Mervyn King speaks frankly about Sustainability Reporting

Q: King III calls for an integrated sustainability report – what do you mean by “integrated”?

It’s not necessarily about one report. We all know about the triple bottom line (TBL). In King III we initially dropped the words TBL in favour of the triple context, which later became just plain context. It’s to get the mindset at the top of the company thinking of the business in terms of three factors – its impact on society, the financial aspects, and its impact on the environment. It’s to make an informed assessment on the economic value of a company as opposed to its book value – as stakeholders need this information.

Assume companies report according to the old Companies Act of 1973 – that’s backward looking information. The major shareholders today are financial institutions and they have a duty to look at the sustainability of a business because they have a 20 to 30 year investment horizon for some of their members. Executives, however, look at a 3 to 5 year horizon.

The Coca-Cola company is an example I use often. Its long-term strategic plan involves the reuse, recycle and replenishment of water. Is it doing this because it’s a good corporate citizen? Yes, because it protects its brand and reputation. But directors understand that water is a scare commodity and they have to plan for the long-term supply of water to their bottling plants.

So this gives the context. It doesn’t matter if there are two reports or three reports. They must show – and this is what King III is all about – the financial performance against the long-term sustainability of the business. This is integral to the business. The people at the top must change their mindset – see the company as an entity with, in some cases, millions of stakeholders attached to it. If directors view only the financial aspects of a company, in the 21st century it’s too narrow a view.

Three years ago, a survey by the GRI (Global Reporting Initiative) of the top global companies asked what stakeholders want. It found they want a quality product or service and a continual quality product or service in ten years’ time. The inference is that a company can create trust and confidence, but how does the board maintain that trust and confidence?

Another survey by the GRI this past year showed that 85% of readers said they formed a more positive view of a company where there was a sustainability report, as they could make a more informed assessment of a company.

So it’s thinking about a company in terms of context. People at the top have to change their mindset; people in the middle and lower levels of a company have to understand the context. It is awareness of long-term strategic thinking and the critical nature of sustainability.

Sustainability is the primary moral and economic imperative of the 21st century. It is one of the most important sources of both opportunities and risks for businesses. Nature, society and business are interconnected in complex ways that should be understood by decision makers. Most importantly, current incremental changes towards sustainability are not sufficient – we need a fundamental shift in the way companies and directors act and organise themselves.

An excellent example of an integrated sustainability report is that of Proctor & Gamble. It shows how the board has applied its mind to ESG (environmental, social and governance) issues in addition to the financial facts, because the board appreciated their relevance to its business.

The term ‘integrated sustainability reporting’ is defined in King III as an holistic and integrated representation of the company’s performance in terms of both its finance and its sustainability.

Q: What should directors be doing about sustainability?
Realise that in carrying out their duties they have to make sure the sustainability of the business is considered in terms of the assets of planet earth – air, land and water.

In 1950, the world population was 2.5 billion. Today, it’s 6.7 billion. By 2050, it’ll be 9.2 billion. Most of those people will be living in cities. Food security will be a big problem. And wars will be fought over water.

Q: Where do you see the GRI in five years’ time?
The GRI will be the standard setter. Europe has already adopted the GRI’s Reporting Framework. It would be an act of insanity for a single country to adopt its own standard after thousands and thousands of man hours have gone into the GRI. The GRI is a worldwide multi-stakeholder network. Business, civil society, labour, investors and accountants collaborate through consensus-seeking approaches to create and continually improve the Reporting Framework.
Q: Should the GRI and IFAC be working together in setting standards for sustainability reporting?
They should be and they are talking to each other. It makes sense for there to be more co-operation between the two global standard setters.

Q: Are auditors the best people to offer assurance on sustainability reports?
I believe so, as they have the necessary training in assurance. They can provide a trustworthy expression of opinion on an organisation’s sustainability report.

Q: Sustainability is still regarded as a “soft” area. What is it going to take before it’s regarded more seriously?
I disagree. It’s not. In South Africa, sustainability considerations are rooted in the country’s Constitution. That is the basic social contract into which South Africans have entered. The Constitution imposes responsibilities upon individuals and juristic persons for the realisation of the most fundamental of rights.

Some countries have already legislated sustainability reporting. In the UK, the company’s impact on society and the environment has to be disclosed. There is legislation in Denmark, Germany and many other European countries. In South Africa, King III is a code. If the JSE adopts the principles of King III, it will spread the word.

There are four capital areas in a company – financial, environmental, social (the community) and human. From a strategic and planning point of view, boards have to get their minds around this. The world today is flat, borderless and degraded. If you don’t get your strategic planning right in terms of these four capital areas, the business of the company will not be sustained. There is nothing “soft” about that. Nineteen years ago, Nike’s market capitalisation dropped dramatically over the use of child labour; it took years for Nike to recover that loss. It had overlooked the human capital aspect in its supply chain.

Q: What is the role of the individual? Can one person make a difference?
Individuals have a huge role to play as providers of labour and capital, and they have the power to choose the products they buy from different companies. If your neighbour dumped toxic waste in your garden in the middle of the night, you would be horrified. We must expect the same from companies.

Each individual should be asking, what am I doing in my household and garden? Do I have plants that soak up water rather than indigenous plants? Do I have a solar geyser? Do I have a water tank?

Q: Tell us about the new Investor Code that is being compiled?
In September this year, we held our first meeting. Major financial institutions and regulators in South Africa are meeting with the aim of developing an investor code. The Code will be in line with the International Corporate Governance Network guidelines and those of the OECD, but taking account of the special circumstances in South Africa, e.g. transformation. It’ll offer guidelines on the environmental, social and governance factors for investors to consider when making an informed assessment of a company. We’re aiming to release the Investor Code by March next year.

The GRI Reporting Framework – of which the Sustainability Reporting Guidelines are the cornerstone – provides guidance for organisations to disclose their sustainability performance. It is applicable to organisations of any size, type, sector or geographic region, and has been used by thousands of organisations as the basis for their sustainability reporting.

Leigh Roberts is Project Director in Standards Division at SAICA.