Shifting from long reports to reporting on the long term Sector analyses
Colofon
Editorial Board Frits Snijder Mark Brand Lola Debersaques Lead researchers Frits Snijder Lola Debersaques Research Jelmer Hiemstra Myra Wiracita Doriane Roelofse Michael Tailleur, Tom Dijkstra Omoniyi Osaba Phuc Le
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Introduction
Our report Shifting from long reports to reporting on the long term (Part A), presents the results of our research comparing the 2011 reporting of Dutch listed companies with the IIRC’s prototype framework. We intend the report, which includes interviews with Novo Nordisk, Eumedion and Deloitte, to provide practical guidance. In this report (Part B) we have also included examples of what we believe to be sound reporting. These examples should not been regarded as best practices, but as inspirational real-life examples for reporting parties. We start each sector analysis with an overview of the current reporting practices, such as the number of sustainability reports in the sector and the GRI levels applied. After briefly discussing the overall score, the two content elements showing most opportunity for improvement are described in more detail. Each of these content elements include a description of what we believe could be improved on the basis of our research. In addition it includes real-life examples on how to implement such improvements. We do recognise that the Integrated Reporting framework is still being developed and is therefore still a work in progress. The prototype framework used for our research was published in November 2012. Hence, the gaps identified between the prototype framework and current reporting practice come as no surprise. It is, thus, important to note that the result of our research should not be regarded as a critical note on
current corporate communications. Rather, it provides an overview of where companies can implement improvements in their journey towards Integrated Reporting. The number of companies embarking on this journey is a very promising sight to behold. Every step at this stage is, we believe, a step towards understanding the concept and therefore a step in the right direction. We hope the readers of this report will use these findings to improve their corporate communications or help them get started with Integrated Reporting. Deloitte truly believes Integrated Reporting to be the way forward, something both reporters and stakeholders will benefit from.
Frits Snijder Lead Researcher Sustainability & Integrated Reporting Deloitte Accountants B.V.
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Landscape of Sustainability Reporting Companies that apply GRI in Reporting
24%
Did not prepare a GRI Report
22%
Applied GRI Level C
28%
Applied GRI Level B
26%
Applied GRI Leval A
Level of external assurance on the sustainability information
44%
no assurance
36%
Limited assurance
20%
Reasonable assurance
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Content
3 Introduction 7 Consumer Business 13 Energy, Resource & Transportation 19 Financial Services Industry 25 Manufacturing 31 Real Estate 37 Technology, Media & Telecommunication 42 Connecting sustainability context to Integrated Reporting 46 Annex I Overview of companies in research
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’’90% of the consumer business sector applied the GRI guidelines in their 2011 reports’’
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Consumer business 7
Consumer Business
Content element
Consumer Business average score (%)
Consumer Business best practice score (%)
Governance
73%
81%
71%
Business model
56%
73%
50%
Organisational overview and operating context
53%
64%
50%
Opportunities and risks
60%
74%
55%
Strategy and resource allocation
50%
68%
51%
Performance and outcomes
52%
69%
53%
Future outlook
42%
66%
40%
Guiding principles
55%
79%
53%
Our research involved a total of ten companies in the consumer business sector, as presented in the table on the right. Six of them prepared a separate sustainability report. The other four companies included sustainability in their annual report. Even though nine companies followed the GRI guidelines for their 2011 report, none of them has reported on a GRI A-application level. Five companies report in compliance with GRI application level B, while four comply with GRI application level C. Three companies (30%) had a third party provide a limited level of assurance on their report. 70% of companies included in the consumer business sector were already following the GRI guidelines four years ago. With a 55% total score average, this sector outperforms the average for most of the content elements. More specifically, the consumer business sector distinguishes itself from the other sectors both through reporting on opportunities and risks and the business model. 8
Cross sector average score (%)
The main improvement areas for the consumer business sector are the content elements strategy and resource allocation and performance and outcomes. Strategy and resource allocation The content element strategy and resource allocation entails reporting on the company’s short, medium and long term strategic objectives and the strategies in place to implement or to achieve them, including how the company will measure achievements. Our research shows the consumer business average score for the quantification of strategic objectives to be only 27%. An example of sound reporting on quantified strategic objectives is given for the FSI sector being Allstate’s Corporate Responsibility Report 2011 on page 22. We noticed that the connectivity between the strategic objectives and the overall strategy as well as between the strategic objectives and the KPIs often remains unclear in this sector, just as in other sectors by the way.
There also seems to be a lack of reporting on the identification of external/future threats that could prevent the company from achieving its strategic objectives and their approach to manage these threats. The consumer business average score for this aspect is 38%. One company in our research provided a SWOT analysis to present the external threats. However, how these threats are managed remains unclear. Truworth’s integrated report 2011 is a good example of linking the strategic objectives to the company’s material issues and performances, as well as reporting on the challenges that would prevent the company to achieve the strategic objectives (see next page). Performance and outcomes Another area where the consumer business sector could make improvements is the reporting on their performance and outcomes. This would help the reader to understand how the company performs against its strategic objectives. Our research shows 80% of the reporting companies to use the GRI guidelines to build their KPIs – even 90% of the consumer business sector applies the GRI guidelines. Still, we have established that many companies report on KPIs without linking them to their strategy or their strategic objectives. Indeed, the consumer business average score for linking KPIs to strategic objectives is only 44%. A good example for the latter aspect is given in the Q-Park Responsible Parking 2011 report on the next page.
Reporting companies Ahold Brunel CSM Heineken Mediq Nutreco Randstad Unilever USG Wessanen 9
Example of sound reporting on strategy and resource allocation reporting Truworth International – Integrated Report 2011 Truworth is a sound example of presenting a company’s overall strategy, linked to the material issues identified. For each material issue, the strategy is translated into strategic objectives for year 2011 as well as for next year. The reader can clearly see how the company performed and what the challenges related to these objectives were, as well as the key risks and mitigation plans. This disclosure of future development, material issues and strategic objectives enhances the report’s connectivity. Also, the presentation with colours and clear headlines adds to clarity.
Material issues on which the company’s overall strategy is based
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The overall strategy is divided into 8 points from which strategic objectives for 2011 and 2012 are derived
Challenges that could prevent the company to achieve its objectives
Example of sound reporting on linking KPIs to strategic objectives Q-Park – Responsible Parking 2011 Q-Park’s report gives a clear overview of the strategic objectives and the KPIs used to measure each of the objectives. The connectivity between the strategy, strategic objectives and KPIs is one of the important aspects of integrated reporting. In this case, each strategic objective is translated into KPIs. The report discloses the previous as well as the current year’s data, and the targets for 2015. The last column shows the priority of the KPIs. This clear performance overview helps the reader understand the company’s progress.
Strategic objectives
The KPIs used for a specific strategic objective
KPIs are given for each of the five themes
The KPIs priorities
Strategic objectives are categorised into five themes 11
’’The ER&T sector outperforms the average for most of the content elements’’
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Energy, Resource & Transportation 13
Energy, Resource & Transportation
Content element
ER&T average score (%)
ER&T best practice score (%)
Cross sector average score (%)
Governance
77%
96%
71%
Business model
58%
83%
50%
Organisational overview and operating context
53%
67%
50%
Opportunities and risks
51%
65%
55%
Strategy and resource allocation
56%
76%
51%
Performance and outcomes
61%
77%
53%
Future outlook
36%
48%
40%
Guiding principles
59%
79%
53%
The sector Energy, Resources & Transportation encompasses eight companies, stated in the table on the right. Most of these eight companies have already reported on sustainability for over four years. All companies in the ER&T group applied the GRI reporting guidelines in their 2011 sustainability reporting, with half of them applying the GRI-A level. The average ER&T sector scored the best on average. This particularly applies to communication of their performance on non-financial indicators. Besides performance, companies in this sector scored relatively high on the description of the business model. The ER&T sector, though, could still improve the connectivity between the different areas they report on. Currently 46% of all the reporting companies in our research publish two separate reports: an annual report and a sustainability report. Three companies in the ER&T sector are also represented in this subgroup. 14
This does not enhance the link between financial and non-financial performance and explains, despite the high scores on performance, the average overall score of only 56%. To put it briefly, most of the reports can be seen as combined reports instead of Integrated Reports. This is not a criticism - it merely shows companies to have only just begun their journey towards Integrated Reporting.Surprisingly, the ER&T sector, a sector most challenged by society on climate change contribution, has scored below average on future outlook. This deteriorates transparency. Another element open to significant improvement is opportunities and risks. Opportunities and risks According to the IIRC’s prototype framework the opportunities and risks also relate to external factors affecting the availability, quality and affordability of relevant capitals. Due to the risk chapter, obligatory
for Public Interest Entities in the Netherlands, we have established companies to indeed report on their risks, usually including the impacts and the mitigation plans in place. The research further shows most companies to subdivide their risks (i.e., strategic, operational, financial and compliance risks). Even though ER&T companies tend to take sustainability issues seriously, none of them scored full marks on the compliance score regarding reporting a balanced risk disclosure. Environmental and social risks are often limitedly mentioned. The next page shows an example of sound disclosure of sustainability risks, by the CLP Group. Furthermore we have observed the reporting of opportunities to be less straightforward than risk reporting. In fact, opportunities are often listed in various places in the report. The companies applying a SWOT analysis to disclose their risks and opportunities constitute best practices. An example of sound reporting on opportunities is provided on page 35, relating to Sonae Sierra’s economic, environmental and social report 2011. Future outlook The other area open to possible improvement is the future outlook. The IIRC’s prototype framework distinguishes future outlook as the future opportunities, future risk challenges and uncertainties that could prevent the company to achieve its strategic objectives. Like other sectors, the ER&T companies scored relatively low on this content element. Two companies within the ER&T sector provide a SWOT analysis to communicate external factors that may influence future performance. However, these threats were either imbalanced or not clearly future oriented. In addition, the companies do
not clearly report how these threats and opportunities are managed or benefited from, respectively. Therefore the reports in the research forgo a clear statement on the connectivity between future opportunities, risks, challenges and uncertainties and the implications these have for strategy and future performance. The following example from Eskom shows a good connectivity between the material issues and future outlook that build the company’s strategy. Another good example of future orientation is provided on page 41 in Fortum’s sustainability report 2011.
Reporting companies Air France-KLM Boskalis Westminster Fugro PostNL Royal Dutch Shell A SBM Offshore TNT Express Vopak 15
Example of sound reporting for balanced risks reporting CLP - Annual report and sustainability report 2011, Powering Asia responsibly CLP gives a clear summary of its risks in the annual report. They subdivide the risks into different categories. This subdivision is broader than the common categories; strategic, financial, operational and compliance risks. Indeed, CLP also identifies risks related to sustainability issues (fuel costs, regulatory risks), environmental risks (climate change, resources scarcity, air quality) and social risks (community). CLP’s sustainability report provides a detailed explanation of the sustainability risks. Moreover, the risk disclosure includes IT risk, which is another important aspect. As all primary company processes are now automated, IT represents the heart of an organisation. CLP is therefore properly balancing financial, economic, environmental and social risks, which adds to connectivity.
Identification of sustainability risks
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IT risks
Sustainability risks also included in the sustainability report 2011
Example of sound reporting on future outlook for strategy Eskom - shift performance, grow sustainably (integrated report for the year ended 31 March 2012) Eskom gives a good example of a company’s long term strategy. Their strategy is future oriented. They have a clear five-year priority, which gives a good medium term goal but represents their future vision too. This helps the reader understand the future goal the company is working towards. Likewise, it provides more insight into whether the business model is sustainable. Material issues raised in the reports are linked to the strategy as well, enhancing the connectivity of the report. The future priorities are then further discussed on the following pages of the report.
Connectivity with material issues raised by stakeholders
Medium term strategy
Future priorities discussed in more details
Long term vision
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’’All reporting companies in the FSI sector report on non-financial information since 2008”
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Financial Services Industry 19
Financial Services Industry
Content element
FSI average score (%)
FSI best practice score (%)
Cross sector average score (%)
Governance
70%
74%
71%
Business model
42%
63%
50%
Organisational overview and operating context
53%
60%
50%
Opportunities and risks
58%
74%
55%
Strategy and resource allocation
49%
54%
51%
Performance and outcomes
58%
81%
53%
Future outlook
43%
62%
40%
Guiding principles
53%
83%
53%
The five companies presented in the table on the right represent the financial services industry sector in our research. All five reporting companies were already reporting on non-financial information four years ago and they all followed the GRI guidelines for their 2011 reporting. Three of them reported applying the GRI A-level, while the rest reports in compliance with GRI application level C. Although this sector seems to have been involved in sustainability reporting for a few years now, it does not necessarily result in higher scores on all content elements (average score of 53%). We found the companies’ reports in this sector to be out of sync with the guiding principles materiality and conciseness from the prototype framework. Only one company has a separate sustainability report (more than a 100 pages), the four others combined it in their financial report (more than 300 pages for four of them). This deteriorates the conciseness and clarity of information. 20
There appears to be room for improvement for the following content elements: strategy and resource allocation and business model. On the other hand, in terms of reporting on performance companies in the FSI sector performed well compared to the average. The other content elements were close to the sector’s average. Strategy and resource allocation The content element strategy and resource allocation serves to describe the reporting companies’ short, medium and long term strategic objectives and the strategies implemented, as well as how they will measure achievements. This also includes the quantification of the strategic objectives, where the financial sector has only achieved a score of 25%. This aspect represents a weak point on average for all sectors, with an overall average score of 29%. The following page shows an example of quantified strategic objectives in the Allstate’s Corporate
Responsibility report 2011. Moreover, we have noticed that the connectivity between the strategic objectives and the overall strategy as well as between the strategic objectives and the KPIs often remains unclear. Once again, this improvement area can be applied to all sectors. An example of sound reporting on linking strategic objectives to KPIs is included on page 11 with the Q-Park’s Corporate Social Responsibility report “Responsible parking”. Business model The other content element on which the Financial Services Industry could improve its compliance with the prototype framework is the description of its business model, including the services and products and the position on the market as well as the key inputs, valueadding activities and outputs by which they aim to create value in the short, medium and long term. How a company can describe its impact on its value chain is discussed specifically for the TMT sector on page 40.
At the time the research was executed, SNS Reaal was a AMX listed company and is therefore included in the overall results. 1
One aspect on which the FSI sector scored relatively low is the disclosure of how various capitals are used to create value. The average score was 36%. Also, the research showed that for all sectors there is a lack of reporting on the companies’ ability to respond to future changes in the availability of these various capitals, with the overall average score being 35%. ACCA’s annual report 2011-2012 provides a good example of reporting resources used by the company. This is shown on the next page.
Reporting companies Aegon ING BinckBank Delta Lloyd SNS Reaal1 21
Example of sound reporting on the quantification of strategic objectives Allstate - Corporate Responsibility Report 201, Leading Change The Allstate’s corporate responsibility report provides a good overview of its strategic objectives and the progress made. As these strategic objectives are quantified the reader is able to clearly understand the company’s goals and how the company has performed against them so far. Moreover, the progress is given for multiple years, which helps to understand where the company is coming from. The connectivity between the KPIs and strategic objectives is clear and enhances the company’s transparency.
The progress against strategic objectives
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Quantified strategic objectives
Clear and balanced overview on whether the strategic objectives have been achieved
An example of sound reporting on key resources used disclosure ACCA - Annual report 2011-2012, Listening and Responding ACCA’s annual report provides a decent picture of the company’s business model. The company highlights in this picture all of the key components used to create value. The report goes on to describe the key resources the business depends on to create value, including a description of the critical relationships. This helps the reader understand how these critical capitals impact the progress of the business.
The business model
Key resources used for the business model
The key resources/ capitals are then described separatly 23
’’Two companies in the manufacturing sector received full score for the identification of material issues’’
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Manufacturing 25
Manufacturing
Content element
Manufacturing average score (%)
Manufacturing best practice score (%)
Cross sector average score (%)
Governance
61%
89%
71%
Business model
55%
73%
50%
Organisational overview and operating context
49%
67%
50%
Opportunities and risks
51%
68%
55%
Strategy and resource allocation
49%
68%
51%
Performance and outcomes
56%
85%
53%
Future outlook
40%
59%
40%
Guiding principles
53%
83%
53%
Our research included eight companies in the manufacturing sector, stated in the table on the right. Two of them have a separate sustainability report, the rest have included sustainability in their annual report. Six of the eight companies in this sector follow the GRI guidelines, two have reported at a GRI-A application level, since 2008. This sector thus seems to have made little headway in terms of sustainability communication. This might also explain the 51% average overall score in this research of the manufacturing sector, which is below the overall average of our research. The only content elements to score above average are business model and performance and outcomes. Although performance scored well, we have seen in our research that companies report on their performances without even communicating a clear strategy and strategic objectives. This shows room for improvement in applying the guiding principle connectivity. With respect to the content elements, organisational overview and operating context and governance are the 26
elements the companies in this sector can improve on. Organisational overview and operating context Organisational overview and operating context constitutes an important aspect of integrated reporting. Organisational overview includes an overview of the company, how it creates value, as well as its reporting boundary. Stakeholder engagement, the materiality analysis and a description of positive and negative impacts the company has on different forms of capitals is part of the operating context. Our research shows reporters in this sector to refrain from including a clear description of their impacts. Reports often include more general statements like ‘’we minimise our impact on the environment by reducing our carbon footprint’’. A good example of reporting on how a company impact its value chain is the 2011 report of Indra. We have elaborated on this specific example of sound reporting on page 40.
Concerning materiality, it appears that when reports include focus areas, there often is no process to identify them; the reader will have to assume or deduce that these focus areas indeed represent material issues relevant for the reporter. The manufacturing sector scored on average 43% for the identification of material issues. Only two companies received full scores. The DIMO annual report provides an example of sound reporting of materiality identification, which is shown on the next page. Governance Another content element that companies could improve on is the communication on their governance. Companies should report on the governance structure and substantiate how this structure supports the company’s ability to create value in the short, medium and long term, and to identify risks and opportunities. As the prototype framework largely overlaps with current governance reporting requirements, our research shows this content element to score the highest average. Nevertheless, in many cases the remuneration aspect is missing. Disclosure on remuneration requires entities to disclose how remuneration and incentives are linked to value creation in the short, medium and long term, including financial and non-financial performances. Obviously, connecting remuneration this way would lead to synergies in achieving the strategy, being one of the prototype framework’s principles. Only two companies in the manufacturing sector fully scored on the disclosure of remuneration complying with the requirements of the Corporate Governance Code and the Integrated Reporting guidelines. A good example on how to do
this, is provided by Leighton Asia’s remuneration report as presented on the next page.
Reporting companies Akzo Nobel Aalberts AMG Aperam Arcelor Mittal DSM Philips Ten Cate 27
Example of sound reporting on organisational overview and operating context reporting DIMO - Annual report 2011/2012, As integrated as DIMO DIMO’s annual report gives a really good example of identification of the material issues. It first explains how it identifies stakeholders and how DIMO engages with each of them. Based on the stakeholder dialogue they identify stakeholder issues. How stakeholder issues are managed is clearly presented in the following diagram and is used to identify material issues. In order to identify the material stakeholder issues, they use a materiality matrix that categorizes the level of priority for the stakeholders and the potential impact on DIMO. The connectivity between the stakeholder engagement and the materiality (relevant topics) is therefore really clear.
Assessment of material issues is part of stakeholder issues management 28
Management of stakeholder dialogue and issues
Materiality matrix
Material issues
An example of sound reporting on remuneration Leighton Holdings Limited – Concise annual report for the December 2011 transitional year financial year Leighton Asia’s report provides a good example of reporting on remuneration. The diagram below shows the remuneration framework to clearly be based on the business strategy and to then be subdivided into fixed, short-term and long term plans. The short term incentive plan is based on both financial and non-financial performances. Moreover, this disclosure shows how remuneration are linked to strategy and what the outcomes are. This adds to connectivity as much as this table enhances clarity. Later in the Leighton Asia’ report, the percentage that is based on performance against non-financial measures and targets for the short-term incentives is given.
Link between remuneration and the strategy and presentation of outcomes enhance connectivity
Short term incentives are based on both financial and non-financial performances 29
’’The real estate sector performs above average on the reporting of future outlook’’
30
Real estate 31
Real Estate
Content element
Real Estate average score (%)
Real Estate best practice score (%)
Cross sector average score (%)
Governance
74%
89%
71%
Business model
48%
63%
50%
Organisational overview and operating context
46%
64%
50%
Opportunities and risks
52%
68%
55%
Strategy and resource allocation
52%
76%
51%
Performance and outcomes
46%
73%
53%
Future outlook
47%
62%
40%
Guiding principles
53%
71%
53%
Our research involved the real estate sector, too: nine companies in total, refer to the table on the right. Three of these reporting companies had a separate sustainability report in 2011, while the others combined sustainability in their annual reports. Nevertheless, five companies follow the GRI guidelines in 2011. One of them applied a GRI A-level, three a GRI B-level and one a GRI C-level. The real estate sector scored in line with the overall average of our research (52%). Nevertheless, there were some deviations on the different topics. This sector appears to perform better than the average in terms of reporting on governance and future outlook. While the real estate sector achieves the highest score for future outlook - an average 47% - this score shows there is still room for improvement. Greater insight into the sustainability of the business model requires more non-financial information as well as an improved 32
definition of the long term vision. These are the challenges for the reporting companies in this sector. The next step in reporting on future outlook would be to report on expected future changes and how these will affect the availability, quality and affordability of the various capitals. This would help shape a more holistic picture of the companies. The content elements organisational overview and operating context, opportunities and risks and performance and outcomes scored lower than the average. Therefore we conclude that most opportunities for improvement are available in these topics. The content element performance and outcomes has already been discussed in our consumer business section. Organisational overview and operating context Organisational overview and operating context should include an overview of the company, how
it creates value, as well as the circumstances under which the company operates. Disclosing stakeholder responsiveness in determining the material topics is also part of this content element. Materiality is discussed for the manufacturing sector on page 28 by showing the sound reporting example of DIMO’s annual report 2011/2012. As mentioned, another important aspect of this content element is stakeholder engagement, which reporting companies generally describe well (average score of 61% for the real estate sector). Communicating how the stakeholder concerns are managed and how this links to the report’s content could be improved. One way of clarifying the link is by presenting this in a table. Hammerson’s Corporate Responsibility Performance Report 2011 provides a good example (see next page). Opportunities and risks As mentioned previously, according to the IIRC’s prototype framework, the key opportunities and risks also relate to external factors affecting the availability, quality and affordability of relevant capitals. The research shows the lack of a balanced risk disclosure relating to financial, economic, environmental and social risks. An example of sound reporting from the CLP Group on disclosing sustainability risks is shown on page 16 for the ER&T sector. The other aspect that also negatively impacted the score of this content element regarded the disclosure of opportunities, scoring an average 55%. We have observed this disclosure to be less straightforward than the risk reporting and it is not governed by a regulatory obligation. We have established that opportunities
are often listed in various places in the report(s). Consequently, a good overview of the opportunities that have management’s attention is missing. Some companies, we have observed, apply a SWOT analysis to disclose their risks and opportunities. These opportunities are merely mentioned, though, without connecting them to other parts of the report, e.g., how the company aims to benefit from the opportunities identified. The next page provides a good example of a risks and opportunities disclosure, from Sonae Sierra.
Reporting companies Corio Unibail-Rodamco Arcadis BAM Eurocommercial Prop. Heijmans Nieuwe Steen Inv. VastNed Retail Wereldhave 33
Example of sound reporting for disclosing stakeholder engagement Hammerson - Corporate Responsibility Performance Report 2011 Hammerson clearly describes how the company engages with its key stakeholders. The different tables, which add to clarity, do not simply highlight how the company engages with key stakeholders - they also show the stakeholders’ concerns and how Hammerson responds to them. This type of transparency in the disclosure enhances connectivity.
They include a table for each of their stakeholders 34
Description of the type of engagement
Stakeholder concerns
How they are responding
Example of sound reporting for disclosing risks and opportunities SONAE SIERRA - Economic, Environmental and Social Report 2011, specialists in creating sustainable shopping centers Sonae Sierra’s report provides a good overview of the risks and opportunities the company focuses on. Opportunities are reported on the same level as risks. The opportunities and risks disclosure is clearly part of the business strategy, which adds to connectivity. Also, through this overview the reader can assess the dependency on the availability, affordability and quality of natural, human and social resources, which is another important aspect in understanding whether the business model is and will remain sustainable.
The risks and opportunities are linked Opportunities disclosure on the same to the business strategy level as the risk disclosure 35
’’50% of the reporting companies in the TMT sector acquired external assurance on their nonfinancial information’’
36
Technology, Media & Telecommunication 37
Technology, Media & Telecommunication Content element
TMT average score (%)
TMT best practice score (%)
Cross sector average score (%)
Governance
69%
89%
71%
Business model
41%
60%
50%
Organisational overview and operating context
44%
62%
50%
Opportunities and risks
56%
74%
55%
Strategy and resource allocation
49%
68%
51%
Performance and outcomes
47%
73%
53%
Future outlook
32%
48%
40%
Guiding principles
47%
79%
53%
Our research included ten companies in the Technology, Media & Telecommunication sector (see the table on the right). Even though six of these companies were already reporting on sustainability four years ago, with an average score of only 48%, the TMT sector seems to score lower than the other sectors (overall sector average score 52%). Half the companies within the TMT sector have a separate sustainability report in 2011. Separate reports often affect connectivity of information and make it difficult to communicate a consistent message. Integrated reporting is not necessarily about reporting more but about reporting better, as it will enhance the connectivity between the company’s departments, but also connect risks and opportunities to strategy and performance to enable value creation now and in the future. Seven companies in this sector follow the GRI guidelines, of which three have reported at a GRI 38
A-application level and two at the GRI B-application level. Moreover, half the companies acquired external assurance on their non-financial information. It appears the TMT sector performed lower than average for all content elements, with the exception of the reporting on opportunities and risks. The lowest scores regard the communication about business model and future outlook. Business model The business model includes the description of companies’ services and products, the position on the market, the companies’ key inputs, value-adding activities and outputs by which they aim to create value in the short, medium and long term. The description of products and services, including geographical markets and customers, was relatively good. The prototype framework further states the companies’ position in
the entire value chain and its impacts to be among the features enhancing the disclosure of the business model. Although some companies clearly state their position in the value chain, overall the reporting companies scored a 35% average on this topic. The TMT sector scored 24%. Indra’s annual report 2011 provides a good example of a company reporting the impacts on the value chain (see next page). The business model description should also include an overview of the resources needed for the company’s operations. This aspect is illustrated for the FSI sector by ACCA’s annual report 2011/2012, on page 23. Future outlook The other aspect on which all sectors could improve - and the TMT sector in particular - is future outlook. This content element seems to be the most difficult to report on. The overall average score for all sectors on providing a clear assessment of their future outlook is 40%; TMT scored 32%. Even though the reports list general developments and expectations, these are often not substantiated or specific enough to the company. We have also established that, despite many of the reporting companies’ reports having an ‘’outlook’’ section, this usually focuses on the short (and sometimes medium) term. Furthermore, we found the ‘’outlook’’ section to often focus on financial information only. A long term overview of financial as well as non-financial expected changes is usually not reported. Future orientation helps the company to tell its story and to clarify where and how it stands in the world.
Looking at this particular aspect, we believe Fortum’s Sustainability Report 2011 from the ER&T sector to provide a good example of reporting on the future outlook of the industry. This is further detailed on the next page. Also, Eskom (see sector ER&T, page 17 provides a good example of a long term strategy.
Reporting companies ASML KPN Reed Elsevier TomTom Wolter Kluwer ASMI Logica Imtech TKH UNIT4 39
An example of sound reporting on a company’s impacts on its value chain Indra - Annual report summary 2011, Yes to challenges Indra’s report provides an innovative way to describe the economic value generated by the business and how this value is distributed to the different stakeholders - and retained. On the next page, Indra’s report includes a table describing the economic, social and environmental impacts the business has on stakeholders. This reflection of the value chain creates a holistic overview of the business.
The impacts of Indra are given for each stakeholder
40
Economic, social and environmental impacts are elaborated
Visual / graph of who generates the value in the value chain
Visual / graph if and (if so) to whom the value is distributed
An example of sound reporting for future outlook disclosure Fortum - Sustainability Report 2011, Towards Solar Economy Fortum’s Sustainability Report 2011 has a clear future focus. This is achieved through their clear strategy towards a solar economy. First they examine the current global megatrends that affect the energy sector, based on which they prepared their strategy. Then, a graph shows the future outlook of the energy sector. The reader can easily see how Fortum has decided to focus on a solar economy. This discussion helps to set up the connectivity between the industry future outlook, the strategy and the rest of the report.
Fortum’s strategy is based on the mission and global megatrends
Graphic presentation of the advantages of their chosen long term strategy 41
Connecting sustainability context to Integrated Reporting The IIRC has put Integrated Reporting on the agenda of many boards. The IIRC framework is developed to help reporting companies enhance the quality of reporting by reporting what is material from a broader perspective. One critical question has not yet been answered though: will this lead to integrated thinking and to reporting real information about impact and will this close the current sustainability context gap existing in sustainability reporting? Our research on reporting practices of the Dutch listed companies shows a clear signal on their reporting: both “strategic focus” and “connectivity” should be improved as these are important ingredients in understanding the company’s most important sustainability issues. 50
45
40
30
20
13
10
6 1 0
0 Eureka!
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Experimentation
Enterprise
Ecosystem
Economy
As mentioned in our results on the guiding principles, the connectivity between the overall strategy of the company, its strategic objectives and the KPIs and performance of the company is often lacking. This finding refers to both financial and non-financial information.” These findings - based on existing integrated reports are no surprise when correlated to the outcomes of the 2012 Deloitte study “Towards Zero Impact Growth – Strategies of Leading Companies in 10 Industries”. This is an innovative assessment of 65 global sustainability leaders and their strategic focus and connectivity towards a deeper understanding of “growth” in a 1-Earth-Economy. This study was based on John Elkington’s “pathways to zero” - 5 mental mindsets in a company’s ambitious journey to grow with at least zero impact, respecting planetary limits and societal well-being. Only 6 out of 65 leading companies so far understand what is at stake for them and how that relates to strategies, programmes and connected performance measures that show impact. If the promise of Integrated Reporting is to come true, the sustainability context gap will need to be closed. Still, our research shows enhancing the quality now in place to be one step away from being sufficient to live up to its full potential. “We need to be steered by the stars, not by the light of each passing ship”, Omar Bradley said decades ago. This means companies will have to focus on their long term strategy - without this no integrated report will ever deliver on the promises regarding strategic focus and connectivity.
Maturity Level Definition from ‘The Zeronauts’
Analogy: Characteristics of a company on that level
No strategy and goals
No definition.
The company barely understands the relevance of restructuring its actions towards sustainable solutions and hardly reports on sustainability. Furthermore, no strategy has been defined and no targets have been set.
Eureka
Opportunity is revealed via the growing dysfunction of the existing order.
The company understands the relevance of restructuring its actions towards sustainable solutions. No considerable actions have been taken yet and almost no strategies and targets have been set. The company does already understand the relevance of the topic though, has started reporting and communicates plans to ameliorate its sustainability performance in the future.
Experiment
Innovators and entrepreneurs begin to experiment, a period of trial and error.
Although the company has started its first innovation efforts and internal programs in certain sustainability areas and has developed initial policies and strategies, no concrete milestones and an overarching future vision have been defined yet.
Enterprise
Investors and managers build new business models creating new forms of value.
The company has developed a short- to mid-term strategy ( ≤ 2020) for specific areas and has set measureable targets. Nevertheless, almost no long-term milestones have been defined. Furthermore, they do not communicate an overarching future vision.
Ecosystem
Critical mass and partnerships create new markets and institutional arrangements.
Measureable, ambitious (zero) targets based on a mid- to long-term vision (≥2020) are set. Nevertheless, a conjoint approach and some collaborative aspects are still missing since the holistic zero impact growth vision has not been (fully) adapted.
Economy
The economic system flips to a more sustainable state, supported by cultural change.
The company has fully adapted the zero impact growth vision. Measureable zero targets that have been adapted jointly are set out for each field of action. A clearly defined strategy is in place on how to achieve these targets, with defined short- and long-term milestones. The underlying benchmarks are clearly defined. 43
Deloitte Sustainability & Integrated Reporting Services
44
Strategy & Leadership
Supply Chain
• Market & materiality analysis • Policy & strategy development • Sustainable growth model
• • • •
Performance management
Operations
• Sustainability KPI management • Dashboarding & IT solutions • Sustainability accounting
• Water stewardship • Environment en Social Management • Carbon footprinting
Products & Services
Reporting
• Sustainable Innovation tracks
• Sustainability Reporting & Assurance • Integrated reporting • XBRL (GRI Taxonomy)
Supplier Performance Circular Economy tools Life Cycle Analysis Commodity management
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Annex I Overview of companies in research
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Reporting company Ahold Heineken Randstad Unilever Cert. Brunel CSM Mediq Nutreco USG Wessanen
Sector Consumer Business Consumer Business Consumer Business Consumer Business Consumer Business Consumer Business Consumer Business Consumer Business Consumer Business Consumer Business
Air France-KLM Fugro PostNL Royal Dutch Shell A TNT Express Vopak Boskalis Westminster SBM Offshore
Energy Resources & Transportation Energy Resources & Transportation Energy Resources & Transportation Energy Resources & Transportation Energy Resources & Transportation Energy Resources & Transportation Energy Resources & Transportation Energy Resources & Transportation
Aegon ING BinckBank Delta Lloyd SNS Reaal
Financial Service Industry Financial Service Industry Financial Service Industry Financial Service Industry Financial Service Industry
Reporting company Sector Akzo Nobel Manufacturing Aperam Manufacturing ArcelorMittal Manufacturing DSM Manufacturing Philips Manufacturing Aalberts Manufacturing AMG Manufacturing Ten Cate Manufacturing
Corio Unibail-Rodamco Arcadis BAM Eurocommercial Prop. Heijmans Nieuwe Steen Inv. VastNed Retail Wereldhave
Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate Real Estate
ASML KPN Reed Elsevier TomTom Wolters Kluwer ASMI Logica Imtech TKH Unit 4
Technology Media Telecommunication Technology Media Telecommunication Technology Media Telecommunication Technology Media Telecommunication Technology Media Telecommunication Technology Media Telecommunication Technology Media Telecommunication Technology Media Telecommunication Technology Media Telecommunication Technology Media Telecommunication
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