Coming Clean

A milestone in the history of corporate reporting was 1993's 'Coming Clean - Corporate Environmental Reporting'. The report was a joint project of the International Institute for Sustainable Development, the British consultancy SustainAbility, and accountants Deloitte Touche Tohmatsu International. It dealt with reporting practices and trends, best practice, and practical advice for first-time reporters.

The study included a survey of the 'first wave' of report makers, workshops with a range of stakeholders, and additional research on corporate reporting. After analyzing the data, the authors made the following predictions.

1. A call to account

Companies will increasingly be asked to make good past environmental damage, including making adequate provisions for the resulting liabilities. The accounting standards which deal with contingent liabilities, like the US Financial Accounting Standards Board's statement on contingencies (FASB5) and the UK Statement of Standard Accounting Practice No 18 (SSAP18), implicitly cover the likelihood of companies having to pay for clean-up compensation. That likelihood is growing day-by-day.

The costs of dealing with environmental damage, including the legal costs, will increase at a rate which will drive them much higher up the agenda of management concerns. Governments and communities are increasingly demanding that they are not shortchanged on remedial measures.

Businesses which think they can hide the damage they are causing will find they are living with false hopes. Pressures for wider disclosure are coming from many quarters, and governments are listening.

Sooner or later, all will be revealed. 'Due diligence' inquiries when a company is the subject of a merger or acquisition, or is seeking to raise substantial funds from banks or the markets, will often address environmental liabilities. Smart companies will ensure that they do not cause problems in the first place - and, if there are issues, that they are known about well in advance.

There will be growing pressure on companies to report on the sustainability of their products and processes - and on their success in taking advantage of the commercial opportunities created by the drive for sustainable development.

2. Compliance is no longer enough

Around the world, business itself is recognizing that it must increasingly move beyond compliance. In the field of corporate accounting and reporting this means that companies must simultaneously ensure that they comply with the various financial reporting and regulatory requirements and begin to report on their performance in relation to a growing range of environmental performance indicators.

3. An index of quality

Major companies that do not produce environmental performance reports will begin to be judged to be poor performers in other areas, such as quality. Regulations, stock market rules, business peer pressure and public concerns are just some of the factors now pushing business towards environmental reporting.

Some companies will use their annual report and accounts as the primary vehicle for environmental reporting. But the growing worldwide demand for sustainable development will ensure that there is also a growing demand for free-standing corporate environmental performance reports. Such reports will need to assess the company's success in meeting the new accountabilities introduced by sustainable development.

4. A question of competitive advantage

There will be many more calls on business to report. Very few current report makers had read Agenda 21, the core document that emerged from the 1992 UN Conference on Environment and Development (UNCED). But some knew that it called on business and industry to report annually on their environmental records, as well as on their use of energy and natural resources.

Corporate citizenship will be a key driver. Many companies are reporting - or plan to do so - because they have supported codes of conduct promoting best environmental practice, such as the International Chamber of Commerce's Business Charter for Sustainable Development and the chemical industry's 'Responsible Care' initiative.

But competitive advantage will be the main driver. Business leaders are clear about one thing. The main reason for reporting in future will not be to position the reporting company as a responsible corporate citizen. It will be to secure a company's competitive position.

5. An annual requirement

Most companies will report on an annual basis, although some companies have decided to produce shorter 'environmental updates' in the interval between more comprehensive reports.

The next generation of reports will contain much more quantitative data - and will be used to benchmark company and industry performance.

6. Communicating commitment - and targets

Some of the largest companies - like Shell - will find it difficult to harmonize their objectives and to set unified targets across a broad spread of operations. But they, too, must continue to push towards this goal.

Successful report makers will treat environmental performance reporting and competitive benchmarking as key components of what will prove to be one of their most challenging tasks: credible, effective and genuinely interactive communications in support of their environmental and sustainable development programmes.

Environmental reports will be seen as an indicator of real commitment to continuous improvement. Very few companies give precise targets for improvement as yet, but most see this as the logical next step. Currently Europe appears to lead in this area.

There will be a growing trend for companies to report overall performance statistics alongside more detailed breakdowns for individual company sites.

7. Employees come first

Internal audiences will be seen as at least as important as external audiences. The essential core audience for many early reports has been the company's own employees. In Canada, Noranda Forest is now considering how it can benchmark the growing environmental awareness of its employees in future reports.

External audiences will remain diverse. Local communities and shareholders are seen as second-priority audiences, followed by environmentalists, the media, trade and industry customers and financial analysts. As ever, there are exceptions to the rule: in the US, USX produced a report custom-made for just eight environmental organisations.

8. The honeymoon is almost over

The 'honeymoon' period, in which early reports were welcomed more for the fact that they had been produced than because of what they said, will soon end. As a result, future reports will be the subject of increasingly rigorous analysis and, in some cases, heated public debate.

There is a growing recognition that a great deal of work still needs to be done to understand - and meet - the requirements of the very wide range of customers for environmental and sustainable development performance reports. Some report makers are already working on second or third generation environmental reports that are better tuned to stakeholder requirements.

The dos and don'ts of corporate reporting

Do:

Do it now - and do it systematically.

Decide at the outset which stakeholders you are targeting.

Find out what they think - and want. Focus your messages - and make the format user- friendly.

Make sure you have accounted for any damage you may have caused - both liabilities and contingent losses - and have reflected this in your financial report and accounts.

Be honest. Give the good news - and the bad.

Focus on the areas of greatest impact.

Quantify and benchmark. Develop meaningful indicators (e.g. waste generated per employee or unit of output, or CO₂ output per $ of sales).

Spell out clear targets.

Consider verification, which involves a non exhaustive cross-checking of the quality of a report, but choose any verifier as carefully as you would a financial auditor.

Ask for feedback (provide a toll-free phone number).

Don't:

Treat your first report as a one-off. This is a requirement for the long term.

Ignore the possibility that some people environmentalists, competitors- may use the data you report to identify your Achilles' heel. Report, but ensure you do so as part of a broader environmental communications strategy and process.

Ignore the need to market your corporate environmental report.

Forget that corporate environmental reporting is just the first step. Think through the implications for your customers and suppliers.

Overlook the next steps, which could well include the development of industry- comparable performance indicators, benchmarking and full environmental cost accounting.