Hi, in this lecture, I want to talk about sustainability reporting. Creating a full-scale sustainability report is a daunting task. But it can be done in stages adding different types of information over time. A big glossy paper report is expensive to produce, but a web based version can be affordable for most companies. We've already suggested posting something about your company's sustainability efforts as a good first project. Here, I want to expand on this idea of a simple posting of a few items to developing something close to a complete report. There are at least four reasons to produce a sustainability or a CSR report. These reports archive what the company's done. It's really easy to lose things if they're not kept in an organized, easy to find spot. So having all the relevant information in a single place in a report can be really valuable. These reports act like a depository for your sustainability information. Sustainability reports let you and the world see what sort of progress the company is making in its efforts to improve operations, become a desirable place to work and take care of its communities in the environment. Showing interested readers that the company is working on being better is valuable. It's also something that employees can and should celebrate. These changes are difficult, so progress is admirable. Sustainability reports are part of the portfolio of information that investors and analysts use to evaluate a company. To satisfy the needs of investors and analysts, you need to provide information about how the company is addressing a wide set of potential risks. Investors are interested in financial returns. This information comes from the income statement, the balance sheet, and cashflow statement. The other part of the investment equation has to do with risk. There are lots of sources of risk. Some of these have to do with topics related to sustainability, like water, climate, employee retention, exposure to commodity price risk, and a variety of possible supply chain impacts. Risk reduces the value of a given level of cash flows because they can't be counted on. Sustainability or CSR reports give the company a place to discuss how it's mitigating these risks. All else equal, lower risk increases the value of the company in the eyes of investors. So, showing the investment community that your company recognizes and is doing something about risk builds confidence and should be value creating. The final reason for producing a sustainability report is to market the firm. It offers a platform to brag about the good things you're doing, but there's limits to how much bragging you can do. Some people consider CSR reports to mean mostly fluff with a few numbers thrown in. And there's something to this criticism. Most reports are filled with pictures of happy employees, happy children running up green hills, and happy community members accepting a gift from the reporting company. You need to be more objective than happy about everything. In fact, to be credible, a report needs to include the bad news as well as the good. Here are results from a survey of CSR professionals about report credibility. The willingness to include bad news is at the very top of the list. There were 300 respondents who could assign scores of minus 50 to plus 50 to each question. The willingness to admit bad news got an average score of about 37 of this minus 50 to plus 50, higher than any other credibility factor. After willingness to include bad news, the next items that gave a report credibility were having data and targets, using a framework or a standard, and fourth, having the report verified externally. We're going over data and targets elsewhere in these classes, so let's skip to using a standard or a framework. The dominant CSR reporting framework is the global reporting initiative, GRI. It was created by a mix of industry people, investors, and watchdog groups. At first, it gave a report a grade based on how many items were reported, no matter how bad the items reported were. This got confusing because people thought that the grade was for the company's sustainability performance, not its reporting. To its credit, GRI has evolved a lot since then. It's now on its fifth iteration, called the GRI sustainability reporting standards. It provides a very thorough framework for CSR reporting. Over 4,000 companies reported to GRI in 2014, and many, many more use parts of the template. You can download lots of resources from the GRI website, that's globalreporting.org, as well as the reports that companies have submitted. Now a competitor with GRI is called the International Integrated Reporting Council Framework. It offers an alternative to GRI, but it isn't used as often. In fact, GRI clearly dominates the field. There are two other groups you should be aware of, one is SASB, the Sustainability Accounting Standards Board, and the other is CDP, formerly the Carbon Disclosure Project. SASB helps design metrics or identifies existing accounting measures that will help investors better understand the sustainability of companies. Its work is highly sector-specific, that is, within an industry. And that's because different industries have different aspects of business that have the most impact. For example, a mining company needs to show how it deals with pollution and indigenous populations. But a retailer needs to show how its suppliers operate and how it's making its own operations more efficient. You can go to the SASB website, so that's sasb.org, and download the standards for about a dozen different industries. Here's an example of the metrics that SASB recommends for companies in the healthcare delivery sector. CDP collects information on carbon emissions, water use, and forest health. It's got very detailed surveys that companies fill out. Some companies find them so detailed that they leave some of the data blank. About 5,000 companies report to CDP. So CDP is a data depository, but it also produces analytic reports based on the data it collects. All of the reports I'm aware of are available for free download. Reporting to CDP is fairly common among the large companies. About 70% of S&P 500 companies report to CDP. This is probably smart because CDP identifies non-reporters. The fourth item on the credibility list was having a sustainability report assured or verified by a third party. This is similar to having something audited. An auditor, hopefully who is objective, examines a report and verifies that it's accurate. About 46% of reporting companies have their reports verified in this way. Most of the verification is done by accounting firms, but engineering companies and some specialty consultants also do some of this work. Now we've covered a lot of territory in this lecture, reasons to create a sustainability report, how to create a credible report. And next lecture, I want to discuss the components of a typical CSR report and then relate how two experts say you should read these reports, thanks.
