Friday, April 8, 2011

Quarterly Non-Financial Reporting: A tool for improving social and environmental business strategies

Every public company in the U.S. releases a quarterly financial statement (the 10-Q) that shows their financial results – how money is flowing in, through, and out of the company – and any significant changes and events that occurred over a three-month period. For external stakeholders, the 10-Q and other financial reports help to uphold a company’s financial accountability to their investors and guide sound investment decisions.  Internally, this information is used to: 1) evaluate financial performance for the reporting period, 2) predict results that are likely to happen in the foreseeable future, and 3) adjust business strategy to capitalize on opportunities and avoid preventable loss.  Frequent quarterly reporting allows companies to constantly update and improve their financial strategy. 
As companies move into the new world of sustainability and shift to a triple-bottom line business model, it appears that they are ill-equipped to adjust their social and environmental strategies as efficiently as they can their financial strategy.  Why?
             Current reporting on a company’s social and environmental performance (CSR reporting, or corporate social responsibility) occurs, at most, on an annual basis, and this information is not released until 6 to 9 months after the reporting year.  More commonly, we see companies publishing bi-annual CSR reports.  This means that for every one CSR report released, there are eight quarterly financial reports. 
When information turnover is this slow, response is delayed.  By the time a company tries to mobilize and make improvements, conditions and needs have changed.  The data used to inform social and environmental strategy decisions is, at best, almost a year old.
If we are to create businesses that value economic, social, and environmental performance equally, then we need to report on social and environmental performance to the extent we do financials.  The speed of this reporting needs to catch up to the evolving world of business that's obsessed with real-time data and immediate response.


BARRIERS

There are two major barriers to incorporating comprehensive reporting in businesses: 1) resources, and 2) metrics.

Resources

Like the finance department that is central to any company, sustainable companies need a department whose primary function is to oversee social and environmental performance.  Only with this level of commitment can frequent triple-bottom line reporting (and thus continuous improvement) be possible.  It cannot be an ancillary function of a department whose main responsibilities lie elsewhere in the company.
Inertia sets on the whim of the financial department when the enormous investment in human resources, education, and infrastructure cannot be financially justified.  In physics, inertia infinitely continues until acted on by a force.  In this case, that force will be a new wave of morally informed investors who believe it is the responsibility of businesses to leverage their power and influence to effect positive impact on communities and the world.
Organizations such as the Social Investment Forum, SocialFunds.com, Calvert Investments, and GreenAmerica.org are helping to accelerate the growth of this investment trend.  They are attracting investors who have new values that extend beyond promising ROI and growing dividends.

Metrics

Fiscal strategy is based on fiscal measurements.  The unit of measure is the dollar (or other local currency).  Using these measurements and comparisons, companies can improve their performance by adjusting sales prices, operating expenses, and cash flows.
The problem with this new phase of sustainable business is that we measure everything in dollars.  The dollar is a product of the economy – NOT of the environment and not of human social interactions.  So why are we trying to measure social and environmental performance in a unit that doesn’t allow us to make the best informed strategic decisions regarding these issues? 
Functional environmental reporting measures electricity, fuel, natural gas, and water usage as well as pollution and waste reduction.  Social reporting assesses (among many other factors) health, safety, and turnover rate of employees, and quality of life, education, and health in global supplier communities. 
Another flaw in current CSR reporting is that numbers for the reporting year are compared only to a prior year’s baseline.  Measuring against past performance is crucial to understand the degree to which a company is improving.  However, in addition, these measurements need to be put into the context of the company’s long-term goals.  In other words, social and environmental performance need to be measured against both past performance and future targets.  Sustainability is a process of continuous improvement that will evolve and innovate into the future.  Businesses need to evaluate their position in terms of their broader sustainability goals instead of only considering their improvements compared to past baselines that were calculated when sustainability initiatives didn’t even exist. 


CASE STUDY: TIMBERLAND

In 2008, Timberland began an initiative to release quarterly social and environmental performance reports in addition to their financial statements and bi-annual CSR reports.  Each quarterly report includes four focus areas that inform their core CSR strategies:

1)  ENERGY
Measured in:
(a)  Metric tons of GHG emissions
(b)  Kilowatt-hours of renewable energy used
(c)  Total percentage of renewable energy used

2)  PRODUCT
Measured in:
(a)  Green Index score – a measure of product impact on the environment [http://community.timberland.com/Earthkeeping/Green-Index]
(b)  Grams of VOC per pair of shoes (volatile organic compounds)
(c)  Total percentage of organic cotton sourced

3)  WORKPLACES
Measured in:
(a)  Percentage of “High Priority” factories – score of at least 80 on the Timberland factory scorecard that evaluates production capacities and working hours
(b)  Percentage of production in “High Risk” factories – They strive for low production from high risk factories so that attention can be directed toward making health and safety improvements in those factories
(c)  Environmental assessment score – Scorecard methodology adopted from the Global Social Compliance Program (GSCP)
(d)  Assessment scores of business partners

4)  SERVICE (community greening)
Measured in:
(a)  Total hours used for community service
(b)  Total percentage of work hours used for community service
(c)  Total percentage of employees who engage in community service

(Source: Timberland Corporate Responsibility, http://community.timberland.com/Corporate-Responsibility/Our-Impact)

Timberland has overcome the barriers of resources and metrics.  They allot sufficient human and financial resources to match their commitment to social and environmental values.  With these resources, they are able to produce frequent comprehensive performance reports and adjust their strategies to meet current needs.  CSR performance is measured in non-dollar units, demonstrating how monetary units cannot adequately inform social and environmental strategic decisions. 

If we are to create a new culture of sustainability and continuous improvment, businesses must adopt this approach to comprehensive performance reporting.  

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