Imagine for a moment what financial statements would be like if bookkeepers, accountants, and CFOs failed to include costs or expenses in their reports. How could people possibly be expected to know what the true financial performance of a company was, if only its revenue, and not its costs, was reported?
Ridiculous, isn’t it? Yet this is precisely what passes for normal in non-financial sustainability reporting every day. What's up with that?
The key issue I mean to raise here is the general absence of context in mainstream sustainability reporting, or more specifically what the Global Reporting Initiative, or GRI – the leading sustainability reporting standard in the world – refers to as sustainability context:
GRI's Principle of Sustainability Context (from G3):
- Performance information should be placed in context.
- The underlying question of sustainability reporting is how an organization contributes to the improvement or deterioration of economic, environmental, and social conditions at the local, regional, or global level.
- Simply reporting on trends in individual performance (or the efficiency of the organization) will fail to respond to this underlying question.
- Reporting organizations should therefore seek ways to express their individual performance in relation to broader environmental and social sustainability.
I've seen literally hundreds of corporate sustainability reports prepared in accordance with GRI, but I have never seen one that adheres to this most basic of principles. Even GRI itself, in publishing its own sustainability reports, fails to do so.
Before we consider the implications of this, let's first be clear about the manner in which context always comes into play in financial reporting. It is costs, in particular, that constitutes context in such reports, in the sense that sustainable financial performance is defined as instances in which revenues exceed costs. If revenues consistently fall below costs, we can say that the organization is not financially viable or sustainable. Costs, then, establish a kind of threshold of performance, below which organizations must not go. If they do, they will fail. Indeed, accountants have a special word for this – they call it insolvency.
What, then, comprises context in non-financial reporting, and can there be meaningful sustainability reporting without it?
Non-Financial Context
Perhaps the simplest illustrations of context in non-financial, CSR or sustainability reporting can be found on the environmental side of the subject. Take water use, for example. Imagine two manufacturing plants owned by two different companies, one located in New England and the other in the southwest. Assume that both plants use the same amount of water and produce the same amount of products, and that apart from location and ownership, are identical in every respect. Let us also say that in 2008, each plant reduced its use of water relative to 2007 levels by 10%.
How, then, according to conventional sustainability management, would these two companies report their plants' sustainability performance in terms of water use? Well, for starters, each of the two companies would publish a report claiming that their plant's water use was "more sustainable" in 2008 than in 2007, since overall use declined. They might even have set some reduction or efficiency goals and then reported progress against them. So far so good, right?
Not really.
Unless each report in our case also included information about the general state of water resources in the regions where the plants are located, we'd really have no basis for drawing conclusions of any kind regarding the sustainability of their water use. For all we know, groundwater resources in the southwest, for example, are on the brink of extinction. And similarly, in New England, where water resources are still plentiful, the same question would apply: "What was the volume of available renewable water resources at the plant's location, and was the plant's use of them sustainable?"
Indeed, in both cases, if all that is reported is the net volume of water used, crucial contextual information regarding the status of local hydrological conditions would be conspicuously missing, just as the absence of costs in financial reports deprive them of context. Without such context, performance reports of any kind simply fail to deliver – at best, they are top-line reports, not bottom-line reports.
As for the reduction of water use by 10%, even declining levels of natural resource use can be unsustainable, since the availability of the resources involved could be falling at a greater rate. Thus, the declining rate of water use by the plant located in the southwest could actually be hastening the loss of water resources there, not slowing it. But how can we tell? In the absence of information as to what the actual state of water resources was at the place and time of the report, it is impossible to say. Sadly, however, this is what passes for best practice in contemporary sustainability measurement and reporting.
Not very encouraging, is it?
Call me old-fashioned, but I think a sustainability report should actually tell me something about the sustainability performance of the organization it describes. In order to do that, though, it must include context. By that standard, few, if any, published sustainability reports have ever actually made it possible to understand the true sustainability performance of the organizations they describe.
Thus, a practice that can actually lead to criminal prosecution and jail time in financial reporting – intentionally leaving context out, that is – routinely passes for best practice in non-financial reporting, and is thereby considered acceptable. Even GRI, by systematically excluding context in its own reports, is complicit in the matter.
So let us pause here for a moment and make a critically important distinction, on a theme I intend to come back to on these pages in the weeks and months ahead – namely, context-based versus context-free reporting. It is my contention that context-free sustainability reporting is an oxymoron, and that it fails on its face. There can simply be no meaningful reporting – financial or non-financial – in the absence of context.
Sustainability reporters who prepare their reports in the absence of context are therefore, in a sense, engaging in fantasy, or dreaming. They tell us how much water they’re using, for example, without making reference to the quality or sufficiency of supplies, as if supplies were irrelevant. Pay no attention, they seem to be saying, to cases in which the quality or sufficiency of water resources may be inadequate, and pay not attention, too, to questions of equity or fairness in water use . This is not just greenwashing, it's dreamwashing, and we should have none of it.
Indeed, some of us really do want to know whether the impacts of the companies we invest in, work for, or are affected by are sustainable. And if they are not, how wide is the gap, what are the risks, and what are they doing about it? Context-free reports cannot possibly address these concerns, yet they are the norm in mainstream sustainability management, and are fed to us as if they can.
Breaking the Pattern
Let us now take a more positive tack on the issue, assuming there is one to be had. Could we, in fact, say that there is an opportunity here, and if so how might individual companies seize it and turn it to their advantage?
Well for starters, if everyone is engaging in the kind of dreamwashing and mass hysteria I describe above, shouldn't there be an opportunity for individual companies to differentiate themselves in the marketplace by simply stepping away from it all, loudly and conspicuously? God forbid a truly sustainability company should proclaim and reveal itself as such by including consideration of context in its reports.
If you're an investor or simply a consumer, and you genuinely care about the true sustainability performance of the companies you own or the products you buy, you will necessarily give preference to businesses and products that are described in reports that include context. How else can you know whether a company and/or its products are truly sustainable?
By the same token, if you are a company that is seeking to operate on a truly sustainable basis, or appeal to consumers who are genuinely trying to differentiate between sustainable suppliers and non-sustainable suppliers, you too will give preference to developing reports that include context. How else can you explain whether your company and/or its products are truly sustainable?
Of course industry could always continue to engage in the kind of foot-dragging and dreamwashing I describe above until regulators and litigators catch up, but why take the risk or forsake the opportunity? Why not step out now, ahead of the pack, and grab the early-adopter, first-mover advantage? Who will be the first company to measure and report their non-financial sustainability performance in a comprehensively context-based fashion, I wonder? Who, that is, will be the first company to produce a sustainability report that actually tells us something meaningful about the sustainability of their operations?
In the weeks and months ahead, I will be returning to this theme by explaining how to include context in the measurement, management, and reporting of corporate sustainability performance, including case studies taken from my own consulting work here and there.
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Mark W. McElroy, Ph.D. is the founder and Executive Director of the Center for Sustainable Organizations and the original developer of the Context-Based Sustainability method.
Published Mar 23, 2009 1pm EDT / 10am PDT / 5pm GMT / 6pm CET