Get ready: sustainability reporting is on the cards for large companies, and is likely to be just round the corner for smaller businesses.
By Deborah Tarrant
The root of the matter
Crunch time has arrived for around 700 Australian large and medium-sized organisations that will have to start reporting on their greenhouse gas activities under new legislation from 1 July.
The kick-off date for the National Greenhouse and Energy Reporting (NGER) Act 2007 has heralded what for many may be a confused frenzy as corporations prepare to meet reporting obligations on their greenhouse gas emissions, reductions, removals, offsets and energy consumption. Not only is there the consideration of the right way to go about it and often a considerable amount of work, but there's a sense of uncertainty as the federal government continues to nut out the rules for reporting.
Big businesses that need to deliver data have no time to waste.
The NGER Act is the first step in establishing a regulatory environment. Its introduction is expected to cut red tape for business by reducing the number of reports to government and eliminating duplication across existing state, territory and national schemes.
The reporting is anticipated to deliver a robust underpinning to the Australian Emissions Trading Scheme, along with company-level information to the public on greenhouse and energy performance.
For the first time many hundreds of companies will need to report if they emit greenhouse gases, produce energy, or consume energy at or above certain levels in a financial year under this mandatory scheme.
Specifically, corporations will be required to register and report if they control facilities that emit 25 kilotonnes or more of greenhouse gas or produce / consume 100 terajoules (a terajoule is one million million joules) or more of energy; or if their corporate group emits 125 kilotonnes or more greenhouse gas, or produces / consumes 500 terajoules or more of energy.
Lower thresholds for corporate groups will be phased in by 2010-11 with the final thresholds, for the foreseeable future, sitting at 50 kilotonnes of CO2 equivalent or 200 terajoules of energy.
While the NGER legislation has delivered a pressing deadline for some, its imminent arrival has fired debate and awareness more broadly over non-financial reporting on the environment and the bigger picture of sustainability reporting for many. Australian companies are lagging well behind their counterparts in continental Europe and Japan. The global Carbon Disclosure Project, which monitors greenhouse gas emissions of international corporations, noted in 2007 that Australian and New Zealand companies rated low on a global scale, 'with only Asian, Indian and South African companies providing a lower level' of disclosure of greenhouse data.
The notion of triple bottom line accounting, expanding the traditional company reporting framework beyond financial outcomes to include environmental and social performance is not new. It's been used voluntarily by many forward-thinking and image-conscious businesses over the past decade, even before the climate change issue and concerns over greenhouse gas promoted global angst. These new rules have simply given sustainability an immediate pivotal focus.
Companies are moving towards a compliance framework in a shifting landscape. Liza Maimone is the partner heading sustainability assurance and advisory services, Oceania, for Ernst & Young, the only accounting / professional services firm registered to provide independent verification under the federal government's Greenhouse Challenge Plus program. She has a critical vantage point to observe the progress.
She says stumbling blocks are in the underlying data capturing processes that typically have been set up for financial information. When companies first set out to put together a carbon footprint, which includes the Scope 1 and Scope 2 emissions that will be required by the new legislation, they tend to use data already in hand, which is not enough. 'Our experience, working under the European emissions trading scheme and working with Australian companies that have been doing this for some time, is that it takes about two years to get to a point where there's a robust set of greenhouse gas accounts,' Maimone says. Almost invariably it requires new systems and retraining of staff.
Even large companies that have been focused on sustainability issues for some time have found it tough. In its most recent 2007 sustainability report Lend Lease admits its reporting process is 'a complex exercise', not least perhaps because it involves gathering data from 130 permanent offices in 21 countries.
Due to its voluntary nature, sustainability reporting generally has myriad approaches and evolutions, Maimone observes. This can be seen in the manner the information has been presented, in stand-alone reports, online or as part of annual reports.
Although official standards don't exist, the globally recognised de facto standards are the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines. These deliver a framework for the principles and indicators that organisations can use to measure and report their economic, environmental and social performance.
The GRI is a collaboration by thousands of experts worldwide. It has the aim of providing global standards for sustainability reporting. The benefit of G3, the most recently published version of the guidelines, according to Maimone, is in advocating an approach for companies to report on the real issues they are facing. 'In the past, stakeholders reading a sustainability report might face a lot of words that didn't tell them much,' she says.
G3 recommends companies specifically report on the environmental and social issues they face, and their per-formance in relation to those issues. A good sustainability report looks at the risks, opportunities and performance of an organisation. By reporting year-on-year over the long term, trends start to emerge. 'It takes time to achieve a degree of sophistication and real performance data,' Maimone says. 'And the pace of the process is determined by whether or not a company has embraced sustainability as part of its core business. If it has done that then reporting is simply part of how they do business.'
Yet the emergence of the GRI and G3 comes in the wake of a raft of international standards on offer to organisations. Business managers might be forgiven for being bamboozled by the options.
As a general rule, say the experts, the most widely recognised standards apply to different aspects of the bigger sustainability picture. For example, the well-known ISO 14000 is a series of environmental management practice standards that in no way collide with GRI reporting guidelines, but can feed into them.
AccountAbility's AA1000 series presents sustainability assurance and stakeholder engagement standards. Verités Monitoring Guidelines concentrate on labour-related issues providing standards on safe, fair and legal working conditions worldwide.
Social Accountability International promotes workers' rights through its SA8000 ethical workplace management system, based on the International Labor Organization standards.
Most deal with internal management systems, which may put a structure around some of the expectations in the emerging area of sustainability reporting.
While not included in the immediate round of mandatory reporting requirements, smaller companies are definitely not immune. Gavan Ord, business policy adviser at CPA Australia, points out that cumulatively small business has a very significant impact on the environment and society, along with an enhanced ability to engage its stakeholders.
Regardless, smaller organisations may feel the pressure to prepare for what's increasingly anticipated to become a market-imposed compliance obligation, as bigger businesses look to the sustainability of their supply chains.
Adopting a standard such as the ISO14000 series to manage their risks makes sense.
'Bigger companies complying with this standard make mention of it when reporting sustainability through GRI,' says Maimone. 'Smaller companies can report it directly to their clients.'
Ord agrees that standards can be 'highly prescriptive and facilitate the capacity to capture data, report and perform'.
Adoption of standards certainly indicates serious intent. But when it comes to compiling an actual sustainability report, it's the disparity of information needed that demands serious planning. 'A business may have an HR system that doesn't produce the sorts of reports suitable for a GRI report,' suggests John Purcell, CPA Australia's policy adviser on corporate regulation. 'To do this sort of reporting means identifying where the information is, who is responsible and drawing it out.'
As it steps centre stage, the new non-financial reporting will typically run alongside traditional financial reporting, and accountants have a major role to play, argues Purcell.
'In terms of methodology and discipline, independent scrutiny of data and the capacity to understand the flow of information through an organisation, and to verify that information, there's a very significant role for accountants and accounting practices in non-financial reporting,' Purcell says.
'There is a need, though, to recognise that this is cross-functional. It will require accountants to engage directly with other parts of the organisation, engineers, corporate strategists, marketing and HR.'
Maimone heads a team of 30 experts encompassing accountants, engineers and scientists. She also believes the two types of reporting will become interdependent, and at the same time it will become imperative for accounting firms to have these cross-disciplinary skill sets or have ready access to them.
Purcell points out accountants remain the principal custodians of corporate information and how that information is disclosed to users. CPA Australia is currently running a project to determine the gaps that exist between financial and the more fluid non-financial reporting. The project is also investigating what's complementary between the two in terms of understanding corporate performance. What are the expectations of those who consume financial as opposed to non-financial information?
'Some non-financial information is quantifiable, and as such should be subject to the same type of rigour as financial information,' Purcell says. 'It must be verifiable.'
Recently introduced guidelines from the ASX stick to voluntary disclosure on sustainability. But this may change in time as a large number of businesses, 89 per cent, according to a recent CPA Australia survey, indicate a preference for mandatory regulation. 'There may be increased requirements for directors to describe how the corporation has performed and how they see its future performance in terms of its environmental and social risks,' predicts Purcell.
It's just one more reason for businesses of all sizes to start putting their sustainability reporting lines in order.
