Wednesday, May 7, 2014

Welcome to Materialnet, hyper relevant...

Internet Disclosure: Part II

The benefits of online reporting reporting has not escaped top Chinese companies listed on the stock exchanges of Shanghai, Shenzhen and Hong Kong. In a country with millions of Internet users, research has shown how listed companies progressively used the Internet since the early 2000s to report on safety, health and environment (SHE). In later years the scope expanded from SHE to broader sustainability. Yet comparability and independent assurance of information disclosed online has remained problematic. Today a revised Environmental Protection Law in China will support efforts by local communities to push for credible site level disclosure of data on air, water and soil pollution.

The benefits of the Internet is also recognised by supply chain initiatives such as The Sustainability Consortium, which advocates online sharing of (product-based) sustainability information through its Sustainability Measurement and Reporting System. This takes the lead from early work by the information and communication technology (ICT) industry to promote use of its services in streamlining supply chain monitoring of social performance. After we launched the Global e-Sustainability Initiative (GeSI) in 2001, one of its first projects was to develop an online self-assessment and data sharing tool for ICT suppliers. The E-TASC (Electronics Tool for Accountable Supply Chains) was launched in 2007. As information disclosure moves beyond B2B to public disclosure, supply chain management serves as a driver for online sustainability reporting. 

The Global Reporting Initiative (GRI) and Deloitte have created a taxonomy of the GRI guidelines, supporting the customisation of data collection and steps towards Web 3.0 through its eXtensible Business Reporting Language (XBRL) Reports Programme. Institutions such as XBRL International are quick to point out that the "New Math" of business is "Transparency = Accuracy + Accessibility + Reusability". Regulators are also buying into the use of XBRL for data or broader information exchange between all organizations, not only between businesses. In a growing number of OECD and emerging market countries regulatory filings (such as financial statements) have to be done in XBRL format. This is seen as a key element in improving transparency and efficiency in both private and public governance. A further advantage of XBRL in the midst of a mass of sustainability information communicated via the Internet is "comparability" (of what tends to be quantitative data disclosed). It also has disadvantages. XBRL can for example be used to tag qualitative (narrative) information, but its predominant focus is on empirical data. As a result the risk of presenting numbers out of context is very real. This goes against the plea of experts such as the Sustainability Context Group

Mindful of consumer-citizen pressure and the expectations of international agreements such as the Aarhus Convention with its clearinghouse, governments world-wide have taken note of the need to make environmental and broader sustainability performance information more accessible. A special task force of the Aarhus Convention has examined ways in which governments can advance "appropriate guarantees of the rights of public access to information in electronic form" (cf Article 5). Experience in North America and Europe with the introduction of the Toxics Release Inventory (TRI) and the European Pollutant Release and Transfer Register (E-PRTR) have shown the greater impact of disclosing electronic information that targets local stakeholder groups directly implied. The ongoing, up-to-date, user-friendly availability of site level data to local stakeholders via the TRI computerised database managed by the US Environmental Protection Agency since 1988 has had a surprising impact in helping reduce facility level emissions during the first ten years of its existence. Here was an effective, direct demand and supply of disclosed information.

If online disclosure and Internet-based sustainability reporting is nothing new, what is different today? We face a challenge of systemic change, having to make a step change in which new generations of Reporting and the Web are linked:

First, the related standard setting discussions to date have viewed electronic and online reporting as secondary, an add-on to stand-alone reports. This hierarchy needs to be reversed, with online sustainability reporting taken as the point of departure. It implies more than simply placing stand-alone reports online in PDF format. Since the first ever website was launched in 1991, our understanding of its technical and design possibilities have evolved sufficiently to come up with a more formal, structured definition of what "online reporting" constitutes today. This is not about "standardising art" in web design or reverting to the static features of what was Web 1.0, but about laying down some basic content parameters to facilitate easy access to relevant information and comparability across corporate websites.

Second, debates on innovation in online reporting to date have tended to be dominated by consideration of either playful design options (marketing & communications focus) or technical options (ICT focus). Between these two extremes, sustainability and finance experts need to sit down and consider what a more formal, structured online approach would look like. This implies finding a middle ground between the extremes of the website as a commercial playground, a stakeholder battlefield or a faceless database of XBRL exchange. We are only beginning to comprehend the range of possibilities that the Internet as communications vehicle offers. The corporate website as such can fulfil many functions. But one function that needs to be more clearly defined and standardised is the "sustainability and financial performance information platform". 

Online disclosure of performance information as currently practised has its drawbacks. One is the fragmentation of reporting content. A series of web pages with web links that takes the user further and further away from core content makes it difficult to judge reporting principles such as "comprehensiveness" and "conciseness". Furthermore, corporate lawyers will always caution that seemingly commercial and forward-looking language can be misinterpreted as statements of fact – with all the liabilities that may follow as highlighted by the Nike versus Kasky case in the early 2000s.

Fact is that senior executives and regulators will always show greater interest when periodic "statutory documents" (such as annual reports, financial statements) are involved. These are stand-alone documents with clear boundaries, ones of which they know clearly defined content is audited and assured, ones of which they know factual misrepresentations will have legal consequences. For this reason sustainability activists would love to see more "ESG" information enter the content of the annual financial report, as this appears to be the Ueber-document taken most seriously. This is what Pavan Sukhdev hints at when recently he referred to the need for "integrated, holistic statutory reporting". At some point the emerging "integrated report" (IR), targeting providers of financial capital, may reach that status. But much of sustainability information is not yet at the necessary level of straight-forward conciseness, standard metrics and assurability. With this in mind, greater uptake of sustainability information through online reporting should be of higher priority, and is indeed more strategic at this stage in the history of "non-financial" disclosure. (The reform of stand-alone, "statutory documents" will evolve at a snail's pace, among others dependent on regulatory reform world-wide.)

Online sustainability reporting has to become top priority for the GRI in taking its game to the next level. This will require interpreting the GRI Guidelines with its standard disclosures in a manner that does not assume the hierarchical, linear structure of a stand-alone or printed report. A process of formalising and standardising the online, corporate "sustainability and financial performance information platform" calls for the following:
  • The GRI network needs to develop a standard protocol for the structure of dedicated sustainability performance information web pages on the website of any reporting organisation, addressing core components such as menu, thematic subsections (e.g. environmental, social and governance or the six capitals and related aspects), geographical subsections (e.g. regions, locations), limitations or avoidance of complex links, presentation of data in standard (e.g. five-year history) tables, timeframes (periodic versus realtime), boundaries and assurability. This approach will not satisfy artistic designers, communications innovators or XBRL developers, but it presents a critical midway that is required for improved use, comparability and reliability of sustainability information in our digital age. In addition to what other parts of the corporate website could offer (e.g. innovative dialogue), the dedicated sustainability performance information web pages could also include "Who are you?" clicks to package the same base of information in different order of priority to cater for the needs of specific stakeholder groups. Key is the understanding that the sustainability performance information involved is of interest only to expert readers / visitors.
  • The legal and accounting professions need to come up with a standard definition of the "textual boundaries" (as opposed to organisational boundaries, operational boundaries, financial control boundaries) of online reporting or the "virtual report". This can be complemented by a protocol with specification of technical aspects such as web page URLs, data format (use of e.g. HTML and downloads), structure (including menu and use of links), multimedia limitations (e.g. time dependent data types, time frame of assurance), pop-up disclaimers and footnotes, as well as best ways (label, certificate) of confirming audited information appearing on the specified, dedicated web pages involved. This is new terrain for old professions, but we need to recognise that virtual texts and electronic certification is the future.
  • IT and archival specialists need to define what would be the best way to store historical records. Similar to the difference between an Income Statement and a Balance Sheet, the question is what format is best to capture information disclosed "ongoing" or "realtime" versus information published on a certain date covering the past 12 months or 1-5 years. This may require agreement to compile content from specified web pages – under a URL ending such as ".com/SR2014" – in a PDF document and storing it under a specified, corporate archives web page. This is where defenders of "reports" may argue sustainability content would still need to be captured annually in a designed electronic report such as a PDF, and stored by third parties such as CorporateRegister.com. Question is: If a manager, analyst or researcher in 2020 wishes to examine the financial and sustainability performance of a company over the past ten years, where would she/he find the 2010 information, data or report? (You'd be surprised how institutional memory can get lost in cyber space.)
At stake here is central platforms or sources of information in what has been dubbed the Sustainability Information Value Chain by the Global Initiative for Sustainability Ratings (GISR). It focuses on an online source – i.e. the corporate website – that opens the way for a wide range of options to engage specific target audiences or stakeholder groups more effectively, including a more standardised section that can credibly provide sustainability information that meets recognised reporting principles. It presents new terrain for private and public institutions alike – consider the Open Data Policy Guidelines developed by a non-profit group in the US. It also supports the new approach of reflexive law – versus traditional, static command-and-control regulation – that seeks to promote behavioural change in reporting institutions and to place relevant information in the public domain so markets can function appropriately. 

When Jacques Derrida said "there is nothing outside the text", he meant that context and interpretation is an inherent part of the text. In fact, more significant than the physical text is the "virtual texts" that readers construct in their search for meaning. Online reporting tackles this challenge head-on. But to reconstruct amidst the chaos of what is Internet information overload, to move beyond shotgun approaches and reporting carpet-bombing, experts and standard-setters in performance management need to wake up to the Internet challenge. What the reporters and users of sustainability and financial performance information need today is structured, targeted disclosure of relevant information via the Internet – let's call it "Materialnet".





Thursday, May 1, 2014

Good bye sustainability reports, hello sustainability reporting...

Internet Disclosure: Part I

Taking sustainability reporting to the next level in coming years will have to be about "Materialnet". This was evident during an international reporting workshop and my meeting with managers from reporting companies in Europe this April. It brought to mind an old debate, Internet-based reporting, albeit with the realisation of how far we are from having it reach its full potential. Related were two historical events reported in business news headlines:

Monday, March 17, 2014

Tragedy of the Commons: tragically common


Despite clear business case examples and regulatory reforms being so obviously required, the "tragedy of the commons" as described by Garrett Hardin in his 1968 paper* seems to repeat itself daily in many ways, in many sectors. Take the case of nutrient overload and the agrifood value chain. Debates about the "clean green" image of New Zealand agriculture, including key export earnings from an industrialising dairy sector, is illustrative.