Sustainability reporting and assurance: the way of the future
Introduction
The evolving concepts of business ethics and stakeholder rights are no longer merely modern jargon, or the “flavour of the month” buzz words, but a key aspect of the modern business environment. Doing business ethically and in a responsible manner will not only contribute to the short-term profitability of a business, but will also ensure its long-term survival. The development of corporate governance over recent years has given prominence to the need for businesses to behave in a responsible and ethical manner, and this has resulted in a move from a focus on profits for shareholders only, to the recognition that business has a responsibility to those that give it its licence to operate, namely its stakeholders at large. This has given rise to the concepts of Corporate Citizenship, Sustainability and Triple Bottom Line Reporting.
In South Africa, the second King Report on Corporate Governance (King II) acknowledged the shift in emphasis from a mainly financial focus of the past to a wider and more inclusive approach to doing business in the future. This resulted in a shift from the single bottom line (that is, profits only) to a triple bottom line that embraces the economic, environmental and social aspects of a company’s activities. With the issue of the third King Report on Corporate Governance (King III) this requirement was taken further in that the Report stated that strategy, risk, performance and sustainability have become inseparable and have resulted in the requirement for integrated reporting, which deals with economic, environmental, social and governance issues. King III also requires sustainability reporting and disclosure to be independently assured.
Sustainability reporting and assurance
The Global Reporting Initiative (GRI) defines the goal of sustainable development as meeting the needs of the present without compromising the ability of future generations to meet their own needs. The GRI went on to state that transparency about the sustainability of organisational activities is of interest to a diverse range of stakeholders, including business, labour, non-governmental organisations, investors, accountants and others. Sustainability reporting is further defined by the GRI as the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organisational performance towards the goal of sustainable development – the broad term used to describe reporting on economic, environmental and social aspects. Similar meanings are assigned to this term in King III and other sustainability guidelines (e.g. SA 8000, ISO 14 000, ISO 26 0000 and BS 8900 standards).
It is of cardinal importance that such sustainability reporting should be accurate and reliable in order for stakeholders to place reliance on it – hence the requirement of GRI and King III for external assurance in relation to sustainability reporting.
Findings on current sustainability reporting practices in South Africa
Since 2005, Ernst & Young has conducted an annual survey of annual reports from the companies listed on the JSE Limited Socially Responsible Investment Index (SRI), as well as the top five state-owned entities. This survey is independently conducted for Ernst & Young by well-known academics from the University of Johannesburg (Marx and Van Dyk). All reports published before the cut-off date of 31 July 2009 were taken into consideration for the purpose of the survey. The printed versions of the companies’ sustainability reporting were used as the primary source for the adjudication process (or the electronic form thereof where provided on electronic disk). Reporting on the internet was taken into consideration in cases where the printed versions specifically referred to sustainability reporting on the companies’ website or any reports that were only available through the company’s website were also included in the adjudication process.
The most significant findings in relation to 2009 sustainability reporting are briefly discussed below.
Challenging economic environment
As expected, most companies reported a difficult financial environment and many business challenges. The challenges resulting from this, both financially and as regards sustainability, were generally well reported on by the company Chairpersons and CEOs. A strong commitment to all areas of sustainability was generally reported, with the emphasis on the fact that sustainability is not a ‘nice-to-have’, but an essential component of doing business.
Commitment to sustainability
As in prior years, there was an increase in the statements by chairpersons and CEOs dealing with sustainability aspects and the companies’ performance in this regard. Many companies incorporate sustainability into their mission, vision and objective statements. This emphasises the importance of economic, social and environmental sustainability as part of companies’ activities and an essential element of doing business.
Many companies also have board committees that take responsibility for, and oversee, sustainability on the board’s behalf. This was expected of companies in the mining sector, but it was encouraging to find this occurring also for non-mining companies. Most companies also complied with the GRI principles and disclosed adequate adherence to these principles.
Effectiveness of communication
As of 2008 there has been an increase in the quality and effectiveness of the sustainability information reported. The reporting has been more concise, less prolix, and has increased in quality. The adjudicators are of the opinion that most of the companies have applied their minds to reporting information that will be of value to stakeholders.
Although this positive trend was indeed in evidence, it was disappointing to see that, on the one end of the scale, some companies continued to report large volumes of data that is difficult for the reader to digest, and, on the other end of the scale, some reported so little that it merely raised questions regarding their commitment to sustainability and open and honest stakeholder reporting.
Format of sustainability reporting
Companies reported on sustainability aspects either in separate sustainability reports, or in a section of the annual report in an integrated format.
A number of companies provided written summarised sustainability reports, providing concise and focused sustainability information, with full sustainability reports (comprehensive in volume and detail) on their websites, or in electronic disk format accompanying the written reports. This format of reporting reflects a growing maturity regarding sustainability reporting.
Stakeholder engagement
There has been an increase in the level of stakeholder engagement reported on by companies. This, however, ranged from comprehensive reporting regarding stakeholder communication and the results thereof, to merely listing the names of stakeholders. Open, honest and responsible stakeholder engagement and reporting is essential for establishing trust between the companies and their stakeholders, and is an aspect that should receive attention in future reporting.
External assurance
Of the 65 reports evaluated, five of which were from state-owned entities (SOEs), only 20 had any form of assurance. Of these 20, three ‘self-assured’, thirteen made use of a reputable auditing firm and the remaining four used the services of ‘boutique’ sustainability consultants. Only one SOE (Eskom) had an audited sustainability report.
This lack of assurance is disappointing, as it is considered good business practice and, indeed, is a recommendation of the GRI- that companies obtain external assurance on their sustainability reporting. A lack of external assurance on sustainability reporting raises concerns regarding its accuracy and reliability and is an aspect of sustainability reporting to which companies should give due consideration for 2010. Only one company also obtained external assurance regarding the sustainability information published on the website.
Public sector reporting
Five public sector companies’ sustainability reporting was adjudicated on for 2009. This ranged from good reporting to substandard reporting.
Improvement in reporting
During the adjudication process, it was encouraging to note an improvement in the commitment to and reporting on sustainability by certain companies. The significant strides made by companies to ensure the accuracy, completeness and timeliness of their sustainability reports were considered during the process of adjudication and arriving at final decisions.
Conclusion
Doing business in an ethical manner will not only result in the respect and support of all parties with which a company interacts, but will also contribute to its profitability. Providing accurate, reliable and credible financial and non-financial information to the various stakeholder groups will ensure both the short-term profitability of the company and its long-term sustainability. There is opportunity in the recommendations contained in King III and the GRI, in terms of which companies can gain material benefits from their compliance with sustainable business practice – not the least of which is that, in the near future, perhaps, compliance will become mandatory rather than voluntary.
Further information on the awards and the results can be found at www.ey.com/za.
References
Institute of Directors. (2002). King II Report on Corporate Governance, Institute of Directors in Southern Africa. Johannesburg.
Institute of Directors (2009). King III Report on Corporate Governance. Institute of Directors in Southern Africa, Johannesburg, South Africa.
Institute of Directors.(nd). Implementing Sustainable Development as a Strategic Business Model. Institute of Directors in Southern Africa, Johannesburg, South Africa.
King, M.E. (2006). The Corporate Citizen. Johannesburg: Penguin Books (South Africa) (Pty) Ltd. ISBN 0143 025082.
Marx, B. 2008. An analysis of the development, status and functioning of audit committees at large listed companies in South Africa. Unpublished thesis submitted in fulfillment of the requirements for the degree Doctor Commercii in the Faculty of Economic and Financial Sciences. Johannesburg: University of Johannesburg.
Global Reporting Initiative (2006). Sustainability reporting Guidelines. EA Amsterdam.
Jayne Mammatt, BA (Hons), ACA(ICAEW), is an associate director at Ernst & Young in Climate Change & Sustainability Services. Ben Marx CA(SA), BCompt (Hons), MCompt, DCom, is a Professor of auditing at the University of Johannesburg.
Vanessa van Dyk CA(SA), BCom (Hons), MCom, is a senior lecturer at the University of Johannesburg.
