“To be applied properly, G4 requires a change in mind-set, which in turn will require a change in the reporting process for some organisations.”
The new G4 sustainability guidelines go beyond check lists to zone in on ‘what matters’
The Global Reporting Initiative (GRI), established in 1997, has spearheaded the movement behind the reporting of non-financial information around the world and has pioneered guidance for organisations on how to report this information.
The GRI aims to promote change within organisations through the measurement, management and reporting of their environmental, social and economic impacts. The recently released ‘fourth-generation’’ (G4) Guidelines are the latest iteration of their sustainability reporting guidelines, providing a response to the rapidly changing sustainability landscape informed by stakeholder engagement processes. So what’s new in G4 compared with its predecessor, the G3.1 Guidelines?
In a nutshell, G4 calls for a more focused approach to sustainability reporting, with the aim of encouraging more reports and better reporting. By using G4, organisations are encouraged to focus on what matters, where it matters – by analysing and prioritising sustainability issues within the organisation and throughout its value chain. The four major changes are:
A stronger focus on materiality
Increased requirements for value chain reporting
The dropping of the A, B, C reporting application levels
The introduction of various new disclosure requirements, particularly on governance
To be applied properly, G4 requires a change in mind-set, which in turn will require a change in the reporting process for some organisations. Sustainability reporting is no longer simply an outcome at the end of a reporting period; sustainability reporting becomes the process. Here’s why:
For the purposes of sustainability reporting, ‘materiality’ is the process of prioritising environmental, social and governance topics and reporting on them appropriately. In defining materiality, the GRI suggests that sustainability reports should report on those ‘aspects’ that: “reflect the organization’s significant economic, environmental, or social impacts, or substantially influence the assessments and decisions of stakeholders”.
While the materiality process can take many forms, several key components are necessary to ensure the holistic view that the GRI is asking for. First, the internal risk management systems should highlight issues from the risk radar; second, stakeholder engagement is necessary to understand the importance of issues and to capture other issues; and finally, materiality should be seen as an on-going process (an issue that is of extreme relevance today may not be so next year, and conversely new significant issues may arise).
An integral part of the sustainability reporting process is the role that stakeholders play in determining the organisation’s future strategic direction. With the growing levels of influence that stakeholders are able to exert over companies (for example through social media channels) and with increasing scrutiny on environmental, social and governance issues, stakeholder relations need to be managed effectively.
The GRI stresses that it is important for the organisation to identify where in the value chain an issue is most material. The intention of G4 is for organisations to examine their entire value chain and to then disclose where an issue is material, why that issue is material, and how that issue is being managed or mitigated. There are a number of new indicators within G4 that reflect this thinking, particularly with respect to the assessment of suppliers for their responses to environmental, human rights, labour relations and societal issues.
Related to materiality is the change in G4 relating to the reporting application levels. Gone are the days of A ‘grades’ for companies that reported on all of the G3.1 indicators. The three ‘grades’ have been replaced with two ‘in accordance’ options, core and comprehensive. Both options allow for organisations to only report material issues, the difference being that comprehensive requires a higher level of disclosure than core for those issues deemed material as well as an increased level of governance disclosure.
G4 addresses wider issues pertaining to corporate governance and ethics, as well as how sustainability issues are managed by the organisation. Fortunately for companies listed on the JSE, many of these governance disclosures are already required either by King III or the Companies Act and should as a matter of course be disclosed. Without good governance and the various governance bodies responsible for sustainability issues, it becomes very difficult for real change to emerge. Within this focus, the process that a company is employing with reference to sustainability, in essence, is more important than the report that emerges at the end of the pipeline.
G4 is the tool that the GRI is hoping will leverage the required change in organisations. In reflecting on the nature of change that sustainability demands, leading environmentalist William McDonough (in his book Cradle to cradle) provides a telling analogy: if we are driving south and realise that we are heading in the wrong direction, driving south more slowly won’t take us north. He suggests that many current sustainability initiatives are simply following business-as-usual, with slightly refined risk management and eco-efficiency practices – a case of going south more slowly.
Perhaps this is the transformation that G4 is attempting to influence: the disruption of entrenched business behaviours. In its purest form, G4 requires companies to take greater responsibility for their value chain and their most material impacts, within their spheres of influence. It is implied in the guidelines that mere disclosure is not enough. The intention is for organisations to take action through whatever means are necessary and to chart their progress.
Will G4 deliver on the level of change that it is seeking? Has the GRI moved too far away from its initial primary focus on increased disclosure and greater comparability of performance? And can the GRI work effectively with the International Integrated Reporting Council (IIRC), addressing issues of value creation and sustainability by targeting different stakeholder groups?
The answers to these questions and many more will only be found in the course of time.
The GRI G4 guidance documents are available for free download at: https://www.globalreporting.org/
Author: Jonathon Hanks is Managing Director and David Baxter a senior consultant, both at Incite