Corporate Sustainability Reporting Jeannie Johnson Harrington MTSU CPE Day December 6, 2012
Agenda • Introduction and Definitions • History • Triple Bottom Line • Evolution of Sustainability Reporting • Financial Reporting • Business Case for Sustainability Reporting • Trends in CSR • Role of Professional Accountants • Conclusion
Definition of sustainability The most commonly referenced definition for sustainability comes from the 1987 Report of the World Commission on Environment and Development: Our Common Future. This commission, also known as the Brundtland Commission, was chaired by Gro Harlem Brundtland, a physician and prime minister of Norway. The report (Chapter 2, page 54) provides the following definition, which is also the definition referred to by the International Federation of Accountants (IFAC) in its Sustainability Framework 2.0: Professional Accountants as Integrators: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts: “The concept of ‘needs’, in particular the essential needs of the world's poor, to which overriding priority should be given; and The idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs.” To summarize, the key considerations that are critical to the development of an equitable future include social, economic and environmental aspects. Ernst & Young Academic Resource Center
Definition of sustainability • Environmental Protection Agency (EPA) Definitions: • A public policy perspective would define sustainability as the satisfaction of basic economic, social, and security needs now and in the future without undermining the natural resource base and environmental quality on which life depends. • From a business perspective, the goal of sustainability is to increase long-term shareholder and social value, while decreasing industry’s use of materials and reducing negative impacts on the environment. • Sustainable development reflects not the trade-off between business and the environment but the synergy between them.
Definition of sustainability Going one step further, some would argue that we don’t want to simply “sustain” life, but provide an opportunity for the members of all species to achieve their potential. John Ehrenfeld, renowned academic in this field and author of Sustainability by Design: A Subversive Strategy for Transforming Our Consumer Culture, defines sustainability as, “the possibility that humans and other life will flourish on the Earth forever.” Ernst & Young Academic Resource Center
Definition of sustainability A decision-making framework for sustainability was introduced in chapter 10 of Australia: State of Environment 1996, a report produced by The State of the Environment Advisory Council. The report states: “We base much of our decision making on the implicit premise that the prime consideration is economic and that environmental problems can always be solved if the economy is sound.” • The report then states: • “the only sensible model for long-term sustainability decision making recognizes that the economy is a subset of society (since important aspects of society do not involve the economy) and that society is enclosed by the natural ecology of the planet.” • This concept is illustrated to the right: • Therefore, this model indicates that economic decisions are constrained by social decisions and, ultimately, by environmental decisions to achieve sustainability. Ernst & Young Academic Resource Center
Sustainability in a nutshell • Puts dollars to the social/environmental accounting agenda. • Focuses on doing the right thing for employees, consumers, society, the earth and the government. • Incorporates profits into doing the right thing.
History • Early financial reporting was only concerned with the measurement and communication of economic and financial data. • In the 1960s, calls were made for social information to be included, along with financial data. • Early social information was provided by sociologists, economists, and political scientists, not accountants. • Thus, it was felt that the studies had unrealistic cost assignments. • These projects needed effective planning and evaluation and accountants were thought to give credibility to social reporting. • Early social/environmental reporting came in national accounts.
Systems of Reporting • SEEA (System of Integrated Environmental and Economic Accounts) • Environmental accounting system that integrates the system of national accounts with information on the environmental impacts and dimensions of an economy • Designed by the United Nations Statistics Division • 1993 SEEA consisted of 5 versions countries could choose from when trying to implement the system, one of which includes EDP (environmentally adjusted domestic product). • 2003 SEEA revised the 1993 SEEA and consists of 4 categories of accounts
SEEA Continued • Currently there is no standardized system or framework used globally • United Nations Committee of Experts on Environmental Accounting (UNCEEA) is working to elevate the 2003 SEEA to a global level. • Countries involved: Norway, Netherlands, France, Indonesia, Mexico, South Africa, Papua New Guinea, Namibia, Botswana, the Philippines, and others
United States Involvement • EPA took a very different approach and determined an NDP (environmental domestic product)….very theoretical. • A bit of work was done during the Clinton Administration in the minerals industry but it was very controversial and little has been done since then. • Until recently ………
Triple Bottom Line (TPL or 3BL) • Created by John Elkington in 1994 • Triple Bottom Line accounting means expanding the traditional reporting framework to take into account ecological and social performance in addition to financial performance – people, planet, and profit. • Also called Corporate Social Responsibility (CSR) or Sustainability.
Planet Bottom Line • Known as natural capital and includes water, air, energy, waste produced, etc. • Evaluated by how well a company includes environmental consideration into its activities. • A company should try to minimize its impact on nature among all its operations.
People Bottom Line • Known as human capital. • It relates beneficial business practices toward labor, the community and region. • Includes good labor practices, human rights, and product responsibility. • It also posits that the company should give part of its profit to the surrounding community in donations.
Profit Bottom Line • The organizational economic impact on the environment. • Can include traditional financial measures. • Refers to an “honest” profit, frowning upon excessive profits with excessive job losses. • It must be made in agreement with the other two bottom lines. • 3BL views people, planet and profits together, not separately, as opportunities for the better.
Evolution of reporting on sustainabilityTBL Social Sustainable Economic Environmental Ernst & Young Academic Resource Center
Evolution of reporting on sustainability In the early 2000s, corporate scandals resulted in a push for companies to report on their corporate governance and ethics. Additionally, youths were demonstrating a stronger belief in equality and social consciousness. Baby boomers were at a time in their lives when they became reflective and were able to give of their time. Essentially, each of these generations was placing a greater emphasis on purpose. They demonstrated a desire to connect with the “heart and soul” of a company and did not accept (what perhaps would have been acceptable in the past) as a “we are in compliance mentality around sustainability. “ Corporate governance and corporate social responsibility (CSR) reports followed and the concept of the quadruple bottom line (QBL) emerged. QBL encompasses four P’s (people, planet, profit and purpose). Purpose might represent ethics and values as well as governance and tone from the top. Purpose might also represent passion or spirituality. Stakeholder value was now associated with a company’s purpose. Ernst & Young Academic Resource Center
Evolution of reporting on sustainability The authors of Firms of Endearment: How World-Class Companies Profit from Passion and Purpose (2007) call the current era the “Age of Transcendence.” When looking at building stakeholder value, they identified approximately 40 companies that met their criteria as a firm of endearment. Their research suggests these companies outperform Fortune 500 companies on both a short-term and long-term basis (1000% over 10 years). Their research also found that more often people ask if a company’s values are in alignment with their own when they purchase goods and services and when they make career decisions. The authors note that a fully engaged employee is more productive and that a satisfied customer is the best advertisement. Ernst & Young Academic Resource Center
Evolution of reporting on sustainability In terms of accountability, the internet also made it easy for stakeholders to research company performance and more importantly, to share experiences and hold companies accountable. Many notable business leaders in the area of strategy and sustainability have suggested that listening to stakeholders and embracing their preferences and imperatives should be part of every business model. Ernst & Young Academic Resource Center
Reporting on purposeExample 1: Johnson & Johnson Credo Johnson & Johnson’s Credo, written in 1943 by Robert Wood Johnson (member of founding family and chairman from 1932 to 1963), reflects the company’s commitment to multiple stakeholders: Our Credo “We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit. “We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical. “Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return.” Johnson & Johnson Ernst & Young Academic Resource Center
Reporting on purposeExample 2: Nike CR Strategy In its fiscal year 2007, 2008 and 2009 sustainability report, Nike’s CEO, Mark Parker, in his “Letter from the CEO,” comments, “sports created Nike, but design and innovation made it grow. Our challenge – and our opportunity – is to use all three to help people reach their true potential.” In this report, Nike also discusses its CR strategy. On its future outlook, it states: ON THE HORIZON “Nike’s vision for Sustainable Business and Innovation is clear: to help NIKE, Inc. and its consumers thrive in a sustainable economy where people, profit and planet are in balance. “For Nike, this means a focus on sustainable manufacturing, sustainable product development and creating a sustainable marketplace. We will design products and influence our supply chain to create less waste; promote equitable and empowered workers in contract factories; and protect access to sport for everyone across the globe. “It’s imperative to find new and innovative approaches to designing product and to managing energy and resources that are needed to run our global business. We will continue to identify closed-loop models and processes that increase sustainability throughout our supply chain – end to end. “Equally, we continue our steadfast commitment to improving working conditions in contract factories. We will maintain our investments in lean manufacturing and human resource training while addressing the root causes and challenges within the supply chain by promoting transparency and collaborating on solutions with the broader industry. (continued on the following slide) Ernst & Young Academic Resource Center
Reporting on purposeExample 2: Nike CR Strategy (continued) “Moving forward, we will sharpen our voice to advocate for youth around the world to have access to fitness and sport. We will elevate the issue with key stakeholders, highlighting the serious decline in opportunities for youth participation with the aim of creating a movement for change. “NIKE, Inc. continues to be a growth company, aligning our strengths and opportunities. Our business strategies are clear and the need to focus innovation against creating sustainable business opportunities has never been clearer than it is today. We are focused on identifying new ways to create value and generate positive returns on investments for our business, shareholders, workers and the environment. “We know we can’t achieve this alone and are committed to partnering and collaborating to find creative solutions. It will take new models of innovation, new forms of collaboration, new financial instruments and new business approaches. It will take changes in public policy. It will take engaged consumers driving new market forces. “Over the past few years, we’ve achieved much success with our efforts and are on track with the ambitious goals that we set for ourselves. It’s clear however, that the more we achieve and the more we look ahead, the more opportunity we see for progress. We invite you to join us in this journey.” Ernst & Young Academic Resource Center
Reporting on purposeExample 3: Unilever purpose and principles On its home page, Unilever shares its purpose and principles: Purpose & principles “Our corporate purpose states that to succeed requires ‘the highest standards of corporate behaviour towards everyone we work with, the communities we touch, and the environment on which we have an impact.’ “Always working with integrity “Conducting our operations with integrity and with respect for the many people, organisations and environments our business touches has always been at the heart of our corporate responsibility. “Positive impact “We aim to make a positive impact in many ways: through our brands, our commercial operations and relationships, through voluntary contributions, and through the various other ways in which we engage with society. “Continuous commitment “We're also committed to continuously improving the way we manage our environmental impacts and are working towards our longer-term goal of developing a sustainable business. “Setting out our aspirations “Our corporate purpose sets out our aspirations in running our business. It's underpinned by our code of business Principles which describes the operational standards that everyone at Unilever follows, wherever they are in the world. The code also supports our approach to governance and corporate responsibility. “Working with others “We want to work with suppliers who have values similar to our own and work to the same standards we do. Our Business partner code, aligned to our own Code of business principles, comprises ten principles covering business integrity and responsibilities relating to employees, consumers and the environment.” Ernst & Young Academic Resource Center
Reporting on purposeExample 4: TOMS purpose In its first Giving Report released in 2011, TOMS shares its purpose in its welcome by its founder: Welcome “If you’re new to TOMS, hi, we make shoes, and with every pair purchased, we give a new pair of shoes to a child in need. One for One™ We think it’s a pretty good system, but know that people still have a lot of questions. That’s kind of the idea of the Giving Report, but also to share what we’ve learned over the years. “If you already know about TOMS, you rock. Hopefully this report will provide you with some info that helps you answer questions that even veteran TOMS supporters ask. “Thanks for taking the time to learn more about our giving. None of this would be possible without our AMAZING customers. “We are so grateful!” Your TOMS family Ernst & Young Academic Resource Center
Reporting on purposeExample 5: Ernst & Young Corporate Responsibility Framework On its home page, Ernst & Young states that it sees the purpose of corporate responsibility as: “…. a responsible business strategy and the use of our skills to improve society is how we make a positive contribution to the world — and create a better tomorrow. We all need to ask ourselves, ‘How can I make a difference?’ “At Ernst & Young, we ask ourselves what we can do to make a difference — not just for our clients or our own business, but: For our communities For the greater good of people everywhere For the sustainability of our planet” Ernst & Young’s Corporate Responsibility Framework reflects a focus on a wide group of stakeholders aligned with its values and purpose Ernst & Young Academic Resource Center
Evolution of reporting on sustainability To facilitate comparison between companies on sustainability measures and provide a sustainability reporting framework, the Coalition for Environmentally Responsible Economies (CERES) founded the Global Reporting Initiative (GRI) in the 1990s. Now in its third iteration, over 3,500 companies prepare and publish sustainability reports that follow GRI guidelines (G3 and G3.1). Most companies prepare reports voluntarily; however, some companies are required to report. Similar to accounting standards, the GRI framework rests on concepts of consistency, comparability, objectivity and verifiability. The fourth iteration of GRI guidelines, or G4, is now in development to address an ever-increasing demand for nonfinancial data and improved clarity. Ernst & Young Academic Resource Center
Evolution of reporting on sustainability Several stock exchanges now encourage GRI-compliant sustainability reports for certain listed companies. For instance: In February 2010, the Johannesburg Stock Exchange made it compulsory for all listed companies to comply with the King Code of Governance Principle (King III), including the recommendation for a company to produce an integrated report for its financial year starting on and after March 1, 2010, or to explain why it was not fulfilling the recommendations of King III. November 2011, the Securities and Exchange Board of India mandated that listed entities must submit Business Responsibility Reports, as a part of their Annual Reports. In January 2012, the Brazil Stock Exchange recommended listed companies to either publish a sustainability report or explain why they do not. In August 2012, Singapore Stock Exchange issued a “Policy Statement on Sustainability Reporting” encouraging listed companies in the Exchange to voluntarily commit to sustainability practices and reporting. In June 2012, Nasdaq recommended listed companies to either publish a sustainability report or explain why they do not. Ernst & Young Academic Resource Center
Use of GRIExample 6: The Coca-Cola Company GRI Report In its 2010/2011 GRI Report (a companion to the 2010/2011 Sustainability Report), The Coca-Cola Company shares the scope of its report and states: About This Report “The Global Reporting Initiative (GRI) is ‘a network-based organization that produces a comprehensive sustainability reporting framework that is widely used around the world.’ This year, in 2011, The Coca‑Cola Company has set out to report against the Key Performance Indicators (KPIs) that measure economic, environmental and social performance. We have done so within the scope of our Company’s wholly owned operations. Where we have reported information on behalf of the Coca‑Cola system (The Coca‑Cola Company and our bottling partners), we have flagged this information within the body of the text. “For 2011, and the 2010/2011 Sustainability Report specifically, our Company has self-declared a grade B against the GRI G3.1 Guidelines. This year’s SustainabilityReport has also received verification by a third-party external verification agency, FIRA Sustainability BV. Their verification is evidenced by a ‘+’ sign next to our grade B, which reflects their verification and approval of our tracking systems. “Throughout this report, you will find the KPIs that we have addressed, along with additional information regarding our most critical initiatives and programs. While we strive to continuously increase our transparency, some of the information requested in response to additional KPIs could put at risk our ability to compete and therefore are not included in the report.” Ernst & Young Academic Resource Center
Use of GRIExample 7: UPS Sustainability Report In its 2010 Sustainability Report, UPS receives a GRI rating of B+ and its “Statement on GRI Application Level Check” states: “GRI hereby states that UPS has presented its report ‘Sustainability at UPS 2010’ to GRI’s Report Services which have concluded that the report fulfills the requirement of Application Level B+. “GRI Application Levels communicate the extent to which the content of the G3.1 Guidelines has been used in the submitted sustainability reporting. The Check confirms that the required set and number of disclosures for that Application Level have been addressed in the reporting and that the GRI Content Index demonstrates a valid representation of the required disclosures, as described in the GRI G3.1 Guidelines. “Application Levels do not provide an opinion on the sustainability performance of the reporter nor the quality of the information in the report.” Ernst & Young Academic Resource Center
Expansion of investor driven discretionary reporting on sustainability areas While some companies might not produce a comprehensive sustainability report, they might participate in discretionary reporting. A notable example of discretionary reporting includes the Carbon Disclosure Project (CDP), which is supported by 655 institutional investor signatories with a combined $78 trillion in assets. Basically, the CDP is asking questions on behalf of these investors, which drives the company’s willingness to respond. In 2011, over 3,000 companies responded to the CDP annual climate change questionnaire, including 81% of the Global 500 and 68% of the S&P 500. The CDP is a project that has encouraged thousands of organizations to measure and disclose their greenhouse gas emissions, climate change risk and water strategies to help transform the way business is done, including managing supply chain risk. The CDP collects this data globally and then makes it available to the public. Ernst & Young Academic Resource Center
CDP participationExample 8: Bayer Sustainable Development Report In its Global 500 Report 2011, CDP reviews disclosures provided by thousands of organizations around the world, scores these disclosures and identifies the 500 leading organizations by industry sector. In the health care sector, Bayer has been identified as the leader and has been recognized in the Global 500 CDLI (Carbon Disclosure Leadership Index) for three consecutive years. In its 2010 Sustainable Development Report, Bayer shares this recognition and other rankings and states: “The Carbon Disclosure Project (CDP) has once again included Bayer in the Carbon Disclosure Leadership Index (CDLI) as the best company in the health care sector. In the newly created Carbon Performance Leadership Index (CPLI), Bayer is listed with a top rating of “A,” confirming our leading position in climate protection. “The table provides an overview of the sustainability indices and funds in which Bayer is included:” (see table on the following slide) Ernst & Young Academic Resource Center
CDP participationExample 8: Bayer Sustainable Development Report (continued) Ernst & Young Academic Resource Center
Integrated reporting or one report Today, many companies are voluntarily preparing sustainability reports. However, while the concept of sustainability includes economic performance, most sustainability reports generally only report on environmental, social and governance/ethics performance. Now, investors are demanding all-inclusive reports that include economic performance as well. This is also known as an integrated report, one report or EGSEE report — economic, governance, social, ethical and environmental. Ernst & Young Academic Resource Center
Integrated reporting or one reportInternational Integrated Reporting Council To address this demand, the International Integrated Reporting Council (IIRC) was created in August 2010: The IIRC states: “Integrated Reporting is a new approach to corporate reporting that demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, Integrated Reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organization is really performing.” Ernst & Young Academic Resource Center
Integrated reporting or one reportInternational Integrated Reporting Council The mission of the IIRC is “to create a globally accepted integrated reporting framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format. The aim is to help with the development of more comprehensive and comprehensible information about organisations, prospective as well as retrospective, to meet the needs of a more sustainable, global economy.” The IIRC released a discussion paper, Towards Integrated Reporting – Communicating Value in the 21st Century, in September 2011. This paper offers initial proposals for the development of an integrated reporting framework and requests feedback from stakeholders. Ernst & Young Academic Resource Center
Integrated reportingExample 9: The Clorox Company Annual Report In its 2011 Annual Report, “Think Outside the Bottle,” the Clorox Company demonstrates an integrated approach to reporting. While comprehensive financial statement disclosures and MD&A are not provided, financial statement information is presented and integrated. In the “About this report” section, the report states: “At Clorox, our financial performance and our ongoing commitment to corporate responsibility (CR) go hand in hand. That’s why we have taken the important step to integrate our financial, environmental, social and governance performance in one report. Our success in each of these areas matters to our stockholders and range of other stakeholders, including employees, consumers, customers, government and nongovernment organizations, business partners and our communities. “We’ve organized this year’s report according to our strategic focus of five key pillars: Performance, Products, People, Planet and Purpose. You will learn more about these pillars throughout the report.” Ernst & Young Academic Resource Center
Integrated reportingExample 10: Southwest Airlines One Report In its 2011 One Report™, Gary Kelly, Southwest Airlines’ CEO, addresses his stakeholders in the introduction of its report with a focus on the triple bottom line and integrated reporting: “For the U.S. airline industry, the first decade of this century will forever be known as the ‘lost decade’—fewer passengers, fewer flights, fewer airplanes, and fewer aviation jobs. Faced with the worst economic recession in aviation history, a worldwide credit crisis, and astronomical jet fuel prices, the airline industry endured billions of lost dollars and numerous bankruptcies and liquidations. And yet, while not immune to the economic collapse, brutal competition, and energy price volatility, Southwest Airlines prevailed. We emerged from the worst decade in aviation history without bankruptcy, without furloughs, without pay cuts, and without degradation of our Customer Experience. We even conquered a feat unmatched in U.S. aviation history, with 2010 marking our 38th consecutive year of profitability. What a tremendous accomplishment for our hard-working, high-spirited Employees. “At Southwest Airlines, we chose not to be a victim of the ‘lost decade’ but rather be motivated by our passion. Our passion and focus on the triple bottom line—Performance, People, and Planet—continues to propel us forward. Our 2010Southwest Airlines One Report™ expands on our accomplishments from our award-winning 2009 Southwest AirlinesOne Report™ and further adheres to the Global Reporting Initiative (GRI), an internationally recognized standard for triple bottom line reporting. The 2010 One Report fully complies with the GRI’s B+ application level, and we are excited to feature an enhanced, microsite format for the 2010 One Report.” Ernst & Young Academic Resource Center
Ecosystem valuation reports The World Business Council for Sustainable Development (WBCSD) launched its Business Ecosystems Training (BET) program in February 2012. The focus of the BET program is to increase the knowledge and understanding of the links between ecosystems and business given that, in an increasingly natural resource-constrained world, corporations must measure, manage and mitigate their impact on the ecosystems where they operate and through their supply chains. Ernst & Young Academic Resource Center
Ecosystem valuation reports In Guide to Corporate Ecosystem Valuation, Bjorn Stigson, President (now former) of WBCSD, states “ecosystem values will be increasingly considered by the finance sector and business-to-business customers as they assess the biodiversity and ecosystem-related risks and opportunities of investments and supply chains.” Additionally, in this report the WBCSD states “Corporate Ecosystem Valuation (CEV) can be defined as a process to make better-informed business decisions by explicitly valuing both ecosystem degradation and the benefits provided by ecosystem services. By including ecosystem values, the company’s aim is to improve corporate performance in relation to social and environmental goals and the financial bottom-line. Valuation can make decision-making around ecosystems more compelling and practical, thereby enhancing sustainable development strategies and outcomes.” Ernst & Young Academic Resource Center
Ecosystem valuation reports The report also presents the business case for CEV as illustrated below: • In recognition of the importance of protecting and enhancing ecosystem services such as pollination and water, 14 companies test piloted the valuation methodology affirming the value they perceive for ecosystem valuation. Ernst & Young Academic Resource Center
Ecosystem valuation reports In a similar effort to measure both its impact and gain a sense of the “free” services provided by ecosystems, PUMA worked with TruCost to develop and publish its first Environmental Profit and Loss Statement for 2010. PUMA estimated its environmental impact (extraction of resources, use of water, air pollution and waste) at 145 million Euros. Ernst & Young Academic Resource Center
Ecosystem valuationExample 11: BET Road Testers and Hitachi Group Sustainability Report A “Message from Road Testers” of the WBCSD BET program in the Guide to Corporate EcosystemValuationstates: “Mainstreaming ecosystem considerations into business is becoming increasingly important in order to deal with the challenges of a resource-constrained world. This Guide to Corporate Ecosystem Valuation (CEV) is a valuable addition to the toolkit used by business today. It can be used in relation to business operations as well as to suppliers, customers and other stakeholders. “This Guide has enabled us to, for example, value the benefits of ecosystem services, choose among alternative land and water management options, and determine new sources of revenue. It will help businesses explore how to adapt their current accounting and finance systems to better reflect the full value of the ecosystems they impact and depend on. “We see that CEV can strengthen business performance by considering social benefits, sustaining revenues, reducing costs, revaluing company assets and determining levels of liability and compensation. “We see the value of ecosystem valuation.” Ernst & Young Academic Resource Center
Ecosystem valuationExample 11: BET Road Testers and Hitachi Group Sustainability Report In its 2011 Sustainability Report, Hitachi Group discusses its participation in the WBCSD Ecosystem Valuation Initiative. Hitachi is one of the 14 companies participating in the initiative to support the BET program. “Dialogue with WBCSD President on Sustainable Development and the Role of Firms “During his May 2011 trip to Japan, WBCSD (World Business Council for Sustainable Development) President BjörnStigson visited Hitachi to talk with Hitachi, Ltd. Representative Executive Officer and President Hiroaki Nakanishi. “Hitachi, Ltd. has been a WBCSD member company since fiscal 2010 and co-chairs the WBCSD Ecosystems Focus Area Core Team. This team has been developing ESR*1 and CEV*2 as tools for evaluating the ecosystem impact of corporate activities as part of its mission to gauge the impact of corporate activities on ecosystems and to preserve ecosystems. “At their meeting, Mr. Stigson and Mr. Nakanishi discussed issues such as the impact of the Great East Japan Earthquake on Japan and Hitachi, the status of the recovery from the disaster, the medium- to long-term business environment outlook, how to handle business in emerging countries, contributions to ecosystem preservation, and the role of the WBCSD. “Mr. Stigson lauded Hitachi Group’s Social Innovation Business as an innovative society focused strategy that clearly delineates the role of companies. He noted that a combination of innovation, markets and appropriate regulation would be essential in achieving a sustainable society.” *1 ESR: The Corporate Ecosystem Services Review WEB http://www.wbcsd.org/web/esr.htm (various languages) *2 CEV: The Guide to Corporate Ecosystem Valuation WEB http://www.wbcsd.org/web/cev.htm (various languages) Ernst & Young Academic Resource Center
Ecosystem valuationExample 12: PUMA Environmental Profit and Loss Statement PUMA generated the first environmental profit and loss statement for the year ended December 31, 2010 through environmental valuation. Ernst & Young Academic Resource Center
Reporting on social impactExample 13: HP climate change disclosures In its 2011 10K, HP provides climate change disclosures (selectively provided): Part I: Business “Our operations are subject to regulation under various federal, state, local and foreign laws concerning the environment, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, and third-party damage or personal injury claims, if we were to violate or become liable under environmental laws. “Many of our products are subject to various federal, state, local and foreign laws governing chemical substances in products and their safe use, including laws regulating the manufacture and distribution of chemical substances and laws restricting the presence of certain substances in electronics products. Some of our products also are, or may in the future be, subject to requirements applicable to their energy consumption. In addition, we face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the chemical and materials composition of our products, their safe use, and their energy efficiency, including requirements relating to climate change. We also are subject to legislation in an increasing number of jurisdictions that makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products (sometimes referred to as "product take-back legislation"). In the event our products become noncompliant with these laws, they could be restricted from entering certain jurisdictions, and we could face other sanctions, including fines. (continued on following slides) Ernst & Young Academic Resource Center
Reporting on social impactExample 13: HP climate change disclosures (continued) “Our operations and ultimately our products are expected to become increasingly subject to federal, state, local and foreign laws and regulations and international treaties relating to climate change. As these laws, regulations and treaties and similar initiatives and programs are adopted and implemented throughout the world, we will be required to comply or potentially face market access limitations or other sanctions, including fines. However, we believe that technology will be fundamental to finding solutions to achieve compliance with and manage those requirements, and we are collaborating with industry, business groups and governments to find and promote ways that HP technology can be used to address climate change and to facilitate compliance with these related laws, regulations and treaties. “We are committed to maintaining compliance with all environmental laws applicable to our operations, products and services and to reducing our environmental impact across all aspects of our business. We meet this commitment with a comprehensive environmental, health and safety policy, strict environmental management of our operations and worldwide environmental programs and services. “The liability for environmental remediation and other environmental costs is accrued when HP considers it probable and can reasonably estimate the costs. Environmental costs and accruals are presently not material to our operations or financial position. Although there is no assurance that existing or future environmental laws applicable to our operations or products will not have a material adverse effect on HP's operations or financial condition, we do not currently anticipate material capital expenditures for environmental control facilities.” (continued on following slide) Ernst & Young Academic Resource Center
Reporting on social impactExample 13: HP climate change disclosures (continued) Part II: Risk Factors: “Unforeseen environmental costs could impact our future net earnings “We are subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of our products and the recycling, treatment and disposal of our products, including batteries. In particular, we face increasing complexity in our product design and procurement operations as we adjust to new and future requirements relating to the chemical and materials composition of our products, their safe use, the energy consumption associated with those products, climate change laws and regulations, and product take-back legislation. We could incur substantial costs, our products could be restricted from entering certain jurisdictions, and we could face other sanctions, if we were to violate or become liable under environmental laws or if our products become non-compliant with environmental laws. Our potential exposure includes fines and civil or criminal sanctions, third-party property damage, personal injury claims and clean up costs. Further, liability under some environmental laws relating to contaminated sites can be imposed retroactively, on a joint and several basis, and without any finding of noncompliance or fault. The amount and timing of costs under environmental laws are difficult to predict.” Ernst & Young Academic Resource Center
Reporting on social impactExample 14: Apple Supplier Responsibility Progress Report In its Apple Supplier Responsibility 2012 Progress Report, Apple shares its process for conflict-free sourcing: “Apple’s commitment to social responsibility extends to the source of raw materials used in the manufacturing of our products. We require that our suppliers only use materials that have been procured through a conflict-free process and from sources that adhere to our standards of human rights and environmental protection. “Apple is taking multiple steps to tackle this challenge. We are working with the Electronics Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI) in an industry-wide effort to train and certify smelters of these metals as being conflict-free through a rigorous independent third-party audit process aligned with the Organisation for Economic Co-operation and Development (OECD) guidelines. These audits include a comprehensive review of business and procurement systems as well as inspection of documentation of raw material purchases and inventory to ensure the absence of conflicted minerals. As the EICC/GeSI initiative completes smelter audits in tantalum, tin, tungsten, and gold, we will require our suppliers to source from these conflict-free certified smelters. (continued on following slides) Ernst & Young Academic Resource Center
Reporting on social impactExample 14: Apple Supplier Responsibility Progress Report (continued) “Apple was one of the first major electronics companies to completely map its supply chain in order to trace the materials used in our products back to their source. Since we began this effort, we have identified 218 Apple suppliers that use tantalum, tin, tungsten, or gold to manufacture components for Apple products and the 175 smelters they source from, broken out as shown in the following table. “In partnership with fellow EICC and GeSI member companies, we are also working on an outreach program to train management at smelters about the need for conflict-free sourcing of raw materials and in the EICC/GeSI certification process. To date, more than 34 smelters have received onsite training and consultation through this endeavor.” Ernst & Young Academic Resource Center
Financial Reporting • US GAAP • SEC Guidance • IFRS