When 17 socially responsible investment firms of the Social Investment Forum issued a joint recommendation that public companies adopt the sustainability reporting standards of the Global Sustainability Initiative, they foresaw not only better reporting, but new opportunities for auditors.
Speaking for the forum in a multinational teleconference, Dave Stangis, director of corporate responsibility at Intel, said that as the Global Reporting Initiative guidelines become the de facto international standard on sustainability reporting, their use is likely to become more widely demanded.
The GRI is a nonprofit institution that has developed a comprehensive and widely accepted set of standardized guidelines for sustainability reporting. The standards use indicators including economic performance (such as total payroll and community donations), environmental performance, labor practices, human rights, social behavior and product responsibility.
"There is a growing market in the auditing of GRI guidelines and reports," Stangis said. "We've talked with several accounting firms, but we have not had a third-party audit of a non-financial statement. Very few of our stakeholders ask for that, but it is an ongoing discussion we have with the social analyst community and with a growing number of stakeholders who are developing more robust auditing standards around these kinds of reports."
Speaking from Amsterdam, GRI chief executive Ernst Ligteringen said that the new opportunities for auditors come with both new and old challenges.
"Auditing non-financial reports is a growing market and is recognized as such by the accounting world," he said. "The GRI is in touch with accounting firms - the Big Four as well as boutique firms. The accounting associations are exploring this area not only because there's business in it for them, but because it addresses some of the big accounting challenges of this moment - such as how to account for and get a handle on intangibles, which seem to be adding up to a large part of a company's value."
Ligteringen said that almost 600 companies worldwide are beginning to offer sustainability reports. About 10 percent are in the United States, and 10 percent of that number are fully compliant with GRI guideline requirements. That figure is almost twice what it was a year ago, and Ligteringen said that he expects to see continued growth.
"Sustainability will be one of the differentiating business issues of this decade," he explained. "This means that protecting and developing environmental and social capital rather than burning it will increasingly affect companies' bottom lines... . The writing is on the wall. Shareholders, customers, employees and neighbors will want to know how companies manage risk and opportunities associated with today's issues, such as global warming, HIV/AIDS, child labor, road safety, obesity and cancer."
Ligteringen predicted that, in five to 10 years, the majority of public companies would be producing sustainability reports.
As a result, opportunities for auditors would be substantial.
Ligteringen pointed out that sustainability reports - also referred to as triple bottom line and corporate social responsibility reports - demand a certain level of expertise not only in GRI standards but in technical and niche areas, such as environmental science, human rights, and labor law, and such intangible areas as corporate relationships with stakeholders.
"This is an area that is still under development, still evolving, and no one has the final claim of wisdom or knows exactly how all this works," Ligteringen said. "This is, therefore, not an area where a few accounting firms have all the answers. There are often a whole variety of players who can make a valuable contribution to the verification of reports."
Opportunities on the horizon
The demand for expertise, however, is seen as an opportunity for auditors that can offer assurance. No such certification is mandated by national regulation, and many companies produce their sustainability reports without independent verification. Still, as these reports become more common, and even competitive, companies are expected to offer more than their word as to their accuracy and veracity.
Intel's Stangis said that producing sustainable reports can consume substantial amounts of time inside the corporation, and that external verification can add a "big chunk of cost" to a report, depending on what kind of accounting firm and what kind of service the company uses.
That big chunk of cost, which Stangis pointed out can be turned into value in credibility and corporate culture, translates into a revenue opportunity for audit and accounting firms.
One motivation for voluntary disclosure was simply to reduce the burden of disparate requests for such information from investors and other stakeholders. The investment coalition said that a single, comparable standardized report would make it easier for companies to provide information, even as it makes it easier for stakeholders to find and analyze information.
In many cases, a sustainability report attracts investment by demonstrating how a company has reduced certain risks.
Steve Lippman, senior social research analyst at Trillium Asset Management, indicated that some kind of third-party assurance would be appreciated by investors.
"As a coalition, we haven't taken a position on whether companies should have an outside auditor provide a verification statement, though we have heard from companies that, in some cases, auditors have helped companies with their measurement and reporting," he said. "In the coalition statement, we encourage companies to include in their reports an explanation of the processes they used to ensure the accuracy of the information they report, and when they include a verification statement, to carefully include a statement about the scope of the verification and how it was conducted."
The 17 firms of the coalition represent over $147 billion in assets. They base investment decisions on various criteria of corporate responsibility and sustainability. They tend to avoid tobacco and arms companies, for example, while seeking companies that minimize their environmental impact, respect employees, participate in community development and generally maintain integrity.
Among the investors are Trillium Asset Management, the Dreyfus Socially Responsible Growth Fund, Pax World Funds, Walden Asset Management, Domini Social Investments and the Calvert Group.
Among U.S. companies that base their reporting on GRI guidelines are Intel, Citigroup, Ford, General Motors, Hewlett-Packard and Starbucks.
Lippman said that investment firms are more interested in sustainability reports because of the loss of confidence resulting from the many recent corporate and accounting scandals. "As analysts, our vision of how to get out of this ethical slump is clear," he said. "The surefire way to reduce the risk of future confidence-killing scandals is increased disclosure. Sunshine truly is the best disinfectant when it comes to irresponsible business practices."
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