The dust is still settling on G4, the GRI's latest update to its sustainability reporting framework that was announced at the GRI Global Conference in Amsterdam last week. There were changes aplenty, from new disclosures (on governance, strategy and management approach) and indicators (on energy, carbon, and supply chain), to the scrapping of ABC Application Levels in favour of a simplified "in accordance with" system with 2 options: 'Core' for the average reporter and 'Comprehensive' for advanced sustainability reporters.
Materiality is king
Notwithstanding the above, the most fundamental change in G4 was the placing of materiality at the centre of a sustainability report. Under the G4 an organisation is required to conduct a materiality assessment, which determines:
- The significant economic, environmental and social impacts relating to the organisation;
- The boundary of the sustainability report; and
- What sustainability indicators to report on, for example carbon, water, energy, supply chain risks, etc.
The GRI's move towards materiality was in response to the most common criticism of the previous version, G3.1, which centred on the link between the number of reported indicators and the final Application Level (G3.1's system of indicating scope of content) of the sustainability report. This led to what many critics labelled a 'box ticking' exercise where organisations could scantily report a large number of indicators and still achieve the highest Application Level - Level A. Although achieving a Level A score bore no relationship with the quality of a report, or indeed the quality of the organisations' activities, it could have appeared that way and indeed some companies could use that to their advantage in promoting their CSR achievements.
With the new emphasis on materiality, GRI is taking a firm stance that sustainability reporting is no longer about the quantity of metrics reported against. Rather, it is about the context and importance of sustainability issues unique to a company and the quality of what is reported. Less is more, so to speak.
What the 'materiality focused' G4 means for business
All of this sounds fine and reasonable, but what is the catch?
The catch is that in order to make the step up in terms of materiality and quality, the GRI has raised the bar with a number of new disclosures and indicators that often go beyond the boundary of the reporting organisation, such as supply chain risks and Scope 3 Greenhouse gas (GHG) emissions. Critics of the new G4 say that the increased volume of indicators will be overly burdensome and companies are simply not ready to handle the complexity of determining materiality across multiple operating industries, supply chains, and stakeholders. The critical question for observers and reporting organisations is: has the GRI been too ambitious with the GRI G4 update, and will it alienate the community of over 4000 reporting organisations that it has managed to build up over the years?
New opportunities under G4
Here at the Carbon Trust, we welcome the changes made by the GRI. We believe that the quality of sustainability reporting does need to be raised to the next level as befits a more mature industry, much like financial reporting, in order to deliver true business value. However, we do recognise that the G4 represents significant challenges for businesses, and requires them to go beyond what they have previously achieved. We see this as an opportunity, not a burden.
Let us take carbon reporting as a case in point. In the G4, there are two new indicators relating to GHG emissions, which cover the reporting of Scope 3 GHG emissions (GA-EN17) and GHG emissions intensity (G4-EN18). From a materiality perspective, it is the inclusion of Scope 3 GHG emissions that will pose significant challenges to most large corporates. In our experience, in most cases, Scope 3 emissions are more material to a company's overall GHG impact than Scope 1 and 2 emissions combined. For example, GlaxoSmithKline revealed in its 2010 Sustainability Report that 80% of its overall carbon footprint comes from indirect emissions - with 40% of this resulting from the use phase of its products, such as propellants in inhalers. For companies that are not already looking at the wider carbon impact of their business the new G4 reporting framework means that many companies will have to find a way to report their Scope 3 emissions, which has traditionally been seen an optional or 'nice to have' exercise.
It is clear that Scope 3 reporting will represent a significant shift for organisations traditionally concentrating on Scope 1 and 2. The volume and complexity of data required and the ability to obtain the relevant data from sources outside the direct control of the company, such as suppliers and even consumers, may present a challenge for many.
However we see this as a real business opportunity. Scope 3 reporting enables a forensic look at the relative carbon performance of your upstream suppliers, which helps to identify inefficient suppliers or practices, and supply chain risks. Whitbread, for instance, worked with its suppliers to measure the GHG emissions of its supply chain and is already engaging them to help reduce emissions, which cuts costs and therefore achieves financial savings.
Scope 3 reporting also enables organisations to actively engage with customers downstream and help companies demonstrate the competitive advantages of their products to create market differentiation. For example, by measuring the use phase emissions of the Airblade, Dyson was able to substantiate and communicate that its product was 80% more efficient than conventional hand dryers.
We firmly believe that new challenges in G4 can be overcome by a commitment to quality reporting and seeing the potential opportunities that it represents. The business leaders of tomorrow will be those that are able to incorporate sustainability into their bottom-line through active measurement and reporting, management of supply chain risks, and the leveraging of innovation to create sustainable low-carbon competitive advantages.
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