03.04.2013

In the run-up to G4 (to be launched in May at the GRI conference), I decided to examine some recent reports (at random, but GRI-based and broadly same sector) to see if they would be good-to-go if the Exposure Draft is approved as published (albeit the likelihood of this appears low - the grapevine is indicating that significant stakeholder pushback is likely to dilute G4, though quite to what extent is not clear).

Below is a reminder of what reports must include in order to qualify as "In Accordance" with the potential G4 Framework as we know it today from the Exposure Draft:

1. All of the Profile Disclosure Items. (There are 73 (!) Profile Disclosures)
2. Disclosures on Management Approach and Core Indicators related to all of the material Aspects identified by applying the Technical Protocol: Defining Report Content and Boundaries.
3. All disclosures identified in any applicable GRI Sector Supplement(s).
4. A GRI Content Index as specified in the GRI Guidelines.
5. A statement, signed by the highest governance body or Chief Executive Officer (CEO), that the report has been prepared in accordance with the GRI Guidelines and that it is a balanced and reasonable presentation of the organization’s economic, environmental and social impacts.

Regarding Profile disclosures, there are four substantive disclosures in G4 which make a difference to the entire reporting content. These are:

• DI 12: Describe the organization's supply chain (number, type, location of suppliers, value of materials purchased etc)
• DI 17: List the identified material Aspects (and other material topics).
• DI 18: Describe the organization’s value chain.
• DI 19: Place material Aspects (or other material topics) in the value chain.

Not reporting on these Profile Disclosures invalidates the "In Accordance" adherence. I will focus on these in my review of reports:

I ignore the 38 (!) Profile Disclosure items relating to governance and remuneration (up from 10 disclosure Items in G3), as, in my view, many of them are irrelevant, unnecessary and a waste of hours that the Working Group invested in devising every data point that they could possibly imagine. I expect this justified the cost of bringing the group to Amsterdam, but, in my view, it makes sustainability reporting look like Amazon.com's inventory of items shipped in the last five years. I suspect that in almost every case, these 38 disclosures alone will disqualify all existing reports from claiming "In Accordance". However, let's not get bogged down in the negatives before we even started....

Regarding Disclosures on Management Approach, there are now three specific disclosures (replacing rather general guidance in G3) which require the company to report for each material issue (aspect), what the issue is and its key impacts, why it is material and what it's doing about it.

First guinea pig:

The Clorox Company
Enduring Value 2012 Annual Report (integrated report)
GRI B+ GRI-checked online report with download (78 pages) Household Cleaning Products

Quick Overview of the Report
Clorox is a $5.5billion household products business with markets in over 100 countries and a workforce of 8,400 people. At Clorox, sustainability is paying off. Clorox people write in their annual report: "Sustainability investments in our Burt’s Bees®, Glad®, Brita® and Green Works® brands have accounted for about 40 percent of our sales growth in the last five years. Additionally, we’ve saved about $15 million annually by making sustainability improvements to our operations." A nice touch in this report is a description of some megatrends that are influencing Clorox's thinking. Clorox's Ingredients Inside is an interesting initiative, which lists all raw materials used in Clorox's cleaning products, with their chemical names and function. Of course, you would have to have a PhD in chemistry to make sense of all of that, but it's a good step for transparency.

The report receives a "+" from the GRI for being assured, although only GHG emissions from electricity consumption in U.S. facilities were verified. Frankly, you couldn't find a smaller sample of disclosure to assure, even if you tried really really really hard. This report, to me, does not stand the test of assurance. I fail to see how the GRI can reasonably award a certificate for assurance here.

The well-respected Leon Kaye's concludes in his review of this report that "Clorox stands out as a corporate citizen that more companies within and outside of its space would be wise to emulate". Certainly the company demonstrates strong performance in waste reduction, GHG emissions, and water consumption. I note some positive employee practices including a new health and wellness program and also good community support.

However, I feel the Clorox report lacks some reporting depth and breadth, and is focused on activities rather than the change that Clorox is effecting in society as a result of its sustainable business focus. For example, 21% of products (since 2010) have been reformulated to reduce materials and waste, but Clorox does not disclose the extent of these improvements and the reduction in impact. There is a commitment to "responsible sourcing" but zero detail on what this actually means, beyond the existence of a Supplier Code of Conduct. More importantly, there is little about how Clorox is changing consumer behaviors with the exception of one or two small examples. With key business growth coming from "green"-ish products, I would have appreciated Clorox telling this story more fully.

Profile Disclosures:
Clorox lists four issues of material focus, based on insights gained from stakeholder engagement processes:

• Sustainable Product Innovation to include solutions for public health and more natural or plant-based products.
• Product responsibility to improve human and environmental safety and ingredient transparency.
• Environmental sustainability for reducing Clorox's eco footprint.
• Public health in the area of disinfecting products.

Looking at G4's matrix of Categories and Aspects, these appear to be just two aspects: Environment (emissions, effluent and waste aspect) and Product Responsibility (customer health and safety aspect). This is quite convenient for Clorox, as the performance indicator content of G4 is required only for Material Aspects. An opportunity to move from 78 pages to 20 :)

Clorox does not describe its Supply Chain, nor its Value Chain and does not place material aspects in the Value Chain. These are required G4 disclosures. G4 good-to-go? NO

As an aside, another interesting Clorox issue which invited the wrath of leading commentator Marc Gunther and several others was their Greenworks campaign, which was too late for this report but may (or may not) be mentioned in the next report. Perhaps it's something for the Material Aspect: Marketing Communications!

Disclosures on Management Approach
This is easy for Clorox as there are only two Aspects to report. I think this report meets the requirements for this section. G4 good-to-go? YES

Performance Indicators
There are 10 indicators which are in the Emissions, effluent and waste Aspect (EN16 - EN25), of which seven are core. Clorox currently reports on three of these seven core indicators in full, providing no data relating to, for example, water discharge (EN21) or significant spills (EN23), and avoiding non-core indicators such as hazardous waste (EN24) and biodiversity affected by water runoff (EN25). G4 good-to-go? NO

There are just two Performance Indicators in the Customer Health and Safety Aspect (PR1, PR2) and Clorox currently reports on one of them, providing a good description of safety assessments and procedures (PR1). Clorox does not report on incidents of non-compliance with regulations concerning the health and safety impacts of products during their life cycle (PR2), but this is non-core, so not required for "In Accordance". G4 good-to-go? YES

Despite producing a lengthy and generally comprehensive report using G3, and recording some good sustainability achievements, it looks like Clorox has quite some work to do in order to prepare future reports "In Accordance" with the G4 Exposure Draft. And this is based on an analysis which barely grazes the surface of the total new scope of G4. I believe this shows that G4 as proposed is not a small evolution for reporting, but a major overhaul, and will require significant reconsideration of what and how to report. The upside is that Clorox G4 will not be required to report on anything not defined as material. But is that really an upside? Are there not some disclosures which should be reported by all companies whether or not they are company-specifically-material? I suspect there are several.

At least Clorox will not be alone in having to make significant change if the company decides to adopt G4... watch this space for an example from Henkel's report in my next post.

Henkel is an early 2013 reporter, and with a GRI B (self-declared report), is now my next guinea pig in the G4 good-to-go test. As you will have seen from my first post in this series, covering the Clorox report, getting to G4 is more of a marathon than a short stroll (if G4, when launched, is fairly close to the current exposure draft).

In this analysis, I focus on just a few significant changes in G4, and these are just four Profile Disclosures and their corresponding Management Disclosures and Performance Indicators.

These are the new disclosures: (for more background see my Clorox post)

• DI 12: Describe the organization's supply chain (number, type, location of suppliers, value of materials purchased etc)
• DI 17: List the identified material Aspects (and other material topics).
• DI 18: Describe the organization’s value chain.
• DI 19: Place material Aspects (or other material topics) in the value chain.

Quick Overview of the Report
Henkel is headquartered in Dusseldorf, Germany, and employs 47,000 people and generates revenues of 16.5 billion Euros, manufacturing household care and personal care products.

Henkel 2012 Sustainability Report GRI Application Level B - self-declared, 52 pages
The printed report is linked to the web-based report using reference codes, enabling you to find additional content by inputting a code - a nice touch. Henkel states a clear strategy for 2030 - a long-term goal to triple the value created by the company's footprint (i.e. become three times more efficient), supported by quantified five-year targets to 2015 in six focal areas - for example, reducing waste, water consumption and energy by 15% per production unit by 2015. Much of Henkel's report is focused on resource efficiency in product manufacturing and development. The company has developed a "Sustainability#Master" matrix approach which identifies the "hot spot" areas for improvement in value development and environmental efficiency for its products, and applies this system for evaluating and implementing improvements.

Profile Disclosures
Henkel's supply chain disclosure includes a section related to suppliers, and there is reference to the supplier base in 125 countries and the fact that more than 70% of purchased volume comes from OECD countries. Supplier selection criteria include sustainability performance and adherence to responsible business practice principles, and Henkel has a risk assessment process which requires suppliers to complete a self-assessment on sustainability issues and participate in audits of their operations.

However, Henkel does not disclose the number of suppliers it works with, nor the number of results of audits conducted. Henkel does not make any reference to the types of suppliers as required by disclosure D12, for example, whether the supplier base includes ingredient suppliers or contract manufacturers (though later in the report we can read that around 10% of Henkel's volume of over 7 million tons of output is produced by contract manufacturers).

DI 12 also requires disclosure of the "total monetary value and/or volume of materials purchased from suppliers broken down by types of materials, types of suppliers and location of suppliers" (although I fail to see why this disclosure is an essential basic profile disclosure) and Henkel does not really provide information which meets this request. DI 12 Henkel G4 good-to-go? No.

I couldn't find a Value Chain description in Henkel's report, though there is evidence of value chain thinking in the Hot Spot analyses, as in the example provided above, as these take into account the upstream and downstream effects of product development, manufacture and use. However, these descriptors are individual for selected products, and are limited to the impacts of products and not the entire organization and the entities it impacts. Additionally, the detailed impacts in these analyses are not fully disclosed - only the areas in which product improvements are identified and the progress of these improvements are noted. Therefore, mapping the Value Chain disclosure - DI 18 Henkel G4 good-to-go? NO.

Henkel has a long list of material issues, which could expand this 56 page report into something much longer in G4. I believe this complies with the requirement for listing the material issues and aspects as required by G4. DI 17 Henkel G4 good-to-go? YES

These material issues translate into 19 material Aspects in the new G4 line-up, according to my calculations. I can't examine ALL of these, but let's take a couple.

Occupational Health and Safety is a material Aspect in the Social sub-category of labor practices and decent work. There are four performance indicators here: LA 6, 7, 8 and 9, of which 8 and 9 are core. LA7 refers to "rates of injury, occupational diseases, lost days, and absenteeism, and total number of work-related fatalities, by region and by gender" and LA8 refers to education and programs to assist with serious diseases. These are unchanged in G4 and Henkel includes these indicators as fully reported. However, Henkel's reporting against LA7 in this self-declared GRI B level report does not meet the indicator requirements. Rates of injury and total fatalities are disclosed but not lost days, absenteeism and this is not split by region and gender.

LA8 relates to serious diseases. The Indicator Protocols define this as "Occupational or non-occupational related impairment of health with serious consequences for employees, their families, and communities, such as HIV/AIDS, diabetes, RSI, and stress." I could find no disclosure relating to such diseases in Henkel's reporting, although some of the health and safety training activities listed also include, for example, "back strengthening exercises and tips on nutrition". Therefore, in this material Aspect, not only does Henkel not meet the requirements for G4, it does not meet the requirements for G3. G4 good-to-go? NO

Renewable raw materials is one of Henkel's stated material issues. This fits into the Materials Aspect in the Environment category. There are two core indicators here: EN1 (materials used by weight or volume, split by renewable and non-renewable) and EN2 (percentage of recycled input materials). Henkel indicates full reporting against both indicators. Regarding materials used, Henkel reports in general on the different types of raw materials in key product categories, and notes the approximate percentage of renewables. However, no data is provided on the weight or volume of key raw materials, including sustainable palm oil, which Henkel notes as a separate issue in its own right. Henkel confirms commitment to participation in the Roundtable on Sustainable Palm Oil and to purchasing of RSPO certified palm oil, but does not disclose how much palm oil the company actually uses. Henkel also mentions various initiatives to improve the sustainability of packaging, but apart from providing the total weight of packaging, does not identify how much is from recycled materials. Therefore, in these two indicators, Henkel does show a good approach and several positive initiatives, but does not meet G4 requirements and not even G3. G4 good-to-go? NO

At this point, we know that Henkel's current reporting does not meet the G4 Exposure draft standards, based on, once again, a very limited analysis of just a small sample of G4 disclosure requirements. This is not surprising, as this report was not written with G4 in mind. It does however demonstrate the step change required to meet G4, as we saw with the previous Clorox example. In other words, Henkel has some significant changes to make before it can claim "In Accordance" with G4, if the company decides to become G4 compliant.

In my next post, I will share some further thoughts about the applicability, relevance, complexity, benefits and uptake likelihood of G4. Watch this space.

PS: In the meantime, have your say in the CR Perspectives survey from CorporateRegister.com.