiative is still beingconsidered at the Economy, Industryand Commerce Commission of theFederal Congress.

On the municipal level, the period from1997 to 1998 saw several interestingpieces of legislation concerning socialreports and corporate socialresponsibility being accepted in citiessuch as São Paulo, Santo André, PortoAlegre, Santos, João Pessoa, andUberlândia. The legislation in SãoPaulo’s was most notable, due to thescope of the legislation in a city withsuch a wide range of economic activity.Passed in October 1998, resolution Nr05/98 (project Nr 39/97) created the“Company Citizenship Seal of SãoPaulo City.” The seal was intended todistinguish quality in social reporting.A commission was formed to developa social reporting model and to awardthe seal to companies meeting itsrequirements.



The mandatory versus voluntary reporting debate

The emergence of legislative measures to require social reporting stimulatedextensive debate among organizations involved in the corporate socialresponsibility movement. Arguments cited followed those highlighted in theearlier section of this report. Some sought to establish a baseline requirement forall companies to report on social aspects of company performance. Braziliancompanies had a history of non-transparency. Most companies disclosed verylittle information regarding their operations or investments. The national lobby ofaccountants led a strong lobby to pass the legislation for mandatory reporting,anticipating increased activity for their sector. The Federal Council of Accountants(CFC) passed a resolution in 2004 concerning the requirements of the “balançosocial” in the hope of pre-empting and influencing expected legislation.

Others were concerned that mandatory regulation would undermine the veryinnovation and drive that defines the movement. A majority of those involved inthe corporate responsibility movement, even those coming from NGOs, wereopposed to mandatory standards. Many felt that it was too early to tell whateffective reporting really entails. The vice-president of the Industrial Federation ofSão Paulo (FIESP) said: “The problem is so much is still unknown. Whenpressured to launch new legislation, typically the government doesn’t enforce itand prays no one will use it.” The requirement for social reporting was felt to bemisguided because it didn’t contribute to establishing an ethical commitmentwith society. It was also feared that creating this type of obligation couldstagnate the pace of voluntary action.

The IBASE Model

Still used today, the IBASE model has several distinctive characteristics: it wascreated entirely by a non-governmental organization, it is strictly quantitativewithout details of policies or practices, and it demands uniformity of informationto facilitate comparison. The IBASE model has evolved marginally since itslaunch, concentrating instead on increasing the number of companies reporting.Today the information requested includes (as a percentage of payroll expendituresor operating revenues) internal expenditures on health, taxes, pensions, cultureand leisure and external investments in culture, education, health and sanitation.Furthermore, the model asks for expenditure on environmental projects bothrelated to company operations and external projects. Particularly controversialhas been employee data related to the number of Afro-Brazilian employees, thenumber of employees with disabilities and the number of women employed.

In 2005, a total of 165 companies published social reports using the IBASE modeland 64 received the IBASE seal. In 2006 IBASE announced stricter standards forobtaining the seal. To evaluate company performance IBASE will submit companyreports to NGOs representing interests related to the environment, workers’rights, consumers’ rights, and diversity, and also collect comments from thegeneral public.


The Ethos Model

In 2001, the Ethos Institute of SocialResponsibility launched its “Guide forSocial Responsibility Annual Report andStatement.” The complicated titlereflected the difficulty to abandon thetraditional term “balanço social” orsocial statement for “annual report”,mindful of the global trend. The 2001Guide sought to bridge the gapbetween the national standard of theIBASE model and internationalstandards, in particular the GlobalReporting Initiative (GRI), to elevate thelevel of quality, consistence, andcredibility of company reports. Absentfrom the IBASE model were theconcept of stakeholder engagement, acomprehensive representation ofindicators along the triple bottom line,and qualitative indicators with non-financial data such as company policiesand management systems. The EthosGuide was seen as an intermediatestep for companies towards fullyadopting the GRI standard. It followedthe same format of the GRIframework, with a selection ofeconomic, social and environmentalindicators. Subsequent versions haveadded aspects related to futuretargets, the topic of corporategovernance, and specific informationon stakeholder engagementprocesses.

Promoting the guide, Ethos and agroup of business organizations havelaunched a Social Reporting Awardprestigiously hosted by the São PauloStock Exchange (BOVESPA). In thethird year of the awards, 167companies competed. A studyperformed by a leading business

school in Brazil, the Dom CabralFoundation (FDC), identified keyconclusions based on a qualitativeanalysis of the reports submitted:

■ Some stakeholders clearly lackcoverage in the existing reports:particularly subcontractors,competitors, and investors;

■ Issues regarding unions, dismissals,retirement, corruption and briberyare usually avoided; and

■ Difficulties, polemic or negativeoccurrences, and unmet targets areseen as negative points that shouldnot be included, though thistendency showed some indicationsof change in 2003

Finally, the study indicates that socialreporting in Brazil is still not seen aspart of a wider process related toperformance. It concludes that thesocial report or “balanço social” is stillseen as a one-way marketing tool bythe majority of companies. Fewindicate the target audience or thecirculation of their reports. In addition,few companies offer feedbackmechanisms or effective channels ofcommunication to obtain moreinformation.6

BOVESPA Corporate SustainabilityIndex

In 2005 BOVESPA launched aCorporate Sustainability Index (ISE –Índice de Sustentabilidade Empresarial)to identify corporations with high levelsof economic, financial, social andenvironmental excellence. This index issimilar in nature to the Dow Jones

Sustainability and FTSE4Good indices.

A questionnaire developed by theCenter for Sustainability Studies of theBusiness Administration School of SãoPaulo (CES-FGV) is used to distinguishbetween companies of the BOVESPA’s150 most liquid stocks in terms of theirperformance, consideringenvironmental, social and economicaspects. Through “cluster analysis” toidentify companies with similarperformance, the ISE lists a maximumof 40 companies with leadingperformance.

The environmental, social andeconomical dimensions are evaluatedconsidering four areas: policies,management, performance and legalcompliance. Additionally, the

questionnaire looks at the nature of theproduct and corporate governancemeasures. While voluntary in nature,companies have shown a great deal ofinterest to enter the index.Development of the index resulted invigorous debate between what is goodpractice internationally in this type ofindex as well as in the local businesscontext, resulting in a rigorousquestioning of corporate activity, policyand performance.

Conclusion

From a cultural history of dependencydue to inequality, companies in Brazilcontinue to struggle to understand theimplications of being a powerful agentin a context of unmet social demands.The first signs of an invigoratedmovement formed around a campaignto eliminate poverty. Ironically, afternearly a decade of progress the themereturned as President’s Lula chief focus

6 For more information, visit www.domcabral.org.br


for mobilizing the business sector. It isof no great surprise then that most ofBrazil’s social reporting focuses onsocial investments made bycompanies. While this might be seeninternationally as “greenwashing” withsocial projects, within the Braziliancontext companies are responding tosociety’s predominant demand toaddress conditions faced by a majorityof the population.

Responding to such a demand,

however, is a dangerous proposition for

companies. By doing so they assume

a role that they are far from capable or

equipped to fulfil in the long term.

These societal issues are too varied

and too complex and most importantly

not the central focus of their

operations. The tendency among

companies is to simplify the social

question into a single response -

education, concentrating resources in

activities that make little difference

when considering the educational

needs of the country.

Recent developments such as the

Ethos guide for reporting and the

BOVESPA index for sustainability have

directed companies toward

international standards and practices.

Company reporting in Brazil still does

not reflect a serious consideration of

core business operations. Largely

absent is a treatment of impacts on

stakeholders or a serious consideration

of materiality. Content focuses largely

on activities dealing with social issues

where companies have only an indirect

impact.

This creates an unfortunate situationfor both companies and society. Whenresponding reactively to societalproblems, demand quickly exceeds thecapacity for companies to respond. Atthe same time, societal stakeholdermisses engagement where companydecision-making can have significantimpact. Still, Brazil does not operate inisolation. As companies become moreexposed to international pressure, theywill need to focus on “issues” that arerelated to their core business.

5.2 Denmark

Denmark has mandatory requirementsfor stand-alone environmental reportsand annual accounts, but not for triple-bottom-line reporting. Approximately

1,000 to 1,200 companies are requiredto submit green accounts and the rateof compliance is one hundred percent.Despite the fact that only 29 ofDenmark’s 100 largest companiesissued a sustainability report, thereports produced are rated among thehighest in various studies (ACCA, 2004,KPMG, 2005).

The majority of the current legislationon sustainability accounting wasintroduced under the former SocialDemocratic government. Thegovernment also took the initiative todevelop guidelines for voluntaryreporting of intellectual capital, socialand ethical reporting, and sustainabilityreporting. As this area is not a priorityfor the current liberal government, newlegislation and developments are notexpected in the foreseeable future.

The Green Accounts Act

The Green Accounts Act regulatesstand-alone environmental reports. Itwas adopted by the Danish Parliamentin 1995 as an amendment to theDanish Environmental Protection Actand introduced as a statutoryrequirement by the Danish Ministry ofEnvironment and Energy. Its primaryobjective is to increase public andcorporate interest in environmentalissues and to encourage enterprises toadopt more active and targetedenvironmental initiatives. The GreenAccounts Act is effective from fiscalyear 1996. Under this actapproximately 1,200 companies in ninespecific sectors - including iron andsteel, processing, oil and gas,chemicals, animal processing andpower generation - have to publishGreen Reports (Green Accounts).Approximately 200 companies do sovoluntarily.

Companies have substantial freedomin how they present environmentalinformation in the Green Reports,which must be submitted to both localand national authorities. The reportconsists of three elements: generalcompany information, a director’sreport which must inform readers withno expert knowledge, and a resourceconsumption report. The resourceconsumption report reflects a materialflow-based approach to reporting oninputs and emissions/releases ofpolluting substances.

Contrary to best practice trends,management is not required to signthe report. If an audit is performed,although this is not a requirement, it

must be included in the report. Theannual statement and EMAS reportmay be allowed as a substitute for theGreen Report. The Act was reviewed in2001 and recent developments, as wellas evolving perceptions in Danishsociety, were taken into account.Requirements have been extended toinclude more information on waste andwaste handling and the environmentalbehaviour of the company. To improvecredibility, local authorities are nowrequired to draw up a statement aspart of the accounts on whether thecompany’s activities are consistentwith information held by localauthorities. Although discussed,verification has not been mademandatory, to avoid further financialburden (Hibbit 2004).

In 1999, the Danish EPA conducted aninvestigation among 550 firms thatsubmitted Green Reports. Theinvestigation found that five out of sixaccounts provided the legally requiredinformation. Although companiesincurred administrative costs for theproduction of the accounts, about halfof them claimed that the beneficialspin-offs of the report made thefinancial cost worthwhile. A total of40% of the companies indicated thatthey had achieved environmentalimprovements. The study also foundthat investors have begun to refer toGreen Reports when evaluating firms.Only half of the investigated group’s“neighbours and general consumers”knew of the Green Reports. TheDanish law on Green Reports does notinclude any direction on environmentalinformation in monetary terms(Nyquist, 2003).

Danish Financial Statement Act

Requirements for environmentalreporting within the annual report andaccounts are stated within the DanishFinancial Statement Act (section 99) asan introduction to the EURecommendation of 2001. Denmark isone of only a few countries to haveintroduced parts of the EUCommission Recommendation ondisclosure in annual reports intolegislation, since 1 January 2002.

The Danish Financial Statement Actrequires listed companies and stateowned public limited companies toreport on intellectual capital resourcesand environmental aspects in amanagement report, if it is material toproviding an accurate view of thecompany’s financial status. Section 99of the Act provides that this reviewshould, inter alia, describe theenterprise’s impact on the environmentand measures taken for the prevention,reduction or resolution ofenvironmental damage. From 2005companies are furthermore required tosupplement the management reportwith information on non-financialaspects that are relevant to thecompany’s activities, includingenvironmental and human resourceaspects. The law is intentionally notvery specific, but does contain criteriafor relevance and includes suppliersand contractors.

Specific requirements of the EURecommendation for disclosure ofenvironmental policies andenvironmental performance, however,are not implemented.



Moreover, management has the option to exclude environmental informationfrom the annual report if it is deemed to be immaterial.

In the event that management wishes to disclose more thorough and specific

information on environmental issues, the Danish Financial Statement Act

provides the opportunity to disclose such information in a supplementary report

that must be clearly separated from and placed after the statutory components

of the annual report.

Although there is some overlap between the Green Accounts Act and the

Financial Statement Act section 99, there are two major differences: reporting

under the Green Accounts Act is at site level whereas reporting in the

management review section, as demanded by the FSA, is at enterprise level.

Secondly, issues identified as having a material impact for Green Accounts are

based on a technical review, whereas environmental issues in the management

review are assessed for materiality from the perspective of providing a true and

fair review of the company’s operations and affairs (Hibbit, 2004).

The Social Index

The Social Index, launched in 2000 by the Danish Ministry of Social Affairs, is a

self-assessment tool for measuring to what extent a company focuses on

employment and social inclusion policies as part of its social responsibility. It is

based on an employee questionnaire. The collated information is used to

determine a company score (a number between 0 and 100). An external and

impartial assessor (inspector) verifies that the score is reasonable. Companies

that achieve a score greater than 60 on the Social Index, and which are verified

by external experts, are entitled to use the Social Index Label on their products

and reports.7

CSR Scorecard

The Consumer Information Centre within the Ministry of Economic and Business

Affairs has an ethical database, the so-called “CSR scorecard” – for which

companies can voluntarily file information about themselves and how they deal

with recognised labour standards.8

Guideline for Intellectual Capital Statements

This guideline explains the intellectual capital statement concept, content and

structure. It aims to help individual companies or public organisations develop

knowledge management strategies and communicate these results in external

intellectual capital statements. Through questions, checklists, examples and good

advice, the guideline leads companies systematically through the process of

preparing intellectual capital statements.9

7 For more information, see www.detsocialeindeks.dk.

8 For more information, see www.csr-scorecard.org.

9 For more information, see www.videnskabsministeriet.dk.


5.3 EuropeanUnion

Commitment by the European Union(EU) to sustainable development isconfirmed in the treaties ofAmsterdam and Lisbon, as well as the2001 Green Paper and 2002Communication by the Commission onCSR. Sustainable development andCSR have been high on the publicpolicy agenda at both EU and nationallevels in recent years. Supranational incharacter, EU law is binding for allmember countries and can be seen asproviding the minimum legal standardfor reporting requirements in Europe.Current EU reporting regulation hasbeen closely related to a series ofdirectives designed to harmonize theaccounting rules for financial reportingin EU countries. These are the 4thDirective (annual accounts) whichdates from 1978 and the 7th Directive(consolidated accounts) which appliessince 1983.

Most of the recent developmentsconsidered in this study have beenundertaken within the EU’s “FinancialService Action Plan” (FSAP), which hasaimed to have a fully integratedfinancial market place from 2005onwards. They are therefore not only ofinterest to EU member countries, butall possible future members as well asthose economies in which companiesseek either financing from Europeaninvestors or listing on European stockexchanges. The difficulties and

experiences faced by the membercountries in transposing thesupranational law into national law arelikely to be of value to countries thatwish to align their reporting regimeswith those of the EU.

The text below describes some of thesteps undertaken by the EU and theconsequent impact on sustainabilityreporting in the member states.10

European CommissionRecommendation of 30 May 2001 onthe recognition, measurement anddisclosure of environmental issues inthe annual accounts and annual reportsof companies (2001/453/EC)

The Commission Recommendation(unlike a Directive, a Recommendationis not mandatory) of 30 May 2001 isintended to encourage member statesto comply with its recommendationsas well as any national legislativerequirements. In recognition of theneeds of investors, theRecommendation urges a strongerconsideration of environmental issuesin annual reports and annual accounts,with an explicit reference tosustainable development (albeitdirected at environmental issues). TheRecommendation provides guidanceon how to apply the 4th and the 7thDirectives with respect toenvironmental issues, and refers to thegeneral rules on recognition,measurement and disclosure in theseDirectives. It is possible to follow theRecommendation without being inconflict with the Directives. Certaincountries in Europe have, however,implemented rules from the Directiveswhich are not in accordance with theRecommendation.

The importance of the AccountingDirectives has recently decreasedsomewhat among listed companies.The reason for this is that as of 2005these companies must prepare theirconsolidated financial statementsaccording to the internationalaccounting standards (IAS).

With regard to recognition andmeasurement, the general view is thatlegislation in most countries is inaccordance with the CommissionRecommendation, but measures havenot been taken to introduce theCommission Recommendation wheresuch legislation does not exist. This ispartly due to the fact that manycountries have already introduced anumber of the rules, as these areincluded in the 4th and 7th AccountingDirectives.

Most of the issues regardingrecognition and measurement arecovered by IAS 16, 20, 36, 37 and 38,which have already been introduced toa certain degree in many countries. Inthe remaining countries they apply toall listed companies since January2005 due to EU Regulation No1606/2002. In IAS, however, theenvironment is not emphasised as aspecial area and is addressed alongwith other issues.

Status of Implementation

Four countries - Denmark, Finland,France and Portugal - have introducedelements of the Commission’srecommendations into their legislation.In Finland and Portugal, requirementsfor disclosure in annual reports havebeen integrated in national accounting

10 It refers mainly to the PricewaterhouseCoopers (PWC) study“Implementation in Member States of the CommissionRecommendation on Treatment of Environmental Issues in Companies’Financial Reports” (2001/453/EC) undertaken on behalf of theEuropean Commission, the study “Integration von Klimachancen undrisiken in die Finanzberichterstattung” undertaken by the NGOGermanwatch with support from the German Ministry ofEnvironmental Affairs, and the research report “Open Disclosure –Sustainability and the listing regime” by Mark Mansley from ClarosConsulting.


standards. In France, the governmenthas introduced specific requirementswith respect to reporting on social andenvironmental issues in listed companyannual reports, with the NewEconomic Regulations Act (NRE) andrelated order (20/02/2002).

In Denmark, issues for disclosure inthe annual report have beendetermined by a general requirementin the Danish Financial Statements Act.Medium-sized, large and all listedcompanies have to describe theirimpact on the environment as well asmeasures introduced for theprevention, reduction or reversal ofenvironmental damage. However, morespecific requirements for thedisclosure of environmental policiesand performance are not enforced.Moreover, environmental informationcan be excluded from a company’sannual report if it is deemed immaterialby management (see more detailedcase study on Denmark). None of theremaining member countries haveintroduced disclosure criteria for annualreporting. Most countries recognisethat environmental issues, in line withother issues, should be described tothe extent that they are material to thecompany’s financial performance.

The Prospectus Directive

The Prospectus Directive, introduced in

2003, was transposed into national law

throughout the EU by July 2005. The

Directive aims to ensure that issuers of

securities have a uniform prospectus

that is valid throughout the EU. Once

this prospectus has been approved by

a home market regulator, a company

will be able to use it to offer securities

for sale anywhere in the EU, and the

issuer need only publish shorter

prospectuses with only the details of

the securities when raising further

capital (for example when issuing

bonds).

Although annex 1 of appendix A does

not explicitly mention sustainability

issues, the directive demands (under

point 8 – property plant and

equipment) “A description of anyenvironmental issues that may affectthe issuer’s utilisation of the tangiblefixed assets.”

The Directive has been controversial,

particularly in the UK where it is

perceived to weaken existing rules on

disclosure and to conflict with the

Combined Code on Corporate

Governance. There is concern that the

Directive may limit the discretion of

domestic regulators to demand

enhanced disclosure, in particular on

non-financial issues such as climate

change and human rights.

In response to the issue of the

Combined Code on Corporate

Governance, the EU has stated that

corporate governance issues are not

affected as the Directive only formally

concerns initial disclosure

requirements (European Commission

Press Release IP/02/1209 of 9 August

2002). Despite this, it has been argued

that there is a conflict if the initial rules

for prospectuses set one standard and

ongoing disclosure requirements set

another. In addition, the proposed

Directive imposes an annual

requirement to update and maintain

prospectus information (Mansley, 2004:

9) which the Directive fails to explain.

Regulation on the Application of

International Accounting Standards

(IAS)

According to the Regulation (EC) no.1606/2002 of the European Parliamentand Council (19 July 2002) on theapplication of international accountingstandards, financial reporting for listedcompanies' consolidated accountsmust comply with accountingstandards issued by the InternationalAccounting Standards Board (IASB) andadopted for use in Europe.Sustainability related references areincluded in the IAS Standards 36(Impairment of Assets), 37 (Provisionsand Contingent Liabilities) and 38(Intangible Assets). Tradable emissionrights will be reported on andaccounted for under IAS 38 andallocated free of charge under IAS 20,as government grants.

Modernisation Directive

Sustainability oriented information inthe annual report is so far required inGermany, Denmark, France, UnitedKingdom, Sweden and the non-member country, Norway.

The EU demands sustainabilitydisclosure from all member countriessince January 2005. The EU AccountsModernization Directive 2003/51/ECamended with reference to the EUCommissions’ recommendations(Article 46 of the 4th AccountingDirective) states:


“The annual report and theconsolidated annual report areimportant elements of financialreporting …The information should notbe restricted to the financial aspects ofthe company’s business. It is expectedthat, where appropriate, this shouldlead to an analysis of environmentaland social aspects necessary for anunderstanding of the company’sdevelopment, performance orposition. This is consistent also withCommission Recommendation2001/453/EC of 30 May 2001 on therecognition, measurement anddisclosure of environmental issuesin the annual accounts and annualreports of companies. However,taking into account the evolving natureof this area of financial reporting andhaving regard to the potential burdenplaced on undertakings below certainsizes, Member States may choose towaive the obligation to provide non-financial information in the case of theannual report of such undertaking”.

EMAS – Eco-Management and AuditSchemeThe EU Eco-Management and AuditScheme (EMAS) is a management toolfor companies and other organisationsto enable effective evaluation,improvement and reporting onenvironmental performance. EMASaims to encourage companies todevelop environmental programmesand management systems, and toreport publicly by way of triennialstatements (similar to environmentalreports). It has had great success inGermany due to tax advantages, butless so in other countries and take-upof the scheme is levelling off. Thescheme has been available forparticipation by companies since 1995(EEC Council Regulation No 1836/93 of

29 June 1993) and was originallyrestricted to companies in industrialsectors (ACCA andCorporateRegister.com, 2004).

Implementation experiences of thenew requirements for the annualreportsThe results of a PwC study (2004)indicate that it takes time for newlegislation to become clearlyunderstood and followed. This is oftenthe result of a general lack ofenvironmental knowledge within topmanagement and finance departmentswho are closely involved in preparingannual reports. At the level ofimplementation there are alsodifferences among member states. InFrance there is opposition to the EUlegislation, especially from companiesthat did not have any environmentalmanagement systems in placebeforehand and find it difficult to reportunder the new requirements. In Spain,where the legislation is not as specificas in France, some sectors (forexample energy) have voluntarilystarted to set up standards for theinclusion of environmental data infinancial reporting. This was done inorder to be able to benchmarkperformance within the sector. The following obstacles confrontcompanies and countries whenimplementing the new EU legislationand rules (PricewaterhouseCoopers,2004):

■ The new legislation resulted in asurplus of detailed information inthe annual report on topics thatwere of limited relevance to the financial performance of a company;

■ An inadequate awareness andunderstanding of environmental

issues among top management, thefinance department andaccountants, since this is not anarea typically covered in the annualreport;

■ Companies already reporting onissues in other environmental reportformats resisted the idea ofadditional reporting in the financialreport;

■ The Commission Recommendationfailed to align with instruments ofenvironmental management,especially EMAS; and

■ Matching the new requirementswith the changing requirements ofthe CSR movement or internationalreporting standards.

Conclusion

The content of sustainability-orientedfinancial reporting practices shouldgenerally improve with the applicationof IAS and additional reportingrequirements in annual reports.Nonetheless, there remain importantconcerns. The data reported is notstandardised, which can posedifficulties for comparative reviews.Although the legal requirement forcompanies to report on theirenvironmental performance is rapidlyincreasing in Europe, the varyingdegree and quality of localinterpretation means that investors findit difficult to rely on information beingquantitative, comprehensive andcomparable.


5.4 India

The level of sustainability reporting inIndia is at an infancy stage and stillevolving. While currently there are noofficially recognized guidelines orreporting standards on sustainabilityreporting (by accounting or regulatorybodies), there has been an increasingtrend amongst companies to publish avariety of information relating tothemes such as community, corporatesocial responsibility, environment,health and safety. Indian companiestherefore present diversity in contentand format under the overall umbrellaof sustainability reporting.

Traditionally, while many organizationsboth in the public and private sectorpractice some sort of corporate socialresponsibility programmes, reportinghas not been a common practice. Asurvey conducted in 2003 by PartnersIn Change showed that 70 per cent ofthe participating companies do nothave a CSR policy, but are neverthelessdoing ‘good work’. However, over thepast few years there has been anincreasing awareness and activity inthe CSR field and many companieshave started some reporting onsustainability issues, albeit in limitedand diverse formats.

There are many reasons for thischange in mindset. Foremost is theincreasing globalization of business.As more Indian companies expandinternationally and acquire interestsoverseas, whilst at the same timethere is a rapid increase in foreigninvestment in Indian corporates,demands on transparency from a more‘global audience’ have put pressure on

Indian companies to start reporting onsustainability issues.

Within India there has also been achange in the mindset and attitudes ofstakeholders on issues relating toenvironmental and social responsibility.Recently government faced publicprotests and pressure to refuse entryby foreign ships that were brought toIndia for decommissioning, as theycontained large amounts of asbestosand other harmful substances. Whilethe general public opinion onsustainability issues is still evolving, itsuggests that companies taking thefirst steps can expect intense publicscrutiny, which again highlights theneed for transparent reporting onoperations.

Another significant push factor hasbeen the role of government as astakeholder. India has historically hadstringent laws on labour, environment,health and safety. However, theirenforcement could have been muchmore efficient. Over the past fewyears the government has becomeincreasingly proactive in addressingenforcement. Intense media attentionand scrutiny on corporate socialresponsibility has also led tocompanies taking more cognizance oftheir activities and engagement withstakeholders.

Reporting patternsMany organizations in India havecertified environmental managementsystems, based on ISO 14001.Consequently, data on environmentalindicators are more readily availableand many companies start reporting by

issuing environmental reports whichalso include health and safety data. Itis only after this initial phase thatcompanies in general start developingreporting formats that conform withthe GRI Guidelines. In accordancewith global trends, some Indiancompanies have also started seekingindependent assurance on theirsustainability reports.

Reporting under environmentallegislationOne of the fundamental features ofIndia’s ancient philosophy has alwaysbeen respect for the environment. TheIndian Constitution is amongst the fewin the world that contains specificprovisions on environmental protection.State policy principles explicitlyenunciate the national commitment toprotect and improve the environment.The national environmental policyframework is the responsibility of theMinistry of Environment and Forests.Implementation is undertaken by theCentral Pollution Control Board (CPCB)and the State Pollution Control Board(SPCB) at the federal and state levelsrespectively. The Department ofEnvironment at the federal levelsupports the SPCBs. The Environment(Protection) Act of 1986, considered asthe "Umbrella Act", was formulated forthe protection and improvement of thequality of the environment andprevention, control and abatement ofenvironmental pollution. The act is alsoan ‘enabling’ law, which articulates theessential legislative policy onenvironmental protection anddelegates wide powers to competentauthorities to frame necessary rulesand regulations.

■ In terms of this Act, the federalgovernment has provided that eachcovered organization should submitan annual ‘environmental auditreport’ (in a prescribed format) tothe relevant SPCB.

■ Reporting in the environmentalstatement includes parameterssuch as water and raw materialconsumption, pollution generated(along with variations fromprescribed standards), quantitiesand characteristics of hazardous andsolid wastes, impact of pollutioncontrol measures on conservationof natural resources and on cost ofproduction, and additionalinvestment proposals forenvironmental protection

At this stage the statement is notrequired to be audited. The legalrequirement on its preparation andsubmission helps ensure that data onenvironmental measures is collated,categorized and analysed by allbusinesses covered under thelegislation. Many organizations in Indiahave started to audit these statementsinternally with a view to improving theirenvironmental performance and as amatter of good practice.

Reporting under the Companies ActThe Companies Act in India governsthe overall regulation of companies inIndia and includes sections ondisclosure and reporting on variousaspects of company operations. Section 217 of the Act stipulates thatthe Board of Directors Report (attachedto every balance-sheet tabled at acompany annual general meeting),

shall contain information onconservation of energy. The latter isexpected to include:

■ Energy conservation measurestaken;

■ Additional investments andproposals, if any, beingimplemented for reduction of theconsumption of energy;

■ Impact of the measures takenabove for reduction of energyconsumption and consequentimpact on the cost of production ofgoods; and

■ Total energy consumption andenergy consumption per unit ofproduction in respect of specifiedindustries.

Reporting on social mattersTraditionally there has been a very thinline of demarcation between sociallyaware entrepreneurship andphilanthropy. Businesses today arebecoming more aware of the businesscase, that social responsibility is notlimited to acts of charity and that itrequires internalization and systemicexpression.

In 1980 Tata Steel released a “Reportof the Social Audit Committee” whichexplored whether the company hadfulfilled the objective contained in theArticles of Association regarding itssocial and moral responsibilities toconsumers, employees, shareholders,the local community and society.Since then there has been a growthand consistent improvements in the



Indian companies, in order to helpinform the thinking of the RPWG.Previously, the GRI also presented areporting training meeting incooperation with the Confederation ofIndian Industries.

Meetings such as the above enable abetter understanding of the Indiancontext of reporting and ways ofapplying the international frameworkstandard domestically. Discussionsconfirmed that sustainability reportingin India often starts as a voluntaryinitiative, in the midst of limitedpressure from local NGOs to publishsustainability reports. Reports are oftenproduced and used for internalpurposes. Indian stakeholders alsoexpressed a strong emphasis on theprinciple of “Sustainability Context”,viewing the local sustainability contextas essential in determining relevantreport content. The Mumbai meetingexpressed strong support for an Indiannational annex to the GRI, in order tohelp Indian organizations report ontheir specific sustainability challenges.

ConclusionThe progress of sustainability reportingin India is slow, but a significant andsound start has been made. Forexample, Tata Steel ranks among thetop 100 reporting companies in theSustainAbility / UNEP / Standard andPoor’s Global Reporters 2004Benchmark Survey of CorporateSustainability Reporting.

In India there are various drivers behindthe increase in dialogue, discussionand publication of sustainabilityreports, drivers that are very different

quality of reporting. Many companiesissuing CSR corporate communicationsnow actively report on the socialdimension as well. Yet in the absenceof any locally recognized standardthere is no clear guidance on socialreporting.

While there are no clearly definedmeans for public disclosure, everyfactory in India is required to reportinformation relating to labour andemployment, working hours,accidents, health and safety. Reportsmust be submitted to the relevantstate governments in a prescribedformat under the Indian Factories Act.While there is a statutory obligation toreport data to the relevant authorities,publication of this information is notmandated under current legislation.

Reporting developmentsIn the absence of formal reportingframeworks in India, companies arebecoming increasingly orientedtowards global standards onsustainability reporting, in particularthe GRI. As part of the G3 revisionprocess, the GRI Reporting as aProcess Working Group (RPWG) met inMumbai, India, on 6 – 8 September2005 at the headquarters of Air India.The meeting was attended by the GRIReporting as a Process experts team,GRI staff and Indian stakeholders. Itincluded a full day meeting with Indiancompanies, including representativesfrom the Tata Group, ITC, Air India, TajGroup of Hotels, Shell, AmbujaCement, Confederation of IndianIndustries, Ernst & Young and KPMG.The purpose of the meeting was toarticulate the reporting experiences of

from other parts of the world. For example, pressure from the NGO sector is lowin India when compared to other countries. Pressure originates rather fromincreasing involvement in the global business environment.

An increasing number of companies in India use the GRI guidelines. From theTata group, eighteen Tata companies have produced or are in the process ofdeveloping sustainability reports. Other GRI users include Dr. Reddy’sLaboratories, Ford India Limited, Paharpur Business Centre, Jubilant Organosysand ITC. Others such as Toyota Kirloskar Motors Pvt. Ltd.and Sony India Pvt. Ltd.are also issuing CSR reports.

In summary, the main challenges for sustainability reporting in India are thefollowing:

■ Lack of a specific sustainability/CSR reporting legislation or guidelines;

■ Companies find it challenging to report how they conduct business in theabsence of clear guidance based on local conditions;

■ Following early experimentation, efforts need to be focused and standardized.Typically companies tend to report their community initiatives on a few pagesin their Annual Reports, rather than providing detailed information on internalpractices and issues such as transparency, risk, and social or environmentalimpacts; and

■ Synergizing social and business interests needs top priority. Corporatephilanthropy needs to transform into the realm of core business and corporatesocial responsibility.

5.5 Japan

Japanese companies are among the top performers globally in terms ofenvironmental management systems and publishing sustainable developmentreports.

■ In 2004, a total of 7,155 companies were certified under ISO 14001. Thismakes Japan by far the leading economy in this field, ahead of Germany insecond place with 2,500 certifications (Hibbit, 2004: 521).

■ With regard to the relative numbers of sustainability reports from the largestcompanies by country, Japan takes the lead with 72% of the top 100Japanese companies reporting. This is substantially higher than for example

the 49% in the UK and 32% inGermany (Hesse, 2004: 48).

■ Japan has the greatest number ofcompanies using the GRIGuidelines (available in Japanese)and has an active GRI nationalforum.

■ Japanese companies are notable inthat most of their reports conformto published guidelines – whethergovernmental or GRI – enablingeffective comparison (ACCA andCorporateRegister.com, 2004).

■ Japanese companies voluntarilyreport environmental policies,achievements and costs but do notconsistently provide hard data onemissions, energy use and water,and also need to improve reportingon social performance.

The reporting regime

With the exception of someenvironmental issues, there are nomandatory accounting or company lawrequirements for sustainability issuesto be covered in annual accounts orreports, or stand-alone reports inJapan. Early publication of guidance bythe Ministry of the Environment (Eco-Friendly Corporate Activity Indicators,1992) and The Voluntary Plan (1992) ofthe Ministry of the Economy, Trade andIndustry are believed to have had aremarkable influence in promoting theproduction of environmental reports(ACCA 2004).

In 2001 the Japanese Ministry ofEnvironment published formalguidelines referring to environmentalissues, consisting of three parts:



larger than SMEs will increase withinthe short term. Japan is now planningto establish a simplified certificationscheme for SMEs, which will requirethe publication of public environmentalreports (ACCA andCorporateRegister.com, 2004).

The success of the entirely voluntarysystem in Japan has been explained inthe context of social and culturalconsiderations, such as the closeworking relationship between majorJapanese companies and thegovernment, as well as the importancefor many companies of setting a goodexample.

5.6 South Africa

South Africa is one of the fewdeveloping economies and the onlycountry in Africa that shows significantreporting activities (ACCA andCorporateRegister.com, 2004). It hasincluded some finalists in the GlobalReporters benchmark surveyspublished by SustainAbility and UNEPover the last four years. In part due toits political history and transition todemocracy in the 1990s, the countryhas taken a leading role in thesustainability reporting movement.There is increasing support from thebusiness community, financialinstitutions and government, and agrowing recognition of the GRIguidelines and the country’s ownreporting regime.

According to KPMG annual surveys onsustainability reporting trends in SouthAfrica over the last ten years, corporatesustainability has steadily shifted froman initial focus on philanthropy andenvironmental management towardsthe inclusion of health, safety, labour,

Environmental Reporting Guidelines;Environmental Accounting Guidelinesand Environmental PerformanceIndicator Guidelines.

The latter two parts of the guidelinesare of particular importance for thefinancial and economic aspects ofreporting and disclosure. They tend toestablish on a quantitative comparativebasis the assessment of environmentalcosts (monetary) and the physicalimpact of environmental protectionactions companies have undertaken.The content of the reporting istherefore similar to the eco-efficiencyindicators developed for and publishedin a manual by UNCTAD-ISAR (Hesse,2004: 48; UNCTAD, 2004).

The environmental guidelines are to beused in the preparation of stand-alonereports. The document providescomprehensive guidance onenvironmental reporting and wasdrafted by a committee of twelveindividuals with a strong representationof the accountancy profession,business and academia.11

No regulatory or political pressure hasbeen placed on Japanese companies,and no plans exist to force Japanesecompanies to follow the guidelines.The guidelines make norecommendation on whether thecompanies should report site-based,regionally or globally or seek externalverification. However, the JapaneseMinistry of Environment plans toestablish a third party review schemefor environmental reports on avoluntary basis. It is estimated that thenumber of environmental reportspublished for domestic corporations

11 An English version of the guidelines is available at www.env.go.jp/en/index.html.

community and broader socio-economic issues. The 2004 survey determinedthat improvements have been made on the level of disclosure on sustainabilityissues, including significant levels of reporting on employment equity, ethics andcorporate social investment. However, significant room for improvementcontinues to exist with respect to issues such as the frequency and severity ofenvironmental incidents, accounting for the value of CSI contributions and levels ofpreferential procurement.

An increase in corporate social responsibility awareness and activity andsustainability reporting, and the emergence of an effective reporting regime, isunderpinned by a commitment to transformation in South Africa. The Apartheidboycott debate of the 1980s has been a factor in inspiring the socialresponsibility, accountability, transparency and disclosure debate driven under theSullivan Principles initiative and others in the USA.

This emerging market economy is still going through an economic transitionfollowing its political transition to a democratic government in 1994. Thereremains extreme disparity in the distribution of wealth, with thirty to fortypercent of the population unemployed. There are also strong labour lawsprotecting employees, supported by the largest labour confederation, COSATU.

South African companies with dual listings on the London Stock Exchange arerequired to comply with the more rigorous corporate governance requirements inthe UK.

In order to address the lagging economic transformation, the South Africangovernment has among others, issued a mining charter and a financial sector

charter. Mining rights are duly reflectedin the charter compliance requirements.In terms of the financial sector charter,the key issues that management hasto address are: ownership and controlof companies, human resourcedevelopment, procurement, corporatesocial investment, access to financialservices and empowerment financing.Adherence to the charter is closelymonitored by the government.

The Second King Report onCorporate GovernanceThe Second King Report on CorporateGovernance 2002 (known as King II)represents a formal review of SouthAfrican corporate governancearrangements, similar to the CombinedCode in the UK. It lays down keyprinciples for use in reporting, withreference to the GRI SustainabilityReporting Guidelines. A key section ofthe code, referred to as IntegratedSustainability Reporting, states that:

“every company should report at leastannually on the nature and extent of itssocial, transformation, ethical, safety,health and environmental managementpolicies and practices.”

The Second King Report also specifiesmatters requiring particularconsideration, including:

■ Health and safety practices(including HIV/AIDS);

■ Environmental governance,including use of Best PracticeEnvironmental Option Standard;


Current reporting practice

KPMG South Africa: 2004 Sustainability Reporting Survey


■ Social investment and blackeconomic empowerment;

■ Human capital development andequal opportunity; and

■ The development andimplementation of a company Codeof Ethics, and disclosure ofadherence to that code.

Compliance with certain aspects of theKing Report has been madecompulsory for listed companies (suchas the separation of Board Chair andCEO positions) while compliance withother aspects such as non-financialreporting are not compulsory. In allcases, listed companies have to reporton whether they comply with therecommendations of King II and if not,why not, exposing listed companypractice to public scrutiny. In addition,there is no clear preference for glossy,stand-alone reports, although the useof the GRI is encouraged.

Disclosure and AccountingstandardsIn addition to King II, steps have beenundertaken to set South AfricanAccounting standards in compliancewith the International AccountingStandards. All Johannesburg StockExchange (JSE) listed companies mustcomply with these generally acceptedaccounting principles which include therecognition of environmental and socialrisks, similar to those of IAS 36, 37and 38.

JSE SRI Index Listed CompaniesThe JSE Socially ResponsibleInvestment (SRI) index, launched inMay 2004, is the first SRI index in an

emerging market. It can be comparedto national indices such as the EthibelSustainability Index (Belgium),Humanix Ethics Index (Sweden), FES(Spain) and international indices suchas Eurosif (Europe), the Dow JonesSustainability Index (DJSI) and theFTSE4Good Index.

The JSE SRI index was developed as ameans of measuring company policies,performance and reporting in relationto corporate governance and the triple-bottom-line. All 154 companies listedon the FTSE/JSE All Share Index wereinvited to participate in 2004, with 74companies choosing to participate and51 companies being accepted onto theindex. In the 2005/6 cycles, 59companies qualified to be included onthe Index. The JSE SRI Index hasacted as a significant motivator forcompanies to increase their reportingon sustainability issues, with manycompanies producing their first stand-alone sustainability reports specificallyto obtain listing on the index.

SummarySouth Africa has chosen a combinedapproach to encourage reporting onsustainability issues: the integration ofmandatory, new generation,international accounting standards intoits financial reporting practices, as wellas a self-regulatory, triple bottom linereporting approach that makessustainability reporting mandatory forall listed companies (through theapplication of a “comply or explain”approach) whilst encouraging thevoluntary use of the GRI guidelines.Speaking at the launch of the 2ndrevised version of the GRI Guidelines

at the World Summit on SustainableDevelopment (WSSD) in Johannesburgin 2002, Mervyn King (chairperson ofthe IOD’s King committee) indicatedthat he foresees more governmentsintroducing mandatory requirementson sustainability reporting, but that the“how” or format of reporting willprobably be left to voluntary choice bythe reporting organisation.

5.7 United Statesof America

Non-financial reporting originated in the

USA in the late 1980s in response to

the disclosure of a wealth of publicly

available information driven by

legislation (the ‘right to know’

legislation).

In the USA, the Coalition forEnvironmentally ResponsibleEconomies (CERES) has played apivotal role in advancing the notion ofenvironmental, and later sustainability,reporting since its formation in 1989.The Sullivan Principles also encouragedUSA multinationals to report progresson activities to advance socialresponsibility. Pressure from sociallyresponsible USA investors was anotherfactor in pushing the growth inreporting throughout the 1990s. Thenumber of companies reporting rosesteeply between 1990 and 1995, but inrecent years has reached a plateau.Since 1995, the proportion of reportswith external assurance has doubled,although this figure is low incomparison with other parts of theworld. Institutional investors, including

pension funds, are playing a leadingrole in promulgating the non-financialreporting agenda. This often involvesusing proxy voting policies toencourage public companies todisclose material environmental andsustainability information. USAcompanies are also driven by thedesire to reduce the burden of fillingout duplicative investor surveys (ACCAand CorporateRegister.com, 2004).

The USA system for reporting anddisclosure on sustainability issues isdominated by the disclosurerequirements stated by the Securitiesand Exchange Commission (the SEC) –an example of a statute-based self-regulatory mandatory reporting regimefor companies. In this case study weexplore some of the advantages anddisadvantages stated in the light of theabove. It is intended to be of particularrelevance to the debate on whether todelegate regulatory power to the stockexchange control.12

The USA is globally the most importantcapital market and has the strictestrules for disclosure of information bylisted companies. Disclosure ofinformation is one of the pillars of USAsecurities regulation. As early as 1971the SEC demanded disclosure ofenvironmental data in SEC filings.

Empowerment/mandate of the SECThe basic USA securities lawsauthorize the Securities and ExchangeCommission to require the disclosureof information “necessary orappropriate in the public interest or forthe protection of investors” (SecuritiesAct, Section 2b). This mandate applies

to information disclosed in conjunctionwith the registration and public offeringof securities, solicitation of proxyvotes, and periodic public reporting.

Disclosure requirements thereby servea dual purpose: protecting investorsfrom fraud and inefficiency in thepricing of securities and promotingresponsible corporate management.

The public interest mandate of theSecurities and Exchange Commissionhas been extended with the NationalEnvironmental Policy Act (NEPA) of1969, (Public Law 91-90, 83 Stat.852,42USC§4321 et seq.1970) whichstates that the protection of theenvironment is a national policy.Congress hereby authorized anddirected the Securities and ExchangeCommission, as a federal agency, toinclude environmental protection in itsmandate to issue regulations in thepublic interest. The Conference Reportto NEPA states that while NEPA doesnot repeal existing legislation and issupplemental to the authorization offederal agencies, “this section doesnot, however, obviate the requirementthat the federal agencies conduct theiractivities in accordance with theprovisions of this bill unless to do sowould clearly violate their existingstatutory authorizations” [ConferenceReport 91-765, 91st Congress, 2 USCode and Administrative News, 2767,2771-2 (1969)].

The SEC was thus directed to takeenvironmental protection into accountwhen enacting disclosurerequirements and other securitiesregulations, other than when this is


12 In this section, special recognition is given to the work of Repettoet al (2002), as well as the excerpt of the UNEP FI conference onEnvironmental Disclosures in North American Financial Statements(2003) and “Open Disclosure” by Mark Mansley (2004), as well as aspeech by Simon Thomas from the Environmental Law Institute on 19January 2005.


clearly incompatible with theprotection of investors and thepromotion of efficiency, competitionand capital formation. In thesettlement of a case arising from arule-making petition brought againstthe SEC by the Natural ResourcesDefense Council, on the issue ofwhether the SEC should require broaddisclosure of environmentalinformation, a USA District Courtdetermined that NEPA did not imposeany specific mandate on the SEC torequire environmental disclosure butdid compel it to take environmentalconsiderations into account.

The SEC definition of materialityIn addition to extensive specificdisclosure requirements set forthlargely in Regulation S-K, the SEC Actsadminister a far more generalobligation on companies to disclose allmaterial information, in order to avoidmisleading statements. Companiesand their officers can be penalized forpresenting false or misleading facts oromitting to disclose a material fact,including criminal prosecution, civilpenalties, withdrawal of registration,and liability to investors suffering as aresult. In 1975 the SEC clarified itsposition that the disclosure of materialenvironmental information is requiredunder securities law and that thisrequirement would be enforced (SEC,Securities Act Release No. 5627; 14Oct. 1975).

A materiality filter has been applied tomuch information that is specificallyrequired to be disclosed, includingenvironmental information. The SECexplicitly states in the SEC StaffAccounting Bulletin No.99 that

numerical benchmarking cannot berelied upon as a materiality threshold.Rather, “a matter is material if there isa substantial likelihood that areasonable person would consider itimportant” [17CFR§211, 12 August1999]. The Bulletin quotes a decisionby the USA Supreme Court that a factis material if there is a substantiallikelihood that the fact would havebeen viewed by a reasonable investoras having significantly altered the totalmix of information made available [TSCIndustries v. Northway, Inc, 426US438, 449 (1976)].

The Bulletin cites examples ofmisstatements or omissions that mightbe material although quantitativelysmall in financial terms. Among theseare misstatements bearing on theintegrity or competence ofmanagement, such as a company’scompliance with environmentalregulatory requirements (Repetto,2002).

There is considerable debate in theUSA around the issue of materiality.Despite the SEC guidance that thequalitative information can be material,companies readily point to“materiality” as an explanation forlimited disclosure of information onenvironmental and social factors. Thisis compounded by the fact that theUSA case law states that in theabsence of a specific regulation todisclose defined information, it isdifficult to press companies to discloseon the basis of general principles(Mansley, 2004).

However, the SEC often applies thefollowing rule of thumb regarding

materiality. If the amount at issue ismore than 10% of the number againstwhich it is measured, then it ismaterial; if it ranges from 5–10% of thenumber against which it is measured, itmay but often not be material; and if itis less than 5% of the number againstwhich it is measured, it is presumednot material (UNEP FI, 2003).

5.7.1. The SECDisclosure System

In order to fulfil this broad mandate theSEC has issued regulations,instructions, interpretative andexplanatory releases that have createdan extensive and highly integrateddisclosure system.

Environmental disclosure in the S-KFilings for listed USA companiesThese disclosure requirements(Regulation S-K [CFR§§229.10 –229.702(1998)]) consist of a basicinformation package that must bedisclosed to all investors as well asadditional in-depth information that ispresumed to be of interest primarily tosecurities analysts, institutionalinvestors and sophisticated individualinvestors.

These requirements have beenstandardised to a large extent in anumber of disclosure stages specifiedin the Securities and Exchange Acts: i)information in a prospectus or similardocument; ii) information contained ina statement accompanying theregistration of securities with theSecurities and Exchange Commission;iii) information contained in proxysolicitations in conjunction with the

election of officers and votes in annual meetings; and iv) information contained inrequired annual, quarterly, and special ongoing reports filed with the SEC andmade available to the public.

Some disclosure requirements apply specifically to information of anenvironmental nature but do not preclude the firm’s obligation to comply with themore general requirement that all material information must be revealed (SECRelease No. 33-6130; 44FR56925). For example, if a company publicly disclosesits environmental policies, it must ensure that statements made are accurate andsufficient to make the information not misleading.

Item 101Item 101 of Regulation S-K requires companies to disclose any material effectsthat compliance with any enacted or adopted environmental regulations will haveon capital expenditures, earnings and competitive position for the current andnext year, and any future years for which the impacts might be material.

Item 101 c) xii) of Regulation S-K specifies:

“Appropriate disclosure also shall be made as to the material effects thatcompliance with Federal, State and local provisions which have been enacted oradopted regulating the discharge of materials into the environment, or otherwiserelating to the protection of the environment, may have upon the capitalexpenditures, earnings and competitive position of the registrant and itssubsidiaries. The registrant shall disclose any material estimated capitalexpenditures for environmental control facilities for the remainder of its currentfiscal year and its succeeding fiscal year and for such further periods as theregistrant may deem material.”

In an interpretive release, the SEC made it clear that in the future, companiesmay have to determine and disclose estimates of environmental compliancecosts if they expect such costs to be material and significantly higher thancurrent costs (SEC Release No. 33-6130; 44FR56924, 3 Oct. 1979).

Item 103In addition, though not targeted exclusively at litigation arising out ofenvironmental matters, Item 103 of Regulation S-K requires disclosure of pendingmaterial legal proceedings:

“Describe briefly any material pending legal proceedings, other than ordinaryroutine litigation incidental to the business, to which the registrant or any of itssubsidiaries is a party or of which any of their property is the subject. Include thename of the court or agency in which the proceedings are pending, the dateinstituted, the principal parties thereto, a description of the factual basis allegedto underlie the proceeding and the relief sought. Include similar information as toany such proceedings known to be contemplated by governmental authorities.”



The instructions to Item 103 stipulate, inter alia, that

…No information need be given with respect to any proceeding that involvesprimarily a claim for damages if the amount involved, exclusive of interest andcosts, does not exceed 10 percent of the current assets of the registrant and itssubsidiaries on a consolidated basis ….

“…Notwithstanding the foregoing, an administrative or judicial proceeding …arising under any Federal, State or local provisions that have been enacted oradopted regulating the discharge of materials into the environment or primary forthe purpose of protecting the environment shall not be deemed “ordinary routinelitigation incidental to the business” and shall be described if:

A. Such proceeding is material to the business or financial condition of theregistrant;

B. Such proceeding involves primarily a claim for damages, or involves potentialmonetary sanctions, capital expenditures, deferred charges or charges to incomeand the amount involved, exclusive of interest and costs, exceeds 10 percent ofthe current assets of the registrant and its subsidiaries on a consolidated basis;or

C. A governmental authority is a party to such proceeding and such proceedinginvolves potential monetary sanctions, unless the registrant reasonably believesthat such proceeding will result in no monetary sanctions, or in monetarysanctions, exclusive of interest and costs, of less than $100,000….”

Item 303 Management Discussion and AnalysisAnother Regulation S-K disclosure requirement with considerable potentialsignificance for environmental information is Item 303. This specifies therequirements for the Management Discussion and Analysis, a narrativeexplanation that accompanies the financial reports. It requires a disclosure anddiscussion of any known trends, commitments, events or uncertainties that willhave a material effect on the firm’s financial condition or operation results. Thisshifts the burden of proof onto management, in that known uncertainties mustbe disclosed unless management can determine that a material effect “is notreasonably likely to occur” (SEC Release No. 33-6835; 54FR22430, 24 May1989).

Environmental disclosure for foreign listed companiesFor foreign listed companies a different approach is taken. In form 20-F, whichspecifies listing requirements for foreign companies, firms are requested to:“Also describe any environmental issues that may affect the company’s utilizationof the assets.”

It is this rather broad statement that

caused BP to make the following

disclosure in its annual report to the

SEC for the fiscal year ended

31 December 1998:

“In December 1997, at the ThirdConference of the Parties to the UnitedNations Framework Convention onClimate Change in Kyoto, Japan, theparticipants agreed on a system ofdifferentiated internationally legallybinding targets for the firstcommitment period of 2008-2012. Therange in Annex I countries (OECD,former Soviet Union and Eastern Bloccountries) is from -8% to +10%. TheUSA agreed on a reduction of 7%, andthe European Union on a reduction of8%, on 1990 levels of emissions ofgreenhouse gases. Projections of theincrease in emissions without anyreduction measures are estimated at32% for the USA and 19% for theEuropean Union. If these targets are tobe met a major reduction in the use offossil fuels would be required, and thiswould be likely to have a significanteffect on BP Amoco’s mainbusinesses, but the Group does notexpect that it will be affecteddifferently from other companies withcomparable assets engaged in similarbusinesses.”

Significantly, BP did not make any such

disclosure in its annual reports in the

UK. It is believed that there are several

other examples of UK companies

providing more extensive disclosure of

environmental risks in their reports to

the SEC than is provided in their UK

annual reports.

The SEC also mentions theenvironment in its industry guides,although only for the real estate sector.Despite the fact that smallercompanies have a less onerous set ofreporting requirements generally, theyare still required to report onenvironmental matters.

Sarbanes-Oxley ActFollowing the corporate scandals ofEnron and Worldcom reporting anddisclosure requirements in the USAwere elaborated with the introductionof the mainly corporate governancefocused Sarbanes-Oxley Act into SECregulations. Though it does notexplicitly regulate the disclosure ofenvironmental or social information itcould enhance transparency andliability by influencing the obligation toreport and disclose sustainabilityinformation.

Relevant sections of the Sarbanes-Oxley Act are:

■ Section 401 requiring Disclosure ofMaterial Correction Adjustmentsand Disclosure of Off-BalanceSheet Transactions;

■ Section 404 requiring Disclosure ofManagement Assessment ofInternal Controls; and

■ Sections 302 and 906 requiringOfficer Certification Requirements.

Environmental Co-OperativeAgreements

An innovative development in the USAis the use of voluntary reportingguidelines within contractualarrangements between government

and industry. In Wisconsin, anenvironmental co-operative agreementwas signed in February 2001 betweenthe private utility Wisconsin Electricand the Wisconsin Department ofNatural Resources. It requiresWisconsin Electric to prepare anannual environmental performancereport in accordance with GRISustainability Reporting Guidelines. Aspart of the agreement, WisconsinElectric must demonstrate measurableimprovements in environmentalperformance, implement anenvironmental management systemand expand its stakeholderinvolvement program. In exchange,Wisconsin Electric will benefit throughpermit streamlining, alternativemonitoring and more flexibleoperations. According to the GRISecretariat, this is the firstspecification of the guidelines in a legalagreement.

Summary

At the most fundamental level, USAdisclosure requirements require that allmaterial information regardingsecurities offered for sale to the publicmust be promptly revealed. Materialinformation is commonly defined asinformation that investors would regardas significant in their decisions to buyor sell a security. Materiality is broadlydefined and not subject to numericalthresholds. In the USA, informationthat has a bearing on the competenceor integrity of management, includingnon-compliance with extant laws andregulations, can be material even iffinancially insignificant. The securitiesregulations of the USA are mandatoryin the public interest.



Management Discussion and Analysis(MD&A) include environmental mattersin instances where the reporting ofthese would “alter a reasonableinvestor’s view” of the reporting entity.It is also apparent that in the Directiveas well as its transposition into nationallaw in the EU member states,materiality is defined in terms of theinterests of shareholders.

The key issue in both the USA andEurope is establishing materiality whenthe costs associated with corporateconsumption of environmental goodsand services are largely external andare therefore not captured byconventional accounting standards.Where environmental costs andliabilities are evident, such as landremediation costs, existing accountingstandards regarding provisions,liabilities and the impairment of assetsshould ensure that they are disclosed.However, where the costs areuncertain or external, the disclosurerequirements in the EU and the USAallow directors considerable discretionas to whether they should be reportedor not, which impacts on the levels ofenvironmental reporting.

The discretion afforded to directors inthese matters lends itself to a diverseapproach to reporting on environmentalperformance. This makes it distinctlychallenging for stakeholders to makemeaningful comparisons betweencompanies on the basis ofenvironmental performance.

Overall, the USA example ofenvironmental disclosure demonstratesseveral important aspects.

Through the National EnvironmentalPolicy Act the public interest is definedto include environmental protectionand the responsibility of the SEC isextended to take environmentalobjectives into account whenformulating rules and regulations.

However, there is little evidence in itsactions that the SEC has accepted abroader responsibility other than toprotect investors and to promoteefficient capital markets. There hasrarely been environmental enforcementby the SEC. The SEC disclosurerequirements are litigation-oriented andthe wording used in the regulations isoften subjective.

The review of disclosure requirementsrelating to environmental information inthe securities regulation of the USAreveals essential similarities andparticular differences in relation toother reporting regimes described inthis report.

The reporting requirements that haveemerged from the UK Operating andFinancial Review (OFR), the BusinessReview, and the EU AccountsModernisation Directive have distinctsynergies with the system that hasexisted within the USA for at least 25years. The EU Modernisation Directivealso requires an assessment ofenvironmental factors “to the extentnecessary” for shareholders tounderstand the factors underlying theperformance of the business over thepast year and the main trends andfactors likely to affect futureperformance. This is very similar to theSEC 10-K filing requirement that the

Firstly, it is significant that the largestfinancial regulator in the worldrecognises the importance ofenvironmental factors and requiressome disclosure. Secondly, theconcept of a link to other regulators,such as the EPA, is valuable andinnovative. Finally, however, the USAexperience highlights the difficulties ofa rule-based approach to environmentaldisclosure. The fact that materiality willbe frequently used as an excuse not todisclose, is an argument for strongerguidance.



There is the story of a traveller who neededdirections to a town he wanted to visit. He lost hisway on one of the many dirt roads in a rural area,and approached one of the locals to direct him towhere he wanted to be. After many attempts toexplain the route, and with the local also gettingincreasingly confused, he finally said: “Sir, if Iwanted to go there, I wouldn’t start here!”

6. Conclusion:Where to start…

Reaching the destination of increasedquantity and quality of sustainabilityreporting will be a complex journey,and no-one can choose their point ofdeparture. The journey will be differentfor every country, depending on whatexists already in terms of regulationand buy-in from different stakeholders,as well as the decision on what wouldbe required in terms of the finaldestination.

These decisions should be informedby, amongst others, the following:

■ A familiarity with sustainabilityreporting, including the main driversfor reporting as well as the currentconsensus on what wouldconstitute best practice. Thisrequires realisation of the potential

value of reporting not only as amonitoring and accountabilitymechanism, but also as part of aperformance process andmanagement instrument that canbe used as an internal diagnostictool to enhance performance;

■ An understanding of the mainglobal standards that are currentlydriving reporting processes. TheGRI has clearly established itself asthe main reference in terms ofproviding a reporting framework,and is supported by othercomplementary standards such asAA1000. A new ISO 26000standard on Social Responsibility,currently under development, mayalso recommend communication inthe form of sustainability reporting.The standard-setting environmentalso has a competitive component,hopefully always within the“cooperating to compete”framework. Organisations shouldrealise that a leading position is notguaranteed indefinitely. Continuouscooperative efforts to find bettersolutions, as well as criticalassessments of new standards orcontributions will benefit allreporters worldwide;

■ A realisation that reporting is onlythe tip of the iceberg and that – forboth reporter and legislator – theemphasis should be onperformance; and

■ The knowledge that the voluntaryversus mandatory debate does notimply an “either / or” position, butrather finding a balance betweenregulation in certain high risk or

high impact areas, and allowingindustry associations or individualcompanies to make decisions inother areas.

When one looks at how sustainabilityreporting has evolved over the last fewdecades, it should also be clear thatcurrent best practice does notnecessarily present a blueprint for thefuture. Critical debates about thefuture of sustainability reporting shouldbe encouraged, and should not beconstrained by current reportingformats and procedures. For example,if sustainability reporting will be fullyintegrated with financial reporting inthe future, it is conceivable that coreindicators will evolve over time andthat it would be possible to presentthem in an annual report alongside theincome statement and balance sheet(perhaps through the introduction of abalanced sheet!). At the same time,what is currently known as asustainability report (i.e. a standalonehard copy or online report) is likely toevolve into a process of sustainabilitycommunication. This might lead to theoverall integration of sustainabilityreporting with financial reports, thereplacement of a standalone report bya series of shorter reports, fact sheets,position statements and stakeholderengagement processes. Clearly, suchdevelopments will have a severeimpact on the ability of governments toregulate in this area. For anorganisation like the GRI thesepotential developments will alsopresent some real opportunities, butalso tough choices.

Convergence between financial andnon-financial reporting raises the

question of reporting “on what?” and “to whom?”. With respect to the what, theGRI provides an internationally recognised, comprehensive index of currentconsensus on what should be measured in the process of organisation-levelsustainability reporting. Yet whilst the distinction between core performanceindicators and additional performance indicators as well as industry sector-specific supplements provide some further guidance on selection, it is still up toeach reporting organisation to decide what is most “relevant” or “material” for itto report on. To start with, industry best practice and governmental legislation onindividual issues make reporting against certain disclosure items and fundamentalindicators a given. Beyond this, the level of detail of disclosure and addition ofinformation on other disclosure items and indicators, as well as the format inwhich it is presented, becomes a matter of preference from the view of thesupposed target audience or report user (the whom). It is here that the “level ofsignificance” or “perceived relevance / materiality” of certain issues andindicators often depend on the stakeholder category and background of thepotential report user. This applies to report users externally and internally.

The following table sets out different functional areas and related stakeholdercategories within the market and society, the enterprise and government.

The above table serves to remind us of the different users of reportedinformation, all with different interests depending on their background and wherethey operate. Users from the same interest and operational area are likely toshare special interest in reporting against similar indicators and disclosure items.The company environmental manager, environment ministry official andenvironmental NGO representative may very well have the same passion for theenvironment and certainly a greater shared understanding for environmentalissues compared to the financial manager.


Table 1: Different providers and users of reported information, inside and outside the enterprise


This highlights the challenge ofintegration and communication acrosswork areas that the sustainabilityreporting – financial reporting debateposes.

The financial accountant may displayvery little understanding forenvironmental management, and mayonly begin to understand asenvironmental risk translates intofinancial risk, liabilities and losses (orprofits) as a result of penalties, finesand law suits (… or making inroadsinto new environmental services andniche product markets). This grey area– overlap between the green and thered - is one that has been grappledwith by both UNEP and UNCTAD’sIntergovernmental Working Group ofExperts on International Standards ofAccounting and Reporting (ISAR) sincethe early 1990s (see UNCTC ISAR,1991 and UNEP IE, 1994).

We therefore see the need to bridgethe gap between communities ofexpertise, which needs to happenwithin business as well as withingovernment. It refers to, by example,the gap between “accounting for theenvironment” or “full cost / greenaccounting” on the one hand and onthe other hand, disclosure on

environmental issues through annualaccounts according to company lawand accounting GAAP. The one isinterested in the environment andmaterial efficiency, whilst the other isinterested in the environment onlyinsofar as it manifests itself in affectingthe financial measurement ofeconomic events at a material level(Gray and Bebbington, 2001: 222).

The related question for the companydirector and the public regulator iswhether reporting on a sustainabilityissue should be done on the basis of arisk-avoidance strategy, on the basis ofa business case, on the basis ofdecision-usefulness or on the basis ofthe “community right-to-know”. Ashighlighted in corporate governancediscussions so often in recent years,the dilemma for the company directorsis the extent to which their fiduciaryresponsibility to their shareholdersrequires them to ignore or incorporatelong term sustainability-related, non-financial information in the AnnualReport. This dilemma has been centralin the debate in the UK over the lasttwo years surrounding thedevelopment of the Operating andFinancial Review (OFR) and theBusiness Review as required under theEU Accounts Modernization Directive.

“In 1990, two years before the first Earth Summit…Government support for publicreporting did not exist. Few, if any, governments were aware of the importance ofnon-financial reporting or were forward thinking enough to encourage companiesto take responsibility for their environmental and social impacts…(Today) thepicture has changed completely. Environmental reporting is no longer news…mandatory environmental reporting has been introduced in some countries,including Denmark, France, The Netherlands, Norway and Hong Kong… Non-financial reporting guidance provided by government has led to higher qualityreports emerging from those countries… governments can play an instrumentalrole in stimulating a culture of reporting and providing national frameworks…(ACCA and CorporateRegister.com, 2004: 10, 12, 16).

The regulator may take a decisionagainst mandatory legislation requiringcomprehensive sustainability reporting.Yet the viability of most regulatoryinstruments is substantially dependenton the availability and quality ofrelevant information. The practicalapplication of economic instruments isheavily reliant on information, forexample about the quantity ofemissions (Gunningham and Grabosky,1998: 82). Running certain economicinstruments may require theintroduction of mandatory reporting formonitoring purposes. Examples arepollution taxes and tradeable permitschemes. In the case of the latter,government needs to ensure reliablemeasuring, accounting, auditing andreporting of emissions, as well asaccurate record keeping of the locationand monetary value of permits. Thisbrings us back to the role of variants ofproduct-based, issue-based and site-based reporting, and the desirability orfeasibility of linking these requirementsup into a comprehensive reportingframework.

Arguing a confining case for policymixes that incorporate a broad range ofinstruments and institutions, as well asthe principle of low interventionism inthe design of regulation, LawProfessor Neil Gunningham (1998: 191)advises as follows: “…a number ofmeasures should be seen asprerequisites for government tosuccessfully regulate large companiesat a distance, giving them the flexibilitythey demand, while achieving bothimproved environmental and economicoutcomes, and communityacceptance”.

The measures he sees as prerequisitesare the following:

– Measuring outcomes byindependent and transparentperformance indicators;

– Independent third partyoversight underpinned byaccess to information;

– Community empowerment,including the transparencyand institutionalised dialoguenecessary to bring this about;

– Government oversight and anunderpinning of effectivesanctions, and

– Credible incentives forindustry participation.

In the context of reporting, theseprerequisites again highlight theimportance of a publicly recognised setof performance indicators (of which theGRI provides a global referenceframework), independent verification,stakeholder engagement in forexample determining what is relevantor material, the role of government inenforcing a level playing field and, lastbut not least, the importance ofincentives.

To conclude, we suggest that thefollowing actions could be consideredby public officials:

■ Detailed review of existinglegislation and other regulatoryrequirements with reference to thefollowing:

– Comparison with GRIsustainability reportingrequirements (principles,disclosure items andsustainability indicators,stakeholder engagementand due process)

– Distinction between duty todisclose information to government and publicdisclosure;

– Evaluation whether existingcompany law encourages onlyconventional, historical costaccounting or also encouragesforward-looking, strategicreporting on businessprospects (trends, factorsaffecting future performance),business drivers and risks;and

– Current practice with regardsto external auditing /verification / assurance.

■ Detailed review of quantity andquality of sustainability reporting inthe specific country, as well asensuring that relevant governmentdepartments remain up to date withthe latest developments in the fieldof sustainability reporting;

■ Consideration of draft legislation:governments that contemplateintroducing some form of legalrequirement for sustainabilityreporting have many optionsavailable, including the following:

– Stipulating a basic minimumrequirement of sustainability



reporting and making suchreporting compulsory througha “comply or explain”arrangement;

– Delegating the responsibilityto make decisions in thisregard to stock exchanges and/ or industry associations; or

– Introducing incentives forcorporations to issuesustainability reports.

The introduction of incentives seemsto be of particular interest, given thecomplexities of existing legislation andthe unlikelihood that regulators will beable to incorporate all forms of existinglegal requirements, combined withareas where there are gaps, into newlegislation. The latter task will be toocomplex and the issue is – at leastcurrently – not perceived to be criticalenough by all decision-makers towarrant this. Examples of possibleincentives include the following:

– If a sustainability report isissued companies could berelieved from the obligation toreport separately to individualgovernment departments,provided that they include allappropriate indicators in theirreport – the issue of whethersuch reports would have to beverified externally would haveto be discussed; and

– Relief from litigation – basedon the example of the FederalSentencing Guidelines in theUSA - companies could

perhaps qualify for reducedfines in cases where theyhave publicly disclosedmaterial sustainability risks insustainability reports andclearly indicated an actionplan for addressing such risks.

Finally, there is the issue of collectivegovernmental action to consider.Within this context, participation inintergovernmental discussions andinitiatives should be encouraged, withspecific emphasis on the need forgovernments with substantialexperience in this area to share theirexperiences and know-how withothers. The role of institutions such asthe United Nations and the GRI will becritical to help ensure informeddiscussions, continued success andprogress in this area.

When in May 2005 the UNEP Divisionof Technology, Industry and Economicshosted a workshop on reporting policyand legislation trends withrepresentatives of a group of OECDgovernments and the emerging marketeconomies covered in this report,participants had two concludingmessages:

– Firstly; in developing countriesmuch awareness raising andcapacity building remains to be done on non-financial reporting as a management tool and as legislative subject.In many developing countries pressure for non-financialdisclosure from the finance and investment community is still non existent.


– Secondly, participants notedthe need to improve the linksbetween micro-level /company reporting, national /macro level reporting andinternational / global levelreports and institutions (e.g. international agreements andUN declarations on issuessuch as the MillenniumDevelopment Goals). Theywelcomed the fact that theGRI has incorporated andintegrated many elements ofkey international texts intoits principles and guidelines.


7. References

ACCA and CorporateRegister.com(2004). ‘Towards transparency:progress on global sustainabilityreporting’, Certified AccountantsEducational Trust, London.

Adams, R. (2002). ’The case for smartlegislation the detail must be flexible’in The Transparent Company. Presentedto IPPR seminar on 20th March 2002.Unpublished set of papers by theAssociation of Chartered CertifiedAccountants.

Baums, T. (2004), ‘Changing Patterns ofCorporate Disclosure in ContinentalEurope: the Example of Germany’.N°04/2002, www.ssrn.com

Buhr, N. and Freedman, M. (2003) ‘AComparison of Mandated and VoluntaryEnvironmental Disclosure: The Case ofCanada and the United States’,http://panopticon.csustan.edu/cpa96/pdf/buhr.pdf

Doane, D. (2002). ‘Market failure: thecase for mandatory social andenvironmental reporting’ set of casestudies commissioned by NewEconomics Foundation, March edition.

Eco, U. (1990). ‘The Limits ofInterpretation’. Bloomington: IndianaUniversity Press.

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European Commission (2004) ‘ABC ofthe main instruments of CorporateSocial Responsibility’ in writings of theDirectorate-General for Employmentand Social Affairs.

Gray, R. and J. Bebbington (2001).‘Accounting for the Environment’.London: Sage.

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Hamann, R., T Agbazue, P. Kapelus,& A.Hein (2005). ‘Universalizing CorporateSocial Responsibility? South AfricanChallenges to the InternationalOrganization for Standardization’s NewSocial Responsibility Standard’ inBusiness and Society Review, Centerfor Business Ethics at Bentley College.Blackwell Publishing, Malden.

Hibbitt, C. (2004) ‘ExternalEnvironmental Disclosure andReporting by Large EuropeanCompanies: An Economic, Social andPolitical Analysis of ManagerialBehaviour’. Limperg Instituut,Amsterdam.

Hibbitt, Chris. and Collison, David(2004). ’Corporate EnvironmentalDisclosure and ReportingDevelopments in Europe’. ACCA,London.

Hesse, A. (2004). ’Das Klima wandeltsich – Integration von Klimachancenund -risiken in dieFinanzberichterstattun’

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Better Markets Sustainability: the roleof accountants’.

KPMG (2004). ‘Survey of IntegratedSustainability Reporting in South Africa.KPMG, Johannesburg.

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8. Disclaimer andAcknowledgements

This document does not constitute

legal advice – it is a research report

prepared for the purpose of informing

discussion. The report is based largely

on desk research and may contain

inaccuracies. No individual or any

other entity, including governments or

governmental representatives, should

initiate actions based solely on the

contents of this report. KPMG and

UNEP do not have a formal position in

favour of either mandatory or voluntary

standards and the recommendations in

the final section of this report are

presented to encourage further

discussion.

Designations employed and the

presentation of material in this

publication do not imply the expression

of any opinion whatsoever on the part

of UNEP concerning the legal status of

any country, territory, city or area or of

its frontiers or boundaries. Moreover,

the views expressed do not

necessarily represent the decision or

the stated policy of UNEP nor does

citing of trade names or commercial

processes constitute endorsement.

The case studies, evaluations of

existing reporting regimes and

recommendations take into

consideration the country-specific

socio-economic background and legal

systems in place. Given the varying

approaches to sustainability reporting,

the different underlying assumptions

and the limited practical experience

inherent in some of the more recent

approaches, it has not always been

possible to draw a justifiable

conclusion. The valuations,

classifications and judgements reflect

the opinion of the authors or the

quoted sources.

The initial research for this report was

commissioned from the Graduate

School of Business (GSB) at the

University of Cape Town, South Africa.

The main author of the initial research

report is Trutz Rendtorff, an MBA

student from the GSB.

The case study on Brazil was prepared

by Rever Consulting.

Information on country specific

standards was supplied by KPMG

representatives worldwide. The final

report was edited by Daniel Malan,

Associate Director: KPMG’s Global

Sustainability Services, South Africa,

and Cornis van der Lugt, CSR

Programme Officer in the UNEP

Division of Technology, Industry and

Economics (Paris).

More information on this project can

be obtained from:

UNEP

Sustainable Consumption and

Production Branch

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See also: UNEP Headquarters web site

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kpmg.com unep.org

More information on this project can

be obtained from:

UNEP

Sustainable Consumption and

Production Branch

UNEP Division of Technology,

Industry and Economics (DTIE)

Tour Mirabeau 11th floor

39- 43 quai Andre Citroen

75739 Paris Cedex 15

FRANCE

Tel: +33 1 4437 1450

Fax: +33 1 4437 1474

http://www.unep.fr/outreach/home.htm

See also: UNEP Headquarters web site

http://www.unep.org

KPMG

Global Sustainability Services

KPMG Crescent

85 Empire Road

Parktown, 2193

SOUTH AFRICA

Tel: +27 11 647 5581

Fax: +27 11 647 6125

http://www.kpmg.co.za

The information contained herein is of a general nature and is not intended to address the circumstances of any particularindividual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee thatsuch information is accurate as of the date it is received or that it will continue to be accurate in the future. No one shouldact on such information without appropriate professional advice after a thorough examination of the particular situation.(KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.)

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