This blog continues our conversation about how to get people to act in the face of climate change impacts. An earlier blog explained the CLIMATE model, this blog explains the “I” in the model which stands for Information Disclosure.
I’ll focus here on companies and their information disclosure. The goal is to get companies to disclose non-financial information. While technologies, regulations, and norms are well established in the financial disclosure arena, this state-of-affairs is far from true for non-financial information.
Non-financial information disclosure usually includes three areas: (1) intellectual capital such as goodwill and R&D; (2) key performance indicators; and (3) environmental, social, and governance issues. The last area is the focus on recent work by the Sustainability Accounting Standards Board (SASB).
The SASB Foundation is an independent 501(c)3 non-profit that is responsible for funding and overseeing the SASB.The SASB maintains sustainability accounting standards that help public corporations disclose material and decision-useful information to investors in mandatory filings.
There is a caveat. Most company representations of materiality and information on non-financial information are too complicated and not integrated. The language used does not invite the public to participate in discussions about what companies are doing about their non-financial issues. This language does not help investors either.
This is where designers, artists, and the humanities can help– they can find user-friendly ways to communicate this important information. We need more trained observers and reporters on this information just like we have for financial information.
Most important is the area of materiality which is an area you want to focus on when reviewing a company’s work. Materiality is a fundamental principle of mandated disclosure in the United States. The concept of materiality recognizes that some information is important to investors in making investment decisions. According to the U.S. Supreme Court, information is material if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.”
SASB standards address sustainability topics that are likely to be material and to have material impact on the financial condition or operating performance of a company. In identifying these sustainability topics, the SASB applies the definition of “materiality” under the U.S. securities laws. SASB standards are designed to integrate into the MD&A and other relevant sections of mandatory SEC filings such as the Form 10-K and 20-F. A company’s management is responsible for determining whether the relevant SASB standard should be used to comply with the disclosure requirements of the federal securities laws. SASB recognizes that each company is responsible for determining what information is material and what information should be included in its SEC filings.
One way to overcome this reporting need and the complicated nature of the reporting is to encourage– through investor pressures and legal action– companies to compile one report.
Charlotte-based Polymer Group Inc. (PGI) is a global innovator, manufacturer, and marketer of engineered materials focused on non-woven products. The 2010 PGI Stakeholder’s Report was a unique report as it combined social, environmental, and economic data in one report (vs. separate financial and ESG data reports).
Veronica M. Hagan, CEO of PGI stated: “This is PGI’s first Annual Stakeholder’s Report, which integrates our sustainability report, based on the Global Reporting Initiative (GRI) G3 reporting framework, with the qualitative and quantitative data from our annual report.This integrated report format allows PGI to communicate directly to stakeholders, employees, and customers on all areas of business–incorporating financial reporting, organizational highlights, and sustainability initiatives in one standardized and easily accessible document.”
Another example is Smithfield Foods, a $13 billion global food company and the world’s largest pork processor and hog producer. In the United States, the company has brands including Smithfield®, Eckrich®, Farmland®, Cook’s®, Gwaltney®, John Morrell®, Kretschmar®, Curly’s®, Carando®, Margherita®, and Healthy Ones®. They introduced their report as follows:
“Welcome to the Smithfield Foods 2012 Integrated Report–our first to combine our annual financial results with our sustainability reporting. Our sustainability strategy is based on our core values and organized by five pillars that represent our key areas of sustainability focus: animal care, employees, environment, food safety and quality, and helping communities. In this summary report, we report on our progress and performance in each area. We have also identified and report on a sixth pillar- value creation- recognizing that this concept underpins our sustainability strategy and connects it with our business results.”
The integrated report is a clear way to report on an integrated sustainability strategy, and it increases disclosure and transparency. Thus, the case for one report is compelling.
A set of principles for sustainability reporting could be:
- Fully integrated annual reports (and other corporate communications)
- Information embedded in a variety of hard copy, PDF, and web-based communications
- Reporting, based on continuous stakeholder dialogue, linked to the business agenda (and fully reflected in the reporting)
Several organizations have suggested guidelines for one report: the International Integrated Reporting Council (IIRC), the Sustainability Accounting Standards Board (SASB), the U.N-sponsored Stock Exchanges Initiative (SSE), and the Corporate Sustainability Report Coalition (CSRC) among the more important organizations. Despite the evidence that one report would improve transparency, little to no academic research exists on this topic.
The major criticisms for one report include:
- The market’s efficiency means there is no reason for companies to change their priorities.
- If the benefits existed, companies would already be doing one report.
- One report would create confusion.
Some responses to these objections are:
- Markets are not completely efficient; better information about company operations will improve capital allocation.
- Companies are not accustomed to thinking about sustainability and, until recently, the reporting procedures were not fully developed. Revealing nonfinancial information will improve management practices.
- Stakeholders do not necessarily have congruent interests; a firm’s ability to communicate as fully as possible about its operations is key for accommodating this diversity.
One report would increase transparency by detailing, in one place, information related to total company performance. More importantly, the information would enable relationships that may, in some instances, be unexpected. For example, information on new operational projects could include information relating to environmental performance. The next decade will likely see exciting advances in the push towards one report. I use every opportunity I can to advocate for this type of reporting.
Another important way to disclose information is through eco-labels, environmental labeling, and product declarations which represent a broad spectrum of “green” product-specific information in retail marketing.
Eco-labeling involves the declaration of environmental information about a product. Product declarations are similar but may include details beyond environmental declarations. The overall goal of eco-labeling is to encourage the demand and supply of “green” and/or sustainable products and services. Consumers are often left to discern the verifiable, accurate, and non-deceptive information (i.e., information that accurately conveys the truly “green” aspects of environmental products and services).
Three types of labels have emerged as eco-labeling has evolved. Seals of approval (known as Type I labels) are labels awarded to products and services by third parties. They tend to compare the environmental characteristics of one specific good with the rest of the goods in the same range of products. Some of the best-known labels are Green Seal (USA), Der Blaue Engel/The Blue Angel (Germany), EU eco-label (Europe), and the NF-Environnement Mark (France) and DGNB (Germany).
Type II labels are self-declarations (e.g., “carbon-neutral” or “organic”) and are based on an organization’s self-declared claims about the product’s environmental performance. These labels do not require (or do not usually carry) third-party certifications. Yet, companies have learned that many consumers demand third-party certifications so some acquire independent verifications to support their claims. Also, many countries are now requiring that these labels carry third-party verifications before the company can use such a label. The third-party verifications may cause a shakeup in the types of labeling and push more companies to use Type III labels.
Type III labeling is an environmental declaration that is regulated by an organization such as the International Standards Organisation standard 14025. These tend to be product declarations providing environmental data about specific products. The different types of labeling vary by the level of stringency of criteria and use of third-party verification and development.
The below table shows a few examples of eco-labeling that are commonly used in various countries. Some private companies monitor these labels. For example, the Ecolabel Index (one of the largest global directories of eco-labels) currently tracks over 425 eco-labels in most countries and 25 industry sectors.
Labels such as organic and green technologies are either poorly defined or seen in various ways. For example, one definition of green technology is “science-based applications that aim to protect the natural environment and resources by minimizing waste and toxicity, conserving energy, and reducing pollution and carbon emissions.” This broad definition can include so many products and applications as to make the category meaningless. See my comments on this label in another blog.
Some companies worry about the market impact of these labels and the impact on trade. While sales have increased moderately when labeling schemes are used, companies are worried labeling might be used as a de facto trade barrier. Meaning, those products lacking specific labels can be prohibited from doing business in certain countries.
Table: Worldwide Eco-Labeling: A few examples (GS= Government Sponsored; PS = Privately Sponsored)
|Australia||Good Environmental Choice||2001||PS|
|Norway||Good Envrionment Choice||1991||PS|
|United States||Green Seal||1989||PS|
Coupled with confusing and diverse standards, the consumer is left wondering what to believe when purchasing products. This issue (i.e., proliferation and confusion) will most likely improve in the future since only the more effective and scientifically sound measures are likely to survive. Your call to action is to advocate for one report, advocate for accurate labels, and to find ways to make this information user-friendly.
Adapted from Daniel S. Fogel (2016). Strategic Sustainability: A Natural Environmental Lens on Organizations and Management. New York, New York: Routledge: 194-196; 214-217.