Environmental reporting: glossing over the issue

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On a personal level, the nation’s obsession with climate change has reached
an all-time high. Just last month the government launched an online calculator
that allows you to work out your own carbon footprint and compare yourself to
the national average of more than four tonnes. Never mind the tie-dye and
homegrown veg, proving your green credentials has brought out a whole new
competitive streak in today’s eco-warriers.

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For business, though, reporting on environmental impact has been patchy, a
situation not helped by confusing legislation, a lack of standards and
widespread ignorance, despite the emergence of a whole consulting industry
dedicated to helping the corporate world gain a competitive edge and deliver
value by responding to the green agenda.

When in November 2005 Gordon Brown announced that the government would not go
ahead with plans to require the 1,300 largest companies in the UK to produce an
Operating and Financial Review, green campaigners warned of a sidelining of
environmental issues and a step back for environmental reporting, even though
the requirement to produce a Business Review, introduced in April 2005,
remained.

The OFR had been the result of several years of consultation with business,
investors, NGOs and regulators around how to encourage meaningful exchange with
financial markets on non-financial issues. Brown’s u-turn hinged on the idea
that the requirements amounted to regulatory ‘gold plating’, but more than a
year and a half on, meaningful business reporting on green issues is still
pretty much a pipe dream.

‘If you compare the OFR with the Business Review at a high level, the
requirements for listed companies are not very different,’ explains Frances
Tangye, an adviser in the risk and sustainability team at KPMG. ‘The OFR was
very prescriptive, but the Business Review allows companies to say what’s right
for them rather than simply box ticking. The good thing is you only put in the
risks relevant to your company, rather than covering everything to avoid being
criticised.’

One issue facing companies is knowing which key performance indicators to
focus their efforts on, although advice from various sources is freely available
(both DEFRA and the Global Reporting Initiative suggests KPIs for environmental
reporting). In reality, it’s the cultural issues that have proved the most
challenging to business.

Cultural Issues

‘Companies’ risk management processes tend to be quite internally focused –
information about their environmental impact is not something many want to share
externally,’ says KPMG’s Tangye. ‘It’s a big culture change requiring
cross-functional communication around risk, policy and performance measures. A
lot of performance measures are still finger in the air and need more rigueur
behind them.’

The good news is that most companies now recognise that there are sound
business reasons for tackling green reporting head on — 92% of respondents to a
survey by corporate reporting agency Black Sun, published last week, said they
felt increased transparency in the narratives of their company reports had
improved investors and analysts’ understanding of the company’s strategy and
performance, while enhancing their reputation in the investment community.

But not everyone remains convinced that their efforts are anything more than
greenwash. Neil McIndoe, head of business development at environmental
consultancy Trucost, believes too much environmental reporting today consists of
‘huge tomes with nice pictures’, but little in the way of hard facts and
figures. ‘If it’s clarity, openness and comparability of data you are looking
for, you have got a hard search on your hands,’ he says.

Similarly, Hannah Griffiths, corporates campaigner at Friends of the Earth,
says: ‘For a credible multinational company, it would be very difficult for them
not to produce a social and environmental report. There’s a general expectation
from shareholders, NGOs and society as a whole. But overall, it’s still very
much a PR exercise. What motivates companies is not wanting to improve their
social and environmental performance, it’s a desire to show people they’re doing
something.’

Griffiths also criticises a lack of standards for rendering reports almost
useless. There’s no shortage of guidance on what to report, but how to report it
is a totally different matter. ‘How do you make a comparison between Shell and
BP, for example, when they report in such different ways. There are guidelines
on which KPIs companies should report on, but how do you know it’s a full and
comprehensive picture when companies can provide the information they choose.’

Friends of the Earth believes a tougher stance from government is the only
way to spur companies into producing meaningful and comparable data. ‘These
reports need to be subject to the same standards and rigueur as financial
reports, and the government needs to set year-on-year targets to force companies
to reduce emissions rather than relying on the market to do what’s right.’

For those companies stalling due to the perceived cost and effort of the
process, Trucost’s research found that putting together an environmental report
isn’t as onerous as many companies might think. It found that 80% of UK
companies would have to report on five or less KPIs. ‘If they take something
like CO2 emissions and waste water, put a figure for this year and a target for
next year, that would be far more useful for shareholders and the financial
community,’ McIndoe says.

Consumer concern over global warming has increased dramatically over the last
six months, according to a study conducted by Oxford University’s Environmental
Change Institute, but two out of five consumers consider it the government’s
responsibility.

No escape

Emma Griffiths, an associate at global environmental consultancy WSP
Environmental, isn’t so sure that sticks are the answer. ‘If you introduce a lot
of regulation, it stifles the innovation of companies. Setting out minimum
standards allows for more interesting narrative reporting. I don’t think
companies can get away with greenwash anymore because stakeholders and customers
are too interested in these issues.’

An enhanced version of the Business Review for listed companies comes into
force in October this year, as part of the 2006 Companies Act. For the first
time, directors’ duties have been codified and include the requirement to report
on the impact of the company’s operations on the environment. The Act will also
make it much easier for shareholders to sue directors for breach of duty.

But if the ultimate goal is to make UK business ‘greener’, even environmental
optimists struggle to give anything but a cautious outlook. ‘Legislation is a
big stick, but ultimately it’s customers, shareholders and employees that will
drive the green agenda forward,’ says Tangye.

‘Today’s reporting requirements aren’t making businesses behave in a more
environmentally conscious way,’ says Griffiths at Friends of the Earth. ‘Until
they move beyond a report of the impact to a report on how they’ve addressed
their impact, nothing will change.’