DIRECTIONSMONTHLYSUPPLEMENT

OCTOBER/NOVEMBER 07

TRENDS AND ISSUES IN THE WORLDOF CORPORATE REPORTING

FINDING YOUROWN PATH

SELECTING NON-FINANCIAL KPISFOR SUSTAINABILITY REPORTING

Directions Monthly October/November 2007 Issue 17

Pavan AthwalLucie Harrild

David McKnightSenior manager Ernst & Young’s Corporate Responsibility Services

In the world of sustainability reporting, effective measurement is not a question of following the pack, as what is right for onecompany or marketplace will not necessarily be right for the next.

Welcome to Directions Monthly. In this edition we take a look at how companiestackle the issue of finding meaningful and relevant key performance indicators(KPIs) that will help them effectively identify, manage and make progress on their corporate responsibility impacts. At their best these indicators should also help companies find the business opportunities in embedding responsiblebusiness practices and the smart companies are defining their own. David McKnight of Ernst & Young gives his insights on some current approaches, and the pluses and minuses of using standards like GRI.

What are examples of good sustainabilityKPI reporting? Avoiding recent Ernst &Young Corporate Responsibility servicesclients, I have selected companies from themining (Anglo American), retail (Waitrose),telecommunications (Vodafone), privateequity (3i), oil and gas (ExxonMobil) andbeverage (Heineken) sectors to explore whatseems to be best practice. Of course thisselection omits sectors that include some of the leading reporters, but boundaries have to be set for the sake of brevity.

So, how do you identify good sustainability KPI reporting? Well, KPIs are meant to help abusiness define and measure progress towardsits goals. In terms of sustainability the lens fordefining KPIs is wider, in that companies shouldreport KPIs on those aspects that are mostmaterial to the company and its stakeholders.

So, how do the reports stack up? Looking firstat Anglo American’s 2006 Report to Society, a wide range of KPIs are presented that cover many of the company’s most materialissues. These include workforce HIV in Africaand safety, although given Anglo American’scurrent focus on safety, the addition of leadingsafety indicators would help stakeholdersunderstand the efforts being made. A range ofenvironmental KPIs are disclosed for each ofthe operating companies. However, whilst there

is a KPI for the amount of land occupied, thereis no indicator on the amount of land disturbedor reinstated each year from their miningoperations. Another key issue for the sector is transparency and like other leading miningreports, Anglo American disclose the taxes androyalties paid to each government.

A related key issue is demonstrating thebenefits to the communities in which theyoperate. As an indicator of these benefits,Anglo American report an “economic valueadded” KPI. Further insight to their economiccontribution would be gained with the inclusionof a definition or explanation of this indicator.

Overall, the leading mining company reportsinclude KPIs across many of the materialissues. With the exception of a meaningful landmanagement KPI, Anglo American appears to be right up there with them. To enhancedisclosure, the sector next needs to considerKPIs on some of the other sensitive issuessuch as resettlement, local community health,and the Voluntary Principles on Security andHuman Rights.

❝KPIs are meant tohelp a business define and measure progresstowards its goals.

❞The Waitrose 2006 CSR Report includes KPIsacross a range of sustainability dimensions,including supply chain and transportation. The supply chain KPIs disclosed are based on the findings of supplier risk assessments.Though it is not clear whether this relates tosuppliers for own-brand goods or if it also

Directions Monthly October/November 2007 Issue 17

Some companies are already being brave and smart enough to define their own path in non-financial reporting. More need to think for themselves and break out of the pack mentality.

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covers other suppliers. Also it would be moremeaningful if the findings were categorised by the risk they relate to, eg labour practices,health and safety, etc. A good next step wouldbe to include KPIs on supplier audits.

The ‘avoided mileage from back and forwardhauling’ indicator presumably helps managegreenhouse gas emissions and the topical ‘food miles’ issue, however a definition wouldaid clarity. The report also discusses anothertopical issue, customer health and nutritionalinformation, but unlike some others in thesector, KPIs are not included.

Overall, Waitrose discloses KPIs in most of the areas covered by its peers, apart fromhealth and nutrition. One competitor also has a brownfield development metric and anotherhas an employee ethics code KPI. Waitrosemay consider that these are not materialbecause of its strategy or ownership structure(employee owned partnership). No one in thesector reports KPIs on the impact of largeretailers on local businesses.

The 3i report is by far the shortest (7 pages)but this is not necessarily a bad thing. Thereport covers their approach to employeedevelopment, health and safety, environment,and community investment. A performanceindicator is included on each aspect and thereis a target on their office greenhouse gasfootprint. This appears to be 3i’s first report so no comparison is made with previous years’ performance. The report says thatcorporate responsibility is taken into account in investment decisions but no details orindicators are provided. This is surely of thehighest level of interest to stakeholders?

The Vodafone 2006 Corporate ResponsibilityReport includes indicators across thedimensions of CR including revenuedistribution, diversity, community investment(voluntary investments and those made underlicence conditions), supplier evaluations,investor and opinion former concerns and theresults of a MORI survey on mast siting. Thereare no KPIs on electromagnetic radiation, but the subject is discussed in detail. KPIs are provided on the re-use of handsets in“lower-middle-income countries”. However, an explanation on the ultimate fate of this

equipment at the end of its life would beuseful, particularly in countries where theredoes not appear to be a local operatingcompany (such as Nigeria which receives 43% of re-used phones). Overall, the KPIsdisclosed are very similar to those reported by the other European mobile operatorsindicating that these are what the sectorconsiders most material.

The KPIs presented in the ExxonMobil 2006Corporate Citizenship Report are based on the sector reporting guide from the AmericanPetroleum Institute/International PetroleumIndustry Environmental ConservationAssociation. Consequently the ExxonMobilreport includes KPIs that are similar to itspeers and cover what the industry consider to be the material issues for which data isreadily available.

Disclosing KPIs on revenue transparency has been problematic for the international oil companies, but Exxon does disclose totaltaxes paid to governments (aggregated – not detailed by each country) and refers to reports published under the ExtractiveIndustries Transparency Initiative (EITI) on payments to certain host governments such as Chad.

Unlike many of its European peers, it is notExxon policy to prohibit political contributions,but they do disclose the contributions made in the US (albeit that such disclosure is legallyrequired in other regulatory filings). Exxon also have a gender and US/non-US workforcediversity KPI.

❝ The important ones to stakeholders areKPIs on the issues that are most material to the business. ❞However, unlike some of their peers, Exxon donot disclose KPIs on breaches of their ethicalbehaviour requirements or environmental and safety fines paid. Exxon do include somemetrics concerning their workforce malaria and HIV programmes in Africa, but these are not to the same level of detail as in theAnglo American report.

The Heineken 2006 Sustainability Reportpresents KPIs on safety and environmental

performance including accident rates, waterconsumption, effluent, emissions to air, andpackaging. There are no metrics on supplychain environmental impacts such as transport,or biodiversity and sustainable agriculture.There are no KPIs on social investment, healthand wellness, responsible drinking, marketingand consumer education. Additional metricsare provided in the GRI G3 Index and data sheet on the web, including seniormanagement diversity, workforce turnover,political contributions and a survey ofoperating companies on the consideration of human rights in supplier selection. The data sheet does not include year-on-yearperformance comparison or targets. I alsocouldn’t help noticing that there were no cases of discrimination reported in a company with over 55,000 employees.

Overall then, which is the best of this bunch?The KPIs and boundaries in all of the reportsare for the most part reasonably clear. The distinguishing factor and probably theimportant ones to stakeholders are KPIs on the issues that are most material to thebusiness. Therefore the best one has to beAnglo American – it presents indicators on keyissues such as HIV, taxes and royalties paid toeach government, and economic value added(although the latter needs further explanation).

What is the future of KPI reporting? Currently,it appears that in some cases reporters are collating information specifically forreporting and complying with GRI. A morepragmatic approach to applying GRI is to use the company’s materiality process todetermine what metrics to report. Indicators on material issues are also more likely to beused in managing the business. Currentlymetrics also tend to be output/lagging metrics (emissions, incidents, etc) with some input/leading indicators (eg, communityinvestment). Engagement with businessleaders and investors would be enhanced with indicators on outcomes – linked to key factors such as brand and strategy.

Some companies are already being brave and smart enough to define their own path in non-financial reporting. More need to think for themselves and break out of the pack mentality.

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