M ANAGEMENT A PPROACH

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G3 SUSTAINABILITY REPORTING GUIDELINES’

DISCLOSURE

ON

M ^ANAGEMENT A ^PPROACH

Establishing a DMA baseline

By Tom Emmelkamp

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G3 SUSTAINABILITY REPORTING GUIDELINES’

DISCLOSURE

ON

M ^ANAGEMENT A ^PPROACH

Establishing a DMA baseline

Rijksuniversiteit Groningen Faculty Economics and Business Master thesis Accountancy

Tom Emmelkamp

Student number: 1271415

First supervisor: dr. D. A. de Waard RA MA (Partner Ernst & Young) Second supervisor: prof. dr. D. M. Swagerman

July 2008

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Preface

This master thesis that lies in front of you is the result of five months of hard work. On March 3^rd 2008 I started my research into the Disclose of Management Approach at Ernst & Young, office Groningen. Now five months later I can state that it has been an exciting experience. In this period of conducting academic research I have learned a lot. For example, I have learned to set up and conduct academic research. Furthermore, I have learned to communicate and work together with internal and external parties. Last but not least, I have got to learn a lot of nice and interesting colleagues at Ernst and Young. They were a great support and I am very grateful for their critical and useful feedback.

Of course there are some persons who I would like to thank in particular. First, I would like to thank my first supervisor dr. Dick de Waard for giving me the possibility to conduct this research at Ernst & Young and for his guidance and support along the way. On April 3^rd 2008 Dick obtained his doctorate with a dissertation on the conception of duties concerning corporate social responsibility by supervisory board members of Dutch stock exchange quoted corporations. For who is interested, the title of his dissertation is “Toezicht op maatschappelijk verantwoord ondernemen: Over de taakopvatting van commissarissen”. Second, I would like to thank Nancy Kamp-Roelands (Ernst & Young’s area director CSR) and Marjella Alma (Global Reporting Initiative) for the collaboration and their useful input. Third, I would also like to thank prof. dr.

Swagerman for the critical feedback he provided as my second supervisor. Finally, I would like to thank my parents, my brother, my sister and of course my lovely girlfriend for being supportive and keeping me focused.

I dearly hope you will enjoy reading this master thesis and you will be able to use the provided information to your advantage.

Tom Emmelkamp July 2008

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Brief summary

This research report establishes a baseline of how the Disclosure on Management Approach, which is a specific section of the G3 sustainability reporting guidelines, is currently being applied by sustainability reporting organizations. According to the Global Reporting Initiative there have been a wide range of interpretations of this section of the G3 guidelines. The purpose of this research report is to document how sustainability reporting organizations are currently applying the Disclosure on Management Approach section of the G3 guidelines in their sustainability reports. Furthermore, this research report provides the reader some additional research findings which include amongst others, the application of the G3 overall structure and the reporting of DMA regarding two specific topics that are being highlighted; ‘Climate Change’ and ‘Health and Safety’.

An interesting finding of this research is that in the far greater part of the sustainability reports the DMA is placed interspersed across the report. In 17 out of the 24 sustainability reports examined, general DMA is reported in a single section in the first part of the report. After this single section more detailed DMA is reported in the second part of the report. In most reports this more detailed DMA is reported by sustainability Categories or by specific Aspects within certain sustainability Categories. Also striking is that only 2 out of the 24 sustainability reports follow the more detailed structure and/or headings of the G3 DMA. Therefore, searching for specific DMA information can be a very intensive and time consuming exercise. The GRI-index should be of help, but in practice this index is not so very helpful. A lot of GRI-indexes only point out the section where the DMA information is placed. Most of the times you still have to read through multiple pages to find the DMA information you are searching for.

Overall it can be stated that sustainability reporting organizations have various interpretations how to apply the G3 guidelines and the DMA section in particular. There is enough room for improvement in the sustainability reporting practice. These improvements can be made by the GRI as well as by the sustainability report preparing organizations. The GRI can further improve their guidelines by making sure that the DMA and the Performance Indicators are more clearly structured in the guidelines. Maybe by adding a numbering or splitting up the sections more clear. To further enhance the readability and comparability of sustainability reports, report preparers should structure their reports in a higher degree to the detailed structure of the G3 guidelines.

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Contents

Preface ii

Brief summary iii

1. Introduction 6

1.1. Topical interest 6

1.2. Problem definition and research sub questions 7

1.3. Relevance 10

1.4. Structure of this report 11

2. Theoretic framework 12

2.1. Introduction 12

2.2. Definition and components of corporate sustainability 12 2.3. Why corporate sustainability and sustainability reporting? 13 2.4. Previously conducted corporate sustainability research 15

2.5. The GRI, the G3 guidelines and the DMA 17

3. Research methodology 19

3.2. Research sample and variables 19

3.3. Research method and score system 22

4. Research findings 24

4.2. Structure of the sustainability report 24

4.3. Placement of the DMA within the overall structure 27

4.4 Structure of the specific headings within the DMA 30

4.5. Reporting on sustainability Aspects 34

4.6. Topics highlighted 37

5. Conclusions 41

5.1. Research findings in a nutshell 41

5.2. Overall conclusion 42

5.3. Limitations 43

5.4. Recommendations 44

References 45

Appendices 47

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Establishing a DMA Baseline 5

ENVIRONMENTAL FRIENDLY SEARCHING ON THE INTERNET 16 April 2008

Since Tuesday it is possible to use an ‘environmental-friendly’ internet search engine. The Australian company Ecocho launched the search engine in fourteen countries, including the Netherlands.

The search engine uses the technology of Google and Yahoo, but per thousand search assignments the company plants two trees. The trees are, for the time being, planted in Australia.

The project is financed with advertising income and in the future the company will invest 70 percent of their income in CO2 reducing measures.

(Source: www.nu.nl)

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1. Introduction

1.1. Topical interest

The news item on the previous page illustrates that corporate sustainability is a hot topic nowadays. At national and international level the attention from the media and society for corporate sustainability issues is getting bigger and bigger. The public pressure on organizations to operate and explore activities according a sustainable development approach is pushed to the limit. Shareholders and other stakeholders like governments, employees, suppliers and communities are expecting high levels of transparency from organizations. They all want information. Not only on profit per share and the remuneration of top executives, but also on corporate sustainability matters like human rights and community involvement. How does the organization approach occupational health and safety issues? Which community projects are sponsored by the organization? Which initiatives are undertaken by the organization to reduce the emission of carbon dioxide and other greenhouse gases? These are just a few examples of questions that stakeholders would like to be answered by the organizations.

Stakeholders also want to know how management approaches sustainability. Which sustainability aspects are valued as important by management and how does the organization manage these aspects? What is the organization’s policy regarding a specific sustainability aspect and which aspect specific objectives are formulated? How is performance on sustainability aspects being monitored and are there follow-up procedures in place? Who has, within the organization, final responsibility regarding the sustainability aspect(s)? These questions are important if one wants to understand an organization’s management approach regarding sustainability and more specific regarding different aspects of sustainability. The reported information on management approach regarding sustainability, in Global Reporting Initiative terms the Disclosure on Management Approach, is the core of this research.

Most organizations recognize the importance of corporate sustainability and sustainable development. They often use their sustainability report to display their commitment to this issue.

Many organizations see their sustainability report as a way to show stakeholders the organization’s commitment to sustainability and show that the organization is carried on legitimately (Deegan al., 1999; Deegan, 2002: Hooghiemstra, 2000). This legitimacy theory is the most used theory to explain sustainability reporting (Gray et al, 1995). Legitimacy in the context of corporate sustainability means in an optimal situation that the norms and beliefs system of the

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organization equals the norms and beliefs system of the community in which it operates (Lindblom, 1994).

As just mentioned, organizations use their sustainability reports to display their commitment to corporate sustainability. These organizations are free in their choice on what to report and how to report it. Most organizations however, report according to general accepted guidelines. The Global Reporting Initiative’s G3 sustainability reporting guidelines (hereafter, G3 guidelines) are such guidelines. They are a third version release by the Global Reporting Initiative (hereafter, GRI) and were launched in 2006. The G3 guidelines provide a trusted and credible framework for sustainability reporting. “To date, more than 1,500 companies, including many of the worlds leading brands, have declared their voluntary adoption of the Guidelines worldwide. Consequently the G3 Guidelines have become the de facto global standard for reporting” (GRI website). These more than 1,500 organizations are situated all around the world and are exploring activities in all kinds of business sectors. When these diverse organizations prepare their sustainability reports in accordance with the G3 guidelines, one might assume that the sustainability reports follow the G3 guidelines to a high degree. This assumption applies to the overall structure and content of the sustainability report, as well as to the more detailed structure and content, like the structure and content of the Disclosure on Management Approach.

But is this assumption a right assumption or are the sustainability reports evenly diverse as the organizations are diverse? The answer to this question will be given in this research publication.

1.2. Problem definition and research questions

As mentioned in the previous paragraph the core of this research is the reporting of the G3 guidelines’ Disclosure on Management Approach (hereafter, the DMA) by organizations that prepare their sustainability reports in accordance with the G3 guidelines. The DMA is a significant development of the G3 guidelines. But according to the GRI, “from the first year of G3 reports it is clear that there have been a wide range of interpretations of this section of the G3 guidelines”. After a first global view at the DMA in the G3 guidelines it can indeed be stated that the DMA could be susceptible to different kinds of interpretations. When reading the chapter on the DMA in the G3 guidelines more closely, this statement is somewhat confirmed by the sentence: “The organization can structure its Disclosure(s) on Management Approach to cover a full range of Aspects under a given Category or group its responses on the Aspects differently”.

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Different DMA interpretations include different structure/placement of the DMA in the overall report and different content reported in the DMA. The aim of this research is to examine these different interpretations to establish a ‘baseline’ of how the DMA is currently being applied by sustainability reporting organizations. A baseline in the context of this report means that the current state of DMA reporting is documented and that the findings can serve as a starting point for further research and for the discussion of whether amendments are needed to the G3 DMA section in the upcoming release of G3.1. The research objective results in the following formal research question:

To place this specific element of the G3 guidelines in a wider context, this research also examines some overall G3 reporting characteristics, like the appliance of the overall structure and overall content of the G3 guidelines. Research on these overall characteristics will reveal if different interpretations only exist regarding the DMA as a specific element of the G3 guidelines, or that different interpretations also exist regarding the G3 overall structure and content. After the exploration of the wider context this report focuses on the appliance of the DMA section of the G3 guidelines. To give some more detail, this research closes off with two sustainability topics that are being highlighted.

To give structure to this research, eight research sub questions are formulated:

Theoretic

1. What is corporate sustainability, why do organizations commit themselves to corporate sustainability and why do organizations publish sustainability reports?

2. Which previously conducted research on sustainability is relevant for this research?

3. What is the GRI, what are the G3 guidelines and what is the DMA?

How is the G3 sustainability reporting guidelines’ Disclosure on Management Approach currently being applied by sustainability reporting organizations?

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Establishing a DMA Baseline 9 Overall sustainability report

4. To which degree does the structure of G3 sustainability reports follow the actual structure of the G3 guidelines?

5. To which degree do the G3 sustainability reports contain the same content as prescribed in the G3 guidelines?

DMA appliance

6. Where in the overall structure of G3 sustainability reports, place the reporting organizations the DMA?

7. To which degree do the G3 sustainability reports follow the specific headings and/or content identified in the DMA section of the G3 guidelines?

Topics highlighted

8. Which and how much DMA information on ‘Health and Safety’ and ‘Climate Change’ is reported in the G3 prepared sustainability reports?

The first three sub questions cover the theoretic part of this research. The answers to these three research sub questions will be given by studying the GRI website, the G3 guidelines and previously conducted research on sustainability. I will outlay the specific parts that are most relevant for this research. The results from this process are reported in chapter two, Theoretic framework. The remaining five research sub questions relate to the empirical part of this research.

The answers to these questions will be given by examining and analyzing twenty four G3 sustainability reports. The results of this examination will be given in chapter four, Research findings.

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Establishing a DMA Baseline 10 1.3. Relevance

Since 2006 organizations can prepare their sustainability reports according to the G3 guidelines.

As mentioned in the first paragraph, the DMA is a significant development of the G3 guidelines.

The earlier version of GRI guidelines (2002) did not contain a specific DMA section. After two years of G3 reporting, with the upcoming release of version G3.1 in mind, it is interesting to see how organizations have responded to the DMA section. This research focuses on the DMA section of the G3 guidelines in particular, because this is a section that could be interpreted quite differently by reporting organizations. Why specifically the DMA section is susceptible to different interpretations will be explained in more detail later on in this research report. This been said it is obvious that this research report is of importance for the GRI. They can use the findings and recommendations in this report to make choices on whether amendments to the DMA section are needed in the release of G3.1.

This research report is not only interesting for the GRI but it is also interesting for sustainability report preparing organizations. They can take notice of the various ways other organizations prepare their sustainability report. After they have taken notice of this report, they can review their own sustainability report once more and look closely at how they interpreted the DMA section. They can compare their interpretation of the DMA section to the interpretations used by other organizations. If these interpretations differ the organization can decide whether it wants to restructure its sustainability report in total and/or restructure its DMA section.

Further, this research report is interesting for stakeholders who find management approach on sustainability and sustainability issues important, but are experiencing difficulty finding this information in the sustainability reports. This research report tells them were to look by showing them the ways in which organizations mostly structure and place the information on management approach in their sustainability reports, making it somewhat easier to find the required information in the future.

Final, this research is relevant because there has not been any previous research into the sustainability reporting organization’s interpretation of the G3 guidelines’ DMA section. So this research adds knowledge to the existing knowledgebase on sustainability reporting practice and gives cause for further research into the reporting of management approach towards sustainability.

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Establishing a DMA Baseline 11 1.4. Structure of this report

Now it is known what this research is all about, let us take a look at the structure of this research report. The next chapter, Theoretic framework, discusses the sustainability issue from general to more detailed. The chapter explains what corporate sustainability is, why organizations practice corporate sustainability and why they publish reports about it. This is done by discussing previously conducted academic research relevant for this research. The chapter also gives some more detailed information on the GRI, the G3 guidelines and the DMA. Chapter three, Research methodology, explains which reports were reviewed, what the used variables mean, which score cards were used in the examination of the reports and some more information to understand what is conducted and why it is conducted in that way. Then the research findings will be presented in chapter four. These findings will be discussed in chapter five, Conclusion. Besides the discussion of the results, chapter five will try to provide some useful recommendations for further improvement of the reporting guidelines and also for the reporting practice. Hopefully reports will be even more readable and comparable in the future.

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2. Theoretic framework

2.1. Introduction

After the introduction this chapter starts with a definition of the term corporate responsibility in paragraph two. Thereafter paragraph three gives an explanation of why organizations practice corporate sustainability and why they publish reports about it. Paragraph four recapitulates previously conducted research on corporate sustainability that is valued as relevant for this research. The discussion of the existing literature on corporate sustainability provides the reader some contextual information, which should make it easier to understand corporate sustainability and the content of the remainder of this research report. Paragraph five gives more detailed information on the GRI, the G3 guidelines and the DMA and GRI reporting practice.

2.2. Definition and components of corporate sustainability

What is corporate sustainability? After reading the first chapter you will probably have developed some thoughts on what corporate sustainability means. But for clarity reason the definition of corporate sustainability, used in a cover story by Adrienne Fox (2007), is given. She uses the definition of The World Business Council for Sustainable Development:

Corporate sustainability can be divided in several elements. Esrock and Leichty (1998) distinguish the following four elements: (1) maintaining fair and honest business practices, (2) maintaining product safety, (3) taking care of employees, and (4) improving environmental record. The GRI G3 guidelines include these four elements but are more comprehensive and distinguish the following six sustainability Categories: (1) Economic, (2) Environment, (3) Labor Practices and Decent Work, (4) Human Rights, (5) Society, and (6) Product Responsibility. Some

Contributing to sustainable development by working to improve quality of life with employees, their families, the local community and stakeholders up and down the supply chain.

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more detailed information about the GRI, the G3 guidelines and the G3 sustainability categories will be given in paragraph 2.5.

2.3. Why corporate sustainability and sustainability reporting?

Now the definition and the components of sustainability are known, let us take a look at why so many organizations practice corporate sustainability and sustainability reporting. What are their motives? To answer this question it is interesting to take notice of corporate history. Although corporate sustainability is common practice for only just a few decades now, organizations in the early days were also busy with more than just their profit. Take for example Philips, a giant electronic company. In 1910 Philips started constructing an entire village to provide their factory workers good living conditions. Philips didn’t construct houses alone; they also constructed schools, shops and playing fields. With this initiative Philips aimed to provide its employees with good living conditions, but of course Philips also wanted to secure a steady workforce by holding a close relationship with its employees. This example reveals that taking care of employees and their families, a corporate sustainability issue, is not a new concept.

The difference with the past lies in the fact that corporate sustainability is nowadays part of everyday business instead of a vague practice, practiced by a few progressive organizations.

Corporate sustainability has developed rapidly. There are some social trends that have accelerated the development of corporate sustainability. These trends are set apart in an advice report, called

‘De winst van waarden: advies over maatschappelijk ondernemen’ (2000), published by the Sociaal Economische Raad (SER). The first trend is the increase in educational level of the community. The second trend is the increase in spending possibilities and prosperity. The increase in prosperity leads to a shift from material needs to immaterial needs. The third trend is the shift from a capital-intensive economy to a knowledge-intensive economy. The fourth and last trend is the increase in the power of public and social organizations, and the related decrease of the power of governmental organizations. This shift of power is followed by a shift in responsibilities. The responsibility for society (people and planet) partly shifts from the governmental organizations to the public and the social organizations.

Besides the above reported trends the SER report mentions a field of force which organizations have to deal with. This field of force contains three forces. (1) What must be done? What must an organization do to be in compliance with corporate rules and corporate law concerning corporate

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sustainability? Does the organization meet the expectations of society? (2) What is the right thing to do? What is the organization supposed to do out of personal conviction? (3) What pays off?

What is the benefit for the organization of practicing corporate sustainability? An example could be a better public image because of the development of a corporate sustainability policy which is better than the competitor’s corporate sustainability policy.

Based on these three forces it can be stated that organizations practice corporate sustainability, because (1) society demands it to an increasing extent, (2) organizations feel the internal need to do so and (3) it pays off. Note that it is of major importance that organizations for their survival must at minimal meet the expectations of society.

But how do corporate sustainability practicing organizations show society that they are practicing corporate sustainability and that they are meeting society’s expectations? Well, they are showing their corporate sustainability practice by reporting about it. There are three ways of reporting that are mostly used by organizations. First, there is the annual report. Organizations can write a section on corporate sustainability in their annual report. Second, there is a separate corporate sustainability report. Since corporate sustainability became part of everyday business, organizations started publishing a separate corporate sustainability report next to their annual report. Third, there is the organization’s website. Most organizations have a website where you can find information about the organization. Where organizations’ websites in the past only provided some general information, nowadays these websites provide much more detailed information. All corporate sustainability information which is reported hardcover is in most cases also available online. In some cases organizations publish even more online than then they do hardcover. In these cases organizations publish for readability reasons only general information on a certain issue in their corporate sustainability report and refer to their website for more detailed information on that issue.

Reporting on corporate sustainability can be seen as a way of telling society that the organization is meeting society’s expectations and by that the organization is carried on legitimate (Deegan 2002; Hooghiemstra, 2000). The legitimacy theory is the most important theory for explaining sustainability reporting. More information on the legitimacy theory in the next paragraph, which sets apart some previously conducted corporate sustainability research.

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Establishing a DMA Baseline 15 2.4. Previously conducted corporate sustainability research

In the past a lot of research had been conducted on corporate sustainability and corporate sustainability reporting. The three most important theories that flow from these studies are: (1) decision-usefulness studies, (2) economic theory studies and (3) social and political theory studies (Gray et al., 1995). According to Gray et al. the social and political theory studies are the most interesting and insightful. I will therefore focus on the social and political theory studies, which can be further dividend into three studies. The first is the stakeholder theory perspective, the second is the legitimacy theory perspective and the third is the perspective that emerges from political economy. As mentioned earlier the, legitimacy theory is the most popular theory for explaining corporate sustainability reporting (Gray et al., 1995). That is why I will only focus on the legitimacy theory. The legitimacy is defined by Lindblom (1994, p. 2) as:

And according to Suchman (1995, p. 574):

Although the just mentioned definitions of legitimacy are pretty clear let us, for better understanding, take notice of where the legitimacy theory comes from. According to Patten (1992) the legitimacy is based on the social contract concept. This social contract concept implies: “Any social institution – and business is no exception – operates in society via a social contract, expressed or implied, whereby its survival and growth are based on: the delivery of some socially desirable ends to society in general, and the distribution of economic, social or political benefits to groups from which it derives its power. In a dynamic society, neither the sources of institutional power nor the needs for its services are permanent. Therefore, an

“…a condition or status which exists when an entity’s value system is congruent with the value system of the larger social system of which the entity is part”.

“Legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, beliefs, and definitions”.

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institution must constantly meet the twin test of legitimacy and relevance by demonstrating that the groups benefiting from its rewards have society’s approval” (Shocker and Sethi, 1974, p. 67;

quoted in Patten, 1991 and 1992).

Brown and Deegan (1998) confirm this by stating that the value system of the larger social system is subject to major changes and it is therefore very important for organizations to constantly monitor the changing expectations of society and that organizations adapt to these changing expectations. The organization’s continuity depends on the ability to constantly operate within the band width set by society and make society aware of this by reporting their corporate sustainability.

The SER advice report mentioned in paragraph 2.3 also states that, to guaranty the organization’s survival acceptance by society and a good reputation are required. Acceptance by society is also called a ‘license to operate’ that organizations get conditionally and that has to be earned over and over again.

Effective organizations quickly react to the changing expectations and they let society know this by reporting it in their corporate sustainability report. Corporate sustainability reporting can in this light be seen as a strategic tool which organizations can use to influence society’s perception of the organization. It can therefore be stated that publishing a corporate sustainability report is a tool to attain legitimacy.

By now the wider context of this research is getting pretty clear, but before going to the methodology chapter there are some other important contextual matters left to be set apart in paragraph 2.5. These matters include an explanation of what the GRI is and what the GRI does, also included are explanations of the G3 guidelines and the DMA.

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Establishing a DMA Baseline 17 2.5. The GRI, the G3 guidelines and the DMA

Paragraph 2.4 ended with the statement that organizations use corporate sustainability reporting to let society know that the organization is taking society’s expectations seriously. Publishing a hardcover corporate sustainability report is common practice amongst large organizations. These corporate sustainability reports are published in all kinds of formats. This is because there is no legislation concerning what should be reported and how it should be reported. The GRI tries to fill this gap by developing a framework that should provide corporate sustainability report preparers guidance when they prepare their reports. This paragraph is devoted to the GRI, the G3 sustainability reporting guidelines and the link between the legitimacy theory and the GRI guidelines.

First, what is the GRI?

“The GRI is a multi-stakeholder governed institution collaborating to provide the global standards in sustainability reporting”. “….thousands of experts, in dozens of countries worldwide, who participate in GRI’s working groups and governance bodies, use the GRI guidelines to report, access information in GRI-based reports, or contribute to develop the Reporting Framework in other ways – both formally and informally” (GRI website).

“The GRI has pioneered the development of the world’s most widely used sustainability reporting framework and is committed to its continuous improvement and application worldwide.

This framework sets out the principles and indicators that organizations can use to measure and report their economic, environmental, and social performance” (GRI website).

Second, what are the G3 guidelines?

The G3 guidelines are a trusted and credible framework for sustainability reporting that can be used by organizations of any size or sector. The first part of the G3 guidelines provides the reporting organizations the principles of sustainability reporting. It provides guidance when defining the report content and setting the report boundary. The second part of the G3 guidelines specifies the base content that should be included in sustainability reports. To begin with, the reports should contain a disclosure on Strategy and Profile. This disclosure sets the overall context for understanding organizational performance. Next, the report should contain a

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Disclosure on Management Approach (DMA). This means that the organization gives information on how the organization addresses a given set of sustainability topics. This information is supposed to give the readers some more detailed information which provides a context for understanding performance in a specific area. Last but not least, the organization should disclose Performance Indicators. These are indicators that elicit comparable information on the three overall Categories the G3 guidelines define: Economic, Environmental and Social.

The last Category, Social, covers: Labor Practices and Decent Work, Human Rights, Society, and Product Responsibility. So in total it can be stated that there are six Categories.

Third, what is the DMA?

The DMA is explained by quoting the G3 guidelines: ‘The Disclosure(s) on Management Approach should provide a brief overview of the organization’s management approach to the Aspects defined under each Indicator Category in order to set the context for performance information. The organization can structure its Disclosure(s) on Management Approach to cover the full range of Aspects under a given Category or group its responses on the Aspects differently. However, the Disclosure should address all the Aspects associated with each Category regardless of the format or grouping’ (appendix 2 shows the Categories and Aspects).

The link between the legitimacy theory and the GRI guidelines

Paragraph 2.4 pointed out that organizations want to let stakeholders know that their organization is carried on legitimately. The best way to do this is to prepare a sustainability report that meets the informational needs of all stakeholders. If organizations must collect these stakeholders’

informational needs their self’s, it would be a timely and costly exercise. Fortunately for sustainability reporting organizations, there is an organization like the GRI.

Instead of organizations individually collecting the informational needs of all stakeholders, the GRI brings different stakeholders together to express their informational needs and to collaborate in developing global sustainability reporting standards. This multi-stakeholder approach provides sustainability reporting guidelines that include all stakeholders’ informational needs. So for showing the organization’s legitimacy to all stakeholders, organizations are in general best off by preparing their sustainability reports in accordance with the GRI guidelines.

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3. Research methodology

In this chapter the research methodology will be set apart. Paragraph 3.2 starts with the organizations included in the research sample. Then, the following five variables will be discussed: report year, GRI/non-GRI, Application Level, internationality and business sector.

Paragraph 3.3 explains what kind of research method is used and how the developed score systems work.

3.2. Research sample and variables

Research sample

The sample for this research contains twenty four sustainability reports from very diverse organizations. The twenty four organizations are alphabetically listed in table 1. A table of the research sample by business sector and by geographic region is found in appendix 1 on page 47.

Table 1. Research sample

1 Anglo American Brasil 13 Jubilant Organosys

2 AquaChile 14 Korean East West Power

3 Bayer 15 Mango

4 Companhia Paranaense de Energia 16 Medley

5 Dong Energy 17 Nutreco

6 Grupo Cortefiel 18 OMV

7 Heinz 19 Orica

8 Hess Corporation 20 Petrobras

9 Illawarra Coal 21 Pfizer

10 Implats 22 Samsung SDI

11 Inditex 23 Sun Microsystems

12 Indra Systemas 24 Sunoco

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Establishing a DMA Baseline 20 Report year

The twenty four sustainability reports were downloaded from www.corporateregister.com and were the latest online available sustainability reports at that time. In most cases (16 reports) these were the sustainability reports 2006. The remaining reports were sustainability reports 2007 (6 reports) and two biannually sustainability reports, one 05/06 and one 06/07.

Internationality

The G3 guidelines are international recognized and organizations from all around the world use the G3 guidelines to prepare their sustainability reports. The organizations selected for the sample are organizations from all around the globe. The geographic regions selected are displayed in table 2.

Table 2. Geographic regions

Africa (1) Latin America (5)

Asia (3) North America (5)

Europe (8) Oceania (1)

The sample is overweight for Europe and underweight for Africa and Oceania. There are two reasons for the different weights of the geographic regions in the sample. The first reason is the geographical spread of reporting. Europe, North America and Asia are the more developed reporting regions and because of that, higher amounts of reports are prepared and available in these regions. The second reason is that I have only reviewed English versions of corporate sustainability reports. For some regions, like Africa and Oceania, English versions of G3 sustainability reports were more difficult to find.

Business sectors

The G3 guidelines are applicable to all kinds of organizations in all kinds of business sectors.

Because of that, the sample comprises organizations’ sustainability reports from eight different business sectors. The sample is however not representative for all organizations. This is because I

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have searched for organizations with a heavy Economical, Environmental and/or Social footprint.

The selected organizations for the research sample are evenly divided amongst the eight business sectors displayed in table 3.

Table 3. Business sectors

Mining Apparel

Oil & Gas Technology/Hardware

Chemicals Utilities

Food Pharmaceuticals

GRI versus Non-GRI

The twenty four corporate sustainability reports in the sample are all prepared according the G3 guidelines. These reports are the most interesting and therefore the core of this research. But because it would also be interesting to know how sustainability reports preparers that don’t use the G3 guidelines prepare their reports, initially an additional six non-GRI sustainability reports were selected. These six non-GRI reports were however so individually different of form, size and structure, that it was very hard to make some useful general statements about non-GRI reports. That is why it was decided to drop the non-GRI reports and focus solely on the GRI G3 reports.

Application Level

The sample contains GRI reports from all kinds of Application Levels. An Application Level indicates that a report is GRI-based. The level indicates to which degree the report preparers have applied the G3 guidelines. There are three Application Levels available to the report preparers:

‘C’, ‘B’ and ‘A’. These three Application Levels are distinguished to meet the needs of beginners, advanced reporters, and those who are in between. Each report preparer can choose which level is applicable for his or her organization. In addition to this self-declaration, reporting organizations can choose to let a third party provide assurance on the self-declaration and/or request that the GRI checks the self-declaration. A “plus” (+) is available at each level (e.g. C+,

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B+, A+) if external assurance was utilized for the report. In this research the “plus” and the GRI check are not considered. The research sample comprises 6 (25%) Application Level ‘A’ reports, 6 (25%) Application Level ‘C’ reports and 12 (50%) Application Level ‘B’ reports.

3.3. Research method and score system

This research is a descriptive survey study because it establishes a baseline of how sustainability reporting organizations currently structure their sustainability reports, what they report, where they place the DMA and which DMA information is reported. This is done by conducting a content analyses amongst twenty four G3 sustainability reports. The twenty four sustainability reports are reviewed using two score systems and two accompanying score cards which will now be explained.

The example version scorecard in table 4 and the full version score cards in appendixes 3 and 4 show that the organizations are given a 1 or a 0 for each time the G3 content under a certain heading (appendix 3) or an Aspect (appendix 4) is reported. 1 means that the organization reports the content under a specific DMA heading (paragraph 4.4) or the Aspect (paragraph 4.5) in their sustainability report and 0 means that it is not reported.

Table 4. Example version of DMA content per G3 heading scorecard (appendix 3)

Implats Jubilant Organosy s Samsung SDI Korea E-W Power

Content DMA

item total item total item total item total

ECONOMIC ITEMS: 1 3 3 3

Goals and performance 1 1 1 1

Policy 0 1 1 1

Additional contextual information 0 1 1 1

ENVIRONMENTAL ITEMS: 6 6 4 5

Goals and performance 1 1 1 1

Policy 1 1 1 1

Organizational responsibility 1 1 0 1

Training and awareness 1 1 0 0

Monitoring and follow-up 1 1 1 1

Additional contextual information 1 1 1 1

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For the topics highlighted (paragraph 4.6) I used a different score system/score card. In table 5 or appendix 5 it can be seen that I have not only examined if the content under the DMA headings is reported, but also how much information is reported regarding that DMA heading. I have given points on a ordinal scale from 0 till 5. 0 points means that regarding that heading there is ‘no DMA information’ reported at all. 1 point means ‘very limited DMA information’ is reported.

The threshold for this is approximately 2/3 sentences, but usually organizations that report only a very small paragraph on the topic receive 1 point. It depends also to some extent on the reporting on other topics and the size of the overall report. 3 points are given if an organization reports a

“moderate amount of DMA information’ on the topic. This means that the organization reports at minimal one large or two smaller paragraphs on the topic. 5 points are given to organizations that report ‘a lot of DMA information’ on the topic. Which means that the amount of information reported on the topic is more then two paragraphs. Again, the points given are also dependent of the size of the overall report and the reporting on other topics.

Table 5. Example version of scorecard for the topics highlighted

score system per item: (on scale 0-5) 0 = no info, 1 = very limited info, 3 =

moderate amount of info, 5 = a lot of info ^Im

plats Jubilant Organosys Samsung SDI Korea East-West Power OMV

Content valuation DMA on Health and Safety

Goals and performance 5 1 1 1 5

Policy 1 1 1 3 5

Organizational responsibility 5 1 2 3 5

Training and awareness 3 1 3 0 5

Monitoring and follow-up 3 1 1 5 5

Additional contextual information 3 1 1 3 5

Total score items (max = 30) 20 6 9 15 30

Content valuation DMA on Climate Change

Goals and performance 3 0 5 0 5

Policy 0 0 5 1 1

Organizational responsibility 0 0 0 0 1

Training and awareness 0 0 0 0 1

Monitoring and follow-up 1 0 5 3 3

Additional contextual information 3 0 3 3 5

Total score items (max = 30) 7 0 18 7 16

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4. Research findings

Now that the (theoretical) context and the research methodology for this research are clear, we have arrived at the most interesting part of this research report which contains the research findings (chapter 4) and the conclusions (chapter 5). In this chapter paragraph 4.2 starts with the findings relating to the overall structure of the sustainability reports. Then paragraph 4.3 reports on the placement of the DMA in the overall structure of the sustainability reports. Thereafter paragraph 4.4 provides information about the reporting of the specific DMA headings, the DMA content and the reporting of the G3 Aspects. Final paragraph 4.5 reports on two topics that are being highlighted.

4.2. Structure of the sustainability report

Overall structure

The G3 guidelines prescribe an overall structure for sustainability reports based on three types of Standard Disclosures: The first standard disclosure consists of Strategy and Profile, the second of Disclosure on Management Approach (DMA) and the third of Performance Indicators.

Table 4. The three types of Standard Disclosures

Strategy and Profile DMA Performance Indicators

When examining the structure of the sustainability reports of the sample it can be stated that all but one of these reports contain all three types of Standard Disclosures. The first Strategy and Profile, is always placed at the beginning of the sustainability report. The second en third Standard Disclosures, respectively the DMA and the Performance Indicators, are reported after Strategy and Profile, and are in close connection to one another. The DMA and the Performance Indicators are many times used in a sort of mixed form. This means that the DMA and the

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Performance Indicators flow through one another and are difficult to separate. For example, one organization reports shortly their policy on waste management (DMA). This phrase is directly followed by numbers about spills and a comparison with recent years (Performance Indicators).

Thereafter the organization explains who is responsible for waste management and gives examples of waste reducing innovations (DMA). This example shows that the DMA and the Performance Indicators are tightly linked and you need to read carefully to separate one from another. It can therefore be stated that a great part of the sustainability reports comprises two overall components, instead of the three Standard Disclosures of the G3 guidelines.

A reason for this reporting behavior could be that the G3 guidelines are maybe susceptible to more than one interpretation. It is for example possible to state that the DMA and the Performance Indicators are two different types of Standard Disclosures and therefore should be reported separately in the sustainability report. It is also possible to state that the DMA and the Performance indicators are so closely linked that they should be seen together and should be reported intertwined. It is not the purpose of this research to explore how the G3 guidelines should be interpreted. Rather interesting however is to know how G3 reporting organizations interpret the guidelines.

More detailed structure and content

Looking at the G3 structure in more detail it can be stated that the numbering in part two of the G3 guidelines can be interpreted as the more detailed structure. This numbering and content of part two of the G3 guidelines is displayed in table 6.

Table 6. Content numbering and content headings

Strategy and Profile DMA Performance Indicators

1. Strategy and Analyses 2. Organizational Profile 3. Report Parameters

4. Governance

5. Disclosure on Management Approach

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None of the reports that contain the three types of Standard Disclosures in some way follows the more detailed structure of the G3 guidelines. Comparing the more detailed G3 guidelines structure with the structure of the sustainability reports in our sample provides us with some interesting findings.

First, of the twenty four GRI sustainability reports 20 (83%) reports contain the same content as specified under the numberings (table 6) in the G3 guidelines. With the same content I mean that although in most cases the headings differ from the G3 guidelines, the same information (content) as prescribed by the G3 guidelines is reported in the sustainability reports.

The difference between the sustainability reports and the G3 guidelines is the different placement of the content in the reports. For example, the greater part of the reports places the GRI index (report parameters) in the appendixes. There are also many organizations that place the report scope and boundary (report parameters) at the very beginning or at the end of the report. These are not very surprising findings, because the G3 guidelines do not prescribe where to place the content. More important is that the content is reported. The remaining questions are, why is the content placed at a certain place in the G3 guidelines and why do a lot of organizations place it elsewhere in their reports? Should GRI replace some G3 content? The answering of these questions goes beyond the scope of this research, but it is obvious that for comparability reasons it should be better if all G3 reporting organizations followed the GRI structure.

Second, the Categories identified in the G3 guidelines are very differently reported. Some organizations just switch the placement of the Categories, but others use a different approach towards the Categories and also towards the different Aspects within the Categories. For example, some organizations define Aspects that they probably value as important as a separate category or chapter. Health and safety for example, is a G3 guidelines Aspect under the Category Labor Practices. In practice however, Health and Safety is reported more then once in a separate chapter instead of in a chapter on Labor Practices. This is just one example of how organizations rearrange Categories and Aspects. After reading the G3 reports you might wonder if the report preparers actually follow the G3 guidelines when preparing their reports, or that they prepare their reports and thereafter check if the reports contain the information that the G3 guidelines prescribe. The first option is the most favorable one, but the variety in report layout, structure and content might suggest that the last option is the one most used in practice.

Summarizing it can be stated that all but one sustainability reports follow the overall three types of Standard Disclosure structure in some way. They also follow the content that the G3 guidelines