As negotiations in the run-up to the Rio+20 meeting have began to become clearer, it appears likely that the Rio+20 summit will produce internationally agreed upon Sustainable Development Goals (SDGs). At meetings this past week, the development and creation of these internationally-agreed sustainability goals is seen as a key priority by most parties. One of the most discussed Sustainable Development Goals mentioned is that of requiring corporations to require sustainability as part of regular corporate reporting. Is this a crucial SDG for the green economy in its current form?
I argue here that Corporate Sustainability Reporting is possibly a very important aspect of the green economy goals of Rio+20, but that its current form offers a lot to be desired.
The idea appears simple. In order for the Green Economy to operate, financiers and investors must prioritize sustainability in their decisions. How can they do this if sustainability practices of companies are opaque, vague, or not even reported? So, if we make sustainability a clearer part of corporate reporting, this will allow the green investors to more effectively target their investment. Nick Robins, a supporter of this provision, wrote in The Guardian that: “whether Rio can convince investors that aligning their asset allocation with the green economy will provide better risk-adjusted returns than ‘business as usual’.” Industry polls have suggested that more information may lead to an increase in green investing throughout stock markets and investment projects.
The idea for the inclusion of a global policy environment requiring business sustainability reporting is well-mobilized it seems. There has developed a formal Dialogue on a Convention for Corporate Social Responsibility and Accountability which is clear about its goals for “Ultimately, we are lobbying for a process which establishes a convention on [Corporate Social Responsibility and Accounting] at the Rio+20 Conference.” According to their website, 20 countries have already endorsed the inclusion of a convention on Corporate Social Responsibility in the Rio+20 negotiations. In addition, with Aviva Investors, a $2 Trillion investment fund, being one of the main pushers there is some significant players involved in this push.
However, we need to assess whether sustainability reporting for corporations will help produce positive environmental and ecosystem service outcomes around the world over the next 15 years. This requires asking whether sustainability reporting actually means anything or whether it is just green washing AND whether an international reporting push is likely to lead to success?
1. Does sustainability corporate reporting actually mean anything? There have been a lot of studies on this aspect, and it suffices to say the evidence seems to be mixed with it meaning something in some instances and not others.
But, let’s take one example and work through it. Since Aviva Investors is one of the major pushers for this, I looked at their Sustainable Futures Fund (“if you believe in taking responsibility for the wellbeing of future generations as well as your own, sustainable future funds could be for you”) and took the top holding in the Global Growth Fund: BG Group. My question is simple: Does their sustainability report actually tell me anything about improved environmental practices? Since they are a major recipient of Aviva’s funds, we should suspect that they are improving environmental practices and that this is clearly ascertainable in the report.
BG Group is an energy company primarily involved with oil and natural gas and is the largest supplier of liquified natural gas to the United States market. It is one of the most valuable companies in the FTSE 100 (the London Stock Exchange top blue chip companies) and has operations in 25 countries.
BG Group has been active in sustainability reporting with reports going back to at least 2001. In addition, they have been part of the UN Global Compact, to be discussed in question 2, since 2004; however, the current communication with the Global Compact is overdue, although not by much. Screenshot from 5/4/2012 is to the side. Click to enlarge.
There most recent sustainability report summarizes the activity taken in 2010 by the company and is available here. The first thing you’ll note is that a large amount of the sustainability report, which declares its goal is “engaging with stakeholders to develop and achieve an accountable and strategic response to sustainability”, is that large parts are password protected. The Tabs for ‘Ethical Conduct’ take you to a page directly, but if you click on any substantive tab under ‘Safety, Health and Security’, ‘Environment’, ‘Society’, ‘Climate Change’, and you are quickly met with a request for a Username and Password. Stakeholders (the intended audience is declared as broader than just shareholders–but…) can access sustainability information about the 2010 Employee survey, but nothing about the environmental practices or goals of the company. We can assume the report efforts are under construction still (which would be interesting in and of itself), regardless to assess sustainability reporting we have to go back to the report covering 2010 efforts (note: link opens a PDF).
What does that report tell us:
- 9 out of 13 projects are ISO 14001 certified. As a generic environmental management system certification, ISO 14001 aims not for absolute environmental goals, but instead aims for companies and projects to consistently improve standards. It means assessing the environmental impact of the operations and looking for ways to improve them. Interestingly, at “The Rashpetco joint venture in Egypt…in 2010, a decision was made to change the certifying company. As a result, the ISO 14001 certification lapsed. The new auditor has performed a preliminary audit and the business is working to address the findings.” What is weird is the lack of mention of the new certification authority. The list of alternative environmental management system certifications to ISO 14001 is quite small. This is not to suggest any deception, but simply that the report seems to be leaving out crucial evidence about the new certification that BG is seeking for the Rashpetco project.
- Water use is increasing. Most of this is a result of hydraulic fracturing activities in Louisiana and Pennsylvania (with EXCO Resources). The report mentions they are adhering to industry standards for preventing water system contamination from the hydro-fracking activities and attempting to use waste water from other sources in the activity to reduce increased water use.
- Nitrogen output increases, sulfur decreased, waste disposal decreased. What is most interesting is that few of these appear to be related to practices–but instead the projects that the group is involved in. So the report says that nitrogen increased because of the the expansion into the unconventional gas and oil reserves, waste disposal decreased because of divestment in Canada. If the purpose of sustainability reporting is to see improve practices, these do not provide evidence of that.
- They comply with national regulations in terms of their biodiversity impact. The Australia example does not show any improved accountability for biodiversity, but instead simply that they passed the Australian government’s bar for not destroying biodiversity.
- Climate change impact is increasing. Although they do some efficiency projects in shipping and at plants, the table on page 27 (pasted below) shows that when we account for the fact that they sold a large amount of electricity generating projects and focused on extraction and delivery, their carbon emissions increased. Once again, the point is this: any carbon reductions are not achieved as a result of changed practices, they are achieved by changed corporate strategy and investments. There is no evidence or indications that BG divested from its power assets in order to achieve greener production. A quick survey of news articles about BG divestment decisions shows no signs that these have anything to do with climate change (India, Chile, Philippines).
The implication is clear: Corporate sustainability reporting neither provides clear indicators for stakeholders, nor (and this is important) leads to improved environmental investment. The BG group is the largest investment of Aviva Investors Sustainable Futures Fund and there is no evidence of changed practices in BG in their sustainability report. The report instead is either too vague or claims environmental benefits from changes in corporate holdings selected for no clear environmental regard.
This is not a problem of BG Group alone; this is a problem with corporate sustainability reporting. In discussing the measure to add requirements for corporate sustainability requirements, a recent news article wrote that “Investment and pension funds would like the measure agreed so they know as much as possible about the ‘green’ credentials of a company before investing in it, which could help open up their trillion-dollar assets for more clean energy investment.” This should be considered highly suspect and the evidence from the BG Group and their inclusion in a sustainability investment fund shows that corporate sustainability reporting cannot at all be assumed to either change corporate behaviors or encourage investment to environmental companies.
2. Could an international policy environment creating accountable corporate sustainability reporting make progress toward a green economy? If simply reporting does not automatically trigger environmental changes by actors, then some may think that there may be some way to make corporations accountable for reporting clear indicators about changes in practice. There seem to be two possible ways to increase accountability: 1. market-based accountability and 2. global standards. Quickly evaluating both routes though highlights some problems.
Market-based accountability is being promoted by the major pushers for strengthening corporate sustainability reporting at Rio+20. Steven Waygood, the head of Sustainability Research at Aviva Investors, recently summarized the September 2011 meeting of the Corporate Sustainability Reporting Coalition, spearheaded by Aviva: “We are collectively calling on nations to adopt at Rio+20 a binding international commitment to develop a convention that provides a global policy framework fostering the development of national measures mandating the integration of material sustainability issues within the corporate reporting cycle, on a comply or explain basis. In addition we would like to see effective mechanisms for investors to hold companies to account on the quality of these disclosures.” (Before moving on, it may be relevant to note that Steven Waygood literally wrote the book on how companies can mitigate attempts by NGOs to influence investors to improve corporate behavior) These coalitions are calling for a strengthening and significant role for corporate sustainable reporting in the Rio+20 process, but also an international accountability process.
Paragraph 24 in the Zero Draft of the Rio+20 Declaration currently reads:
- “We call for a global policy framework requiring all listed and large private companies to consider sustainability issues and to integrate sustainability information within the reporting cycle.”
Waygood and the Corporate Sustainability Reporting Coalition want that paragraph revised to read:
- “We commit to the development of a Convention that provides a global policy framework fostering the development of national measures mandating the integration of material sustainability issues within the corporate reporting cycle, on a comply or explain basis as an important step towards integrated reporting. We will also promote consideration of effective mechanisms for investors to hold companies to account on the quality of their disclosures, including for instance through a vote at the [Annual General Meeting of the company].” See their full policy report, here.
The argument seems to be that investors will hold companies responsible at annual stockholder meetings for good or bad reporting on sustainability indicators. It isn’t clear exactly how this will getting everyone to report will improve the quality of those reports. I suppose if there are some companies doing really good reporting, they will have easier stockholder meetings as a result; but it all seems a little fuzzy. It seems environmental activists pressuring shareholders may improve this, but one wonders then why the emphasis on the Annual General Meeting and not on other possible accountability standards for companies.
Global Standards of accountability may mean actually establishing some coherent basis for reporting internationally that companies have to respond to. The UN Global Compact is a voluntary program for companies to improve their environmental and social responsibilities based upon regular reporting and clear international guidelines. If companies fail to report or do not meet standards they can be delisted from the group of companies in the UN Global Compact. Thousands have been removed from the program and the current head of the program has significantly increased standards on parties. It seems a decent model, but its voluntary nature will allow the majority of the world economic sector to remain outside of the program.
Most companies have reporting requirements in most aspects of their operation: financial statements, domestic environmental and labor regulations, accounting requirements, and professional membership certifications. Some of these have even been internationalized. Global standards of accountability for sustainability reports do not seem needlessly intrusive. However, standards that are agreed upon by all members is highly unlikely. So voluntary requirements like the UN Global Compact may be the only ones appropriate. Reporting accountability in a UN forum is the most effective manner to ratchet up accountability of reports, but is far from sufficient.
Is Corporate Sustainability Reporting a key part of the Green Economy? It seems to do too little. The green economy has to prioritize improved environmental practices and corporate sustainability reporting so far has been too vague, too limited, and investors (at least not all of them) are not the long-term thinking agents that champions of reporting contend they are. If the section in the zero draft regarding corporate sustainability reporting remains as is or gets cut entirely, the Rio+20 process can still make sizable gains. Such a claim is not possible when it comes to clarifying the international institutional context for environmental politics or increasing funding for sustainable development; if Rio+20 does not accomplish those aspects, it cannot make sizable gains. Corporate sustainability reporting is not a necessary issue for progress on the green economy.
However, it is a unique tool that can be crucial in the work of Rio+20 and the green economy. A convention on sustainability reporting and possibly some accountability provisions can be a crucial outcome of the negotiations. It should not be sidelined or minimized in terms of its potential for improving corporate environmental practices, it just cannot be assumed to improve those practices automatically.
Corporate sustainability reporting in the Green Economy? Absolutely. The current form of it? We can do better.