Investigating the level of disclosure of
emissions by the top ten manufacturing
companies in South Africa
JM van Zyl
11830298
Mini-dissertation submitted in partial
fulfilment of the
requirements for the degree Master
of
Business Administration
at the Potchefstroom Campus of the North-West University
Supervisor:
Prof AM Smit
EXECUTIVE SUMMARY
Throughout the world, countries and companies are directing their attention towards actions to protect the planet, and an important focus area during various initiatives is the aim to stabilise greenhouse gas concentrations at a level that would prevent dangerous anthropogenic interference with the climatic system. Various targets are set by governments to reduce greenhouse gas emissions and the South African Government is, among others, investigating a carbon tax policy to facilitate their transition to a greener economy. As the global manufacturing industry emits up to 43 percent of the global CO2 emissions, it is evident that the companies in this industry are expected to play a significant role in reducing greenhouse gas emissions going forward.
What gets measured, gets managed, and formal institutions and regulatory establishments, such as, but not limited to, the Global Reporting Initiative, Greenhouse Gas Protocol and Carbon Disclosure Project provide recommendations and guidelines for companies regarding emissions disclosure in their sustainability reports as well as how to account for emissions inventories.
During this research, the integrated and sustainability reports of the top ten manufacturing companies listed on the JSE were reviewed and the disclosures of emissions were evaluated against a checklist that was developed through a literature review comprising various sources.
From the results of the research, it is evident that all the companies reviewed are aware of the importance of emissions disclosure and the impact that emissions have on climate change. All the companies reviewed did participate in the Carbon Disclosure Project in 2013, and all the companies make use of some formal document as guideline for their emissions reporting. Companies, in general, adhere more to the qualitative, narrative type of requirements than to the more computable, performance-related reporting of emissions. It is recommended for the top manufacturing companies to improve on the emissions performance reporting.
As a very limited sample was selected for this research, and no comparison periods were reviewed to measure the level of improvement of the emissions reporting, it is recommended for future research to focus on emissions performance reporting measured over a period of time to identify an improvement in emissions reporting of the top manufacturing companies.
TABLE OF CONTENTS CHAPTER 1
1.1 INTRODUCTION 8
1.1.1 Background to the study 8
1.1.2 Carbon Tax and CO2 emissions in South Africa 9
1.1.3 Sustainability disclosure 10
1.1.4 Motivation of topic actuality 12
1.2 PROBLEM STATEMENT 13
1.3 OBJECTIVES 13
1.3.1 Main objective 13
1.3.2 Secondary objectives 13
1.4 RESEARCH DESIGN AND METHOD 14
1.4.1 Literature review 14 1.4.2 Empirical research 14 1.4.3 Methodology applied 14 1.5 OVERVIEW 15 CHAPTER 2 2.1 INTRODUCTION 16
2.2.1 Sustainability reporting 18
2.2.2 King III requirements for integrated reporting 18
2.2.3 Guidelines as per the latest Global Reporting Initiative 20
2.2.4 Greenhouse gas emissions and reporting thereof 25
2.3 MANUFACTURING COMPANIES 36 2.3.1 Green businesses 36 2.4 CONCLUSION 38 CHAPTER 3 3.1 INTRODUCTION 39 3.2 RESEARCH METHODOLOGY 39 3.3 MEASURING INSTRUMENT 41 3.4 RESEARCH SAMPLE 42 3.5 RESEARCH RESULTS 44
3.5.1 Results on narrativereporting 47
3.5.2 Results on quantitative computable emissions reporting 48
3.6 CONCLUSION ON RESULTS 50
CHAPTER 4
4.1 INTRODUCTION 51
4.2 CONCLUSION 51
4.2.1 Guidelines and requirements for good disclosure practices 51
4.2.2 Current level of emissions disclosure of top-ten manufacturing companies 52
4.2.2.2 Quantitative, computable emissions reporting 55
4.3 RECOMMENDATIONS 58
4.4 ACHIEVEMENT OF OBJECTIVES 58
4.5 RECOMMENDATIONS FOR FUTURE RESEARCH 59
REFERENCES
ANNEXURES
A: Checklist for Aspen Holdings B: Checklist for Sasol
C: Checklist for Tiger Brands D: Checklist for BAT
E: Checklist for Mondi Ltd F: Checklist for Nampak G: Checklist for Richemont H: Checklist for Steinhoff I: Checklist for Bidvest J: Checklist for SABMiller
LIST OF TABLES
Table 1.1: Benefits of integrated reporting 12
Table 2.1: Elements of standard disclosures 21
Table 2.2: Categories and aspects of specific standard disclosures 21
Table 2.5: Guidelines regarding different approaches 30
Table 3.1: Difference between qualitative and quantitative research methods 40
Table 3.2: Top 40 listed companies 42
Table 3.3: Top 10 listed manufacturing companies 43
Table 3.4: Scores and classification of results 45
Table 3.5: Scores per type of question and average in total 46
Table 3.6: Summary on results on narrative questions tested 48
Table 3.7: Summary of results on questions relating to quantitative,
computable emissions reporting 49
Table 4.1: Summary of emissions reporting guidelines per source studied 52
LIST OF FIGURES
Figure 2.1: Major GHG emitting countries 27
Figure 2.2: Contribution of Scope 1 and Scope 2 emissions of total emissions
in each sector 33
Figure 2.3: GHG emissions in relation to the value chain 34
LIST OF GRAPHS
Graph 2.1: World GHG emissions in 2010 26
Graph 2.2: Sectors emitting the most CO2 in South Africa 28
Graph 3.1: Level of adherence to guidelines tested 47
Graph 4.1: Score per guideline 53
Graph 4.3: Performance on computable emissions reporting 56
Graph 4.4: Level of intensity ratio reporting per guideline used 57
LIST OF ABBREVIATIONS
ACCA Association of Certified Chartered Accountants
BAT British American Tobacco
CBSD Component Based Software Development CDP Carbon Disclosure Project
CGE Computable General Equilibrium
CH4 Methane
CO2 Carbon dioxide
FCCC Framework Convention on Climate Change
FTE Full Time Employee
GDP Gross Domestic Product
GHG Greenhouse Gas
GRI Global Reporting Initiative GWP Global Warming Potential
HAP Hazardous Air Pollutants
HFCs Hydrofluorocarbons
IRG Integrated Reporting Committee
JSE Johannesburg Stock Exchange
N20 Nitrous oxide
NF3 Nitrogen trifluoride
NGOs Non-government Organizations
NOx Mono-nitrogen oxides
ODS Ozone-depleting Substances
PM Particulate Matter
POP Persistent Organic Pollutants
SF6 Sulphur hexafluoride
SOx Mono-sulphur oxides
US United States
UK United Kingdom
UNFCCC United Nations Framework Convention on Climate Change VOC Volatile Organic Compounds
WBCSD World Business Council for Sustainable Development
WRI World Resource Institute
KEYWORDS
Emissions; environmental policy; environmental disclosure; manufacturing; environmental legislation; South Africa; King III; integrated reporting; Carbon Disclosure Project; Greenhouse gas;
CHAPTER 1
INTRODUCTION
1.1 INTRODUCTION
1.1.1 Background to the study
More than 150 countries signed the United Nations Framework Convention on Climate Change (FCCC) in 1992 aiming to protect the climate by stabilising greenhouse gas concentrations at a level that would prevent dangerous anthropogenic interference of the climatic system (Kim & Worrel, 2002:827). During the second and third conferences, further actions were identified and targets were set to reduce emissions of greenhouse gases of which CO2 is the most significant (Kim & Worrel, 2002:828).
The South African Government published their Carbon Tax Policy Paper on 2 May 2013 with the aim of reducing greenhouse gas emissions (GHG) and facilitates the transition to a greener economy. The carbon tax will be applicable to companies in the electricity, petroleum (coal/gas to liquid), petroleum (oil refinery), iron and steel, cement, glass and ceramics, chemicals, pulp and paper, sugar, and fugitive emissions: coal mining and various other industries (Jeffrey, 2013:19). The policy indicates that carbon will be taxed at R120 per tonne CO2, but a fairly complex structure is created on how exactly the process will be handled (Jeffrey, 2013:19).
According to Kim and Worrel (2002:827), the global manufacturing industry emits up to 43 percent of global CO2 emissions. The iron and steel industry is one of the most energy-intensive industrial sub-sections, accounting for approximately seven percent of total anthropogenic CO2 emissions (Kim & Worrel, 2002:827).
In most manufacturing companies, environmental performance is becoming increasingly important due to the nature of the processes and the impact on the environment. The bulk of greenhouse gas emissions emanate from the manufacturing sector and, going forward, these companies are expected to play a significant role in reducing greenhouse gas emissions. According to the Carbon Disclosure Project (CDP, 2010:4), companies will ensure they remain in business by continuously identifying risks and opportunities by increasing their resilience and making climate change and the measuring, verifying and reporting of the GHG emissions part of their core business strategy.
Integrated reporting means a holistic and integrated representation of the company’s performance in terms of both its finances and its sustainability (IODSA, 2009). When deciding whether to invest in a company or not, the investor makes an assessment of the economic value of the company that is determined by factors such as future earnings, brand, goodwill, the quality of its board and management, reputation, strategy and other sustainability aspects (IODSA, 2009). Investors are individuals who are also consumers and citizens and therefore concerned about the sustainability of our planet. With integrated reports a company increases the trust and confidence of its stakeholders and the legitimacy of its operations.
Integrated reporting puts the financial results in perspective by also reporting on how a company has both positively and negatively impacted on the economic life of the community in which it operated during the year under review; it also indicates how the company intends to enhance those positive aspects and eradicate the negative aspects in the year ahead (Eccles & Saltzman, 2011:57). To ensure a company maintains or improves the trust and confidence of the shareholders, it is important that they adhere to integrated reporting and simultaneously confirm the company’s values, ethics and governance.
With the looming implementation of carbon tax in South Africa, companies should adhere to sustainability reporting as many investors raised concerns regarding the sustainability of their investments should carbon tax be implemented. The proper disclosure of current carbon emissions can make a valuable contribution to investors not only in the estimation of the possible impact of carbon tax, but also add value to their investment decision-making process.
1.1.2 Carbon Tax and CO2 emissions in South Africa
Climate change is a serious challenge facing the world today and many countries are trying to change environmentally harmful behaviour by introducing market-based mitigation measures such as carbon tax (Mbadlanyana, 2013:77). Without such concrete measures, it will not be possible to keep the world on a sustainable climate patch (Mbadlanyana, 2013:77). The introduction of carbon tax in South Africa will, however, result in increased prices and will place the country in a considerable competitive disadvantage (Jeffrey, 2013:19).
South Africa can be classified as both a contributor to and victim of global climate change and is ranked among the top 20 countries measured by absolute carbon dioxide (CO2)
emissions as the country emits more greenhouse gases (GHGs) than all the other Sub-Saharan African countries combined, mainly because of its carbon-intensive economic sectors (Mbadlanyana, 2013:79). Proper disclosure of carbon emissions is therefore important to equip shareholders and possible investors with enough information to maintain the trust and confidence in the performance of the company and its sustainability. The oil- and coal-dependent sectors make up 80 percent of South Africa’s greenhouse gas emissions profile, as 93 percent of electricity produced rely on coal as primary energy source (Mbadlanyana, 2013:79). South Africa is currently contributing approximately 1.2 percent to the global climate change phenomenon with no explicit emission reduction targets (Mbadlanyana, 2013:79). It is important that the cost of future environmental damage is internalised into today’s decisions by putting an effective price on carbon (CDP, 2012:10). It is, however, estimated that with implementing the proposed carbon tax structure, by 2021, the carbon tax alone would result in a -0.3 percent reduction in the potential annual growth of the gross domestic product (GDP) of South Africa (Jeffrey, 2013:19).
Carbon tax was considered as one of the most effective mitigation options as it not only encourages companies to lower their carbon intensity, but also because an ‘early adoption’ of low-carbon growth can result in a competitive advantage with other possible benefits such as investments in energy efficiency and renewable energy, developing new markets, encouraging research and development of green technologies, decoupling emissions from economic growth and allowing South Africa to remain competitive in a resource constrained global economy (Mbadlanyana, 2013:81). The pre-emptive mitigation policy would not only avoid South Africa being disadvantaged in global markets, but would also avoid having to rapidly reduce emissions in the future in the transformation to a ‘greener’ economy (Alton, Arndt, Davies, Hartley, Makrelov, Thurlow and Ubogu, 2013: 345).
Carbon tax will, however, also impose substantial adjustment costs on the economy, including reduced export competitiveness, job losses and higher energy prices (Alton et al, 2013:352). Carbon taxes will reduce national welfare, but is regarded as more efficient than other tax instruments on energy use or pollution, and in South Africa, the welfare impact is more affected by institutional distortions than tax distortions (Devarajan, Go, Robinson & Thierfelder, 2009: 3).
1.1.3 Sustainability disclosure
The Carbon Disclosure Project (CDP) is a non-profit organisation that was established in 2000, situated in the United Kingdom (UK), and operates the only global climate reporting
system. The objective of the project is to raise overall awareness for both corporates and investors and the goal, as stated on its website, is “to create a lasting relationship between shareholders and corporations regarding the implications for shareholder value and commercial operations presented by climate change” (CDP, 2010:5).
The King III Report indicates that, every year, all companies should prepare an integrated report that conveys adequate information about the social, economic and environmental impact of the company on the community in which it operates (IODSA, 2009).
Despite some uncertainty regarding carbon disclosure, the measurement and reporting of carbon emissions at the product, facility and organisation levels display considerable momentum and this growth is the result of mainly three core drivers, namely: regulatory compliance, pressure from non-governmental organisations and managerial information systems intended to facilitate participation in carbon markets, and lastly reduced energy costs and management of reputational risk (Knox-Hayes and Levy, 2011:1). Continuous voluntary improvement in the levels of disclosure across all indicators as reported in the climate change report (CDP, 2013:6) mainly attributed to an increased commitment to more sustainable business as well as to the Carbon Tax Policy Paper and the Climate Change Response White Paper.
South Africa is among the first countries to work on a green economy strategy seeking to harness ecosystem goods and services as well as ensuring that the developments follow a low carbon development path (Mbadlanyana, 2013:78). Industries worldwide are becoming progressively more aware of the social and environmental liabilities pertaining to operations and products as these liabilities have financial effects associated with them (De Beer & Friend, 2006:548). Financial effects are more often portrayed in corporate images and reporting while liabilities includes the impact on the natural environment conveyed through the three principal media, such as air, water and soil (De Beer et al., 2006:548).
A corporation’s environmental performance and the public disclosure of that performance are the elements of corporate environmental accountability and jointly affect the corporation’s profitability and the value of its common equity (Al-Tuwaijri, Christensen & Hughes, 2004:447).
Many believe that corporations’ success in the long run is at risk if they consistently disregard the interest of key stakeholders and should welcome attempts to develop tools that make ethical business practices and social responsibility more transparent to the manager,
shareholders and other key stakeholders (Norman & MacDonald, 2004:244). In a study done several years ago by Epstein and Freedman (1994:96), the majority of non-institutional investors surveyed were of the opinion that environmental stewardship is more important than increased dividends.
1.1.4 Motivation of topic actuality
In January 2011, a guidance document for companies practising integrating reporting was issued by the Johannesburg Stock Exchange (JSE) and, as from March 2010, it was furthermore required from companies to submit integrated reports as supported by the King III (Eccles & Saltzman, 2011:57). Although integrated reporting is still in its early stages, the possible benefits identified are summarised in Table 1.1.
Table 1.1: Benefits of integrated reporting
Internal benefits External market benefits Future benefits
Better resource allocation Meeting the needs of mainstream investors
Managing regulatory risk
Greater engagement with shareholders and stakeholders
Appearing on sustainability indices
Being prepared for possible global regulation
Lower reputational risk Ensure accurate non-financial reporting
Being part of framework and standard development
Source: Eccles et al., 2011:59
As the global manufacturing industry contributes significantly to the current CO2 emissions, it is important for manufacturing companies to ensure adherence to sustainability reporting and as such reap the associated benefits and put investors at ease regarding the sustainability and risk in the organisation. Businesses are facing a carbon-constrained future and corporate responsible firms are being incentivised by financial markets, while those that are lagging behind are being penalised and viewed by investors as high risk (Adam, 2012:26).
1.2 PROBLEM STATEMENT
Reporting of the social, environmental and ethical status of a company has become increasingly important and various guidelines and regulatory requirements are in place to assist companies listed on the JSE to adhere to integrated and sustainability reporting requirements. Although sustainable reporting has grown significantly in the recent years, latest evidence suggests that only 21 percent of listed companies worldwide report any sustainability information (Solomon & Maroun, 2012:7). In South Africa, government has committed to reduce national GHG emissions by 34 percent by 2020 and 42 percent by 2025, against the business-as-usual scenario (CDP, 2010:2). This commitment as well as the introduction of the Green Paper on climate change and the policy on carbon tax sends a clear signal to businesses that the country is entering a regulatory phase to curb GHG emissions (CDP, 2010:5).
Manufacturing companies are contributing the most to GHG emissions and the top-ten listed manufacturing companies should adhere to integrated and sustainability reporting to allow visibility of environmental performance and strategic objectives on how to reduce these emissions and still remain profitable. In a challenging global environment and the ever-increasing focus on environmental performance, it is imperative for financial managers and environmental managers to understand both the risk and financial implication associated with poor or reactive environmental management as well as the economic imperatives that determine the viability of a corporation.
1.3 OBJECTIVES 1.3.1 Main objective
The main objective of this research is to investigate to which extent the top-ten manufacturing companies listed on the JSE adhere to good disclosure practices, specifically regarding the disclosure of carbon emissions.
1.3.2 Secondary objectives
To determine the guidelines and requirements for good disclosure practices;
To conceptualise the disclosure of carbon;
To conceptualise carbon disclosure and the importance thereof for manufacturing companies;
To determine the current status and level of carbon disclosure of the top-ten manufacturing companies listed on the JSE; and
To determine the level of good reporting practices of the top-ten listed manufacturing companies.
1.4 RESEARCH DESIGN AND METHOD 1.4.1 Literature review
A literature review will be conducted through various mediums such as electronic media, journals, books and newspapers. The literature review will focus on clearly defining the requirements of carbon disclosure as part of sustainability reporting as per the guidelines in the King III, Global Reporting Initiative (GRI), Greenhouse Gas Protocol (GHG Protocol), Carbon Disclosure Project (CDP) and other regulatory documents. The literature will also identify different methods of reporting and look at the possible benefits associated with carbon disclosure and sustainability reporting. The overall economic impact of environmental disclosure focusing on aspects such as the ‘triple bottom line’, share price, public image and economic profits will be investigated through the literature review.
From the literature review, a ‘checklist’ will be developed to measure the conformance of the top-ten manufacturing companies listed on the JSE to the regulations and guidelines provided in various mediums, as mentioned above, with a specific focus on the disclosure of carbon emissions.
1.4.2 Empirical research
The research will be conducted on the top-ten manufacturing companies listed on the Johannesburg Stock Exchange;
The empirical research will be conducted by reviewing the audited integrated reports for 2013 with the focus on sustainability reporting of each of the top-ten manufacturing companies and evaluate their adherence in terms of disclosure of carbon as per guidelines reviewed; and
Data analysis techniques will be applied to analyse the collected data.
1.4.3 Methodology applied
The research methodology will focus on evaluating the conformance of disclosure of carbon emissions in the 2013 integrated and sustainability reports of the sample companies to the ‘checklist’ compiled through the literature review. The research will, however, only focus on the integrated and sustainability reports for 2013 and will not take previous years into
consideration and therefore the progress and possible improvements of each company on the level of adherence to guidelines will not be possible.
Internal validity, external validity and reliability are tests that will verify the appropriate conduct of the research and the analysis of the data.
A content analysis approach will be applied as it seems the most appropriate approach for this research as companies within the same sector will be compared and reporting will be tested for adherence to various guidelines provided.
1.5 OVERVIEW
The research will be broken down into four chapters as follows: Chapter 1: Introduction
Chapter 1 will present the background and motivation for the study, the problem statement, research objectives and the research design as well as the methodology applied.
Chapter 2: Literature review
Chapter 2 will consist of a literature review that will focus on sustainability reporting and more specific on the guidelines that are provided by various sources regarding emissions reporting and the importance thereof. The literature review will also look at possible future legislation regarding carbon emissions and their disclosure.
Chapter 3: Empirical research
This chapter will focus on the applied theory and methodology used for the empirical research and the justification for the selected design. It will focus on the research validity, reliability and any ethical considerations to take note of regarding the study. The chapter will be concluded with a discussion regarding the data collection and analysis procedures and techniques.
Chapter 4: Conclusion and recommendations
This chapter will explain the overall findings in response to the objectives of the study and the research questions. Opportunities for future research, recommendations and limitations of this study will be discussed.
CHAPTER 2 LITERATURE REVIEW 2.1 INTRODUCTION
Companies all over the world want to make operations sustainable, and expectations that long-term profitability goes hand-in-hand with social justice and protecting the environment are gaining ground, according to the Global Reporting Initiative (GRI) (2013:3). These expectations are only achievable if understood by the companies, financiers, customers and other stakeholders (GRI, 2013:3). The reasons why companies choose to issue integrated reports is in most instances similar and is an indication of their commitment to sustainability and is regarded as the best way to communicate this sustainable strategy to shareholders and other stakeholders (Eccles & Saltzman, 2011:58). In South Africa, sustainability has been addressed in the King III Report in terms of the triple bottom-line concept of economic, social and environmental sustainability (Smith & Perks, 2010:2). The first national attempt to enforce integrated reporting across all listed companies was introduced in 2010 by the Johannesburg Stock Exchange (JSE) when they mandated integrated reporting through its listing requirements via compliance with the King III Report of 2009 (Solomon & Maroun, 2012:6).
In the research conducted by Clarkson, Li, Richardson and Vasvari (2011:142), it was proven that companies that experienced significant declines in environmental performance tend to experience relative declines in their financial resources and/or management capabilities immediately prior to their relative decline in environmental performance. Integrated reporting can potentially assist management and shareholders with appropriate information to effectively forecast and plan for the future. Companies not primarily listed on the JSE are not required to produce an integrated report (Solomon et al., 2012:9).
2.2 INTEGRATED AND SUSTAINABILITY REPORTING
Integrated reporting gives a holistic and integrated representation of a company’s performance both in terms of its finances as well as its sustainability and can be presented in a single report or dual reports; however, if presented in dual reports, it should be presented at the same time and disclosed as an integrated report (IODSA, 2009). According to the Integrated Reporting Committee (IRC) (2011:3), an integrated report is the organisation’s primary report and the overarching objective is to enable stakeholders to assess the ability of an organisation to create and sustain value over the short-, medium- and long term. The integrated report should ultimately replace all other forms of corporate reporting and will
(Solomon et al., 2012:7). The users of the report should be able to determine whether the organisation’s governing structure has applied its collective mind in identifying the environmental, social, economic and financial issues that impact on the organisation and assess the extent to which these issues have been incorporated into the organisation’s strategy (IRC, 2011:3).
It is important to ensure the integrated report presents a balanced and reasonable picture of the organisation and its activities and careful determination is required about the information to be included in the report as it needs to contain information that is both relevant and faithfully presented and material to the decision-making process of stakeholders (IRC, 2011:9). Information that is capable of making a difference in the assessments and decisions of stakeholders is relevant even if some users do not make use of it or are already aware of it from other sources, while faithful representation means to ensure that the information presented is complete, neutral and free from error (IRC, 2011:9). The easiest way to determine materiality is to consider the following questions:
Are all the ‘right things’ being reported?
Are these ‘right things’ being reported accurately?
Is the organisation being responsive to the legitimate interests and expectations of its key stakeholders, also known as stakeholder inclusiveness?
Comparability, consistency, verifiability, timeliness, understandability and clarity are key principles to determine the quality of the reported information (IRC, 2011:10), while the crucial elements determining the content of integrated reports are materiality, a focus on risk, risk management, strategy and the need for forward-looking information (Solomon et al., 2012:8).
Solomon et al. (2012:8) reported the benefits arising from integrated reporting, as summarised by the IRC (2011:21), as follows:
Better alignment of reported information with investor needs;
Availability of more accurate non-financial information for data vendors;
Higher levels of trust with key stakeholders;
Better resource allocation decisions, including cost reductions;
Enhanced risk management;
Better identification of opportunities;
Greater engagement with investors and other stakeholders, including current and prospective employees, which improves attraction and retention of skills;
Lower reputational risk;
Lower cost of, and better access to, capital because of improved disclosure; and
Development of a common language and greater collaboration across different functions within the organisation.
2.2.1 Sustainability reporting
Sustainability reporting makes abstract issues tangible and concrete, thereby assisting in the understanding and managing of the effect of sustainability developments in the organisation as the report conveys disclosures on the organisation’s impacts, either positive or negative, on the environment, society and economy (GRI, 2013:3). Organisations should prepare sustainability reports that contain valuable information about the organisation’s most critical sustainability-related issues with the required degree of transparency and consistency to make information useful and credible to markets and society (GRI, 2013:3). Sustainability reporting is an intrinsic element of integrated reporting as it considers the relevance of sustainability and addresses sustainability priorities and key topics, focusing on the impact of sustainability trends, risk and opportunities on the long-term prospects and financial performance of the organisation (GRI, 2013:85). Sustainability reporting is therefore fundamental to an organisation’s integrated thinking and reporting process in providing input into identifying material issues, strategic objectives and the assessment of the ability to achieve such objectives (GRI, 2013:85).
In a discussion paper on the framework for integrated reporting and the integrated report that was issued by the Johannesburg Stock Exchange in January 2011, it reported that for the most part sustainability reports have failed to address the lingering distrust among civil society of the intentions and practices of businesses and emphasise the fact that shareholders want forward-looking information that will enable them to more effectively assess the total economic value of an organisation (IRC, 2011:9). In recognising these shortcomings of existing sustainability reporting models, various discussions around the world have begun to focus on integrated reporting.
2.2.2 King III requirements for integrated reporting
As per the King III (IODSA, 2009), all information disclosed should be complete, timely, relevant, accurate, honest, accessible and comparable with past performance. The requirements for transparency and accountability can furthermore be summarised as follows:
A truly integrated report should be presented in one document, but it can be presented in more than one document as long as they are made available at the same time;
Ensure the truthful and factual presentation of the company’s financial position as well as verification of integrity of the integrated report through external review by an audit committee together with proof of the competence of the external auditors;
Annually prepared with adequate information about the operations of the company, the sustainability issues pertinent to its business, the financial results, and the results of its operations and cashflows; and
Effective reporting on the goals and strategies of the company together with its performance with regard to economic, social and environmental issues.
The financial disclosure requirements as per King III (2009) are as follows:
Should include financial statements with the necessary commentary from the board regarding the reported financial results; and
Disclosure regarding the going concern status of the company and any possible concerns regarding the current status as well as reasons for the status and action steps taken to remedy the situation.
Sustainability disclosure as per King III (2009) can be summarised as follows:
Describe how the company has made its money as well as reporting on the positive and negative impact of its operations on its stakeholders and highlighting the plans to improve the positives and eradicate or mitigate the negatives in the financial year ahead;
Integrated across all performance areas and include reporting on the triple contexts of economic, social and environmental issues and reflecting the choices made in strategic decisions adopted by the board;
Transparency in reported information is important to allow stakeholders to understand the key issues affecting the company and the effect (both positive and negative) of the company’s operations on the economic, social and environmental wellbeing of the community;
Sustainability reporting parameters and performance indicators reported should be explained in terms of its implications and also having regard to available benchmarks;
Sustainability reporting should be integrated with other aspects of the business process and managed throughout the year;
Sustainability assurance is an ongoing integral part of the integrated reporting cycle and they should report on the extent to which the reports are subject to assurance and the name of the assurer should be clearly disclosed; and
The board should be responsible for the accuracy and completeness of the sustainability reporting and disclosure, but may rely on the opinion of a credible, independent assurance provider.
2.2.3 Guidelines as per the latest Global Reporting Initiative
When using the guidelines as given by GRI, organisations firstly need to decide the most suitable ‘in accordance’ option. Guidelines are provided for a core or a comprehensive option and any option can be applied by all organisations irrespective of their size, sector or location as both options focus on the process of identifying the organisation’s significant economic, environmental and social impacts.
The core option contains the essential elements of a sustainability report and provides the background against which an organisation communicates the impacts of its economic, environmental and social governance performance (GRI, 2013:11). The comprehensive option builds on the core option by requiring additional standard disclosures of the organisation’s strategy and analysis, governance, ethics and integrity, and organisations are required to communicate performance more extensively by reporting all indicators related to the identified material aspects (GRI, 2013:3). The type of option does not have any relation to the quality of the report or to the performance of the organisation; therefore, organisations need to choose the option that best meets its reporting needs and those of its stakeholders regarding the information required (GRI, 2013:4).
The guidelines provided by the GRI further include recommendations regarding standard disclosures. Standard disclosures consist of two different types, namely general standard disclosures and specific standard disclosures. General standard disclosures are applicable to all organisations preparing sustainability reports and, depending on the ‘in accordance’ option, organisations have to identify the required general standard disclosures to be reported. Specific standard disclosure is the disclosure of management approach and indicators. Table 2.1 gives an indication of the elements of the different types of standard disclosures.
Table 2.1: Elements of standard disclosures
GENERAL STANDARD DISCLOSURES SPECIFIC STANDARD DISCLOSURES
Strategy and analysis Disclosure on management approach Organisational profile Indicators
Identified material aspects and boundaries Stakeholder engagement
Report profile Governance Ethics and integrity
Source: GRI (2013:6)
The guidelines for specific standard disclosures are broken down into economic, environmental and social categories. The social category is further broken down into sub-categories, namely labour practices and decent work, human rights, society and product responsibility. Different aspects are listed for each category or sub-category as provided in Table 2.2 below.
Table 2.2: Categories and aspects of specific standard disclosures
Category Economic Environmental
Aspects Economic performance Materials Compliance Market presence Energy Transport Indirect economic Impacts Water Overall
Procurement practices Biodiversity Supplier environmental assessment Emissions Environmental grievance
mechanisms Effluents and
waste
Products and services
Category Social
Sub- category
Labour practices and decent work
Human rights Society Product
responsibility
Aspects Employment Investment Local
Communities
Customer health and safety
relations discrimination service labelling Occupational health and
safety
Freedom of association and collective bargaining
Public policy Marketing communications
Training and education Child labour Anti-competitive behaviour
Customer privacy
Diversity and equal opportunity
Forced or compulsory labour
Compliance Compliance
Equal remuneration for women and men
Security practices
Supplier assessment for impact on society Supplier assessment for
labour practices Indigenous rights Grievance mechanisms on society Labour practices grievance mechanisms Assessment Grievance mechanisms for impacts on society Supplier human rights assessment Human rights grievance mechanisms Source: GRI (2013:9)
Only in exceptional cases reasons for omissions may apply with regard to standard disclosures and the information omitted should be clearly identified. Should a standard disclosure or part of a standard disclosure or an indicator not be applicable, the reason for it not being applicable should be disclosed. If the information is subject to specific confidentiality constraints, those constraints are to be disclosed and the same apply if information is omitted due to legal prohibitions. If the required information is not currently available, the organisation should disclose the steps taken to obtain the information and the expected time frame for doing so. A large number of omitted standard disclosures may invalidate an organisation’s claim that its sustainability reporting is in accordance with the guidelines as per the GRI.
Emissions is classified as one of the aspect under the environmental category that is part of the specific standard disclosures and includes guidelines regarding greenhouse gas (GHG) emissions as well as ozone-depleting substances, NOX, SOX and other significant air emissions GRI (2013: 79). The purpose of this research is to focus on greenhouse gas emissions and the guidelines provided by the GRI regarding the reporting of greenhouse gas emissions. Table 2.3 provides a summary of the guidelines focusing only on greenhouse gas emissions.
Table 2.3: Guidelines for emissions disclosure as per GRI
Guidelines for:
Direct greenhouse gas emissions (Scope 1)
Energy indirect greenhouse gas emissions (Scope 2)
Other indirect greenhouse gas emissions (Scope 3)
S cop e 1 e m iss ion s S cop e 2 e mi ss ion s S cop e 3 e mi ss ion s
Report gross direct (Scope 1) GHG emissions in metric tons of CO2
equivalent, independent of any GHG trades, such as purchase, sales or transfers of offsets or allowances
X
Report gross energy indirect GHG emissions in metric tons of CO2 equivalent,
independent of any GHG trades such as purchases, sales, or transfers of offsets or allowances
X
Report gross other indirect (Scope 3) GHG emissions in metric tons of CO2,
equivalent, excluding indirect emissions from the generation of purchased or acquired electricity, heating, cooling, and steam consumed by the organization. Exclude any GHG trades such as purchases ,sales, or transfers of offsets or allowances
X
Report gases included in the calculation X X X Report biogenic CO2 emissions in metric tons of CO2 equivalent separately
from the gross direct (Scope 1) GHG emissions X Report biogenic CO2 emissions in metric tons of CO2 equivalent separately
from the gross indirect (Scope 3) GHG emissions X Report other indirect (Scope 3) emissions categories and activities included in
the calculation X
Report the chosen base year, the rationale for choosing the base year, emissions in the base year, and the context for any significant changes in emissions that triggered recalculations of base year emissions
Report standards, methodologies, and assumptions use X X X Report the source of the emissions factors used and the global warming
potential (GWP) rates used or a reference to the GWP source X X X Report the chosen consolidation approach for emissions (equity share,
financial control, operational control) X X
Guidelines for reporting greenhouse gas emission intensity
Report the GHG emission intensity ratio
Report the organisation-specific metric (the ratio denominator) chosen to calculate the ratio
Report the types of GHG emissions included in the intensity ratio: direct (Scope 1), energy indirect (Scope 2), other indirect (Scope 3)
Report gases included in the calculation
Guidelines for reporting on the reduction of greenhouse gas emissions
Report the amount of GHG emission reductions achieved as a direct result of initiatives to reduce emissions, in metric tons of CO2 equivalent
Report gases included in the calculation (whether CO2,CH4, N2O,HFCs, PFCs, NF3, SF6 or all)
Report the chosen base year or baseline and the rationale for choosing it
Report standards, methodologies, and assumptions used
Report whether the reduction in GHG emissions occurred in Scope 1, Scope 2 or Scope 3 emissions
Guidelines for reporting of ozone-depleting substances (ODS)
Report production, imports, and exports of ODS in metric tons of CFC-11 equivalent
Report substances included in the calculation
Report standards, methodologies and assumptions used
Report the source of the emissions factors used
Report the amount of significant air emissions, in kilograms or multiples for each of the following: o NOx
o SOx
o Persistent organic pollutants (POP) o Volatile organic compounds (VOC) o Hazardous air pollutants (HAP) o Particulate matter (PM)
o Other standard categories of air emissions identified in relevant regulations
Report standards, methodologies and assumptions used
Report the source of emission factors used
Source: GRI (2013:59)
2.2.4 Greenhouse gas emissions and reporting thereof
Global warming and climate change have come to the fore as a key sustainable development issue and many governments around the world are taking steps to reduce greenhouse gas emissions through various initiatives such as emission trading programmes, voluntary programmes, carbon or energy taxes as well as regulations and standards on energy efficiency and emissions (World Resource Institute, 2004:3). The Carbon Disclosure Project (CDP) is a global disclosure system for companies to report their environmental impacts and strategies to investors (CDP, 2013:2). Since the establishment of the CDP over ten years ago, the CDP platform has evolved significantly, supporting multinational purchasers to build more sustainable supply chains and it enables cities around the world to exchange information, take best practice action and build climate resilience (CDP, 2013:2). This initiative assesses the climate performance of companies and drives improvements through shareholder engagement (CDP, 2013:2). Graph 2.1 below provides a representation of the major types of contributors to GHG emissions in the world in 2010. From the graph, it is clear that CO2 emissions make up the majority (70 percent) of the total GHG emissions, followed by CH4 emissions at 20 percent.
Graph 2.1: World GHG emissions in 2010
Source: CDP (2010:52)
The traditional view is that the reduction of GHG emissions imposes additional costs on firms (Nishitani & Kokubu, 2012:518); however, to ensure long-term success in a competitive business environment, companies need to be able to understand and manage their GHG risks and need to be prepared for future national or regional climate change policies and regulations (WRI, 2004:3). In a study conducted by Nishitani et al. (2012: 526), it was proven that the reduction of GHG emissions is regarded as an intangible value by stockholders and investors and can therefore enhance firm value.
South Africa is ranked as the 7th largest emitter of GHG emissions per capita in the world and, if the South African economy grows without constraints over the next few decades, GHG emissions will continue to escalate, multiplying more than four-fold by mid-century (Winkler, Hughes, Marquard, Haw & Merven, 2011:5825).
20% 70% 8% 3% CH4 CO2 N2O Other Gases
Figure 2.1: Major GHG emitting countries
Source: Adam (2012:2)
The global manufacturing industry emits 43 percent of the global CO2 emissions (Kim & Worrell, 2002:827), while South Africa has experienced an almost seven-fold increase in CO2 emissions since 1950 (Menyah & Wolde-Rufael, 2010:1374). Carbon dioxide emissions are those stemming from the burning of fossil fuels and the manufacture of cement and include carbon dioxide produced during the consumption of solid, liquid and gas fuels and gas flaring (WRI, 2004: 35). South Africa is a middle-income country that produces 65 percent of Africa’s and 1.5 percent of the world’s carbon dioxide emissions (Devarajan, Go, Robinson & Thierfelder, 2009:2). The energy sector is responsible for 47.6 percent of the CO2 emissions in South Africa, followed by the basic metal and metal products industry that contributes 22.2 percent (Devarajan et al., 2009:5). Graph 2.2 below provides a breakdown of the major sectors contributing to the CO2 emissions in South Africa.
Graph 2.2: Sectors emitting the most CO2 in South Africa
Source: CGE model data base in Devarajan et al. (2009:5)
If GHG emissions are to be managed, it must first be measured and reported (Association of Certified Chartered Accountants, 2011:6). The Greenhouse Gas Protocol (GHG Protocol) Initiative is a multi-stakeholder partnership of businesses, non-government organisations (NGOs), governments and others convened by the World Resource Institute (WRI), a US-based environmental NGO, and the World Business Council for Sustainable Development (WBCSD), a Geneva-based coalition of 170 international companies. The GHG Protocol Initiative comprises two separate but linked standards, namely:
GHG Protocol Corporate Accounting and Reporting Standard (step-by-step guide for companies to use in quantifying and reporting their GHG emissions); and
GHG Protocol Project Quantification Standard (forthcoming: a guide to quantify reductions from GHG mitigation projects).
The GHG Protocol Initiative encourages the use of the GHG Protocol Corporate Standard by all companies regardless of experience in preparing a GHG inventory. The GHG accounting and reporting standard is based on the principles, as listed in Table 2.4 below.
47.6% 22.2% 10.5% 4.9% 14.8% Electricity
Basic metals and metal products
Transportation,including household expenditure
Basic and other chemicals, rubber and water supply
Table 2.4: Principles of GHG accounting and reporting standard
GHG ACCOUNTING AND REPORTING PRINCIPLES
RELEVANCE
Ensure the GHG inventory appropriately reflects the GHG emissions of the company and serves the decision-making needs of users – both internal and external to the company.
COMPLETENESS Account for and report on all GHG emissions sources and activities within the
chosen inventory boundary. Disclose and justify any specific exclusion.
CONSISTENCY
Use consistent methodologies to allow for meaningful comparisons of emissions over time. Transparently document any changes to the data, inventory boundary, methods, or any other relevant factors in the time series.
TRANSPARENCY
Address all relevant issues in a factual and coherent manner, based on a clear audit trail. Disclose any relevant assumptions and make appropriate references to the accounting and calculation methodologies and data sources used.
ACCURACY
Ensure that the quantification of GHG emissions is systematically neither over nor under actual emissions, as far as can be judged, and that uncertainties are reduced as far as practicable. Achieve sufficient accuracy to enable users to make decisions with reasonable assurance as to the integrity of the reported information.
Source: World Resource Institute (2004:7)
Taking into consideration possible future regulations regarding GHG emission, significant GHG emissions in a company’s value chain may result in increased costs (upstream) or reduced sales (downstream); it therefore makes good business sense to improve one’s understanding of the companies’ GHG emissions and a method to do so is by compiling a GHG inventory that adheres to the principles listed in Table 2.4 above. What gets measured gets managed and proper measurement and accounting can contribute to finding the most effective reduction opportunities (ACCA, 2011:7).
For corporate reporting of GHG emissions, two distinct consolidation approaches can be used as per the GHG Protocol Standard, namely an equity share approach and a control approach. Under the equity share approach, a company accounts for GHG emissions from operations to its share of equity in the operation and, under the control approach, a company accounts for 100 percent of the GHG emissions from operations over which it has control (WRI, 2004:11). Control can be defined in either financial or operational terms. Table 2.5 provides guidelines in terms of the accounting category, its associated accounting definition and the reporting of GHG emissions according to the GHG Protocol Standard’s different approaches.
Table 2.5: Guidelines regarding different approaches Accou n ting c ateg o ry
Financial accounting definition
Accounting for GHG emissions according to GHG protocol corporate standard Based on equity share Based on financial control G ro u p com p anie s/ S u b si d iar ie s
The parent company has the ability to direct the financial and operating policies of the company with a view to gaining economic benefits from its activities. Normally, this category also includes incorporated and non-incorporated joint ventures and partnerships over which the parent company has financial control. Group companies/subsidiaries are fully consolidated, which implies that 100 percent of the subsidiary’s income, expenses, assets and liabilities are taken into the parent company’s profit and loss account and balance sheet, respectively. Where the parent’s interest does not equal 100 percent, the consolidated profit and loss account and balance sheet shows a reduction for the profits and net assets belonging to the minority owners.
Equity share of GHG emissions 100% of GHG emissions Associ ated / a ff ili ated co mp anies
The parent company has significant influence over the operating and financial policies of the company, but does not have financial control. Normally, this category also includes incorporated and non-incorporated joint ventures and partnerships over which the parent company has significant influence, but not financial control. Financial accounting applies the equity share method to associated/affiliated companies, which recognises the parent company’s share of the associate’s profit and net assets. Equity share of GHG emissions 0% of GHG emissions
No n -inco rp o rated joi n t ve n tu re / p ar tn er sh ips / o p er atio n s w h er e p ar tn e rs h av e j o int f inan cia l con tr o l
Joint ventures/partnerships/operations are proportionally consolidates, i.e. each partner accounts for its proportionate interest of the joint venture’s income, expenses, assets and liabilities. Equity share of GHG emissions Equity share of GHG emissions F ixe d a ss et in ve stm ent
s The parent company has neither significant influence nor
financial control. This category also includes incorporated and non-incorporated joint ventures and partnerships over which the parent company has neither significant influence nor financial control. Financial accounting applied the cost/dividend method to fixed asset investments. This implies that only dividends received are recognised as income and the investment is carried at cost.
0% 0%
F
ranch
is
es
Franchises are separate legal entities. In most cases, the franchiser will not have equity rights or control over franchise. Therefore, franchises should not be included in consolidation of GHG emissions data. However, if the franchiser does have equity rights or operational/financial control, then the same rules for consolidation under the equity or control approaches apply.
Equity share of GHG emissions 100% of GHG emissions
Source: World Resource Institute (2004:19)
GHG emissions can further be classified as direct GHG emissions or indirect GHG emissions. Direct GHG emissions are emissions from sources that are owned or controlled by the company and are principally the result of the following types of activities undertaken by a company (ACCA, 2011:7):
Generation of electricity, heat or steam: These emissions result from combustion of fuels in stationary sources such as boilers, furnaces and turbines;
Physical or chemical processing. Most of these emissions result from the manufacture or processing of chemicals and materials, for example cement, aluminium, adipic acid, ammonia manufacture and waste processing;
Transportation of materials, products, waste and employees. These emissions result from the combustion of fuels in company-owned/-controlled mobile combustion sources such as trucks, trains, ships, airplanes, buses and cars; and
Fugitive emissions. These emissions result from intentional or unintentional releases, for example equipment leaks from joints, seals, packing and gaskets; methane emissions from coal mines and venting; hydrofluorocarbon (HFC) emissions during the use of refrigeration and air-conditioning equipment, and methane leakages from gas transport.
Direct GHG emissions are classified under Scope 1 emissions as per the guidelines and principals of the GHG Protocol.
Indirect GHG emissions are emissions that are consequences of the activities of the company, but occur at sources owned or controlled by another company (WRI, 2004:25). Indirect GHG emissions are classified under Scope 2 and Scope 3 emissions, while Scope 2 emissions account for GHG emissions from the generation of purchased electricity consumed by the company, and Scope 3 emissions allow for the treatment of all other indirect emissions. Credible information on Scope 1 and Scope 2 emissions allows a company to better understand what is happening inside its fences as it provides information on what is happening at the plant or factory as well as how much electricity is being bought to keep the plant or factory operating (ACCA, 2011:7).
Figure 2.2 below provides a representation of the split in contribution of Scope 1 and Scope 2 emissions in the major industry sectors.
Figure 2.2: Contribution of Scope 1 and Scope 2 emissions of total emissions in each sector
Source: CDP, 2010:43
Scope 3 emissions look at emissions across the full value chain and research has suggested that Scope 3 emissions could account for approximately 75 percent of an entity’s total GHG emissions (ACCA, 2011:5). Measuring Scope 3 emissions provides information needed to understand climate-related risks and opportunities upstream and downstream from operations, beyond operational boundaries and on the products and services developed and sold and may challenge companies to look at what they are doing and not just how they are doing it (ACCA, 2011:7). Due to the wide variety of emission sources, calculation methods and lack of consist approach in Scope 3 accounting, resulted in companies, investors and other stakeholders calling for standard approaches to accounting. The outcome was primary voluntary accounting and reporting standards such as: ISO 14064 series; WBCSD/WRI GHG Protocol and Component Based Software Development (CBSD) reporting framework (ACCA 2011:19). Figure 2.3 below provides a graphical presentation of the different scope emissions relating to different parts of the value chain. It is important to note that different types of companies operating in different sectors have very different levels of involvement and influence over different parts of the value chain.
Figure 2.3: GHG emissions in relation to the value chain
Source: ACCA (2011:10)
It is important that a public GHG report is based on the best data available at the time of publication and being transparent about the limitations of the data, while all material discrepancies that were previously identified are also reported (WRI, 2004:35). As per the GHG Protocol Corporate Standard, a GHG emissions report should include the following information:
A description of the company and inventory boundary;
o An outline of the organisational boundaries chosen, including the chosen consolidation approach;
o An outline of the operational boundaries chosen, and if Scope 3 is included, a list specifying which types of activities are covered; and
o The reporting period that is covered.
Information on emissions; and
o Total Scope 1 and Scope 2 emissions independent of any GHG trades such as sales, purchases, transfers or banking of allowances;
o Emissions data separate for each scope;
o Emissions data for all six GHGs separately (CO2, CH4, N2O, HFCs, PFCs, SF6). In the accounting and reporting standard amendment of February 2013, nitrogen trifluoride (NF3) was added to the list of GHGs (WRI, 2013:1) and the requirement was changed to emissions data for all GHGs covered by the UNFCCC/Kyoto Protocol separately in metric tons of CO2 equivalent (WRI, 2013:2). The United National Framework Convention on Climate Change’s (UNFCCC) objective is to prevent dangerous human interference with the climate system by stabilising
itself set no mandatory limits on GHG emissions for individual countries and contains no enforcement mechanisms, but instead provides for updates (‘protocols’) that set mandatory emission limits (WRI, 2013:5). The Kyoto Protocol was adopted in 1997 and came into force in 2005 and set binding GHG emission reduction targets for a group of industrialised countries. These targets are implemented in rolling emission reductions commitment periods, with the first period from 2008 to 2012, and the second from 2013 to 2020 (WRI, 2013:5); o Year chosen as base year and emissions profile over that time;
o Appropriate context for any significant emission changes that trigger base year emission recalculation (acquisitions, divestitures, outsourcing);
o Emissions data for direct CO2 emissions from biologically sequestered carbon; o Methodologies used to calculate or measure emissions, providing a reference or
link to any calculation tools used; and
o Any specific exclusion of sources, facilities and/or operations.
Ratios can also be used, which might be useful and relevant to the decision-making process and the following examples of ratios for GHG reporting can be considered:
Productivity or efficiency ratios
These ratios express the value or achievement of a business divided by its GHG impact. Increasing efficiency ratios reflect a positive performance improvement. Examples of productivity/efficiency ratios include resource productivity (for example sales per GHG) and process eco-efficiency (for example production volume per amount of GHG).
Intensity ratios
These ratios express GHG impact per unit of physical activity or unit of economic output. A physical intensity ratio is suitable when aggregating or comparing across companies that have similar products, while an economic intensity ratio is suitable when aggregating or comparing across companies that produce different products. A declining intensity ratio reflects a positive performance improvement. Intensity ratios include:
o Product emission intensity (for example tonnes of CO2 emissions per electricity generated);
o Service intensity (for example GHG emissions per function or per service); and
