Sustainable Business Development The Future Next Exit

Sustainable Business Development

In accordance with the Swedish Act on Copyright in Literary and Artistic Works (1960:729), the contents of this book can not be reproduced and such restrictions applies to each and every form of reproduction via printing, copying, etc.

Sustainable Business Development Stockholm September 2010 Published by: Far Frlag AB Box 6497, 113 82 Stockholm, Sweden. Phone: +46 8-402 75 00. Fax: 08-402 75 25. E-mail: info@farforlag.se Author: Lars-Olle Larsson Production: Grafiskt Centrum at Far Frlag ISBN 978-91-86245-40-5

Foreword
It is high time that we discuss and debate the subject of sustainable business development. Changes taking place in society are occurring at an increasingly rapid rate and in forthcoming years, many areas within both business and society will look very different to how they do today. How should corporate management and Boards, auditors and investors turn their visions of a programme for sustainable change into reality? Our goal in 2009, when we published the book Hllbar affrsutveckling for Swedish readers, was to present them with background information and facts, and, primarily, to provide them with a tool to initiate change programmes in their own organisations.When the idea arose that we should perhaps update, edit and translate the book for an international readership, we saw a positive possibility. Sustainable development has no boundaries. By updating and translating the book, Sustainable Business Development ^ The Future Next Exit, Far Frlag publishing company will have broken through the language barrier, as this is the first book we are publishing in English. The author of this handbook is Lars-Olle Larsson. We are pleased to have the opportunity, in this book project, of working with one of Swedens and perhaps Europes most well-known experts within sustainable business development. Lars-Olles many years of involvement and practical work with these issues in Sweden and Europe, his assignments in a number of large organisations and companies, and his experience from previous publications, give him a unique position in this field. Thishandbook contains a numberof excerptsfromguidelines and standards, from a variety of documents.We wish to thank all of the organisations whowillinglygranteduspermissiontopublish theseimportant excerpts and citations.A specialthank youis also extended to Kathleen C.Andersonwho is responsible for the English translation of the Swedish book. We are pleased and proud to make Lars-Olle Larssons book, entitled Sustainable Business Development ^ The Future Next Exit, available, via USB flash drive to the 4,000 participants attending the 2010 World Congress of Accountants in Kuala Lumpur. Stockholm, November 2010 Marie Wernerman Managing Director, Far Frlag AB

About the author

The author, Lars-Olle Larsson, is a qualified professional member of Far, the Institute for the accountancy profession in Sweden, and Partner in PwC. Since 1977, he has worked with CR, CSR, ESG, sustainable development, business ethics, communication, marketing and corporate governance, both as a memberof, and as a consultant to, corporate management in Swedish companies, international groups, state owned companies, and in the public and non-profit sectors. Since 1995, he has worked with these issues in the auditing industry. Lars-Olle has been awarded The European Federation for Communications prize as Best Communication Manager in Europe,CERP PRIX European Public Relations Professional Award and The International Public Relations Associations prize for Best Total Communications Programme, IPRA Golden World Award of Excellence.Lars-Olle has also received a numberof writers scholarships from the Scholarship Committee, Swedish Association of Educational Writers. Lars-Olle is a member of the Sustainability Experts Advisory Panel set up by the International Federation of Accountants, the International Auditing and Assurance Standards Board and Public Accountants in Business Practice. He represents Far in the Federation of European Accountants Sustainability Policy Group and is representing the Swedish Institute also in the Management Committee of the International Sustainability Reporting Association. Lars-Olle represents ICC Sweden in the Commission on Corporate Responsibility and Anti-corruption of the International Chamber of Commerce and is chairing the Swedish Society of Financial Analysts Corporate Responsibility Committee. He is the overall chairman of Globe Award ^ Leading Sustainability Awards and is also chairing Fars Jury Group for the Swedish Sustainability Reporting Awards Scheme. Over the past fifteen years, Lars-Olle has participated in a large number of consultancy and assurance-related assignments within his area of expertise in a large variety of industries, in listed companies, other companies, in the public sector, in Swedish state owned companies and in the NGO and civil society sector.

From our perspective!

Todays global economy is almost five times greater than it was half a century ago.If this rate of growth continues at its current pace, it will be eighty timeslarger by the year 2100.This current scale and pace of development is mind-boggling and has no historical equivalent. At a time when we now find ourselves returning to a growth scenario, after this most recent financial crisis, the worst since the 1930s, we are also presented with informed scientific research requiring serious attention and consideration. The UNs climate panel has agreed that, through industrialisation and the emission of greenhouse gases, the climate is impacted in a manner which is detrimental to sustainability. Two billion people live on less than USD 2 per day. And, even more alarming, we are increasingly beginning to understand that the ecosystems, on which we so heavily rely, are not delivering as they have in the past.The overfishing of our seas and lack of clean water are examples of this.The most recent study within this area isTEEB ^ The Economics of Ecosystems and Biodiversity Report. The TEEB study comprises four focus areas aimed at Policy Makers; Local and Regional Administrators; Business; and Citizens and outlines the implications and costs of the decline of our natural capital for each audience. The TEEB for Business Report was launched in London in July 2010, and evaluates both the risks and the opportunities presented to business associated with the loss of biodiversity and ecosystem services.We must turn the tide of this development! Our modern economy is dependent on growth for its stability. When growth stagnates ^ which has occurred during the financial crisis ^ uncertainty and concern spreads.In the wake of the economic decline follows unemployment. A negative spiral must be turned upwards.To question and restrict the concept of growth in general is not a particularly wellconsidered strategy. We have to choose a new, sustainable means of growth.We must also replace short-termism with a longer-term perspective. In this work it is trust which is the most important form of capital. Lars-Olle Larsson, who fifteen years ago initiated Fars (the Swedish Institute for the Accountancy Professions) working committee on sustainable development, has for many years worked with corporations and accountants to improve their approach to sustainable development. He has represented Far inThe Federation of European Accountants organis-

ations (FEE) Sustainability Policy Group, and also in the Management Committee within the European Sustainability Reporting Association, as well as within the International Federation of Accountants organisations (IFAC) expert group, Sustainability Experts Advisory Panel. With this handbook Lars-Olle Larsson provides valuable knowledge and insight gained from many years of experience. He predicts that the way forwards will look very different to what has previously been imagined.We agree! The cover image ^ The Future,Next Exit ^ strongly illustrates the message behind this handbook.We see, from our perspective, how issues relating to sustainable development have successively grown in the work of accountants, due to the fact that market and societal developments require this involvement. The accountancy profession is an important part of society and assumes active responsibility ^ in the Public Interest ^ in order to ensure that the financial systems can be sustained and can continue to serve us far into the future. Kuala Lumpur, November 2010 GranTidstrm President IFAC Dan Brnnstrm Secretary General, Far

Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Parallels between the financial crisis and unsustainable development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 The Stern Review ^ an economic analysis . . . . . . . . . . . . 2.2 The findings of scientific research ^ where are we going? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 An impossible equation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Research regarding financial incentives ^ from risk to value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 Doubts and contestation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Sustainable Business Development . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Sustainability, sustainable development and sustainable business development . . . . . . . . . . . . . . . . . . . . 3.2 A market-based approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Business ^ a prerequisite for welfare . . . . . . . . . . . . . . . . . . 4 Stakeholders and the shaping of opinion . . . . . . . . . . . . . . . . . . . . . 4.1 Civil society and advocacy groups drive opinion . . . . . . . 4.2 Business and Human Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Politicians track public opinion, aiming to scorepolitical brownie points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Customers, consumers and consumption patterns in flux . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 The supply chain ^ opportunities and threats . . . . . . . . . 4.6 The role of the media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 The financial sector from a sustainability perspective . . 4.8 Indices identify the most sustainable companies . . . . . . 4.9 Research providers ^ first to market . . . . . . . . . . . . . . . . . . 4.10 The long-term investment view gaining ground in financial markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.11 Analysts analyze and provide purchasing and sales advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 A few definitions ^ from sustainable development, via CSR, to RI, ESG, GRI and A4S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 12 17 17 18 29 30 35 36 37 39 40 41 42 48 52 55 59 62 64 74 78 79 81 83

6 Corporate governance and sustainable business development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 How its done ^ a new old-school business model . . . . . . . . . . . 7.1 Business Strategy in flux . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 How to integrate adaptation to the requirements of sustainable development? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 ICCs nine practical steps towards responsible business conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 ISO Guidance on social responsibility . . . . . . . . . . . . . . . . . 7.5 IFAC Sustainability Framework . . . . . . . . . . . . . . . . . . . . . . . . 7.6 The leadership decides! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7 Policies for governing towards sustainable business development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8 The stakeholder perspective . . . . . . . . . . . . . . . . . . . . . . . . . . 7.9 Defining goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 Business advantages in the long run . . . . . . . . . . . . . . . . . . 7.11 Expand total risk analysis and lay it on the managements table! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.12 Cooperation with suppliers for sustainable development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.13 Partnerships ^ a means of developing business . . . . . . 7.14 Some remarks on philanthropy . . . . . . . . . . . . . . . . . . . . . . . . 7.15 Charity-driven marketing work and social entrepreneurship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.16 A business model for sustainable, profitable business development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.17 SustainableValue Creation ^ a summary . . . . . . . . . . . . . 8 Accounting for change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 From annual report via sustainability reporting to connected and integrated reporting . . . . . . . . . . . . . . . . . . . 8.2 Disclosure requirements on sustainability information in annual reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 UNCTADs 16 selected indicators . . . . . . . . . . . . . . . . . . . . . . 8.4 Research into the identification of industry-specific sustainability indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 Climate Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 The Carbon Disclosure Project . . . . . . . . . . . . . . . . . . . . . . . .

86 91 91 94 95 98 100 102 103 104 107 108 110 113 117 120 121 121 124 125 125 128 130 132 134 135

The CDSB Reporting Framework . . . . . . . . . . . . . . . . . . . . . . EMAS ^ The EUs Eco Management and Audit Scheme The Global Reporting Initiative . . . . . . . . . . . . . . . . . . . . . . . . Guidelines for external reporting for state-owned companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.11 The Danish government followed . . . . . . . . . . . . . . . . . . . . . . 8.12 Global Compact and Communication on Progress . . . . 8.13 Accounting for Sustainability, A4S . . . . . . . . . . . . . . . . . . . . . 8.14 Accountability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.15 Integrated reporting pays off in Globe Award ^ Leading Sustainability Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Assurance on sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 The Professional Accountants Role ^ in the public interest! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 FEE Sustainability Policy Statements . . . . . . . . . . . . . . . . . . 9.3 A basis for decision making? . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 What doesgoing concernmean in the context of sustainability? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5 GRIs recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 A brief history . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 3410N Assurance Engagements Relating to Sustainability reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.8 Sustainability Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.9 Assurance of sustainability reporting in an international perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Brand building, communication, and practicing what you preach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 The deep impact of CSR communication . . . . . . . . . . . . . . 10.2 The role of communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 The need for Total Communications Management . . . 10.4 What isTotal Communications Management? . . . . . . . 10.5 Social media is an essential part of Total Communications Management . . . . . . . . . . . . . . . . . . . . . . . 10.6 Essential socio-environmental analysis . . . . . . . . . . . . . . . 10.7 Risk, Culture and Communication . . . . . . . . . . . . . . . . . . . . . 10.8 Sustainable value growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8.7 8.8 8.9 8.10

135 137 137 145 146 146 148 153 155 157 157 159 163 164 166 167 172 195 202 204 204 205 206 207 208 209 210 211

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11 Concluding remarks and a look into the future ^ what can we expect? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 The climate change issue must be solved... . . . . . . . . . . . 11.2 ...but this is, nevertheless, only the tip of the iceberg . . 11.3 An ever-increasing number of people do not have food for the day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 The reduction of poverty and the development of democracy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 The multicultural, global society . . . . . . . . . . . . . . . . . . . . . . . 11.6 The Recycling Society will become a reality . . . . . . . . . . . 11.7 Changes in consumption patterns . . . . . . . . . . . . . . . . . . . . . 11.8 Our lifestyle is changing ^ the dinosaurs are dying out! 11.9 Research, progress and innovation lead the way . . . . . . 11.10 The market economy will remain, but will be more heavily regulated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.11 Risk issues will increase and become the responsibility of the Board ^ internal control becomes ever more important . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.12 Investors, fund managers, analysts and credit rating companies will choose sustainable business . . . . . . . . . . 11.13 The EU will provide guidance in matters of CSR,ESG and sustainability reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.14 Sustainability Reporting is integrated and established . . 11.15 The best chance ever! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Websites and links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 FEE Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1 Bold words, big commitments . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 Of all these bold words ^ which ones should we choose to follow? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3 SustainableValue Creation: The Investors Questions . . 14.4 SustainableValue Creation: The Analysts Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

213 213 214 214 215 215 215 215 216 216 217

217 218 219 222 224 225 231 233 233 267 267 273

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1 Introduction
When this book is published, more than two years of experts and analysts attempting to research and identify solutions for one of historys most extensive international financial crises will have passed. Although the world economy is now slowly on the road to recovery from the greatest financial and economic downturn since the 1930s, this recovery is still fragile and is based on extraordinarily expansive policies. Increasingly, the discussion now revolves around how and when these incentive policies will be phased out and when regulations will be introduced into the financial markets. Everyone now understand that confidence in financial systems andinstitutionsis key to creating the necessary conditions forentrepreneurship and investment. The recession hit at the same time asthe climate issue, which, although recognised long before the financial crisis, has now developed into one of the key issues on the political agenda.There is still disagreement regarding the climate change negotiations which took place in Copenhagen a year ago; whether they laid the foundation for a new and global approach to the carbon dioxide problem or if the COP 15 will be regarded as a lowpoint in international politics.Whilst knowledge of the greenhouse effect is now increasing, there is growing concern as regards other forward looking sustainability issues, such as the fear that ecosystems are degrading at an unsustainable rate. This book addresses the subject of sustainable business development and necessary change. It is not intended to contribute to the wider environmental debate but, instead, is intended for use by corporate management,Boards of Directors, their advisors and financial sector players, such as investors, asset managers and analysts, and the accountancy profession, in discussions regarding what must be done, and how such change can be managed. The books aim is to help to promote a greater awareness, knowledge of and belief in this subject in order to guide and direct management in identifying a vision that is not short-term, but longterm; a vision of sustainable business development.

12 Introduction

1.1 Parallels between the financial crisis and unsustainable development

A number of striking similarities have been found between the analysis of the financial crisis and the globalrecession, and the equallyalarming findings on climate change. Both are, needless to say, serious issues and are top of the agenda.Voices are now beingraised claiming that we have had a sufficient period of time to heed the advice of climate scientists and that there is no longer any doubt that the threat towards the climate is immediate and potentially devastating. Most agree that further knowledge is required, but this does not mean that we can afford to continue to wait. In December 2008, Prince Charles made an inspiring presentation in London, in conjunction with the Conference of Accounting for Sustainability, on the subject of Decision-Making and Reporting in a Resource Constrained World, in which he discussed his own initiatives surrounding reporting on sustainability. In his speech, Prince Charles drew parallels between the causes of the current financial crisis and the impending ecological crisis. He drew attention to certain key causes (financial and ecological) which he believes require immediate attention and action.

1.1.1 Consume now ^ pay later!

The primary (and most important) reason for the credit and financial crisis is that we have allowed ourselves to consume now and pay later.The huge growth in lending, and general acceptance of consuming today and paying tomorrow, has proven to be devastating.The banks and credit institutions were very willing to actively extend credit to promote consumption with payment to be made in the future, allowing the debt burden to grow past the borrowers ability to repay.This risk propensity in credit has been excessively high and we see the results in the banksown reports. Central banks worldwide have come to the rescue and banknote presses have been running at full steam to save what can be saved. Unfortunately, we also manage environmental capitalin the same manner. Although we have not put an actual price on the ecosystem, we have put it under considerable strain in supporting the immense global development of recent years, (a similar strain to that which has afflicted the economy) and, consequently, we find ourselves in a situation which can be likened to a huge ecological debt.

Introduction 13

Today, we over-consume by about 20%, compared to the total production ofthe worlds ecosystems.The amount of carbon dioxide in the atmosphere is at its highest level in almost a million years. Simply put, it is the Earths natural capital that creates the conditions for humanitys continued survival.Over-exploitation of natural capital at the levels seen today is not sustainable in the long run.The problem with this type of debt, however, is that, in comparison with the accumulation of credit risks in the financial crisis, no central banks in the world (or banknote presses for that matter) can resolve the problems that have come to the fore. Withdrawing more than the annual growth rate (interest) from the ecosystem is, de facto, devastating to Natures capital. We are consuming non-renewable resources faster than ever before and we are polluting the ecosystems, causing irreversible damage.The question is how is this debt to be paid? Everyone understands that the ecosystem collapse cannot be solved in the same manneraswe are dealingwith the financial crisis or with the rescue by central banks.

1.1.2 Self-regulation after the ice has melted

The second reason for the financial crisis and the recession in which we now find ourselves is that there has been an over-reliance on market mechanisms and the financial systems ability to identify and manage the risk of this over-consumption.There are certainly those who think that the recession is proof that self-regulation actually works, but the majority of analysts would agree that, in the wake of the financial crisis, there should be even more regulation.The majority agree that no system, to date, has proven to be better forgrowth and welfare development than the capitalist system. At the same time, it appears that this system must, after all, be subject to some degree of regulation. As with our reliance on the self-regulation of the financial system, we have been overly reliant on the ecosystems ability to manage and adapt itself to the stresses and pressures to which it is exposed. In the manner in which politicians are now regulating self-regulation we see the need to also regulate the over consumption of natural resources and lessen the strains put on the ecosystem. Political agreement on fishing quotas in the oceans and climate agreement post-Kyoto are, of course, just the beginning of the necessary regulation needed to ensure consumption of environmental capital at levels which can be tolerated by the ecosystems.

14 Introduction

1.1.3 Incentives must be changed and become long-term

The third reason for the credit and financial crisis stems from the fact that we have rewarded short-term results over long-term results. Managers responsible for results and companies have been rewarded on the basis of a short-term view, which is at the expense of sustainability. It is easy to understand that incentives must be changed and a reward system must be established to encourage sustainable development. This is a longterm goal. In his research, Professor Jared Diamond has studied the speed at which civilisations have survived or collapsed. Two things seem to have been the most important survival factors ^ the ability to undertake longterm planning and the willingness to change fundamental values. In other words, if we compare this to the current financial and ecological crises, we see that the countries focusing, excessively, on short-term goals are less likely to survive and develop in new conditions and circumstances. Prince Charles draws attention to the fundamental causes of the credit and financial crisis which he believes are over-consumption and insolvency, as well as the over reliance on self-regulation and short-sightedness which are also responsible for a much more serious catastrophe ^ the climate crisis. I choose here to conclude with a direct quote from Prince Charlesinteresting opinionsvoicedin the opening speech at the London Conference in December 2008, which, I believe also serves as a starting point for this book:
Just as the world is (hopefully) coming together to tackle the credit crunch, so we need to work together even more powerfully, and with the same sense of urgency, to tackle climate change and the challenges of a resource-constrained world. We need a new, and greater, level of international co-operation, very much including business and the accountancy profession, and, crucially, we need a much greater sense of the scale of the emergency and the action needed in the short-term. ...I am not trying to suggest that the climate crunch is more important than the financial crisis, or that we should focus on solving one rather than the other.On the contrary, a growing chorus of voicesnow urges a response which is geared to dealing with both at the same time, through an integrated programme for low carbon and resource-efficient development. New industries, millions of new jobs and many new commercial opportunities can go hand in hand with transformation toward an ecologically durable economy.

Introduction 15

1.1.4 Sustainable development ^ a way out of the crisis

It is obvious that we cannot continue as before.The most recent elections to the European Parliament made it clear to all parties that it is environmental issues which the EU citizens hold dear. Politicians are now expected to orchestrate economic controls and instruments and to undertake initiatives, such as emissions trading, taxes on energy efficiency and conversion to renewable fuels and energy sources, carbon taxes, etc. The fishing industry, agriculture and the food sectors are in transition, as well as forestry and industry, in general. Spending on research, development, innovation and infrastructure will create new opportunities for entrepreneurs and enterprises. Globally, more people now live in cities than in rural areas, and the focus will be on the change and development of cities andinfrastructure, such as solutions for public transportation and recycling schemes. The new, sustainable global society which is now emerging is a society that respects the natural environment.This society has every opportunity to provide people with a better quality of life socially, culturally and with regard to healthcare. The motivation needed to lift us out of the global recession is precisely the vision of sustainable development. With the transition we are now facing, many millions of new jobs are being created in new sectors, which are replacing old industries. In a perfect world, the old industries are changing to meet the demands of adapting to sustainable development. ^ A UN report estimates that the wind energy industry, which has so far created 2.3 million jobs, will create another 20 million new jobs by 2030. ^ The same report states that 12 million jobs will be created in agriculture by 2030 to produce biomass, as well as 12 million jobsto insulate and build energy-efficient houses. The EU Commission estimates that energy efficiency by 2020 will lead to 1 million new jobs in Europe by 2020. The Stern Report predicts that there will be 25 million employees within the renewable energy sector by the year 2050, i.e. ten times more employees than there are today.

^ ^

16 Introduction

The imminent structural transformation and paradigm shift implies that many jobs will be lost in old industries.This is a shift that can be compared to the transformation from an agricultural society to an industrial society. The shift from an industrial society to a communications community has been discussed before, and is already in full swing. In parallel with rising unemployment in old industries, people must be convinced to change certain aspects of their lifestyle and embrace new ways of communicating. In addition, it is in our own interest that developing countries do not follow the same energy-intensive growth development which todays industrialized countries have previously experienced. The markets in the socalled BRIC countries1 must build up their prosperity on the basis of sustainable development. Poverty reduction must not fail to take into account environmental degradation and climate change, and the transfer of capital, skills and new technologies is, therefore, a prerequisite for the new markets sustainable welfare development. In addition, the need for finance is also, obviously, particularly high in the developing markets, which are first in line to be hit hard by climate change.In large parts of Africa and Asia, the population will be affected by climate change, a change which they have had, practically speaking, no hand in contributing to, for example, the flooding in Pakistan. All in all, major political challenges lie ahead and work has already been initiated by the worlds leading politicians. Barack Obamas first years as President of the worlds most powerful economy, affirm a vision that sustainable development can also be a way out of the financial crisis. Change, trust and transparency are key ingredients to a sustainable future. This book does not address, primarily, the questionWhy?, but rather focuses onHow? The hope is that it willinspire wise and sustainable processes of change within organisations and companies.

Brazil, Russia, India and China.

17

2 Background
All decision-making requires a basis for assessment that can be trusted and relied upon. At the same time, decision-making requires the courage to take a stand on issues that do not always have simple answers, or where responses and opinions diverge. There are greater requirements placed on decision-makers today than ever before, and even more will be expected of the decision-makers of tomorrow. It would appear that the complexity of politics, societal development and entrepreneurship has never been greater. In the following background description, I have chosen to present and discuss a selection of findings from various fields of research which I believe are relevant to the discussionsinvolving business decisions about necessary changes towards sustainable development.

2.1 The Stern Review ^ an economic analysis

The Stern Review on the Economics of Climate Change, or the Stern Review as it is popularly known, is a widely publicised report written by the British economist, Nicholas Stern, commissioned by the then British Chancellor of the Exchequer, Gordon Brown. This review was published in October 2006 and describes a scenario in which the effect of global warming is measured in monetary terms. The Stern Review estimates that the impact of a 5 degrees Celsius average temperature increase by 2100 would be equivalent to a global GDP level between 5 to 20% lower than what it would have been without such a temperature increase. However, early action in the form of an investment equal to just 2% of the worlds GDP perannum could curb the runaway greenhouse gas emission levels, thus avoiding the worst effects of climate change, considerably outweighing the costs incurred in such investment. The Stern Review has faced criticism from a variety of parties. Certain critics argue that the basis for the calculations is, in fact, too uncertain, and that the review paints an excessively gloomy scenario. Others say Sterns starting point for the state of the environment is based on outdated knowledge, and that the actual condition of the environment is even worse today than when the Review was produced.The Stern Review is perhaps the most widely known and talked about economic report of its kind on climate change and was the first to be commissioned by a government,

18 Background

receiving major attention in the media. Key political leaders refer to the report as an argument that it is possible, and even economically sensible, to invest in mitigating climate change to achieve long-term results.

2.2 The findings of scientific research ^ where are we going?

Major advances in the fight against world poverty have been made in recent years, and hundreds of millions of people have had the opportunity to lift themselves out of absolute poverty and the UN Millennium Development Goals have come within the reach of a number of countries. Over several years, world trade has grown very rapidly, something that has benefited many developing countries. During the 2000s, for example, the rate of growth in African economies has more than doubled, compared with the previous decade. With the financial crisis of the last couple of years, however, circumstances have changed dramatically, threatening this previous progress. Global private sector capital flows decreased by as much as 65% between 2008 and 2009 and world trade declined at a greater rate than at any time prior to World War II, and unemployment is increasing and migrant workers are failing to find work. The governments of developing countries are faced with rapidly rising deficits in current accounts and state budgets, and the World Bank estimated that approximately 70^100 million people will fallbelow the poverty line as an effect ofthe financial crisis and the ongoing economic downturn. According to the United Nations agricultural agency, there are more people hungry in the world than ever before and more than a billion of the worlds inhabitants, almost a sixth of the human race, are now suffering from hunger and chronic malnutrition. The reasons are the global economic crisis and increasing food prices, lower incomes and higher unemployment. We are floodedwith awide range of information and alarmingreports, all of which claim to be based on new research findingsin diverse issues, such astheriskof pandemicsorclimate change, projectionsregardingthe global oil supply, estimates of expected risesin the sea level or population growth. The media often intensifies controversial research, making it increasingly difficult for us to distinguish between fact and speculation, whilst what is essential, is knowing where we are going, and how these changes will impact our business operations, our companies and our daily lives.

Background 19

2.2.1 Scientific research becomes ever clearer

Population growth is one of the greatest threats to the future of mankind. The Earths natural resources are stretched to their limit and cannot sustain our growing demands for food production. Furthermore, the worlds population is still growing, albeit at a slower pace than before. In 1950, the global population was 2.5 billion and grew by around 50 million people per year. By the end of 1960 (just a decade later), the population was growing by over 70 million per year, according to statistics from the UN. This represented unprecedented population growth. If population growth were to continue at this rate, it would imply a doubling of the worlds inhabitants every 35th year. Two publications addressing the population problem have attracted considerable attention. At the end of 1960, Paul Erlich published his book Population Bomb and in 1972, the Club of Rome became famous for the publication of its book Limits to Growth2, which also made reference to the consumption of natural resources. Population growth, in absolute terms, culminated in the second half of the 1980s when the world population increased by no less than 87 million people per year, according to the report Demographic trends in the world ^ From population growth to the population reduction, published by Statistics Sweden. However, this trend is not simply a case of the population doubling every 35 years; the UNs population projections suggest a slightly steadier growth from 6.5 billion in 2005 to 9.1 billion in 2050, but even so, when this book was first published in Swedish in the autumn of 2009 there were already approximately 6.8 billion global inhabitants with 80% living on less than $10 a day. Asmentioned, the Club of Rome, became best known foritsbook Limits to Growth ^ a report forThe Club of Romes Project on the Predicament of Mankind, which sold more than 30 million copiesin approximately 30 languages. This book has been criticized for submitting arguments that the Earths resources will not be sufficient for economic growth due to rapid population increase, and was criticized for a lack of scientific validity. In 1992, three of the authors (Meadows, Meadows and Randers) published the sequel in Beyond the Limits ^ Global Collapse or a Sustainable Future.

Donella Meadows et al.

20 Background

Limits to Growth ^ the 30-year update, 2005.

Critics of the projectionsin Limits to Growth alleged, inter alia, that one did not have to worry about the impact purported by the book as everything would probably be alright, somehow. One supporting argument for this interpretation was that mankind had such a remarkable ability to innovate that, in fact, there were, and would be, no problems. Critics stated, for example, that it had, despite difficulty, been possible to clean up the Thames! Critics also pointed to price mechanisms, that is, if a given resource should become scarce, then prices would rise and substitutes would appear. The fact that there are no actual substitutes for certain resources was ignored, and the authors tried to explain that they meant something else, something global, but it was not easy for them to provide concrete examples. As late as 1972, there was no generally accepted consensus supporting the existence of global environmental effects.The total research elite had hardly even heard of the three environmental terms ^ global warming, acidification and holes in the ozone layer ^ which we have been aware of during several years through daily reports in newspapers, radio and television.

Background 21

Carbon dioxide emissions have increased by 80% since 1970 and the emission growth rate is now faster than ever. A total of 13 million hectares of tropical rain forest is devastated each year, an area three times greater than Denmark. Asmanyas 16,000 species are threatened with extinction. That which researchers had a difficult time convincing us of almost 40 years ago has now become one of the hottest topics on the political agenda. Researchers have been drawing attention to these issues for many years, while contradicting voices have been raised for a corresponding length of time.We cannot say that the alarm bells have not been ringing. In Limits to Growth ^ the 30-year update (2005), the authors review the 1972 publication and it can be concluded that many of their projections were correct. The climate changes, which the UN panel of 2,500 international climate scientists3 warned us about in their report from February 2007, are taking place fasterand more dramatically than researcherspredicted. Since that time, awareness has grown rapidly, especially as regards the so-called feedback mechanisms (or threshold effects). The adverse effects of a warmer climate can include, for example, large amounts of methane being emitted from the melting tundra, exposing even more land and reducing reflection which causes even more snow and ice to melt, thus further accelerating global warming (known as the albedo effect). According to the Intergovernmental Panel on Climate Change (IPCC), the average global temperature has risen from 0.6 to 0.7 degrees Celsius since 1750, and whilst this may seem like a small amount to the layman, it represents, in fact, a marked increase to climate scientists. The IPCC report in February 2007 also concluded that climate change is, with 90% certainty, a result of large amounts of emissions of greenhouse gases produced by humans, and is far in excess of emissions already produced naturally. But, still, the worlds climate emissions continue to increase. Between 1990 and 2004, global GHG emissions increased from 29 to 49 billion tonnes of carbon dioxide and this increase is expected to continue.In the energy sector, alone, the use of coal is estimated to increase by 43% by 2030. Even if we were able to radically reduce emissions, it would be difficult to limit globalwarming to 2 degrees Celsius.

International Panel on Climate Change, IPCC.

22 Background

The Arctic is melting much faster than expected, and there is now open water in areas where there has previously only been ice. With the rate at which Arctic ice is now melting, this area may be ice-free in 30 years, according to recent research. Even the Antarctica is melting, a fact not previously known. Several of the Himalayan glaciers have stopped producing new ice in the winter and are melting faster than previously believed. The worlds 30 most studied glaciers have not only retreated sharply over the past 25 years, but the rate of melting is also increasing. Melting will result in rising sea levels, which may affect the Earths biological diversity and the many millions of people living in coastal areas. The IPCC calculated that sea levels could rise by between 18 and 59 centimetres in this century, and new measurements indicate that the current rate of rising sea levels, believed to be taking place at a rate of 3 m.m. per year, is actually closer to 4 m.m., three times faster than the IPCCrate. Untilnow, the oceanshave absorbed approximately 25% of the carbon dioxide emitted by Nature and humans. Warming is likely to damage the seas capacity to absorb carbon dioxide, which would result in additional amounts of greenhouse gases reaching the atmosphere, further enhancing warming.The worlds forests have absorbed approximately the same amount of carbon dioxide as absorbed by the oceans, about 25% of global emissions. International researchers recently reported that a global warming in excess of 2.5 degrees Celsius would also damage the forests ability to absorb carbon dioxide, at which point the forest instead beginsto discharge carbon dioxide into the atmosphere, again, further increasing emission levels. Damage to ecosystems can be managed, and even repaired to a certain degree, but once the limit is crossed, irreparable negative effects remain. There are a variety of theories as to whether we have already, or will very shortly, pass the actual critical threshold of consumption, in proportion to the production of the Earths resources.One can say that there is an inertia in ecosystems which implies that we do not always understand when we have crossed a natural threshold or a so-called tipping point. In September 2009, Johan Rockstrm, Head of the Stockholm Resilience Centre at Stockholm University, together with research colleagues (which included the Nobel Laureate in Chemistry, Paul Crutzen) published a research paper4 on these critical tipping points in the worlds leading
4

A Safe Operating Space For Humanity.

Background 23

scientific journal, Nature. The scientists identified nine areas of concern and it is from this research article that I have taken seven of these areas. If these limits are exceeded, the research team believes that we risk dramatic threshold effects. The nine environmentalareastaken from the new research findings are: 1. Carbon dioxide and global warming. The research team suggests that the level of carbon dioxide in the air must be down to 350 parts per million by volume. At the end of 2009 we had already reached 385 parts per million. 2. Extinction and biodiversity loss.The research team believes that no more than ten animal or plant species per million species should be eradicated as a result of climate change each year. Last year (2009), more than one hundred species per million species per year became extinct. Nitrogen cycle and phosphorus. The researchers suggest that we may emit a maximum of 35 million tonnes of nitrogen a year; 121 million tonnes were emitted last year (2009). Stratospheric ozone depletion. The researchers believe that because of past international agreements, we are now on the right track, but that ozone levels must continue to decline. Ocean acidification. Carbon dioxide emissions create carbonic acid in the oceans, which contributes to acidification, harming organisms with calcareous shells, such as corals. The researchers believe that the calcium content of the ocean could be reduced by up to a fifth. Global freshwater use. The researchers believe that a maximum of 4000 cubic kilometres may be used for irrigation annually. Last year (2009), 2600 cubic kilometres were used. In other words, we are currently on the right side of the limit. Agriculture. The researchers believe that no more than 15% of Earths ice-free surface is to be cultivated, compared with 10% utilised last year (2009).We are thus on the right side of the limit. Atmospheric Particles.These particles (e.g. from the combustion of diesel oil) are unhealthy and contribute to climate change. The researchers believe that this issue is so complex that with current knowledge it is actually not possible on a scientific basis, to establish limits for the time being.

3.

4.

5.

6.

7.

8.

24 Background

9.

Chemical poisons. Of approximately one hundred thousand harmful heavy metals and toxic organic substances we handle today, only a few thousand have been investigated. The researchers believe that today we know too little about what happens when we are exposed to various substances in combination and are, therefore, on a scientific basis, unable to set any limits for the time being.

The full scientific article Planetary Boundaries: Exploring the safe operating space for Humanity was published in Ecology and Society on 14 September 2009. Knowledge of how all of the various areas are related is increasing year by year, but new knowledge also implies an escalation of the environmental debate and opinion-forming. In a world of increasingly limited and uncertain ecosystem services, of course the prerequisites for entrepreneurship also change.

2.2.2 Threats to biodiversity ^ a growing business risk!

The total cost of reduced biodiversity and the depletion of the ecosystem was estimated to be between USD 2 and 4.5 trillion for the year 2008, which is the equivalent of 3.3 ^ 7.5% of the worlds total GDP according to the report, Biodiversity and Business Risk, presented by PwC at the World Economic Forum in Davos, January 2010.
^ Seen on a global scale, the alarming destruction of agriculturalland continues at a speed of 5^10 million hectares a year (0.36 ^ 0.71% of the worlds arable land mass). During the last 300 years the forest areas of the world have been depleted (by as much as 40% in the tropics). This depletion continues estimated speed of 13 million hectares a year, corresponding to an area the size of England. It has been calculated that at least 60% of the worlds examined ecosystem has been negativelyaffected by humans during the last 50 years.

The consequences of these developments not only influence businesses making direct use of natural resources, but also influence supply chains and the targeted growth of the majority of the industries in both the developed world and in developing countries. Today, there are a total of 6.8 billion people in the world; by 2050 this figure will increase to 9.1 billion (according to the UNs population forecast) andwith a continued and rapid loss of services dependent on ecosystems

Background 25

(forexample, clean drinking water, decomposition of waste, production of food, etc.) it is difficult to imagine that this will not impact businesses. Until now, it was the short-term risks which policy makers primarily focused upon; today, however, there is cause to recognise the impending medium and long-term business risks inherent in reduced biodiversity, and these risks are numerous.

2.2.2.1 Physical risks

Reduced productivity: Loss of biodiversity, negative influences on the ecosystems ^ the loss of such systems can all negatively impact productivity in many industries. Lack of and increased costs for raw materials: For those businesses whose operations are based on raw materials in the form of plants and animals (including genetic material), scarcity and increased costs can be a major threat to continued operations. Disruptions in operations: Years of negative influences on the ecosystems has ensured that many areas are now exposed to what had previously been called natural catastrophes.

2.2.2.2 Regulatory and legal risks

Reduced ability to exploit land and natural resources: Many business models are based on the access to natural resources and areas with high biodiversity. In a number of areas it is now more difficult to gain permission for such access. Disputes: Businesses are often subjected to legal requirements as a result of the use of biological resources, or because they have a negative impact on the ecosystem with subsequent effects on peoples health. Reduced allocation: Many industries are controlled through the allocation of permits for the extraction of biological resources. These permits limit the possibility of growth and if allocations are reduced, this can have dramatic effects on a businesss growth, even in the short term. Regulation of prices and duties: In many parts of the world, governments introduce new regulatory systems, duties and market-based instruments, with the aim of reducing threats to ecosystems and threats to biodiversity.This places a just price on the damages to the environment caused by businesses and internalises costs which were previously external. Such mechanisms will increase the costs on industries and individual businesses.

26 Background

2.2.2.3 Market risks

Changed consumer patterns: As consumers are becoming more aware of how businesses behave towards the environment and of the environmental impacts of their products, changes in purchasing patterns can be seen. If this trend continues, then environmentally sustainable products and supply chains will compromise a prerequisite for a number of industries. Buyer demands: many larger purchasers introduce or tighten up guidelines on product durability, something which implies substantial risks for the suppliers who have problems living up to such guidelines.

2.2.2.4 Other remaining risks

Risks to reputation/trademark: To be associated with negative influences on ecosystems and biodiversity can result in serious damage to a businesss trademark and can restrict its sociallicence to operate.

2.2.2.5 Financing and supply chain risks

The risks described above can have a negative impact on a companys cash flow and can reduce its credit rating and, therefore, increase costs for new borrowing.In addition, major financiers are tightening up environmental demands for corporate loans, especially those financiers who have signed the Equator Principles. Insurance companies are, today, increasingly interested in risks associated with reduced biodiversity and the negative impact of business models on the ecosystem. Risks to the supply chain: The above-mentioned risks mentioned above have dramatic, negative effects on businesses further down the supply chain by actually threatening these supply chains or resulting in increased costs.
^ Deforestation in the catchment area of the Agno River in the Philippines has affected the river and the reservoirs so profoundly that the Binga hydropower plant, with its capacity of 100 MV, can work only at certain times during the year. Measures to control deforestation and the transformation of forest into soy and palm oil production can considerably increase the price of these natural resources which are important for many food and consumer goods manufacturers.

Background 27
^ During the last ten years, commercial fishing in the EU has been affected by fishing quotas for cod, hake, plaice and other fish, and these quotas are being tightened in order to prevent overfishing of the wild fish stock. Companies fishing in excess of their quota can incur major fines and can lose their fishing license. The American Endangered Species Act forces landownersin the USA to counteract their impact on affected species in that the land owners must buy credits to the value of similar biotopes in other locations, from a Biodiversity Banking organisationin order to balance the inevitable effect on their own land. The same concept is applied in Australia. Companies removing vegetation are required to purchase offsets corresponding to similar biotopes in other locations.These offsets are purchased through the BushBroker System. The average price for a credit is between AUD 42,000 and AUD 157,000 per hectare. The growth in ecologically certified products and marking systems, for example The Marine Stewardship Council (MSC), Forest Stewardship Council (FSC) and Rainforest Alliance etc. shows how consumer demand changes in favour of products meeting requirements of biologicaldiversity.Sales ofthese certified products are growingrapidly; worldwide sales of MSC-certified products grew by 67% between April 2008 and March 2009. Walmart are now buying only farmed shrimp certified according to the Global Aquaculture Alliance standards, and have recently said that for their shops in North America they are going to buy only fresh and frozen fish from companies certified by the Marine Stewardship Council (except as regards their farmed sources). The forestry company MacMillan Bloedels reputation was damaged when Greenpeace and other CSOs protested against the company because they were clearly cutting forests. For that reason, Scott Paper and Kimberly-Clark in Great Britain stopped their purchases from MacMillan Bloedel, which instantly impacted the companys annual turnover with a reduction of 5%. In 2008, the Government Pension Fund of Norway disposed of its 500 million GBP investment in RioTinto and deleted it from its list of approved investments.This disposal was in protest against the unethical activities at RioTintos mining sites in Indonesia.

2.2.2.6 In summary
Will companies activities be influenced by the measures which public authorities are implementing due to a decreasing level of biodiversity, for example, by allocating quotas for the extraction of natural resources or

28 Background

through price regulations for the conservation of the ecosystems, or through new requirements for the establishment of a new company? Will the current depletion of ecosystems involve the risk of increased interruptions in companiesoperations, for example, due to floods? Do the activities of companies and their suppliers have negative ecosystem effects which remain, as yet, concealed.These effects include the unsustainable provision of goods, the impact on endangered species, and pollution.Can risks surrounding biodiversity influence companies most important suppliers activities? Will the risks found in the depletion of ecosystems and biological diversity be of considerable importance (be material) for mainstream companies? Isit possible, on the other hand, to reverse the approach and see potential business opportunities in the importance and value of biodiversity? Climate neutrality and energy efficiency have now won admission into many companies business strategies. Will business models develop which are also based on a contribution to solutions addressing the depletion of ecosystems? 2010 is the UNs International Year of Biodiversity.This year is the tenth conference between Parties to the Convention on Biological Diversity (known as CoP 10) which is being held in Nagoya at which an extensive international study, The Economics of Ecosystems and Biodiversity (TEEB), is going to be published.The report TEEB ^ The Economics of Ecosystems and Biodiversity Report for Business ^ Executive Summary 2010 was issued in July 2010. This report is aimed squarely at the business sector and provides practical guidance on the issues and the opportunities created by the inclusion in mainstream business practices of ecosystem- and biodiversity-related considerations. This report is for a wide array of enterprises, including those with a direct impact on ecosystems and biodiversity, such as mining, oil, gas and infrastructure. The report is also of importance for those business operations depending on healthy ecosystems and biodiversity for production, such as agriculture and fishing industries. Likewise, it is clear that industry sectors financing and providing the basis foreconomic activity and growth, such as banks and asset managers, as well as insurance and business services; and for businesses are impacted by this issue. Furthermore, and obviously those entities selling ecosystem services or biodiversity-related products, such as eco-tourism, eco-agriculture and bio-carbon, are also a target group of this report. In other words, this

Background 29

means that we are going to hear the word biodiversityused much more often and used in relation to a number of items on the agenda for a necessary adjustment to a sustainable society and business development.

2.3 An impossible equation?

One means of reflecting on the current state of the global ecosystem, where we are heading and what needs to be done to solve the problem has, for years, been presented in the form of an environmental equation for sustainable development. S P C I S Environmental status or pollution situation in the world. P The Population. C Consumption; the average material standard of living (measured by the average number of items per person). I Products and services environmental impact, that is, the amount of pollution to manufacture, use and dismantle an average product or service during its lifecycle. This equation is based on an environmental situation in balance, in which the overall global environmental impact is equal to the number of humans on Earth (the population), multiplied by the per capita consumption of what all of these humans consume (the amount of services and transportation we consume), multiplied by these products and services environmental impact in an environmental life cycle perspective. In order for the equation to add up, it may be written as follows:

1 1 1 1
Now we can make projections by altering the terms of the equation, which obviously has consequences for the equation as a whole. In this example we can move ourselves to 2050 and then assume that the population is 9.1 billion, as the UN has predicted. This means that the figure representing population is changed to 1.33 and, thus, affects the figure representing the state of the environment by the same degree.The equation, then, looks like this:

1,33 1,33 1 1
If we assume that the BRIC countriesgrowth impacts consumption, in general, so that the Earths total population increases its per capita con-

30 Background

sumption of bicycles, cars, furniture and other items and services by a factor of 0.25, the state of the environment is further burdened.The equation, then, looks as follows:

1,66 1,33 1,25 1

In order for the sustainability equation toadd upin such a manner that the state of the environment does not worsen globally, products and servicesmust improve in environmentalperformance within theirlifetime bya factor of 0.602, which results in the following equation:

1,000825 1,33 1,25 0,602

From thisvery usefuland simplified calculation, it followsthat in order to prevent further deterioration of the global environment for the next generation, the impact of all of the worlds products and services must be nearly halved in the next 40 years.One can, of course, draw other conclusions from this, but most would agree that within a 40-year period it will be difficult to slow down population growth.Denyinggrowthas a fundamental concept inimprovingwelfare development in emerging markets, willbe a hard issue to argue. What remains therefore, is to ensure sustainable growth through research, conceptual thinking, innovation development and long-term planning. Sustainable business development is a necessary change and the opportunities for business and entrepreneurship have never been greater!

2.4 Research regarding financial incentives ^ from risk to value

During the last twenty years, the arguments in favour of investing in decreased environmental effects and also in favour of investing in decreasing corporate social risks (for example, via control of suppliers based on a Code of Conduct being included in the purchasing contract) have centred on risk reduction. These arguments have primarily been focused on addressing brand risks and preventing negative publicity. However, companies are, today, required to act ethically in all aspects of their operations and are monitored, accordingly, by environmental and human rights movements and their opinion leaders in civil society. However, from time to time arguments have been put forward that businesses can actually reduce costs through active environmental work. Over the years, there have been a number of studies on whether invest-

Background 31

ment in sustainable development creates improved profitability and higher market capitalization.The research results are divergent and it has not been easy to convince interested parties that there is a Business Case for work on these issues. In 2006, Mistra5, a major institutional investor, launched a research programme on sustainable investment, SIRP6. The Mistra programme is encouraging other institutional investors to begin to combine financial investment criteria with sustainability criteria when making investment decisions. In this way, financial markets also contribute to sustainable development.Under the direction of Mistras Research Director,Professor Lars G. Hassel, the research programme has presented new and highly acclaimed research. The research report, The Value Relevance of Environmental and Social Performance: Evidence from Swedish SIX 300 Companies, was rewarded, for instance, the Outstanding Research Award and Best in Session Award at the 2009 Global Conference on Business and Finance. The research team has also been rewarded with a Globe Award ^ Leading Sustainability Awards in the Sustainability Awards Research category, and can be said to lead global research development in this field. There is far too much information to fully describe the research report and its starting points, limitations andimplementation, etc., but the reports findings are so important that they represent a milestone within this research genre, which is why it is of particular value to directly quote from its conclusions.
Since the release of recommendations by the Swedish Society of Financial Analysts (2006) regarding sustainability reporting, the importance of extrafinancial information to investors in Sweden is increasing. In this paper, we posit that environmental and socialinformation is likely to be positively valued by the capital market. Our hypothesis is tested by examining the valuation implications of GES environmental and social performance ratings and their sub-dimensions for SIX 300 companies listed on OMX Stockholm. The evidence presented in this study indicates that environmental and social performance is value relevant and complements financial information in the forecasting of future earnings. Specifically, we find a significantly positive correlation between the market value of equity and environmental performance. Given the fact that social indicators are not homogeneous, this study distinguishes the different impacts of the various dimensions of social performance on stock returns.The results reveal that community and supplier indi5 6

Foundation for Strategic Environmental Research in Sweden. Sustainable Investment Research Platform, SIRP.

32 Background
cators are positively correlated with market value.We conclude that companies with a higher level of environmental and social performance tend to achieve higher returns, while companies with the lowest scores underperformed on the market. Regarding relative explanatory power of the variables examined, nonfinancial environmental and social performance exhibits value relevance beyond that incorporated in earnings and book value of equity.The results of this paper are in line with earlier studies, which show a positive correlation between environmental/social information and market reactions. In addition, this paper suggests that the integration of extra-financial value approach into traditional financial investments analysis could provide a richer picture of the environmental and social opportunities that companies face. Our study can be extended in severalways.Further research isneededinto the value relevance of the interaction effect of environmental and social performance on the market value of equity and this is a requirement for the investigation of this effect in large, mid and small-cap sub-samples of SIX 300 companies.Understanding how environmental and socialnormsmay differacross industries and how they affect environmental/social performance relations and stock returns would be a valuable area for future research. Future work in the area would benefit from improved availability and quality of data, particularly regarding social performance.

The results should provide each Board of Directors with a suitableBusiness Case highlighting all of the reasons why sustainable investment is valuable to the business, and drawing attention to the risks of failing to address these issues.

2.4.1 The financial sector has awoken from its slumber!

More and more managers and institutional investors are taking into consideration the manner in which portfolio companies management of environmental, social responsibility and corporate governance issues can impact the development of the value of the funds they manage. As new research emerges, there is an increased awareness that these issues increase the possibility of good, long-term returns, while reducing the risks in the investment. In April 2006, the then UN Secretary General Kofi Annan presented guidelines for responsible investment within asset management7. These were developed through a UN initiative undertaken together with many of the worlds largest institutional investors.
7

Principles for Responsible Investment, (PRI).

Background 33

The European Sustainable Investment Forum (Eurosif), is an umbrella organisation in Europe for many national associations which has, for many years, pushed for the development of Socially Responsible Investments (SRI) and mandatory legal requirements for disclosure on sustainability in annual reports in the member countries. In April 2009, Eurosif addressed a public policy position paper on the subject of Sustainable and Responsible Investment (SRI) to the European Institutions. This paper makes the case for greater transparency and accountability on the part of large companies and institutional investors as regards Environmental, Social and Governance (ESG) issues. In the position paper, Eurosif recommends that the European Commission adopt three proposals to increase transparency on behalf of various actors in the financial value chain in order to foster a longer-term, sustainable economy within the EU: 1. Transparency from Companies European institutions should mandate disclosure of ESG data by publicly traded, large corporations. Such reporting would be principles-based and use a limited number of standardised Key Performance Indicators (KPIs), some of them being sector specific. Transparency from Institutional Investors European institutions should introduce a mandatory Statement of Investment Principles (SIPs) for Investment Funds in which trustees would state the extent (if at all) to which ESG considerations are taken into account in the selection, retention and realisation of investments; and their policy in relation to the exercise of the rights (including voting rights) attached to investments. Shareholders Rights and Transparency The Commission should adopt measures to allow shareholders to keep control of their rights at all times, improve accountability of service providers within the proxy voting chain, and allow issuers to know who their shareholders are at any moment so that they can communicate to them efficiently.

2.

3.

The CFA Institute, the global not-for-profit association of investment professionals, launched already in 2008 the report Environmental, Social, and Governance Factors at Listed Companies: a Manual for Investors to assist investors in understanding how a company deals with environmental, social and governance (ESG) issues. The ESG Manual, a companion to The Corporate Governance of Listed Companies: a Manual for Investors, is

34 Background

designed to help investment professionals identify and properly evaluate the risks and opportunities that ESG issues present. The European Federation of Financial Analysts Societies (EFFAS), the umbrella organisation in Europe for national financial analysts societies, published Key Performance Indicators for ESG in April 2009 ^ A Guideline for the Integration of ESG into Financial Analysis and CorporateValuation. In the spring of 2009,EFFAS and DVFA (The Society of Investment Professionalsin Germany) released Version 3.0 ^ Exposure draft of KPIs for ESG, Key Performance Indicators for Environmental, Social & Governance Issues. These critical success factors are developed to be applied by analysts and investors in order to evaluate companies ESG performance8. Once considered fringe issues, these topics are now part of the metrics applied by investment professionals to analyse and value the public companies in which they invest.Investors are, generally, wellversed in analyzing a public companys financial data, but as more and more firms provide nonfinancial ESG metrics, they are finding it challenging to understand and incorporate these factors into their research models. The Swedish Society of Financial Analysts (SFF) presented the first recommendations for listed companies in 2008 in SFFs Recommendation on Corporate Responsibility, and made it clear that it wanted to see companies provide sustainability information in financial statements. SFFs recommendation is reproduced, in full, in the Appendix to this book. Among the internationally known indices, on which index companies have based their sustainability criteria, are the Dow Jones Sustainability Index and FTSE4Good. In November 2008, NASDAQ OMX launched, in conjunction with GES Investment Services, a sustainability index that reflects the Nordic companies responsibility for such environmental and social issues, in accordance with international guidelines. It is now obvious that in recent years the financial sector has awoken from itsSleeping Beautyslumber in terms of its interest in sustainability as a factor influencing value. Now, work is under way with the introduction of PRI and consequently, we see a positive implementation of a working methodology for integrating sustainability analysis into current financial analysis practices.

Environmental, Social and Governance.

Background 35

2.5 Doubts and contestation

The books introduction ends withThis book does not address, primarily, the questionWhy?, but rather focuses onHow?. However, it is for transparencys sake necessary to make note of the degree of scepticism which has, over the years, always been found among certain representatives of corporate Boards and management teams. However, with a wise, holistic approach to corporate responsibility, companies will no longer be the ostrich sticking its head in the sand, avoiding the problem of sustainability but will, instead, by actively seeking more extensive and better evidence, add value to what isthe hottest topic on the agenda.The Board of GM, who so totally misjudged the demands for lower fuelconsumption, and thereby seriously threatening the survival of that company, may well come to be compared in the future to the dinosaurs. While this is just one example, it illustrates the reality of either being able to adapt or die ^ and as far as we know, the dinosaurs were unable to adapt. Let us now hope and trust that a newly quoted General Motors will develop cars for the future, sustainable cars for a sustainable business!

36

3 Sustainable Business Development

Today, industry has identified sustainable development as a major challenge. The issues surrounding sustainable business development remain, however, difficult for many to understand, and the majority of measures have not yet been undertaken. On the other hand, everyone now recognises that we are dealing with a very complex problem. Today, sustainable development is an important concern, probably the most important, for business and society, and even for those who for years argued in favour of the importance of change towards sustainable development, this issue is now perceived as being more apparent and urgent. This not only concerns future generations, but also the here and now; not a question of Why but,How. In the words of the Brundtland Report from the UN Conference in Rio de Janeiro in 1987:
Sustainable development is the development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

However, even today, twenty years later, we face the risk of not actually managing the needs of ourown era and generation.Business representatives agree, in principle, that sustainability issues are real risk issues, and also that these issues can influence value. Sustainable development is no longer merely an aspect of risk management in large companies. This is no longer a question of discreet philanthropy, a way to improve the status of a logo or brand, or a matter of gaining a competitive advantage. People are no longer interested in whether a company has good intentions or seems to be conscientious and take responsibility; they want to know whether companies effectively manage sustainability issues and, thus, provide and contribute to solutions, or whether, instead, they are part of the problem and actually add to the negative development of conditions in the present and future. The discussion of and work with this necessary change is taking place during a period in which the credit and financial crisis is expressing extensive scepticism as to whether companies and business interests are contributing to social welfare in line with the interests of society. There is, of course, a risk that the public will lose confidence and trust as regards the business and industrys ability to contribute solutions to todays major

Sustainable Business Development 37

problems, whether in terms of poverty and disease or climate change, the over-consumption of naturalresources or the degradation of ecosystems and biodiversity. This scepticism about business, entrepreneurship and enterprise is not likely to be offset by the belief that politicians, governments, the EU or the UN can solve the problems. Consequently, politicians, business representatives and social movements must work together to create public confidence that we are, in fact, able to re-adjust in all areas, and to actually solve problems. There is no lack of ideas and initiatives, but there is considerable uncertainty as to the measures to be prioritised. We cannot afford towaste time, energyand resources on potential solutions that later turn out to be ineffective or even counter-productive. We need diversityand experimentation, but we do not need a cocktail of solutionswhich fails to instilreal confidence that we are capable, in fact, of solving the problems.Industry needs a stable business environment in which entrepreneurs and companies can plan and respond to the growth opportunities presented by the transition to sustainable development. Credible, relevant and quality-assured information is obviously critical to sustainability, sustainable development and sustainable business development.

3.1 Sustainability, sustainable development and sustainable business development

Sustainability is the goal and describes a world in which the level of resources is, as a minimum, maintained, a world in which we do not over-exploit capital, regardless of whether we speak of environmental capital, economic capital, social capital or human capital. In this vision, industry is integrated into society and Nature. Businesses operate in the global community and contribute to its development.In other words, business and society are not separated; on the contrary, they depend on each other in order to function properly. Sustainable development as a concept hasnot been clearly defined, but several attempts have been made to make its meaning clearer. Furthermore, work towards sustainable development is a process without a final solution. This process covers social, ecological and economic aspects. A holistic approach, dialogue and critical thinking is the foundation; the democratic process through which sustainability can be achieved and maintained.

38 Sustainable Business Development

Sustainable business development describes the commitments and activities of a business aiming to achieve sustainability. If we want businesses, and business as a whole, to be sustainable, by definition the resources they depend upon must also be sustainable.The climate issue is a part of sustainable business development and in recent years this issue has come into focus. This concerns the handling of energy issues and how to secure future energy supplies; the carbon-reliant society becoming carbon-neutral. Such a perspective is forward looking.Corporate issues in this area of sustainable business development include whether a given activity is dependent on a stable energy supply, whether there are strategies to ensure this access, how energy consumption can be minimised, what the business risks looks like, whether the business has the prescience to effectively prepare for forthcoming political decisions on energyand the climate, and whether there are anyactivities within emissions trading ^ and whether the business has a strategy to manage all of this. There are strong links between sustainability issues and the information provided through companies and organisations reporting and accounting. Sustainable communities, associations and organisations learn to adapt, evolve and succeed depending on how they process information. Over time, they need to change values and attitudes, reorganise and develop new models, including new business models based on new but one that is still relevant ^ the only thing information. It is an old cliche that doesnt change is the need for continual change. The vision of thegood companyconcerns, among other things, fulfilling new requirements in a global society, being able to certify to humane working conditions and having a sound environmental approach, even when production is concentrated in developing and emerging countries. The aim is to take into account brand risk and to seize opportunities by: ^ Building the business model on an ethical basis. ^ Understanding that legitimacy is a central concept. ^ Ensuring that credibility is a prerequisite. ^ Using transparency as a tool. ^ Working with a long-term view.

Sustainable Business Development 39

3.2 A market-based approach

In the publication Sustainability:The Role ofAccountants, publishedin 2004 by the Institute of Chartered Accountants in England and Wales9, a discussion was presented regarding corporate marketing and accounting information, and how to design a supportive decision making process.

A market-based approach.Sustainability:The Role of Accountants, ICAEW 2004.

In all market activities, companies must respond to a number of market mechanisms which, in varying degrees, impact the companys business operations and business conditions.These include: ^ the chosen business strategies, ^ supply chain conditions, ^ the degree of engagement of stakeholders in the company, ^ codes and rules of conduct (e.g. Global Compact), ^ rating companiesassessments and comparisons, ^ taxes and charges, ^ emissions trading and ^ laws and other requirements.

ICAEW.

40 Sustainable Business Development

In other words, in a functioning market economy there are many market mechanisms. Opinion leaders, activist groups and legislators are just a few ofthe entitiesmaking demands on and driving and adapting corporate activities to market requirements in terms of the sustainable development of their business models, products and services. It is, more or less, self-evident that companies and organisations must communicate their views, attitudes and activities, and business strategies and business performance must also be communicated. Voluntary codes of conduct addressing, for example, business ethics and the approach to an entire range of liability issues, such as conditions in the companys supply chain, must be adopted and systems to implement these new approaches must be put in place. Quality-assured information makes it possible for all of a companys stakeholdersto determine whether the company is reallyon track towards achieving its stated objectives. The results of explicit efforts become the most important area to communicate and report upon instead of or only describing good intentions. Based on performance reports, all sectors in society can decide how andat what rate development must accelerate, for example through legislation or imposing taxes. We must move towards a state of sustainability.

3.3 Business ^ a prerequisite for welfare

It is important for me to conclude this section by saying that my personal view is that business meanspositive welfare development.Business generates wealth. Entrepreneurship, business and good leadership create employment and generate income which, in turn, generatesthe tax revenue needed to build the common infrastructure of a society on which its citizens (and companies) are dependent. It is, therefore, important to support and recognise leadership that is not short-term, but rather leadership which encourages us to invest in the future, not the least with consideration of our children, grandchildren and their children.

41

4 Stakeholders and the shaping of opinion

Clearly, companies and organisations do not operate in a vacuum and it is, therefore, extremelyimportant for the management and Board of Directors of a company to correctly assess the shaping of public opinion and the complexity of interaction with society. The world of leadership in large organisations and companieshas changed completely injust a few decades. With the illustration below as a starting point, this Chapter describes the way the axioms by which companies operate are affected by various protagonists and stakeholders.Today, the rules of the game have changed in light of international developments and questions about companies roles and aims, as well as due to environmental and social responsibility concerns, being formulated differently.In just a few years, corporate governance has acquired a new and broader meaning than ever before, when all that was required, according to the governance codes, was ensuring the quality of financial reporting.

License to operate ^ in constant change. Corporate Governance (CG) and Corporate Social Responsibility (CSR) are integrated in sustainable business development.

42 Stakeholders and the shaping of opinion

4.1 Civil society and advocacy groups drive opinion

Only twenty years ago, companies rules of conduct were determined nationally in consultation with the business worlds trade organisations and governments, politicians and law-makers. The rules by which companies operated were established on the basis of the governing principles established by legislation. At that time, it was considerably easier to manage a company than it is today as they could assume that, as long as they acted in compliance with the law, they could operate unquestioned. It was even possible for a company to operate without necessarily beingseen. When Civil Society Organizations (CSOs) and Non-Government Organizations (NGOs) entered the arena, the conditions for companies and business decisions changed drastically.CSOrefers to the organisations and movements forming part of civil society, ranging from the trade union movement to protest movements or pressure groups in local communities.These are also commonly referred to as social movements. The various national and international campaigns of the World Wide Fund for Nature (WWF),Greenpeace, and the Swedish Society for Nature Conservation are examples of the environmental movements influence on opinion shaping.This campaigning is driven on both a national and an internationallevel bya variety of agenciesin civil society, such as the trade union movement and consumer lobbyists.The unexpected opportunities to communicate with, and influence, audiences, which the Internet has provided to the shapers of public opinion, have meant that the playing field has changed beyond recognition foreveryone: it is hardly possible for the larger companies and organisations to operate unseen. The list of examples of how NGOs, social movements and individuals influence the shaping of public opinion through their websites is endless. Greenpeaces call for a boycott in 2005/2006 of one of the worlds largest forestry products, with the brand name Kleenex, is one example of this.In 2009, Greenpeace deemed that their action against one of the worlds largest forest industries had achieved its intended impact, and they communicated this message on their international website.

Stakeholders and the shaping of opinion 43

This is how Greenpeace announces its victoryover Kimberly-Clark on its website in 2009.

The forestry sector was an early target of the environmental movement. Among others, the Swedish Society for Nature Conservation criticized the National Forest Enterprise of Sweden (now Sveaskog) and the rest of the countrys forestry industry for the use of herbicide. Clear cut areas were sprayed with herbicides to prevent birch trees from growing and shadowing the pine seedlings that had been planted there as the land was to be used for pine wood production, more lucrative than birch wood. Initially, the forestry industry did not comply with calls for the prohibition of herbicides.The forestry industrys perspective was clear: pine wood supply for industry (which constituted an extraordinarily large portion of Swedens export revenues) was substantially more important than the possible consequences for the ecosystem from the utilisation of chemicals. Today, twenty years later, its easy to say it should have been possible, at that time, to predict the outcome of this campaign, i.e. the eventual prohibition of herbicides by law and a corresponding change in forestry practices. This example clearly illustrates how individuals actions and cam-

44 Stakeholders and the shaping of opinion

paigning, in combination with the support of the media, can change a companys license to operate. SwedWatch is an example of an NGO that very actively pursues issues regarding companies environmental and social responsibility. SwedWatch is an association consisting of five member organisations: the Swedish Society for Nature Conservation, the Church of Sweden, rica Latina (SAL), Fairtrade Center and Friends Solidaridad Suecia-Ame of the Earth Sweden. The Swedwatch association was founded in 2003, but was active as a network already in 2002. SwedWatchspurposeisto help Swedish companiesto take people and the environment into consideration in their activities in developing countries. This is achieved by monitoring the companies operations and by publishing reports on the results of these often critical assessments, while Swedwatchs member organisations also engage in campaigning and dialogue with the business world.Two examples of reports produced by SwedWatch that have caught the medias attention are the Kakao- och kafferapporten (Cocoa and Coffee Report) from 2006, which exposed child labour and the use of hazardous chemicals in the cocoa and coffee industries, and the Elektronikrapporten (Report on the Electronics Industry) from 2007, which came to the conclusion that electronics companies did not exercise sufficient control over the origin of the metals used in their products. According to their website, SwedWatchs aim is to reduce poverty and the negative consequences of manufacturing and investing in developing countries by informing key groups and the general public in Sweden about such activities. In order to achieve this, consumers, private investors and institutional investors require access to updated information that is independent of the information provided by the companies themselves.

Stakeholders and the shaping of opinion 45

SwedWatchs website, reports regarding lapses by Swedish companies in terms of their social & environmental responsibilities are published & commented upon.

SwedWatchswork isprimarily funded by Sida (The Swedish International Development Cooperation Agency). Sida does not necessarily share the opinions expressed in Swedwatchs reports or on its website and the responsibility for the content falls exclusively on SwedWatch. Several of SwedWatchs reports have received considerable attention over the years, asthe media, as always, interestedin seizing the moment, publishing debate articles, explicit criticism and revealing controversies in which Swedish listed (or unlisted) companies are sometimes held accountable in a manner which is not always entirely accurate.The media may, for example, print headlines, pictures and captions which, although the details discussed in the article may not be completely factual, may damage the involved companiesreputation and brand.

46 Stakeholders and the shaping of opinion

A number of years ago, a documentary shown on Swedens public television channel depicted how a mining company in Ghana was responsible for the deaths of at least five people, and how this company had mistreated those who had protested against the mining companys land acquisition and environmental destruction. ATTAC in Sweden and Friends of the Earth Sweden filed a complaint with the Swedish National Contact Point (NCP) for the OECDs guidelines for multinational companies regarding Sandviks and Atlas Copcos respective operations in Ghana. In Sweden, the NCP consists of representatives from various departments within the Government Offices, along with representatives from trade unions10 and industry11. However, it emerged that the NCP did not consider the Swedish companies to be accountable in the alleged manner. Of course, the damage to the companies concerned was already a fact. Any negative effect from the medias role as a leverage for civil societys campaigning can take years to heal. The OECDs guidelines for multinational corporations are collective recommendations for corporate entities provided by 40 different governments.These guidelines were negotiated in cooperation with representatives from trade unions, employers and individual organisations representatives at the OECD in Paris. The affiliated countries governments have committed themselves to promoting the guidelines by, amongst other things, establishing NCPs. Sweden also promotes the guidelines through the Swedish Secretariat for Global Responsibility. Compliance with OECDs guidelines for multinational corporations is voluntary. The NCP is not a legal process and has no means of enforcing the guidelines. The NCP should serve as a forum for dialogue and outreach in matters relating to the guidelines and their implementation. Thus, the role of the NCP is not to act as an independent auditor or to judge. Its primary role is to foster the application and understanding of the guidelines by, amongst other things, servingas a forum fordiscussionto encourage companiesto comply with the guidelines, thereby, creating a platform for dialogue between the involved parties. Being correct in legal terms does not necessarily imply that a company is free from the question of responsibility. An example of the manner in
10

The SwedishTrade Union Confederation (LO), Swedish Confederation of Professional Employees (TCO),The merger between the Swedish Industrial Union and the Swedish Metalworkers Union (IF Metall), Swedish Union of Clerical and Technical Employees in Industry (Sif),The Swedish Confederation of Professional Associations (SACO). 11 SwedishTrade Federation, Confederation of Swedish Enterprise.

Stakeholders and the shaping of opinion 47

which a moral question of responsibility can come to the fore is described in the following short article byTT (the largest news agency in Scandinavia) published in Svenska Dagbladet (a Swedish daily newspaper), on 4 October 2009: SwedishWaste Forces 7,000 to Move
The Chilean authorities have evacuated around 7,000 people from a shanty-town in the town Arica in northern Chile, after those living near a large rubbish tip reported cases of poisoning and illness. In the 1980s, the mining company Boliden exported tons of lead and arsenic waste there.The waste came from Rnnskrsverken [a metallurgical complex in Sweden] and the recipient in Chile was the now bankrupt company Promel in Arica, NorraVsterbotten [a local newspaper in Northern Sweden] writes. It was intended that the company should reprocessthe waste into somethingless environmentally hazardous, but it dumped the waste at the rubbish tip. Bolidens export was undertaken with the approval of the Chilean environmental authority, and Boliden has not violated the export provisions in force in the 1980s. In addition, Boliden has asserted, in all communication with the Chilean authorities, that it is not responsible for the incident.The Chilean authorities have tried to obtain compensation for the suffering and the damage the waste management has created.There is no money to retrieve from the bankrupt Chilean company and Boliden states that it cannot take any responsibility for the incident.

In April 1998, a dam burst at the Los Frailes mine, operated by Bolidens Spanish subsidiary. The environmental disaster was, of course, enormous, aslarge amounts of waterand mud containing arsenic andlead flowed into the river, Guadiamar. Agricultural land was poisoned and the ecosystem in the area suffered for many years. Boliden was acquitted in the criminal case, but in 2008, the Swedish Court of Appeal ordered the Swedish Enforcement Authority, after years of legal procedures, to freeze assets in Boliden amounting to SEK 1.4 billion. Dagens Industri (daily Swedish business newspaper) reported in November 2009:
The sequestering of SEK 1.4 billion, an asset that Boliden is now restricted from utilising, should be seen in the context of the companys net profits of SEK 1.7 billion so far this year, and with the companys market capital of SEK 25 billion.

How thisBillion Blow for Boliden (as Dagens Industri entitled its article) has and will affect Boliden is, of course, difficult to predict. It is, however, clear that events occurring in foreign countries can have major consequences for a parent company.

48 Stakeholders and the shaping of opinion

4.2 Business and Human Rights

It is clear that globalisation has significantly changed the world we live in, presenting new and complex challenges as regards the protection of human rights. Economic players, particularly companies operating across national boundaries (transnational companies) have gained power and influence throughout the global economy. To an increasing extent, business is seen as inextricably linked with human rights. Consequently, companies operating in or sourcing from countries with repressive governments, weak rule of law or poor labour standards may become complicit in human rights violations. In other words, companies may be held accountable for violations committed by third parties. Regardless of where corporate responsibility for human rights begins and ends, the following may be noted: without doubt, the globalisation of the economy has offered many new opportunities to the business world, but also many new threats as companies are caught up in situations of conflict and, not the least, human rights violations. Hence, companies assuming moral and social responsibility for their business activities protect themselves and improve the context in which they operate. Still, efforts by NGOs and civil society to expose human rights violations in different parts of the world, human rights scandals often tend to explode in the face of corporate Boards.Thoughit is widelyacknowledged that scandals can be very damaging to a companys reputation, it is better to be proactive and prevent human rights violations from ever occurring. There is an ongoing debate as to where the borderline between voluntary and mandatory action lies when it comes to corporate responsibility. The following is a transcript of part of a luncheon speech made by Claes Cronstedt, Gaemo Group, on corporate behaviour and the increasing requirements placed on companies at the International Chamberof Commerce, Stockholm, 26 May 2010:
In spite of the Universal Declaration of Human Rights and the many conventions that followed, on issues such as discrimination, torture, childrens and womens rights, approximately four billion people live outside of the rule of law according to a recent UN report. Virtually every component of the justice system, police, defence lawyers, prosecutors, and courts, works against, not with, the poor in providing the protection of the law. This enforcement gap also has disastrous effects on economic productivity and stability and fuels corruption on all levels. In addition, it benefits free riders: those businesses that earn money through unfair competition by violating human rights and harming the environment with little risk of being held accountable.

Stakeholders and the shaping of opinion 49

It is the structural inequalities and power imbalances in the world that have created CSR. Some argue that CSR is only the voluntary standard-setting beyond compliance. But when mandatory law is dysfunctional or lacking ^ what happens? CSR expands. The reasoning is as follows. Companies are expected to comply with local laws even if they are not enforced in practice. If nationallaw is unsatisfactory orabsent, the principles of relevant international instruments shall be respected. If national law violates human rights, such as apartheid, the situation gets more complicated and thats another story. However, in short, what the company is not allowed to do at home, it must not do in the host country either. Broadly speaking, it could thus be argued that CSR is, in practice, mandatory. Consequently, multinational corporationsexport the application of international norms on human rights and environment to developing countries; thereby reducing the enforcement gap. Perhaps you can call it a lex Mercatoria process (soft rules that crystallize into hard law ^ belief arising from custom).

Key facts and historical notes: ^ The Universal Declaration of Human Rights (see Appendix) calls upon every individual and every organ of society ^ which includes companies ^ to protect and promote human rights. ^ TheNorms on the responsibilities of transnational corporations and other business enterprises with regard to human rights were adopted by the UN Sub-Commission on the Promotion and Protection of Human Rights in 2003.The UN Commission on Human Rights considered the Norms in 2004, did not approve them, and said they had no legal standing. Even though the Norms were not adopted by the UN Commission on Human Rights and, therefore, have no legal standing, they are perhaps the most comprehensive set of standards on business and human rights issued to date. In July 2005,Kofi Annan appointed Professor John G.Ruggie to serve as the Special Representative of the UN Secretary-General (SRSG) on business and human rights, with the following mandate: a) To identify and clarify standards of corporate responsibility and accountability for transnational corporations and other business enterprises with regard to human rights; b) To elaborate on the role of States in effectively regulating and adjudicating the role of transnational corporations and other business enterprises with regard to human rights, including through international cooperation;

50 Stakeholders and the shaping of opinion

c)

To research and clarify the implications for transnational corporations and other business enterprises of concepts such as complicityand sphere of influence; d) To develop materials and methodologies for undertaking human rights impact assessments of the activities of transnational corporations and other business enterprises; e) To compile a compendium of best practices of States and transnational corporations and other business enterprises... ^ The Business & Human Rights Resource Centre established a web portal at John Ruggies request to facilitate communication and the sharing of materials related to the mandate. At the most recent session of the United Nations Human Rights Council (at the time when this book was being produced for an international audience), delegations expressed strong support for the proposal that the final product to comprise the result of SRSGs mandate should involve two components: Guiding Principles for the Implementation of the Protect, Respect and Remedy Framework and a paper with options for various possible follow-up measures and/or mechanisms.These are to be drafted following a round of consultations with national governments, business and civil society during the current 2010 and 2011. The government duty to protect highlights the primary role of governments in preventing and addressing corporate-related human rights abuses. The Special Representative, Professor John G. Ruggie, documented the dutys legal foundations, policy rationales and scope in his 2008 and 2009 reports. The term responsibility to respect, rather thanduty when it comes to the corporate responsibility to respect, is meant to imply that respecting rights is not an obligation which current international human rights law generally imposes directly on companies, although elements may be reflected in domestic laws. At theinternationallevel, corporateresponsibility to respect is a standard of expected conduct acknowledged in virtually every voluntary and soft-law instrument related to corporate responsibility, and is now affirmed by the UN Human Rights Council itself. Access to remedy will focus on three types of grievance mechanisms that can provide avenues for remedy: company-level mechanisms and both non-judicial and judicial State-based mechanisms.

Stakeholders and the shaping of opinion 51

Amnesty International is a worldwide movement of people campaigning for internationally-recognised human rights for all. The organisation works to improve human rights through campaigns and international solidarity. With more than 2.8 million members and supporters in more than 150 countries and regions, Amnesty International coordinates this support to act for justice on a wide range of issues. Amnesty International asks companies to promote respect for human rights by, for example: ^ Using their influence in support of human rights, ^ ^ Including a specific commitment to human rights in their statements of business principles and codes of conduct, Producing explicit human rights policies and ensuring that they are integrated, monitored and audited across their operations and beyond borders, Putting in place the necessary internal management systems to ensure that human rights policies are acted upon.

Amnesty Business Group encourages companies to be proactive in preventing human rights violations with the following six recommendations (Amnesty Business Groups Recommendations ^ Guidelines for corporations work on human rights):
^ ^ Adopt a corporate policy on human rights that explicitly recognizes the Universal Declaration of Human Rights (UDHR). Perform a risk analysis that takes into consideration the particular risks for human rights violations that are linked to the companys line of business and the countries in which the company has business operations. Moreover, the companys businesspartners should be screenedin order to establish that they do not violate human rights in their operations. Inform all employees, suppliers, customers and other businesspartners about the corporate human rights policy. Further, programmes for effective human rights education and training of all employees should be established. Establish systems to effectively implement and apply the human rights policy. Targets and performance indicators should be established so that work towards them can be reviewed and measures taken if deviations are discovered. Report on the companys objectives and performance with regard to human rights on a regular basis. For example, this can be done in the annual report. Further, the human rights policy should be reviewed periodically by an independent auditor. Promote respect for human rights in any given situation.

52 Stakeholders and the shaping of opinion

The Universal Declaration of Human Rights and the International Labour Organisations (ILO) 3 core labour standards provide a framework of international human rights standards for companies. The UDHR calls onevery individual and every organ of society to play their part in ensuring respect for human rights.

4.3 Politicians track public opinion, aiming to scorepolitical brownie points

In the EU parliamentary elections in 2009, environmental concerns emerged as one of the winning issues. Environmental questions are definitely on the political agenda and politiciansresponsibility for sustainable development is presupposed. After the EUs latest parliamentary elections, no political strategists in any party will be able to ignore these questions in forthcoming election campaigns. From a historical perspective it is, of course, interesting to see how the climate question has come to be the core issue for almost every political party within only a few years. We are all aware of how Al Gores commitment to this area has come toinfluence the shaping ofopinion and politics. The ability to exercise governmental authority is based on the voting publics trust. Successful policies are, thus, characterised by submission to what the electorate wants to see happen in terms of ideology and by the political programme the political parties wish to represent. This is a sign of the times in terms of political correctness as more and more parties define their vision of sustainable development. The electorate is expressing anxiety concerning the future ^ and politics follows! As the climate issue knows no national borders but must be solved in an international context, it is also now that visionary politicians, such as President Barack Obama, communicate new approaches and new political standpoints. One example is the handling of BPs tragic oil leak in the Gulf of Mexico, where political authority demonstrated responsibility and took charge by demanding the company set up a major fund to insure the financing of damage control and decontamination. As a result of the enormous damages which the oil spillage is creating, (the leakage continues as this book is being produced), a discussion regarding the conditions applying to drilling for oil at such depths has come to the fore, also demonstrating the issue of responsibility in the political context. The difficult balancing act performed by politics and politicians evidently consists of finding solu-

Stakeholders and the shaping of opinion 53

tions which can be seen to avoid making conditions worse for companies and citizens; it is a difficult and politically sensitive balancing act between long and short-sightedness. Over 40 years ago, Robert F. Kennedy made the following remarkable statement:
We will find neither national purpose nor personal satisfaction in a mere continuation of economic progress, in an endless amassing of worldly goods ^ the gross national product measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile.

Now, more than ever, the limitations of the broken compass we use to guide our decisions and to measure our success are evident. Now, more than ever, we need to address Kennedys basic concern: How should we measure progress and towards which goals? One Swedish politician who has dedicated his political career to bringing about sustainable development and who, through the years, has argued for a new way of looking at growth, is Anders Wijkman, UnderSecretary Generalin the UN, and Policy Directorofthe UNDP fora number of years, who retired as a member of the EU Parliament at the end of his term of office in 2009. In the booklet Voices on transparency and sustainability reporting (Rster om transparens och hllbarhetsredovisning) (2008) Wijkman develops his thoughts about the necessity of developing new economic models in which the base level of natural resources determines the limits of traditional growth:
The economic modelwe are usinghasforaverylong time excluded the effects on the environment and climate.Thiswent wellaslongasthe externaleffects ^ in the form of pollution and degradation of natural capital ^ were comparatively limited. This is no longer the case. The external effects ^ whether we are talking about the influence on the climate, deforestation, overfishing or the fresh water crisis ^ constitute the most difficult problems our society is facing today. It is becoming increasingly obvious that the model needs to be changed. It has to be complemented with knowledge from the natural sciences, based on the limits defined by Nature. The economy can never be allowed to expand over what is physically possible within the framework of a stable climate and the sustainable use of natural resources. There are limits to the conventional growth. The debate, however, is stillin its fledging stage.There is hardly a company on this planet which does not want to increase production ^ with the intent to increase profits. Business models are designed in such a way that profit

54 Stakeholders and the shaping of opinion

increases when volume increases. This generally requires more energy and more resources; a kind of Catch 22 in a world where the strain on energy and material is already severe and where residual products and waste ^ in any case with todays technology ^ create ever bigger problems. The debate about these issues often falls on deaf ears. Economists and experts argue as if they lived in completely different worlds. While the scientists stress the seriousness of climate change and the big-scale degradation which is currently taking place in many of our most important ecosystems and urge for a changed direction of development whilst the message from most of the economistsis continued conventionalgrowth.These messages do not mix well, of course. We have to stop imagining that society is making progress just because the growth of GDP increases. Hurricane Katrina is a clear example. Katrina caused damage of more than 200 billion USD and at least 1,100 people lost their lives.Yet at the same time, the United States GDP shot upwards due to the upswing in building activity in Louisiana. We must also assign a value to natural capital. Otherwise, it is impossible to stop the deforestation of the tropical rainforests or overfishing. Correspondingly, environmental costs must become incorporated in market prices, otherwise we will never achieve the wide stimulus for development of efficient and environment-adjusted technology which is necessary. The big task for the business community must be not to hide behind the conventional economists, not to be lulled into the idea that more of the same is the solution to the big problems we are facing. Solutions should, instead, be sought in different economic models where quality is asimportant as quantity and where fairness within and between generations is paramount. The economic framework has to be changed, but the same applies to the business models.We can find an interesting example in the energy sector where certain power providers are investing in economising programmes in cooperation with their customers and then splitting the profit ofthis economisingwith those customers. The point here is to offer a service ^ not to supply more kilowatthours.In this discussion the private sector is needed as an important dialogue partner.This is the sensible next step in the CSR process!

These two quotes can be seen to comprise examples of the way in which politicians, politics and the political agenda are increasingly influenced by the question of how we can attain sustainable development.When Anders Wijkmanwas a memberof the Swedish Parliament, 1970^78, it washardly possible, at all, to secure political gains through campaigns on environmental issues.The situation was probably the same in all of the other parliaments around the world at that time.Today, it is politically incorrect not to demonstrate that one takes responsibility for sustainable development.

Stakeholders and the shaping of opinion 55

Between 1999 and 2009, for example, environmental and, increasingly, climate issues grew in importance and they now constitute one of the most important items on the EUs agenda. It is understood that this change in attitude within politics is going to alter the rules of the game for companies and the business world, nationally as well as internationally. Even though the COP 15 negotiations in Copenhagen appeared to be a major failure, we can be sure that the future will not consider what the worlds political leaders accomplished there to be the beginning of the end, but rather only the end of one chapter which will lead to the start of something new. That politicians have a responsibility to determine laws, rules and licenses to operate is, of course, a given. Globalisation puts the realm of political choice in a new context. For this reason, we sometimes experience that the discrepancies between words and actionswithin politics are very great, indeed. As previously mentioned, it is now up to politicians not to stray too far from the voting publics wishes as regards the speed of change, if they want to stay in power.The development of political action seen from a historical perspective is, to some degree, predictable and sustainable development is a growing issue on the political agenda.

4.4 Customers, consumers and consumption patterns in flux

The action plan Agenda 21 was adopted at the UN Conference on Environment and Development12 in Rio de Janeiro in 1992.This agenda provides objectives and guidelines forachieving sustainable development by erasing poverty and removing threats to the environment.The action plan is long-term and extends into the 21st Century. The guidelines take the form of recommendations and are, therefore, not legally binding, but the action plan is very clearly politically and morally binding for the countries that, through their participation in Rio, stand behind Agenda 21. Agenda 21 represents a powerful call for action. The Agenda should be seen as a challenge for both governments and for all groups and individuals within society to participate in the work with environmental and development issues.

12

UN Conference on Environment and Development (UNCED).

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Agenda 21 includes 40 chapters in total. In turn, each of these addresses one or more programme areas. Agenda 21 sets out the objectives to be achieved and the measures necessary to be undertaken, as well as providing guidance for implementation. There is no detailed description of Agenda 21 included in this book, although in this section, reference is made to one of the Agenda chapters. Chapter 4 of Agenda 21 deals with issues relating to human consumption levels and resource consumption, and how these patterns should (and can) be changed in order to meet the long-term goal of sustainable development. Unsustainable consumption and manufacturing patterns, especially in developed countries, are regarded as the main contributor to the continued destruction of the global environment.The unsustainable consumption of natural resources should receive special attention. The actual use of natural resources must reflect the goal of minimizing consumption and reducing pollution and even though consumption in certain parts of the world is very high, the most basic needs of a great portion of humanity are not met. A change in consumption patterns should allow for a new, comprehensive strategy focused on satisfying the basic food, healthcare, shelter and education requirements of the poor and, at the same time, reducing waste and the use of finite resources in production. In the production of goods and services, a reduction in the amount of energy and material needed per unit could lead to decreased environmental strains and could result in a higher level of economic andindustrial productivity and competitiveness.Governments are being encouraged to increase their efforts to ensure that energy and resources are used in an economically and environmentally efficient and sound manner. This can be done by: a) facilitating the spread of existing environmentally sound technologies; b) promoting research and development (R&D) in such technologies; c) helping developing countries to use these technologies effectively, and to develop technologies that are tailored to these countries specific conditions;

d) promoting the environmentally sound use of new and renewable energy sources; and e) promoting the environmentally sound and sustainable use of renewable natural resources.

Stakeholders and the shaping of opinion 57

The importance of a sustainable recycling society has been repeatedly highlighted. The total amount of waste is considered to be reducible through increased recycling, both in industry and among consumers and the waste of resourcesin the packaging of products should bereduced.Individuals and households should receive assistance and information in order to be able to make sound purchasing decisions.Governmental procurement should take environmental factors into consideration. Environmentally sound pricing is important. Prices and other market signals should reflect the environmental cost of energy usage and consumption of natural resources, including the disposal of waste from production. If this does not take place, it is doubtful whether any major change in consumption patterns will actually occur.The use of suitable economic tools to impact consumption patterns, such as fees and taxes, as well as deposit and recycling systems, is one recommended means of this. Joint efforts by governments, consumers and producers are necessary in order to change unsustainable consumption and production patterns.The important role of women and households should behighlighted, as well as the impact of their purchasing power on the direction of economic developments. These comments describe the current status of the agenda adopted by the political world in terms of the changes in consumption patterns seen as necessary to achieve sustainable development. But whats happening in the market? A number of studies show that consumers are willing to contribute to sustainable development by purchasing environmentally friendly products. Other studies show that, in practice, it is the wallet that controls these decisions, together with the usual driving forces of quality, status, etc.Forexample, organic productshave been on display in grocery storesfor more thantwo decades, but have stillgained onlyover 5% ofthe market share. Today, more and more companies and brands are making ethical demands; for example, by ensuring that International Labour Organizations (ILO)13 core conventions are complied with.This is a positive development. At the same time, it is not always easy for the consumer to keep track of all of the different labels and concepts. The purpose of this book isnot to explore allofthe ecolabelling systemsexistingin the market, such as the Nordic Swan ecolabelling system, or, for that matter, the
13

International Labour Organization (ILO) is the UNs tripartite multilateral agency that brings together governments, employers and workers of its member states in common action to promote decent work throughout the world.

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range of products and services focused on environmental and social responsibility offered by social entrepreneurs. However, we will touch upon the field of sustainable products, as we look a little more closely at the Fairtrade labelling system.

4.4.1 FairTrade in Sweden

Fairtrade (Rttvisemrkt in Sweden) is the only product labelling system aimed at combating poverty and at strengthening of the degree of influence and participation of global citizens in the worlds developing countries.No other product labelling system has this asits starting point.Other ethically focusedlabelshave, forexample, the main purpose, forexample, of protecting the environment or increasing transparency in the marketing chain. They neither work, nor claim to work, towards contributing to the producerspossibilities of influencing their own future. In 2007, the total consumption of Fairtrade-certified goods amounted to EUR 2.3 billion globally, an increase of almost 50% compared to the previousyear.In certain countries, the market share for Fairtrade islarger than 20% among certain product groups and Sweden follows the same trend. In 2007, the sale of Fairtrade-certified products grew by 165% compared to the previous year and by 75% in 2008. Today, there is a wide range of products with the Fairtrade label, for example, coffee, tea, cocoa, chocolate milk, chocolate bars, bananas and other fresh fruit, juice, soft drinks, rice, ice cream, sugar, spices, nuts, snacks, sweets and honey. In addition, it is possible to buy Fairtrade-labelled wine, flowers, sports equipment and products containing Fairtrade-labelled wool. Today, 78% of Swedes claim to recognise the Fairtrade labelling system. This must be considered to be a very high percentage, even if it indicates only that people are knowledgeable of the existence of the product label, and does not evidence their purchase of the goods. Statistics Swedens figures for the sale of groceries in 2008 showed record sales of organic groceries and drinks. Organic-labelled goods constituted 3.4% of total sales. Organic fish was the bestseller in 2008, as sales rose from 0.3% to 3%.Naturally, it is likely that this positive trend for sustainable products will continue, making it a necessary consideration in the development of consumer products and services in all industry sectors.

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4.5 The supply chain ^ opportunities and threats

No chain is stronger than its weakest link and a supply chain has many links, some of which are relevant to the discussion of sustainable development. Approximately fifty years ago, Japanese delegations conducted study trips to Kockums shipyard in Malm in southern Sweden and took home valuable knowledge about how the tanker shipyard, which at the time was a leader in the field, constructed their ships. Today, the largest oil tankers and gas ships are constructed in Asia. Approximately thirty years ago, the textile and clothing industry in Sweden was a booming manufacturing industry centred in the Bors region. Production was moved, step by step, to Finland and Denmark, then to Portugal, and thereafter to Hong Kong and Taiwan.Today,China and India compete with other Asian countries for the manufacturing of the worlds clothing. When production is relocated to developing countries, this contributes to the welfare of these countries and is naturally a prerequisite for fighting poverty and building prosperity. Today, we speak of China as the global factory, and the world economys centre of gravity has gradually shifted towards thetiger economies.It is obvious that also the companies within the tiger economies seek solutions that are as cost-effective as possible in all areas of their business. For example, India is now becoming the worlds centre for ITand it is not unusual that customer service operations issues in, for example, Europe are resolved by personnel located in New Delhi. But all types of service and production activities in low-cost countries are under scrutiny as regards their working conditions and the environment and companies must deal with these issues while, at the same time, improving their own efficiency. This development, inwhich cost-efficiency hasbecome a driving factor, not only brings with it possibilities but also risks. The medias interest in monitoring the conditions in a companys supply chain is not to be taken lightly and there are countless headlines, articles and television reports, based on varying degrees of fact, criticizing companies and their management and Boards for lack of responsibility. An example is the criticism ofthe manner inwhich Indianworkersin the textile industry have to work in the dyeing of fabrics in ways that are prohibited in Sweden and elsewhere in the industrialized world. These kinds of working conditions, as well as long working hours andlow wages, make consumers hesitate before pur-

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chasing products from brands with an image that is associated with such conditions. In the 1990s, Hans Moberg,IKEAs CEO at that time, was forced to deal with allegations that child labour was being used in the factories of IKEAs carpet suppliers in India. Back then, many did not understand that supply chain conditions could affect a companys image and brand. It is more or less self-evident that campaigning groups choose large, well-known companies as targets for their activities.

With increasing frequency, companies are having to deal with headlines like this one, printed in theTimes, 28 July 2010.

Large, well-known companies are financially powerful and can, therefore, make a major difference.Moreover, these companies are of interest to the public and, therefore, to the media.IKEAis no exception.With the development and introduction of IKEAs IWAY Standard ^ Minimum Requirements for Environment and Social & Working Conditions when Distributing Home Furnishing Products, IKEA has set an example for handling responsibility issues in the supply chain. In the supplier contract, all IKEA suppliers agree to comply with IWAY and for many years IKEA has been carrying out unannounced on-site visits to suppliers to monitor these conditions through independent consulting and accountancy firms. Through systematic work with sustainability issues in the supply chain, IKEA has received major recognition and has set an example for many other companies who have subsequently realized the importance of this work. All companies basing their business models on the supply of raw materials from, or on production in, the poorer parts of the world will, sooner or later, be forced to deal with sustainability issues.This is in spite

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of the fact that the company (as in IKEAs case) is only purchasing, not directly producing, the goods in question.

On IKEAs web page can be found the standard which, for many years, has set an example for handling sustainability issues in the supply chain.

In 2009,Plan, an international child rights organisation, reported the problems of child labour within the tobacco industrys plantations in East Africa. In light of this, it may be assumed that the multinational corporations in the tobacco industry have the same improvements to make as IKEA. Shortly thereafter, Plans report14 was published in the worldwide media and, as the report was based on research and scientific facts, it helped to uncover the fact that thousands of children working at Malawis tobacco plantations were suffering from nicotine poisoning (the equivalent of smoking 50 cigarettes a day). Plan made the alarming discovery that children as young as five were showing symptoms of nicotine poisoning, suffering from headaches, stomach pains, muscular problems, coughing and shortness of breath. Plan is now demanding that Malawis government comply with its own laws and international conventions regarding child labour and occupational safety.

14

Hard work, long hours and little pay ^ Research with children working on tobacco farms in Malawi.

62 Stakeholders and the shaping of opinion

The report Hard work, Long hours and Little Pay (2009), put Malawis government and the tobacco companies up against the wall.

Companies buying tobacco cannot escape moral responsibility.The list of examples of the essential work on issues of justice carried out by NGOs is endless, and such examples should serve their purpose, that is, to teach Boards and corporate management teams to understand the sustainability agenda. Of course, major news items change on a daily basis, but these days, the transfer of information also takes place on a global scale, and at the click of a mouse. Now is the time to act!

4.6 The role of the media

Values govern our decisions and, therefore, our future.The same applies to businesses and organisations and the personal values found among corporate management members and Boards of Directors determine the course for the future of companies and organisations. All of the examples presented thus far in the Chapter Stakeholders and the shaping of opinion, have been taken from traditional mass media, such as the daily press, radio and television. These examples have been chosen deliberately, some for the express reason that they are not entirely topical and that they have been brought to the fore by what we might call the world of analogue media (even though television has now actually been digitalised). There are innumerable examples in which the management and

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Board of Directors of a company have changed their approach in matters of responsibility, ethics and morals to reflect the focus of the mass media. During the months in which this book is being edited for an international readership, we are, for example, following the medias surveillance of BPs oil catastrophe in the Gulf of Mexico. Through the medias megaphone, campaigning for public opinion has frequently resulted in major changes. The power of the traditional media is perhaps most visible as regardsinquiries into the actions of people in leading positions. Ministers, managing directors and trade union leaders have been forced to leave their positions after media inquiries, and of course, the damage to their personal image also spills over onto the company or the organisation in question.The mass medias major focus on the so-called Skandia scandal in Sweden centred on bonus issues, is only one example of many, which many years later, has resulted in legal action. The damage to the Skandia trademark is, of course, evident, and difficult to repair. The power of the mass media in the world of analogue media has been, and still is, great. Furthermore, with the evolution of the world of digital media, also frequently referred to as social media, the complexity of media impact has grown at an altogether unprecedented rate.The information and communication strategies of the older generation (which were, of course, analogue) are out of the race. Approximately two million Swedes (of a population of about 9 million) are now living in the digital world of blogging, with close to half a million thought to have their own blog.There is a strong focus on shared opinions and values; the individual takes precedence over the group, and transparency ismore important than control. When Isabella Lwengrip (a very well-known young Swedish blogger) expresses sympathy ordislike for a company, an event, a service or a product under heraliasBlondinbella, nearly the entire teenage population of Sweden (especially young girls) follows, and blogger Lwengrips influence on the teenagers is likely greater than that of the analogue mass medias impact and is probably also greater than the impact of analogue advertising. A displacement is occurring in the digital world in which bloggers, websites, downloads, podcasts, etc., are to the entire younger generation what the evening press, daily press and television are for those born in the 1940s and 50s. The media map is currently being redesigned and it is, practically speaking, impossible to control messages in this state of total communication. Through interaction on, for example, Facebook,

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pressure groups or so-called communities can form incredibly quickly and can achieve considerable scope regarding a common issue. This might, for example, concern a desire to criticise a particular company, its products or services or its insufficient responsibility. Such campaigns can gain a foothold within a mere couple of days and it is obviously tremendously difficult to answer to this type of digital attack. It is, therefore, all the more important today, and even more decisive for the future, to determine companiescore values and guidelines, and that companies practice as they preachand walk the talk. This concerns the leaders of corporations, as well as the corporations themselves, and the larger the company, the more important that they are seen to take action. IKEA is world famous for persistently establishing its core values and for setting a precedent with the help of social media. The company has tested new ways of leading campaigns: instead of advertisements in newspapers and on television, public relations groups have toured around in caravans, meeting the public, and attempts have been made to reach out to potential customers through social media, such as blogs and Facebook. Its easy to understand the force with which opinions can be formed for, or against, companies, services and products concerning issues of responsibility for sustainable development. Facebook has, according to its own records, more than 300 million active users; Linkedin has 47 million members. So far, however, the effects of shaping public opinion through social media are largely difficult to measure.

4.7 The financial sector from a sustainability perspective

In recent years, the financial sector has had a greater impact on companies approaches to sustainable development than was previously the case. If CSR and CR issues were previously driven more by NGOs and CSOs, one can equally say that investor governance and corporate governance issues were the focus for the financial sector. On the other hand, we have, for a number of years, been seeing investors increasing their interest in integrating environmental and sustainability issues into the discussions on governance. In the financial sector, the all-inclusive concept of ESG, which stands for Environmental, Social and Governance, has instead, become the focus.

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4.7.1 The investorsand funds perspective

The perspective of investors and, consequently, fund managers is the owner-investor perspective. This perspective is multi-dimensional and encompasses the concept of value growth and profit generation. At the same time, institutional investors and fund managers have fiduciary responsibility; responsibility asa good citizen, in that they manage other peoples money. In this perspective, risk and value must be assessed and balanced, as well as the time horizon, both in the short-term and longterm. The basis for decisions for purchases and marketing activities is multi-layered. Financial reporting and accounting naturally comprises an important part of this. In 2001, the Enron scandal peaked after it became public that advanced and well-planned breaches of a variety of statutory regulations and laws had taken place, including, amongst other things, insider trading, violation of bookkeeping regulations. Enron was also accused of having helped manipulate the supply of electricity on the market, which lead to the California electricity crisis (also known as the Western U.S. Energy Crisis). Over many years, Enron was an investment favourite. However, its reputation was tainted after accusations of cartel building and bribery in conjunction with energy deals abroad. What really destroyed the company, however, was the revelation that the consolidated accounts excluded certain entities, so-called specialpurpose entities.Certainloans and derivatives had been accounted for in special companies which were not, formally, owned by Enron. One of the worlds largest accountancy firms, Arthur Andersen, was dragged down with Enron. Enrons bankruptcy in 2001 was followed by the even larger bankruptcy of Worldcom in 2002. Whenthe Enron and Worldcom scandalswere closely followed byother accounting scandals, governance issues received new attention. Since that time, the Sarbanes-Oxley Act was adopted in the USA and a number of other countries have established governance codes. These codes focus primarily on the quality assurance of the financial reporting which, of course, is the core aspect and starting point of allinvestment decisions. At the same time, we now see that Board and management work with value-creating risk management and that internal control has expanded to incorporate an all-inclusive view of a companys risks and possibilities, also taking into account the risks and possibilities inherent in a sustain-

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ability perspective. That this all-inclusive view of value creation is now quickly winning groundis due to the investorsand fund managersinterest in these issues. Corporate Boards have, of course, the duty to ensure the owners intentions.

4.7.1.1 How does one define responsible investments?

From the report, Responsible Investing: a Paradigm Shift ^ From Niche to Mainstream15 from 2009, we can derive the following definitions:
In line with market standards, we have defined RI as an investment process that considers the social and environmental consequences and looks at governance aspects, and employs strategies such as positive and negative screening, engagement andintegration within the context of rigorousfinancial analysis. RI covers both SI and SRI (see exhibit 1). Conversely, Sustainable Investments (SI) may have elements of both SRI and non-SRI. SI may include companies that SRI investors perceive to be unethical (e.g., land mine and cluster bomb companies), as long as they meet sustainability criteria. Investors often use the terms SRI, RI and SI interchangeably though. Different investors use different criteria for RI, and there is no public consensus on the definitions. A broad range of criteria is used for investment analyses within RI, including Environmental, Social and Governance (ESG) and publication of Corporate Responsibility (CR) reports. The disparity of RI definitions suggests that the RI market is still immature being in the early stages of development. We anticipate a convergence of these RI terminologies as RI becomes a major component of investors portfolios. Opportunities remain for future market makers to both (re)define RI and shape the RI market.

15

Robeco in Rotterdam and Booz & Company in London.

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From the report Responsible Investing: a Paradigm Shift ^ From Niche to Mainstream.

From the discussion of definitions above, it can be seen that this area is still being developed and that the concept is not at all clearly defined. Norm-based screening, in which companies breaching conventions and regulations are rejected from the fund, as well as companies which the police have already arrested due to violations, belongs to the category negative screening. This, in turn, refers to either Core RI or Broad RI (see exhibit above), depending on the number of conventions referred to in a given companys policy.

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4.7.1.2 Ethics and responsible funds

Ethical investing and Socially Responsible Investing (SRI) or environmental and ethical funds (SRI funds) are funds which distinguish themselves in a variety of ways through environmental, ethical or other signs of responsibility. In an ethical fund, ethical assessments influence the choice of investment together with traditional financial analysis. In these funds, positive selections are combined with negative eliminations. One actively seeks to identify responsible companies showing reliably that they can handle their social, ethical and environmental risks. One also seeks to identify companies which have the ability to fully exploit the business opportunities in these risks and which drive developments. In this context, the UNs convention on human rights, the UN Global Compact and ILOs core conventions comprise an important value framework. At the same time, companies are excluded if a significant portion of net sales are derived from the manufacture and/or sale of war material (weapons), alcohol, tobacco, commercial gaming operations and pornography. ^ An environmental fund is an ethical fund taking the environment into consideration in its investments. There are so-called sustainable funds, which select the leading environmental companies based on an active environmental analysis, and there are charitable environmental funds which grant funds to environmental organisations or projects. Furthermore, there are environmental technology funds which, for example, invest in wind energy companies or businesses working with water or air reprocessing. The criteria for these fund segments vary. One approach could be to seek to influence the companies in which investments are made via active owner dialogues in order that they become better and more result-focused when it comesto the handling of environmentaland socialaspects.The focus can be directed at the companies climate impact and how they link environmental aspects with their product development. There is no contradiction in ethical funds having the same companies in their portfolios as traditional funds.What is different is that, in their analysis, ethical funds and environmental funds also undertake a review of how the companies work with social and environmental aspects. For example, many larger Swedish companies who are generally seen as good investments are also at the forefront as regards en-

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vironmental work.Consequently, these shares are found in both ethical funds and environmental funds, as well as in traditional funds. ^ A charitable fund provides a portion of the funds wealth to a NGO or to a voluntary organisation in conjunction with the annual dividend distribution. A charitable fund can also be an ethical fund.

Whether funds of the so-called RI type have or have had a better return than traditional funds is subject to analysis and is, of course, of interest to the mass media.

4.7.1.3 Mainstream investors

Traditional investors, that is, themainstream investors, have also begun to consider ESG issues in their investment activities. In general, the finance industry has grasped the concept. Policies and new working methods have been established first and foremost amongst the institutional investors and fund managers over the last few years in order to incorporate sustainability aspects into their management activities.

4.7.1.4 UN Principles for Responsible Investment

The Principles for Responsible Investment (PRI) is aninvestment initiative in partnership with the UNEP Finance Initiative and the UNs Global Compact. PRIs principles regarding sustainable investments were launched by the then General Secretary, Kofi Annan, on 27 April 2006. In 2009, more than 500 investors, asset and fund managers, analyst companies and investment advisors had adopted these principles. PRIs principles have now been adopted by investors and fund managers who, together, own and manage more than USD 18 trillion, that is, 18,000,000,000,000.The UNEP Finance Initiative reports annually on the process of the implementation of these principles:

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Country/countries USA Canada UK The Netherlands France Scandinavia Switzerland Australia/New Zealand Brazil South Africa Japan

Total 31 12 36 21 13 25 16 56 20 13 11

Capital Owner Capitaland Fund Manager 11 20 4 8 14 22 12 9 3 10 21 4 3 13 30 26 16 4 1 12 3 8

PRIs six principles are as follows:

1. We will incorporate ESG issues into investment analysis and decision making processes. Possible actions: ^ Address ESG issues in investment policy statements ^ Support development of ESG-related tools, metrics, and analyses ^ Assess the capabilities of internal investment managers to incorporate ESG issues ^ Assess the capabilities of external investment managers to incorporate ESG issues ^ Ask investment service providers (such as financial analysts, consultants, brokers, research firms, or rating companies) to integrate ESG factors into evolving research and analysis ^ Encourage academic and other research on this theme ^ Advocate ESG training for investment professionals 2. We will be active owners and incorporate ESG issues into our ownership policies and practices. Possible actions: ^ Develop and disclose an active ownership policy consistent with the Principles ^ Exercise voting rights or monitor compliance with voting policy (if outsourced) ^ Develop an engagement capability (either directly or through outsourcing) ^ Participate in the development of policy, regulation, and standard setting (such as promoting and protecting shareholder rights) ^ File shareholder resolutions consistent with long-term ESG considerations

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^ ^ ^ Engage with companies on ESG issues Participate in collaborative engagement initiatives Ask investment managers to undertake and report on ESG-related engagement

3. We will seek appropriate disclosure on ESG issues by the entitiesin which we invest. Possible actions: ^ Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative) ^ Ask for ESG issues to be integrated within annual financial reports ^ Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives (such as the UN Global Compact) ^ Support shareholder initiatives and resolutions promoting ESG disclosure 4. We will promote acceptance and implementation of the Principles within the investment industry. Possible actions: ^ Include Principles-related requirements in requests for proposals (RFPs) ^ Align investment mandates, monitoring procedures, performance indicators and incentive ^ Structures accordingly (for example, ensure investment management processes reflect long-term time horizons when appropriate) ^ Communicate ESG expectations to investment service providers ^ Revisit relationships with service providers that fail to meet ESG expectations ^ Support the development of tools for benchmarking ESG integration ^ Support regulatory or policy developments that enable implementation of the Principles 5. We will work together to enhance our effectiveness in implementing the Principles. Possible actions: ^ Support/participate in networks and information platforms to share tools, pool resources, and make use of investor reporting as a source of learning ^ Collectively address relevant emerging issues ^ Develop or support appropriate collaborative initiatives 6. We will each report on our activities and progress towards implementing the Principles. Possible actions: ^ Disclose how ESG issues are integrated within investment practices ^ Disclose active ownership activities (voting, engagement, and/or policy dialogue)

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^ ^ ^ ^ ^ Disclose what is required from service providers in relation to the Principles Communicate with beneficiaries about ESG issues and the Principles Report on progress and/or achievements relating to the Principles using aComply or Explainapproach Seek to determine the impact of the Principles Make use of reporting to raise awareness among a broader group of stakeholders

The UNs then Secretary General opens the NewYork Stock Exchange trading on the 27 April 2007, by ringing the bell in classic style, and simultaneously making public the investor initiative, PRI, Principles for Responsible Investment.

It is obvious that these principles will have a major impact on companies approaches regarding the shift towards sustainable business development, as they become integrated into traditional investor activities and fund management around the world.

4.7.2 Swedish institutions in investor co-operation

In 2009, thirteen Swedish institutional investors, with managed funds totalling approximately EUR 380 billion, informed the public that they would now be co-operating... in order to jointly encourage Swedish listed companies to move towards responsible and long-term sustainable value creation.... Together, these institutions have SEK 490 billion invested in the Swedish stock market. This is equivalent to 18% of the total capital

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represented on the Stockholm Stock Exchange.The 100 largest companies on the Stockholm Stock Exchange were requested to reply to investors questions and the results were made public at a breakfast meeting in January 2010. In the press release issued at the public notification of this cooperation one could read:
... We believe that companies, by actively handling the environmental and social aspects of their operations can contribute to decreased risks and costs and also safeguard business possibilities. Thereby, long-term sustainable value creation is supported, and as investors, we can be assured that important prerequisites are in place for the future financial yield ofour clientscapital. The goalofthe project isto stressthe importance of Swedishlisted companies working in a structured manner with sustainability issues for long-term value creation. Improved transparency is created on the basis of reliable and relevant information from companies as to the manner in which environmental and social aspects are integrated in their business operations. Thereby the initiative contributes to creating an improved basis for decision-making for investors and to developing practices at the Swedish Stock Exchange...

The project, entitled Sustainable Value Creation, welcomes the participation of additional institutional investors in this cooperation. The model for this project is the Norwegian project Baerekraftig verdiskaping, which was initiated in 2008.The surveys questions, which were distributed to the chairmen of the 100 largest listed companies on the Stockholm Stock Exchange, are included in the Appendix of this book and provide a good basis upon which to initiate the adaptation of the core operations of a company to sustainable business development. In a press release dated 28 January 2010, portions of the result of the survey were presented: Report on the results of the investor initiative SustainableValue Creation
Today the results of the survey sent in September 2009 to the Board chairmen of the 100 companies with the largest market value on the NASDAQ OMX Stockholmsbrsen will be made public. All of 84% of the companies replied to the survey.The survey addresses four major areas: the companys governing guidelines and commitments, implementation and compliance, communication and reporting, and the responsibilities of the Board. The companies were questioned regarding the guidelines concerning human rights, labour rights, the environment and climate, anti-corruption, responsible business ethics and the work environment, health and security.

74 Stakeholders and the shaping of opinion

The results show that the companies workingin a structured manner with sustainability issues also make the greatest progressinintegrating these issuesboth strategicallyand operationally.Common to these companiesis that they see sustainability issues both as a possibility and a premise for good business practice and that these issues, consequently, contribute to creating value. Conclusions from the survey: ^ The Boards and group management state that they place major importance on sustainability issues and all of 75% of the Boards believe that they, themselves, have the necessary competence to follow-up the work with sustainability. ^ Sustainability issues are not reflected in the bonus systems ^ More than 90% of the companies have governance guidelines within one of the sustainability areas included in the survey. A majority have guidelines in all of the areas. ^ All companies have not progressed equally as far as regards the implementation of the guidelines. ^ Environmental and climate issues are experienced as the least difficult to associate with economic gains and business possibilities, however, half of the companies lack structured work with human rights and labour rights.

4.8 Indices identify the most sustainable companies

In 1999, Dow Jones established the Dow Jones Sustainability Index which, together with the index FTSE 4Good launched in 2001, is the leading sustainability index in the world. In order to qualify for the DJSI World, the registering company must be considered to be amongst the top 10% of the best-rated companies fulfilling three criteria: economic success, environmental performance and social responsibility. The selection is made from the 2,500 largest companies in the Dow Jones World Index. The annual review process, which all companies undergo in order to be selected for sustainability indices, is performed by SAM, a Swiss consulting firm. The process includes a deep analysis of particular companies corporate governance, risk management process, management of climate issues, and procedures on subcontracting and occupational health. A place in the DJSI World and DJSI STOXX is proof that the company is amongst the best in its class in terms of its work with these issues. This obviously has a positive effect on the brand and also helps build confidence among stakeholders, not the least amongst the investors and asset and fund managers who have endorsed the PRI.

Stakeholders and the shaping of opinion 75

The importance and value of being included in various sustainability indices is best illustrated by looking at how companies provide this information on their own websites. SCAs website from autumn 2009 provides the example shown below.

4.8.1 Awards and indices

External monitoring of listed companiessustainability work is increasing and such external studies often form the basis of fund managersand investorschoice of competent, sustainability-performing companies.

76 Stakeholders and the shaping of opinion

Stakeholders and the shaping of opinion 77

SCAs website August 2010.

4.8.2 NASDAQ OMX Sustainability Index

In autumn 2008, the stock market operator Nasdaq OMX launchedits own sustainability index for the Nordic market, known as the Nordic OMX GES Sustainability Index. This is a benchmark index for the Nordic region, in which 50 listed companies who are leading in matters of sustainable development are included. The index criterion for sustainability is based on the international guidelines for the environment, social responsibility and corporate governance, internationally known as ESG (Environmental, Social, Governance).These guidelines support the published UN principles16. The evaluation for this index is made by GES Investment Services.The most actively traded companies are examined by GES Investment Services based on their level of preparedness as regards ESG issues. The Nordic OMX GES Sustainability Index was developed to provide investors with fluid, independent and reliable parameters for responsible investment. The index is also meant to ensure that investment portfolios can meet global criteria for sustainability in line with their development.
16

UN Principles for Responsible Investment (PRI).

78 Stakeholders and the shaping of opinion

4.8.3 Global Initiative for Sustainability Ratings

AllenWhite, the co-founderof the Global Reporting Initiative, is among the principals behind a new initiative designed to get rid of confusion and opacity in sustainability performance ratings and create a generally accepted sustainability ratings framework. The project, Global Initiative for Sustainability Ratings (GISR), is a swipe at the profusion of sustainability ratings providers and theproliferation of tools and methods which GISR says has created confusion for the market. GISR grew out of the Tellus Institutes Corporation 20/20 project whose backers include major corporations such as General Electric Co., Hewlett-Packard, Citigroup and State Street Corp. Domini Social Investments, KLD (now part of MSCI), the Corporate Library, Greenpeace and the UKs Department of Trade and Industry (DTI) are also supporters. Its hoped that GISR will develop into a stand-alone, non-profit, global organisation. GISR aims to create sustainability ratings products that will be public goods, accessible to all users at nominal or no cost.The activities will be via an independent, non-commercial, multi-stakeholder process. The founders say the rapid consolidation of the ratings field and the proliferation of new raters are undermining confidence and trust in the quality of available ratings frameworks. It is argued that its not uncommon for a single company to annually complete a dozen or more disparate questionnaires ^ with equally disparate outcomes. GISR says it will drive the resources of asset owners and asset managers, government procurement, consumer purchasing, and civil society toward organisations that are true sustainability leaders.

4.9 Research providers ^ first to market

During the past decade, a market has emerged for specialised consulting, analysis and advisory services to institutional asset owners and fund managers with risk maps and analysis for decision-making in investment and administration activities.The focushere is on ESG issues, namely environmental, social and governance issues.

Stakeholders and the shaping of opinion 79

4.10 The long-term investment view gaining ground in financial markets

Meta Asset Management AB is an independent fund manager working exclusively with global ESG equity funds. These funds are intended for institutional investors with a long-term investment horizon. The investment model applied by this fund manager is described as follows:
By applying a genuine long-term perspective in the investment process, institutionalinvestors can actively contribute to creating conditions for better longterm returns. The theories behind universal ownership illustrate how all investors are affected by diminishing returns when investment capital is passively managed (e.g. tracking an index) and thereby automatically also invested in corporations that create negative externalities.These arise when a firms behaviour affects the surrounding world in a negative manner and, thus, creates additional costs for other companies in an investment portfolio. To promote long-term return our investment model integrates ESG factors (environmental, social and governance issues) in a quantitative investment process, which ensures that the portfolio, even in the short-term, has an optimal risk and return profile.

Meta Asset Managements report How to invest pension funds ^ views from abroad from 2009 describes developments in Sweden:
Responsible investment has grown dramatically in Sweden during the 21 st century, but perhaps not as strongly as SWESIFs1report Sustainable & Responsible Investments, 2008 indicates. According to this report, a total of 67% of the institutional capital in Sweden is now managed according to sustainability principles. The study is, however, difficult to interpret since many Swedish institutions are applying very simple screening methods which still allows a large percentage of the managed capital to be defined as RI.
1

Swesif; Sweden Social Investment Forum; swesif.org

Thomson Reuters Extel recently announced its rankings of European ESG analysis. This clearly shows that the economic sphere is now dominated by the major players of the financial markets ^ not by the smaller specialized firms within ESG. Table 3: Ranking of European ESG analysis te Ge ne rale 1. Socie 2. UBS 3. Cheuvreux 4. Goldman Sachs 5. Oddo Securities

80 Stakeholders and the shaping of opinion

6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Citi Investment Research HSBC Macquarie Equities Bank of America Securities ^ Merrill Lynch CM-CIC Securities (ESN) CLSA Asia Pacific Markets Natixis WestLB Barclays Capital Jefferies International Commerzbank Corporates & Markets Exane BNP Paribas Credit Suisse Securities Innovest Strategic Value Advisors, Inc Morgan Stanley

Today, it is the major international players, the investment banks and major pension funds, that are driving the change in long-term asset management where ESG issues are at the forefront. According to the abovecited Thomson Reuters Extels report, in 2009 there were 175 ESG sellside analysts in 67 companies in Europe. It would, therefore, appear that a new profession is now well established.The report, Responsible Investing: a Paradigm Shift ^ From Niche to Mainstream17, summarises the development of the RI market as follows:
We expect the RI market to become mainstream within asset management by 2015, reaching between 15 percent ^20 percent of total global Assets Under Management (USD 26.5 trillion) and a total revenue of approximately USD 53 billion*. Factors driving the growth of the RI market include: increased social awareness and the media attention and pressure this will attract, the increasing prices of energy and raw materials, changing legislation such as mandatory CO2 reductions, the established track record for RI performance, and further technological innovation. This trend will significantly re-shape the asset management landscape over the next few years. Today, the RI market is heavily fragmented. Larger players have not yet actively pursued RI or are just about to position themselvesin the game.By 2015, niche players are likely to be taken over by global players or grow themselves to become sizeable specialists; the current leading players might become laggards if they do not follow this trend. * Please note: all figures used in this paper are related to SRI only.
17

Robeco in Rotterdam and Booz & Company in London.

Stakeholders and the shaping of opinion 81

4.11 Analysts analyze and provide purchasing and sales advice

It has become increasingly clear that investors and fund managers, both in the SRI niche and in traditional asset management, have taken a serious interest over the past decade in the management of ESG issues in listed companies. Eurosif runs an EU-targeted lobbying campaign for greater transparency in corporate accounting and calls for clearer legislation in member countries. Here is what Eurosifs recommendation18 to the European Commission, published in April 2009, looked like:
In this position paper, Eurosif recommends that the European Commission adopt three proposals to increase transparency from various segments in the financial chain that would foster a longer-term, more sustainable economy within the EU: 1.Transparency from Companies European institutions should mandate disclosure of ESG data by publicly traded, large corporations. Such reporting would be principles-based and use a limited number of standardised Key Performance Indicators (KPIs), some of them being sector-specific. 2.Transparency from Institutional Investors European institutions should introduce a mandatory Statement of Investment Principles (SIP) for Investment Funds in which trustees would state the extent (if at all) to which ESG considerations are taken into account in the selection, retention and realisation of investments; and their policy in relation to the exercise of the rights (including voting rights) attached to investments. 3. Shareholders Rights and Transparency The Commission should adopt measures to allow shareholders to keep control of their rights at all times, improve accountabilityof service providerswithin the proxy voting chain, and allow issuers to know who their shareholders are at any moment so that they can communicate to them efficiently.

18

Public Policy Position Paper related to Sustainable Responsible Investment (SRI).

82 Stakeholders and the shaping of opinion

The European Federation of Financial Analysts Societies (EFFAS) is an umbrella organisation for financial analysts societies (of which the Swedish Society of Financial Analysts, SFF is a member).The federation has developed some self-help guidelines which are now spreading fast among financial analysts worldwide: Key Performance Indicators for Environmental, Social & Governance Issues ^ A Guideline for the Integration of ESG Into Financial Analysis and CorporateValuation.

EFFAS,The European Federation of Financial Analysts Societies, Guidelines focusing on ESG issues, to be used in the analysis and valuation of companies.

4.11.1 SFF Recommendations

For the first time in 2008, the Swedish Society of Financial Analysts (SFF) published their recommendations on corporate responsibility in a separate publication. These recommendations were updated in 2009 and included in The Financial Analysts Recommendations 2009, commonly known as the Recommendation Book, which represents the Swedish financial analysts associations final recommendations for listed companies. The section entitled SFFs Recommendation on Corporate Responsibility is included in its entirety in the Appendix to this book (14.4).

83

5 A few definitions ^ from sustainable development, via CSR, to RI, ESG, GRI and A4S
The many concepts covered by the umbrella term sustainable development can be confusing. Acronyms are constantly altered and new ones are added each year. CSR (Corporate Social Responsibility), SR (Social Responsibility and Sustainability Responsibility), and CR (Corporate Responsibility) are a few examples.There are varying definitions of these acronyms, but we will attempt to clarify them here.In 1983, the UN established the World Commission on Environment and Development, also known asthe Brundtland Commission, after its Chairman, the then Norwegian Prime Minister, Gro Harlem Brundtland. In 1987, the Commission was briefed and the Brundtland Report, Our Common Future, was published. In this report, sustainable development was defined as:
Sustainable development is the development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

However, it isthe UN Conference on environment and development, which took place in Stockholm in 1972, which is often described as the starting point for the work that we now summarise in the term sustainable development. This concept refers to the interplay between the dimensions of economic, environmental and social sustainability. Compare this to the term triple bottom line, coined in the 1970s and which was based on what was considered to be economically feasible, environmentally sound and socially responsible. The concept of sustainable development was confirmed twenty years later at the 1992 UN Earth Summit Conference in Rio de Janeiro. It was here that the Rio Declaration, the Convention on Biological Diversity, UNFCCC and Agenda 21 were adopted, leading to the discussion of national strategies for sustainable development at the UN Rio +10 Conference in Johannesburg in 2002. In 1999, the Amsterdam Treaty came into force, emphasising sustainable development as a fundamental objective of the EU. In Gothenburg, in 2001, the EU agreed on a strategy for sustainable development, which meant, from that time on, that political commitment regarding economic and social regeneration was also to have an ecological dimension.

84 A few definitions

If we leave this history of sustainability and, instead, look into actual contribution of companiesto sustainable development, it is easy to understand that the political definition referred to above may be difficult to apply to the business sector. For this reason, a number of industry-orientated definitions of corporate responsibility, with a bearing on sustainable development, have been subsequently established: ^ The EU defines CSR as: A concept whereby companies integrate social and environmental concerns into their business operations and in their interaction with their stakeholders on a voluntary basis. The International Chamber of Commerce (ICC) suggests the following definition of CSR:The voluntary commitment by business to manage its activities in a responsible way. TheWorld Business Council for Sustainable Development (WBCSD), which grew out of the ICCs Environmental Committee, is a network of approximately 200 international companies. WBCSD defines CSR as: the continuing commitment by businesses to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families, as well as of the local community and society at large. Within the academic community, Portney i Hay et al (2005), defines CSR as: a consistent pattern of private firms doing more than they are required to do under applicable law and regulations governing the environment, worker safety and health, and investments in the community in which they operate.

The acronym CSR has, since that time, come to be considered to be excessively narrowin the context of seeking to ensure corporate accountability in a broader sense, and a discussion is growing around the use of the term Corporate Citizenship, which identifies companies as being members of society. There is also an increasing use of the acronym CR, ^ Corporate Responsibility, which is not only concerned with reducing companies negative impact, but also, more positively, with how companies can contribute to becoming part of the solution to problems. From this comes the term CS ^ Corporate Sustainability, which is the latest fashionable acronym used by the initiated.

A few definitions 85

When the question of whether a responsible company can create added economic value for its shareholders began to be seriously discussed and analysed in the 1990s, a niche market of environmental and ethical funds, known as SRI ^ Socially Responsible Investments, was born. In conjunction with institutional investors beginning to understand that the corporate management of areas of responsibility could influence value, the concept of RI ^ Responsible Investments, was established. When the UNEP (the United Nations Environment Program) Finance Initiative launched PRI ^ Principles for Responsible Investment, the phraseESG was also established in order to provide the financial industry with a term covering sustainable value creation and responsible investment in Environmental, Social and Governance issues. On the basis of this, Corporate Governance (CG) issues were also included in the analysis of that which, generally, characterises a responsible company, and business. This rhapsody of acronyms (which certainly does not claim to be comprehensive), hasbeen an attempt to briefly describe the lexicon of corporate and investor acronyms.To this list, theGRI ^ Global Reporting Initiative must, of course, be added.The GRI, which began as anot-for-profit organisationin Bostonin 1997, now hasitshead office in Amsterdam.This initiative has grown into a global network comprised of various stakeholders (including representatives of businesses, trade associations, NGOs, etc).The GRIhas published a framework of Sustainability Reporting Guidelines, which has been translated into over twenty languages.The GRI has become thestandard for sustainability reporting, withGRI G3, the third generation of sustainability reporting guidelines issued by GRI, forming a necessary requirement for companies and investors working towards sustainable development.The reporting framework of the GRI is outlined in Chapter 8 Accounting for change. When mentioning the GRI, one must also mention the acronym A4S. The Princes Accounting for Sustainability Project involves businesses, investors, the public sector, accounting bodies, NGOs and academics in working to develop practical guidelines and tools for embedding sustainability into decision-making and reporting processes.To date, the project has included the collaboration of more than one hundred and fifty public and private sector organisations. The A4S Project is outlined in Chapter 8 Accounting for change.

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6 Corporate governance and sustainable business development

The traditional definition of corporate governancerefers to the relations between a companys senior management, its Board of Directors, its shareholders and other stakeholders, such as employees and their representatives.This definition refers to the structures used to describe a companys objectives, as well as the means of achieving those objectives and of monitoring results. As shareholdersand investorsinterest grows in the companys adaptation to new requirements regarding sustainable business development, it is relevant to also include the responsibilities of these entities in the concept of corporate governance. Characteristic of the majority of corporate governance codes is the fact that they concentrate on issues concerning the composition of the Board, issues regarding compensation and benefits, shareholder influence, responsibility and evaluation of corporate management, the companys internal controls and the external audit. The codes have a clear relationship to the companies, while the owners are represented by the Board, the Nominating Committee and shareholders meetings. The term corporate governancecharacterises the owners as the governing body and as having responsibility for the companys ethics, business model and strategies. In other words, the responsibility for sustainable business development lies, of course, ultimately with the owners. Corporate governance codes have been developed in order to strengthen trust in business operations and activities. Such codes anchor the requirement that the Board ensure that the necessary guidelines are ' vis adopted as regards the companys actions in terms of ethics vis a employees, customers, suppliers and society at large. However, in addition, these codes also address the companys relationship to its stakeholders in overall terms. It is stated that the choices on behalf of companies in this context are not due to these issues being deemed to be of less importance but, rather, that they conclude that these issues are primarily included in the operational managements area of responsibility. It is not at all obviousthat the delimitation of the scope of corporate governance is to be establishedin this manner.In other contextsin the discussion regarding corporate governance, for example, in OECDs Principles for Corporate Governance (2004), one can see how a broader perspec-

Corporate governance and sustainable business development 87

tive is established. Here it is shown, for example, how the interests of the companys other stakeholders (that is, other than shareholders) are to be met. It has been established that the framework for corporate governance recognises other stakeholders legal rights, and encourages active engagement between companies and stakeholders, in order to ensure the welfare, work environment, vitality and financial health of the company. ESG (Environmental, Social and Governance) should result in reflective thought on corporate governance work. When PRIs principles regarding responsible investments has now been accepted by all of the major investment banks andinstitutionalinvestors and are alsointegrated into investment policies and analysis work, it is necessary to have an allinclusive view of the areas and issues of corporate responsibility. Companies who do not take a position as regards ethical and environmental issues and who do not assess the manner in which these issues impact business operations, take unnecessary risks. The Board has the ' -vis the owners, for the companys long-term ultimate responsibility vis-a value growth, and this is the reason why the Board also has the obvious responsibility for choosing the business model and business strategy. Consequently, companies wishing to legitimise confidence and longterm value growth should work actively with a code of corporate governance as the starting point, and with corporate governance in a broader perspective.In other words, this work should be expanded to also include important issues related to ethics, the environment, social responsibility and sustainable development. Over the years, the application of the various corporate governance codes has provided us with new experience, and a new view of good Board practices is developing. The Boards responsibility for strategic governance, follow-up and control and the dissemination of external information, has been described in a number of such codes.That responsibility cannot be correctly exercised without competence and experience is obvious. As an increasing number of investors and fund managers now integrate the companiesenvironmental andresponsibility issuesin investor and shareholder governance, it is natural that this logic should also lead to corporate governance being integrated with these issues. The Austrian financial analysts association, OVFA (Oesterreichische Vereinigung fr Finanzanalyse und Asset Management) issued the report Corporate Responsibility 2.0 ^ From Corporate Responsibility to General Responsibility in June 2010. The following is an excerpt from the report

88 Corporate governance and sustainable business development

confirming that Corporate governance means credibility. The company has to identify with it and live it:
...Most European countries have effective Company Laws in place, which clearly define the roles and tasks of company bodies (especially Germany and Austria). It is also important to distinguish between two-board systems and one-board systems. On top of that, there are local corporate governance codes.These make sense, as do the rules laid down by them and the compliance with them in order to increase the level of transparency in areas where the Company Law is not effective enough. As self-regulating measure, corporate governance is part of corporate responsibility and thus a welcome vehicle to demand responsibility from company management in even more detail.But it isimpossible to force management to beresponsible, even if companies have independent auditors, lawyers etc. scrutinize their compliance with numerous codes.Could a better corporate governance code have helped overcome the global financial, economic, and confidence crisis more effectively, or even avoid it altogether? ^ A clear no to that one. The volume of mortgages granted on the US housing market and of the products traded on top of those on the financial market had become too large, and a better corporate governance code would not have made a difference here. However, an institution that was aware of the economic interdependencies and that had capped the trade in these products could have prevented the crisis. On the one hand, there need to be clear rules and regulations on the financial markets, as pointed out above. A gigantic trade volume that is completely left to the devices of the free market and that not even the supervisory bodies or the financialinstitutionshave any control over is evidently not efficient enough. On the other hand, confidence/trust also depends on simple psychological sentiments of people acting in the market and also the entire population.This trust and complete transparency are particularly important in the context of something as sensitive asmoneyin order to maintain globalmoney circulation and liquidity. And this trust was severely damaged and partially destroyed in the crisis. The excessive salaries that we have seen cropping up again right after the crisis are not only completely irresponsible. In such phases, they are bordering on aloofness and show a lack of sensitivity towards what is essential. And lastly, they are a testament to a narrow mind that completely neglects global dependencies. Responsibility therefore has to be lived and implemented more comprehensively and should not be reduced to the existence of audited documents. These additional aspects of comprehensive responsibilityare the centralissues ofthis 2nd VFA publication onCorporate Responsibility 2.0: From Corporate Responsibility to General Responsibility.

The European Commission EC Green Paper Corporate Governance in Financial Institutions and Remuneration Policies (COM (2010) 284/3 with deadline for comments 1 September 2010) provides, in its introductory

Corporate governance and sustainable business development 89

section, a clear view of the manner in which one assesses the importance of corporate governance, and from the ECs Green Paper we understand that this area is now subject to more specific political directives and, thereafter, national legislation.
The scale of the financial crisis triggered by the bankruptcy of Lehman Brothers in autumn 2008 and linked to the inappropriate securitisation of US subprime mortgage debt led governments around the world to question the effective strength of financial institutions and the suitability of their regulatory and supervisory systems to deal with financial innovation in a globalised world. The massive injection of public funding in the US and Europe ^ up to 25% of GDP ^ was accompanied by a strong political will to learn the lessons of the financial crisisin allits dimensionsto prevent such a situation happening again in the future. In its Communication of 4 March 20091, effectively a programme for reforming the regulatory and supervisory framework for financial markets ' re report2, the European Commission based on the conclusions of the Larosie announced that it would (i) examine corporate governance rules and practice within financial institutions, particularly banks, in the light of the financial crisis, and (ii) where appropriate, make recommendations, oreven propose regulatory measures, in order to remedy any weaknesses in the corporate governance system in this key sector of the economy. Strengthening corporate governance is at the heart of the Commissionsprogramme of financialmarket reform and crisis prevention. Sustainable growth cannot exist without awareness and healthy management of risks within a company. ' re report, it is clear that Boards of Directors, As highlighted by the Larosie like supervisory authorities, rarely comprehended either the nature or scale of the risks they were facing.In many cases, the shareholders did not properly perform their role as owners of the companies. Although corporate governance did not directly cause the crisis, the lack of effective control mechanisms contributed significantly to excessive risk-taking on the part of financial institutions.This general observation is all the more worrying because corporate governance has been relied upon as one of the ways of regulating business life. Consequently, there is a need to address the fundamental question of whether the existing corporate governance regime is deficient as far as financialinstitutions are concerned or whether it has rather been poorly implemented. In the financial services sector, corporate governance should take account of the interests of other stakeholders (depositors, savers, life insurance policy holders, etc), aswellasthe stabilityofthe financial system, due to the systemic nature of many players. At the same time, it is important to avoid any moral hazard by not diminishing the responsibility of private stakeholders.It is therefore the responsibility of the Board of Directors, under the supervision of the

90 Corporate governance and sustainable business development

shareholders, to set the tone and in particular to define the strategy, risk profile and appetite for risk of the institution it is governing.
1 2

COM (2009) 114 final. Report of the High-Level Group on Financial Supervision in the EU published on 25 February 2009. ' re was Chairman of the Group. Mr Jacque de Larosie

The issue as to how faceless institutional ownership can be responsible and how shareholders impact the companies norms, in terms of that which is seen to comprise responsible business practice, is certainly topical. One conclusion should be that the changed expectations on behalf of the companiesstakeholders have implied, and continue to imply, that the requirements on the operations have become tougher and more complex. The interface between the various actors in the financial markets is currently changing, a change which, of course, impacts and will continue to impact companies now and in the future.

91

7 How its done ^ a new old-school business model

Sustainable business development requires a strategic basis. To lead a company or an organisation towards sustainable development requires that sustainability issues and ESG issues are totally integrated. Strategy, business planning, risk analysis and risk mapping, management, reporting and accounting, internal control, and, not least, the independent external audit, offer a holistic view of enterprise risks and opportunities. This section of the book provides suggestions as to how a responsible business model for sustainable development might be designed, and refers to some useful guidelines for the establishment of a sustainable business model.This is how you do it!

7.1 Business Strategy in flux

Since 1960, the worlds population has quadrupled and the world economy has grown more than five times.If this growth continues at this rate, by 2100 the world economy will have increased 80 times over compared to the economic situation at the end of World War II. If China were able to begin to reduce its level of atmospheric emissions only after 2030, the financial costs of such a failure to address climate change would be so great that these costs would be equivalent to 7^8% of the countrys projected GDP19. Today, the vast majorityof people recognise the need to act to create an environmentally balanced society and to adapt to what Nature can tolerate. Nevertheless, neither mainstream consumers, nor businesses, have seriously taken the step from wordsinto action.We see ever increasing amounts of marketing and promotional materials expressing both understanding and well-intentioned ambitions. However, it is much rarer for ESG issues to be integrated into business models or for management and Boards of Directors to take the issue of sustainability seriously. For many companies, sustainability reporting is not an aspect of the reporting carried out by the Board. Strategic thinking on sustainability issues means that a companys Board of Directors and management assume a
19

According to a study undertaken in 2009 by the Department of Environment, Resource and Development Economics at Beijing University.

92 How its done ^ a new old-school business model

standpoint on the issues applying to that company, and how they might affect the business. A strategy for sustainable business development requires: ^ that the company defines and clarifies the terminology it has chosen to use (sustainability, corporate responsibility, CSR, etc.), and what these terms mean for the company in relation to the business operations, product development, organisational development, etc., ^ ^ ^ ^ ^ ^ ^ establishment of a leadership which acts as a carrier of the vision and values, and whose leaders practice what they preach, establishment of a commitment from the key stakeholders identified by the company, decisions on long- and short-term goals, establishment of the Business Case that will direct the business development strategy towards sustainable development. integration of risk analysis and management, that suppliers be involved and engaged, establishment of partnerships.

Companies successfully integrating sustainability issues from a strategic perspective are better positioned than others in terms of obtaining commercial advantages.This is evident, for example, when looking at climate issues that involve both risks and opportunities. Establishing a strategic starting point helps companies to develop insight and understanding into sustainability risks and to exploit existing opportunities, whilst, at the same time, ensuring the ability to handle the difficult trade-offs that must be made between what is environmentally or socially responsible, on the one hand, and what is economically feasible, on the other. A strategic approach is critical and provides a company with the foundation from which to develop the necessary knowledge to ensure that it makes the informed decisions on sustainability which can be crucial precisely to its operations. The World Business Council for Sustainable Development (WBCSD) sees its mission as the provision of business leadership acting as a catalyst for change towards sustainable development and has developed Ten Messages by Which to Operate, which is an excellent strategic foundation from which to start.

How its done ^ a new old-school business model 93

TheWorld Business Council for Sustainable Developments ten messages by which to operate:
1. Business is good for sustainable development and sustainable development is good for business. Business is part of the sustainable development solution, while sustainable development is an effective long-term business growth strategy. 2. Business cannot succeed in societies that fail. There is no future for successful business if the societies that surround it are not working. Governments and business must create partnerships to deliver essential societal services like energy, water, health care and infrastructure. 3. Poverty is a key enemy to stable societies.Poverty createspolitical and economic instability, a big threat to business and sustainable development. By contrast, businesses can lift living standards and eradicate poverty. 4. Access to markets for all supports sustainable development. Sustainable development is best achieved through open, transparent and competitive global markets. 5. Good governance is needed to make business a part of the solution. Supportive frameworks and regulations are needed for business to contribute fully to sustainable development. 6. Businesshasto earnitslicense to operate, innovate and grow.The way business acts and is perceived is crucial to its success. Accountability, ethics, transparency, social and environmental responsibility and trust are basic prerequisites for successful business and sustainable development. 7. Innovation and technology development are crucial to sustainable development.They provide key solutions to many of the problems that threaten sustainable development. Business has always been, and will continue to be, the main contributor to technological development. 8. Eco-efficiency ^ doing more with less ^ is at the core of the business case for sustainable development. Combining environmental and economic operational excellence to deliver goods and services with lower external impacts and higher quality-of-life benefits is a key sustainable development strategy for business. 9. Ecosystemsin balance ^ a prerequisite for business.Business cannot function if ecosystems and the services they deliver, such as water, biodiversity, food, fibre and climate, are degraded. 10. Cooperation beats confrontation. Sustainable development challenges are huge and require contributions from all parties ^ governments, business, civil societies and international bodies. Confrontation puts the solutions at risk. Cooperation and creative partnerships foster sustainable development.

94 How its done ^ a new old-school business model

7.2 How to integrate adaptation to the requirements of sustainable development?

The integration of sustainable development issues requires the commitment of the Board of Directors and senior management. After the Board has taken strategic decisions and expressed its level of ambition, the CEO, in an ideal situation, will drive forward the integration of ethical and sustainability issuesinto the businessplanning.The integration of sustainable development issues into business planning and budgets implies that sustainability issues are followed up in the customary monitoring of results. When this occurs, results and opportunities are identified and capitalised upon, thereby ensuring that environmental and responsibility issues are not reduced to the level of merely complying with regulations. The majority of businesses follow corporate governance programmes and exercise regulatory compliance.Whilst this is very important, corporate governance must also support the company in its ambitions to improve even further.Forexample, successful companies are developing their practices to include the necessary adjustments for sustainable development and adherence to international codes, are taking advantage of the opportunities presented to them and are evaluating the results of their work. Furthermore, the corporate governance process should be comparable to that of the most successful companies. As business conditions are constantly changing, corporate governance must also evolve and adapt to handle future threats and opportunities.Thisis achieved by developing the companys procedures to manage these new issues.The Board has ultimate responsibility for: ^ adopting and establishing a code of conduct for sustainable development (e.g. Global Compact), ^ ^ ^ ensuring up-to-date risk-mapping, including ESG issues, establishing and monitoring a business ethics policy alongside other relevant policies, appointing a senior member of staff who under the supervision of the Managing Director is responsible for the establishment of ESG issues, establishing awhistle-blower function, regularly providing updates on ESG issues at Board meetings to engage Board members.

^ ^

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7.3 ICCs nine practical steps towards responsible business conduct

The previous ICC Commission on Business in Society (now part of The Commission on Corporate responsibility and Anti-Corruption) developed an interactive guide on the ICC website.

ICCs guidance regarding corporate responsibility.

In the document Business in Society ^ Making a Positive and Responsible Contribution, the following nine steps towards responsible business conduct are presented:
1. Confirm CEO/Board commitment to give priority to responsible business conduct A basic requirement is the commitment of senior management to treat responsible business conduct as a corporate priority. Rather than reacting to outside pressures, a companys voluntary adoption of its own business principles should be motivated by the desire to express the values that guide its approach to doing business. 2. State company purpose and agree on company values Responsible business conduct is built upon the values and goals of the company itself, aswellas onlegalrequirements and stakeholderexpectations. Business principles commonly include a statement of mission, values and operating principles. All companies should consider articulating their core values as an underpinning for their own principles.

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3. Identify key stakeholders Business principles set out what companies see as their responsibilities to employees, shareholders, customers, business partners and other groups in society. Finding out from stakeholders what issues are important to them is therefore essential. Stakeholders ^ defined as those constituencies that have a direct stake in a company ^ typically can include shareholders and investors, company employees, trade unions, client companies and consumers, and local communities directly affected by a companys operations. A company may also wish to broaden its consultations to include other participants in the production chain, as well as government authorities, the media and non-governmental organisations. Companies should be mindful of the differences that may exist within stakeholder groups, such as local communities, who are becoming increasingly emphatic about their concerns and with whom it may be useful to establish a dialogue. 4. Define business principles and policies Each company needs to think through its principles for itself (rather than just take an existing code off the shelf). Some companies choose to do this through open dialogue and collaboration with selected stakeholders. Some companiesbusiness principles are high-level statements of principle; some contain more detailed statements of policy, while others prepare separate materials on policies, management systems, implementation and monitoring procedures. The underlying reasons why business principlesmake good economic sense should be borne in mindin defining the principles. Companies should consider legislation, social expectations, reputation indicators, risk management, bottom-line benefits, corporate and product image and strategic advantage. 5. Establish implementation procedures and management systems Companies must raise awareness among their own personnel and other stakeholders if business principles are to be effective and command wide support. Processes or formal management systems for developing, adopting and implementing individual principles should therefore include internal consultation and communication. Companies offer many examples of management systems covering areas ranging from health, safety and the environment to business integrity, human resources and sustainable development. There are also international standards for these systems, such as those of the International Organization for Standardization (ISO). In some sectors, management processes and guidelines also apply both to joint ventures and to contractors and suppliers. The range of issues covered varies between sectors but continues to develop to include, for example, diversity of the work force, climate change, biodiversity, waste management andrecycling.In order toimplement itsbusi-

How its done ^ a new old-school business model 97

ness principles effectively, a company should define objectives and targets and a structured programme to achieve them. 6. Benchmark against selected external codes and standards Government-mandated or other external codes are unlikely to be a viable alternative to voluntary business principles developed by the company itself, although these may have significant value as external benchmarks. Some companies choose to express public support for one or more of these external codes. It is for an individual company or industry sector to decide what the most useful benchmark codes are and to develop their own understanding of how business principles relate to external codes and guidelines, and to societal expectations. Support for external codes can be time-consuming, since they may imply additional commitments. Companies should be selective, bearing in mind their own needs. ICC can provide guidance on the implications of supporting some of the existing international code offerings. 7. Set up internal monitoring Corporate policies and their implementation need to be kept under constant review to keep abreast of developments in technology and scientific understanding, customer needs and wider societal expectations. It is for the company to assess its social performance through internal consultation and periodic review by management. Equally, it is the companys responsibility to check that its business principles are being acted upon. The extent and manner of external reporting of performance is, of course, for the company to decide.Given the wide differences between industries and individual companies, the contents of such reports are bound to vary. Several international initiatives are being undertaken to develop a common yardstick for voluntary reporting of the economic, environmental and social impact of company activity. An example is the work being done by the Global Reporting Initiative, which is supported by the UN and other international organisations, to agree on a set of common core indicators. They would enable investors and other stakeholders to make global comparisons. Companies should retain the flexibility to adapt such voluntary indicators to their particular circumstances. A key way for companies to create confidence and trust in their commitment to responsible business conduct is to provide timely and reliable information on their financial, environmental and social performance and to communicate this to their stakeholders. Markets all over the world provide examples of companies who enjoy sustained public goodwill and respect by doing this successfully.

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8. Use language that everyone can understand Principles, policies and guidelines must be clearly expressed, particularly if the material is to be translated. The same is true of any external reports. 9. Set pragmatic and realistic objectives These recommendations require the commitment of executives running the business and the development of expertise and internal processes. Above all, responsible business conduct requires a sustained effort by everybody in the company. A key element of a companys organisational development is promoting the importance of responsible business conduct and ensuring that new managers are well versed in this area.

7.4 ISO Guidance on social responsibility

The International Organization for Standardization (ISO) has, for many years, developed standards for quality and environmental management which should preferably be applied during the process of adaptation to sustainable development. At the time this book is being written, the next applicable ISO standard is being developed and will have been published, DRAFT INTERNATIONAL STANDARD ISO/DIS 26000, Guidance on social responsibility. When published in its final form, this guidance standard (which is not intended to be a certification standard) will, provide selfhelp assistance to all sorts of organisations in the implementation of social responsibility into their business operations. The draft standard provides guidance to all types of organisations on:
^ ^ ^ ^ ^ Concepts, terms and definitions related to social responsibility, The background, trends and characteristics of social responsibility, Principles and practices relating to social responsibility, The core subject and issues of social responsibility, Integrating, implementing and promoting socially responsible behaviour throughout the organisation and through its policies and practices related to its sphere of influence, Identifying and engaging with stakeholders, and Communicating commitments and performance and other information related to social responsibility.

^ ^

The standard draft specifies seven principles of social responsibility:

1. Accountability An organisation should be accountable for its impacts on society and the environment. This principle suggests that an organisation should accept appropriate scrutiny and also accept a duty to respond to this scrutiny.

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2. Transparency An organisation should be transparent in its decisions and activities that impact on society and the environment. An organisation should disclose in a clear, accurate and complete manner and to a reasonable and sufficient degree, the policies, decisions and activities for which it is responsible, including their known and likely impacts on society and the environment. This information should be readily available, directly accessible andunderstandable to those whohave been, or may beaffectedin significant ways by the organisation. It should be timely and factual and be presented in a clear and objective manner so as to enable stakeholders to accurately assess the impact that the organisations decisions and activities have on their respective interests. 3. Ethical behaviour An organisation should behave ethically. An organisations behaviour should be based on the values of honesty, equity and integrity. These values imply a concern for people, animals and the environment and a commitment to address the impact of its activities and decisions on stakeholders interests. 4. Respect for stakeholder interests An organisation should respect, consider and respond to the interests of its stakeholders. Although an organisations objectives may be limited to the interests of its owners, members, customers or constituents, other individuals or groups may also have rights, claims or specific interests that should be taken into account. Collectively, these individuals or groups comprise the organisations stakeholders. 5. Respect for the rule of law An organisation should accept that respect for the rule of law is mandatory. 6. Respect for international norms of behaviour An organisation should respect international norms of behaviour, while adhering to the principle of respect for the rule of law. 7. Respect for human rights An organisation should respect human rights and recognize both their importance and their universality.

In order to formulate a reasonable definition of social responsibility, to identify relevant issues and to establish the right priorities, the draft of the guidance standards highlights seven core areas on which to focus efforts:
1. 2. organisational governance human rights

100 How its done ^ a new old-school business model

3. 4. 5. 6. 7. labour practices the environment fair operating practices consumer issues, and community involvement and development

The Appendix to the draft contains an extensive collection of examples, Examples of Cross-Sectoral Initiatives, listing organisations around the world that are involved, in various ways, with issues related to social responsibility and sustainable development. The latest draft of the International Standards Organization ISO 26000 Guidance on Social Responsibility, was approved by the ISO Working Group on Social Responsibility on 21 May 2010 at its final meeting in Copenhagen.This draft willbe edited and produced asthe Final Draft International Standard (FDIS) and will be distributed for a two month ratification process among ISOs national standards bodies. If the FDIS is ratified, it will be published as an International Standard (ISO 26000) in December 2010. The standard will comprise a guidance document and does not seek to standardize the issue of social responsibility; it will not contain any requirements and, thus, cannot be applied as a basis forany form of certification. The process applied to develop the draft was based on a type of multistakeholder approach, involving individuals from six broad stakeholder categories: government, industry, labour, consumer groups, NGOs and other groups (academia, etc.).

7.5 IFAC Sustainability Framework

In 2009, the International Federation of Accountants, IFAC, published a framework to assist in and support the adaptation to sustainable business development. This comprehensive framework is a web-based tool which can be downloaded free of charge from IFACs website. The IFAC applies a holistic approach to sustainability with an in-depth analysis of four perspectives: ^ Business Strategy, ^ Internal Management, ^ Financial Investors, and ^ Other Stakeholders.

How its done ^ a new old-school business model 101

The focus is on the importance of leadership, ranging from adopting and implementing strategic decisions to presenting the results to stakeholders. Presented below is a summary of the frameworks four perspectives or areas of focus. Business strategy perspective ^ Taking a strategic approach
The Framework emphasizes the importance of adopting a strategic approach, so that sustainable development is a part of strategic discussions, objectives, goals, and targets, and is integrated with governance and accountability arrangements and risk management. Ensuring that sustainable development is featured at a strategic level, supported by leadership and envisioning, is the only way to ensure itsintegration into all parts of the operational plan-do-check-act management cycle.Only by taking a business strategy approach can organisations make sustainable development a part of doing business, as opposed to an add-on luxury that encourages rhetoric rather than sustainable business models and practices.

Internal management perspective ^ Making it happen

The internal management part of the Framework focuses on all those areas covering performance and change management that help an organisation to deliver on its strategy and specific sustainable development objectives and targets. In many organisations, (a) enhancing performance evaluation and measurement, (b) changing behaviors, and (c) introducing sustainability and environmental accounting as an extension of existing accounting/information systems to accommodate organisational plans for sustainable development, can be a challenge for organisations, and can take time to achieve.Therefore, this perspective also includes advice on how organisations can achieve relatively simple quick wins to improve energy efficiency and reduce waste, that can help them improve environmental performance while reducing their costs, all in a relatively short time frame.

Financial investors perspective ^ Telling the story to investors

Organizations that are well developed in the internal management perspective are usually in the best position to deliver high-quality information about their sustainability and corporate responsibility performance to investors.The Framework offers advice on bothincorporating environmental and other sustainability issues into financial statementsin away that supports an organisations stewardship role and enhanced reporting to investors in financial reporting, including narrative reporting using management commentary.

Other stakeholders perspective ^ Wider transparency

The final perspective considers an evolving part of sustainable development that builds on the development of stakeholder relationships (covered in the business strategy perspective) to improve transparency and non-financial reporting

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against a broader set of expectations.Such reporting commonly takesthe form of separate sustainability or corporate social responsibility reports that may be based on de facto standards, such as those from the Global Reporting Initiative. This perspective also includes sustainability assurance, to help to improve credibility and trust.

7.6 The leadership decides!

Values always influence the politics of business and decision-making. A value-driven company develops its business based on a clear set of values. Value basis is what the company stands for and the qualities by which it seeks to distinguish itself.Determining the value basis and, therefore, helping all employees in the business to make the right, balanced decisions, is, and will continue to be, an issue which is critical to business operations and the establishment of overall, lasting values. For companies that are growing in markets in the developing world, it is of course particularly important to ensure that the codes of conduct are complied with and that they dont only exist as a pdf file on the company website. Professional Accountants in Business Committee, a committee within the International Federation of Accountants IFAC20 published, in 2007, the International Good Practice Guidance ^ Defining and Developing an Effective Code of Conduct for Organizations. The principles of the design and development of codes of conduct are further detailed in these guidelines. The Key Principles in Defining and Developing a Code of Conduct
A. The organisations overarching objective should be to develop a valuesbased organisation and a values-driven code, to promote a culture that encourages employees to internalize the principle of integrity and practice it, and encourages employees to do the right thing by allowing them to make appropriate decisions. B. A code of conduct reflects organisational context. The nature, title and content of an effective code willvary between organisations, as will the approach to its development. C. Commitment from Board of Directors: Ultimately, ethical responsibility lies with the Board of Directors (or its equivalent), the body that has power to influence an organisations culture and behavior. Boards should specifically oversee the development of the code of conduct (and a wider initiative to achieve a values-based organisation), and formally appoint a senior manager to supervise that development.
20

International Federation of Accountants.

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D. A multi-disciplinary and cross-functional group including international personnel should lead code development where organisational size permits. Groups of employees and other key stakeholders can help to identify risks to corporate culture and business conduct and consider potential vulnerabilities arising from these risks and can usefully assist in defining and reviewing code content. E. Clearly identifying the established process for defining, developing and reviewing a code will promote understanding of, and agreement on, the key stages and activities. F. A code of conduct should apply across all jurisdictions in which an organisation operates, unless contrary to local laws and regulations. G. Continuous awareness and promotion of the code and the wider approach to ethics and compliance is an important part of conveying managements commitment to their underlying principles. A continuous awareness program should sustaininterest in and commitment to the code.Employees and others should be made aware of the consequences of not adhering to the code.

7.7 Policies forgoverning towards sustainable business development

Leadership and vision are the keys to sustainable business development. Policies are established to describe how words are to be turned into action, from strategy to active business operations. Environmental policies might, for example, describe a firms relation to environmental laws and regulations, the significance of environmental priorities/performance for future business development, the companys environmental footprint, and might include possible initiatives for improvement, for example, through investments in renewable energy, modification of product designs or improved production processes. In the present climate, it is a precondition that companies establish and adopt environmental policies, or broader sustainability policies, if such efforts are to be taken seriously.Policies convey the companys ambitions and intentions and send a clear message to employees and other stakeholders. The credibility of such policies is strengthened by references to international codes, standards and regulations, against which the companys performance can be evaluated. Multinational companies should also consider applying the expectations of the most stringent market in which the company is active as a benchmark for all of their markets. Policies can, thereby, act as governance instruments against which company performance can genuinely be monitored.

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7.8 The stakeholder perspective

Legitimacy is a companys most important asset. Legitimacy is created through relationships that are established with the most important stakeholders. The complex environment in which a company exists requires, therefore, that stakeholders be heard, included and actively involved. The stakeholder perspective concerns, in essence, gathering as much information as possible so that decisions are aligned with the priorities of stakeholders. Progressive corporate management teams seek means to find solutions to various issues in collaboration with stakeholders. This dialogue with stakeholders is an important method for the company to understand and define the scope of its responsibility for and potential contribution towards sustainable development. Planned, systematic and well-documented dialogue with stakeholders informs a company of how its activities and products/services affect, and are affected by, current changes. Companies have, for obvious reasons, always communicated with their most important stakeholders, as well as owners, employees, customers and the local community. Examples include investor and analyst meetings, customer satisfaction polls, and formal meetings with institutions, forexample, concerning permits, etc.It is obviously important to continue to foster these types of stakeholder relationships; however, this is not what is meant by stakeholder dialogue for sustainable development. In this context, stakeholder dialogue is about finding long-term solutions for managing complex strategic issues concerning sustainable development. Stakeholder dialogue should provide direction for the long-term business development of the company. Suitable guidance regarding why and how firms can work with stakeholder dialogue is provided in From Words to Action ^ The Stakeholder Engagement Manual21 1995. What do we mean by stakeholders? From words to action... provides the following explanation:
Stakeholders can be thought of as any group or individual who can affect, or who can be affected by, a corporation or its activities. We can also think of stakeholders as groups or individuals who define value propositions for the company and who therefore must be attended to as part of a sound commercial approach to building loyalty with customers, employees and investors.

21

Stakeholder Research Associates Canada Inc. with support from the United Nations Environmental Programme (UNEP) and the non-profit organization, AccountAbility.

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Stakeholders are sometimes divided into primary stakeholders, or those who have a direct stake in the organisation and its success, and secondary stakeholders, or those who may be very influential, especially in questions of reputation, but whose stake is more representational than direct. Secondary stakeholders can also be surrogate representatives for interests that cannot represent themselves, i.e., the natural environment or future generations.

7.8.1 Why?
A systematic stakeholder analysis and dialogue: ^ broadens the companys risk analysis and lowers risk exposure, ^ may lead to the discovery of new business and market opportunities, ^ contributes to increased transparency and legitimacy.

7.8.2 Stakeholder analysis ^ the first step!

An important first step is to understand how stakeholder analysis and dialogue can contribute to the accomplishment of business goals. Once the value of stakeholder analysis has been understood, stakeholders are mapped in order to determine actual groups constituting stakeholders, the stakeholders who are the most important (a net list) to the operations, and the respective priorities of each stakeholder. An understanding of the stakeholder environment (the most important stakeholders, and their respective concerns) can, then, be integrated into decision-making and broader strategic considerations, including decisions regarding the performance indicators which the company should aim for, report on and be ultimately held accountable for.

7.8.3 How?
The factors critical to a successful stakeholderapproach are summarized in From Words to Action ^ The Stakeholder Engagement Manual: preparation, participation and maintaining progress. Preparation
^ ^ ^ Ensure that stakeholder engagement is the appropriate mechanism for the issue at hand Get the right stakeholders to the table and keep them there through ongoing monitoring and evaluation of the engagement process Assign adequate time and resources, taking into account the need to inform and educate some stakeholders, both internal and external, on complex issues

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^ Agree on the rules of engagement, including each partys role, to ensure a process where all parties share the risks and benefits

Participation
^ ^ ^ ^ ^ Be focussed, yet flexible, with clearly articulated expectations Listen and be respectful, investing the necessary time in learning each othersmindsets and vocabulary Accept that it is not necessary to agree on everything and that some perceptions will neither align with yours nor ever be changed Operate in a transparent and accountable manner Be realistic, considering both the risks and opportunities of stakeholder engagement over the long term

Maintaining progress
^ ^ Operationalise decisions Follow-up using targets and by measuring and reporting progress

7.8.4 Connections to sustainability reporting

According to GRIs guidelines for sustainability reporting, Stakeholder Inclusiveness constitutes a significant accounting principal. Stakeholder Inclusiveness is defined as follows: The reporting organisation should identify its stakeholders and explain in the report how it has responded to their reasonable expectations and interests. The tests recommended by GRI as guidelines for the reporting principle stakeholder inclusiveness are as follows: ^ The organisation can describe the stakeholders to whom it considers itself accountable. ^ The report content draws upon the outcomes of stakeholderengagement processes applied by the organisation in its ongoing activities, and as required by the legal and institutional framework in which it operates. The report content draws upon the outcomes of any stakeholder engagement processes undertaken specifically for the report. The stakeholder engagement processes that inform decisions about the report are consistent with the scope and boundaries ofthe report.

^ ^

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7.9 Defining goals

Cleargoals demonstrate commitment to sustainable development and, in striving to achieve such goals, sustainable business development is incorporated into the planning process. It is important to establish both wider and more detailed goals. Naturally, objectives should be measurable and should be assigned a specific timeframe.They can be qualitative orquantitative, and need not be monetary. It is important that ESG goals are incorporated into planning, reporting, and appraisalprocesses, and that the chosen target indicators are on the basis of a base year. The example below illustrates the goals which DuPont has chosen to set, and which have subsequently been published. Reducing DuPonts Footprint 2015 Goals
Greenhouse Gas Emissions: Since 1990, DuPont has reduced our global greenhouse gas emissions measured as CO2 equivalents by 72%. By 2015, we will further reduce our greenhouse gas emissions at least 15% from a base year of 2004. Water Conservation: DuPont commits to reducing water consumption by at least 30% over the next ten years at our global sites that are located where the renewable freshwater supply is either scarce or stressed as determined by the United Nations analysis of river basins globally. For all other sites, DuPont will hold water consumption flat on an absolute basis through the year 2015, offsetting any increased demand from production volume growth through conservation, reuse and recycle practices. Fleet Fuel Efficiency: Effective immediately, DuPont will introduce fleet vehicles that represent the leading technologies for fuel efficiency and fossil fuel alternatives. By 2015, we will ensure that 100% of our off-site fleet of cars and light trucks meet these criteria. We will continue to ensure these vehicles are safe as well as fuel efficient, and we will track and report on our fuel efficiency improvements. Air Carcinogens: Since 1990, DuPont has reduced our global air carcinogen emissions by 92%, well beyond legal requirements. By 2015, we will further reduce our air carcinogen emissions at least 50% from a base year of 2004. This will bring our total reductions since 1990 to 96%.

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Independent Verification: By 2015, DuPont will ensure that 100% of our global manufacturing sites have successfully completed an independent third-party verification of the effectiveness of their environmental management goals and systems. We will make this information publicly available and communicate it to our local communities.

2010 Goals
Energy Use: We will hold total energy use flat using 1990 as a base year. Renewable Energy: We will source 10% of our energy use from renewable sources at a cost competitive with the best available fossil fuels.

7.10 Business advantages in the long run

Berkshire Hathaway, the conglomerate owned by investment tycoon and billionaireWarren Buffett, raised profits by 14%, to USD 3.3 billion, during the second quarter of 2009, at the peak of the financial crisis. This increase was entirely due to successful investments on the stock and options markets. Through long-term investments bordering on the legendary,Warren Buffett has managed to build up one of the worldslargest fortunes. When investment banks began creating mortgage-backed securities on a large scale, Buffett was critical, calling them financial weapons of mass destruction. In a letter written together with the Aspen Institute in September 200922 Buffett, along with 27 other US executives, criticised companies for pursuing short-sighted goals.
We believe a healthy society requires healthy and responsible companies that effectively pursue long-term goals. Yet in recent years, boards, managers, shareholders with varying agendas, and regulators, all, to one degree or another, have allowed short-term considerations to overwhelm the desirable long-term growth and sustainable profit objectives of the corporation. We believe that short-term objectives have eroded faith in corporations continuing to be the foundation of the American free enterprise system, which has been, in turn, the foundation of our economy. Restoring that faith critically requires restoring a long-term focus for boards, managers, and most particularly, shareholders ^if not voluntarily, then by appropriate regulation...

Buffetts position is that companies often suffer from short-termism, emphasizing quarterly results over the tougher actions needed for stable long-term development. He believes that the private sector must regulate itself before institutional regulators are forced to intervene.
22

The report: Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management.

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With regard to the fundamental transformation which societies around the world are experiencing today, it is not difficult to find business cases facing the need to adapt to sustainable development. One example is the automobile industry, which hashad several yearsto adjust to evolving fuel and emission requirements.The need to adapt should have been clear for all auto manufacturers, in the same way it was forToyota.
Toyota strives to continuously improve its environmental record while seeking growth as a profit-making business.These two imperatives are not in conflict. In fact,Toyota sees environmental sustainabilityas a prerequisite for long term business sustainability. To ensure that our vehicles continue to contribute to economic growth, Toyota has positioned the environment as a priority management issue. (Excerpt taken fromToyota North America Environmental Report, 2004)

WhileToyota invested in hybrid technology, Ford and General Motors continued to develop fuel-hungry SUVs, and when EU politicians began discussing caps on carbon emissions per kilometre for new cars, attempts were made by these companies to influence the outcome through lobbying, instead of accepting the necessity of such regulations and adapting to them. The auto industry, generally speaking, has made considerable progress with regard to the efficiency of production processes. Still, how could the necessity for product developments in terms of fuel efficiency have been overlooked to such an extent? When this book was first published in Sweden in December 2009, it was no longer possible to trade GM Corporation shares on any stock market. The dramatic example of the automobile industry, in the context of sustainable development, will surely be replicated in other industries with equally dramatic consequences. All societies, sectors, and industries need to adapt to new sustainability requirements ^ its that simple. Due to the fact that Boards and management teams are, and should be, business-minded, it is crucial that strategies for sustainability be established in a business case for sustainable development. There are many examples, Paul Monaghan, Sustainable Development Manager at Cooperative Bank, says:
We have calculated ethical and ecological benefits of sustainability reporting to be in excess of 40 million profit contribution to products and services. Producing a sustainability report has enabled us to manage a whole host of ethically and environmentally motivated risks much more robustly.

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In 2003, Baxter International reported savings of USD 69 million, compared to USD 22 million in environmental costs. In a 2003 sustainability report, BritishTelecom concluded that:
...our environmental program, which includes energy efficiency and fuel savings, has saved BT more than 600 million over ten years.

BTalso contended that its emphasis on social and environmental issues had won contracts worth GBP 900 million during the 2004 financial year.

7.11 Expand totalrisk analysis andlayit onthe managements table!

The systematic analysis of opportunities and threats, taking into account ESG issues, clearly offers competitive advantages, and the mapping of such threats and opportunities facilitates decision-making. Once these opportunities and treats have been identified, emphasis can be focused on the most significant risks and business opportunities. Such analysis requires a comprehensive approach and coordination between different functions within the company. The stakeholder perspective must be included through the documentation of stakeholder dialogue. A framework for dealing with risk management and internal controls facilitates and creates knowledge of the internal process. An internationally recognized and often applied framework for dealing with such issues is Enterprise Risk Management ^ Integrated Framework23 published in 2004.This framework is based on COSOs framework Internal Controls ^ Integrated Framework, where emphasis is also given to internal control of prioritised risks. There are several definitions of risk management, the most recognized being the definition provided in the COSO framework:
Enterprise Risk Management is a process, effected by an entitys Board of Directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.

Risk is defined asthe chance of an event occurringwhich might negatively affect a companys ability to reach its goals.This definition encompasses all types of risk, for example, strategic, financial and operative, as well as
23

The Commitee of Sponsoring Organizations of theTreadway Commission (COSO).

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risks related to the adherence of relevant laws and regulations. Sustainability risks (ESG risks) should, therefore, be included in a comprehensive view of risk. The outcome of a risk and opportunity assessment can be illustrated in a risk and opportunity map, reflecting the companys current risk exposure, and future opportunities. This risk and opportunity map should provide a clear overview and should be updated regularly. It is essential that the management of risks and opportunities is dynamic and continually improved. Risk management and internal controls should be updated regularly as a companys circumstances change (for example, as a result of new markets, products or suppliers). A companys risk exposure is constantly changing, and both global and local risk scenarios should be identified and monitored (for example, as regards political decisions, pandemics, macroeconomic shocks etc.). The Board of Directors and the Audit Committee must ensure that sustainability risks are included in a comprehensive analysis of the company. They must set the framework and specify the types of reporting they require, given that Board members seek to improve their understanding of risk management and the internal controls within the company. The Board and Audit Committee should also ask themselveswhether the controls established to deal with risk are sufficient, before monitoring and evaluating them. Examples of methods for monitoring and evaluating controls established to oversee sustainability risks are: ^ Control Self-Assessment (CSA) ^ CSA should be as objective as possible, which can be ensured by allowing it to be reviewed by an independent auditor. ^ Business performance reviews ^ continuous monitoring of operational activities, including the review of relevant Key Performance Indicators (KPI) for ESG ^ risk management and internal control should, therefore, have a permanent place on the Boards agenda. Controlling ^ effective systems and methods for the monitoring and control of a companys activities and sustainability work, measured against predefined objectives. External audits and appraisals, as well as external reviews, to ensure that reported failures are corrected.

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External tests ^ a testing program should be developed where an individual other than the controller tests to determine if the controlling process has been correctly performed. ^ Committee reports to the Board ^ for example, the audit committees work on the quality control of sustainability reports. ^ Internal audits ^ in the case of inspection, the terms for fulfilling the demands of these controls can be made to include adherence to pre-established internal controls. Examples of the hierarchy of governance documents: ^ Policies ^ describe why; the principle ambition and intent of the Board. ^ Guidelines ^ describe what must be done for the principle objectives to be fulfilled. ^ Manuals/process descriptions ^ describe the way in which the content of policies is to be implemented. ^ Routine descriptions/instructions ^ describe how and by whom the measures are to be implemented. It is of key importance that the governance documents be communicated within the organisation in a clear manner, so that everyone involved understands the guidelines and how the objectives are to be reached. In addition, feedback systems must ensure that ambitions and objectives are, in fact, being pursued. In companies without internal auditing, the Board should annually evaluate the need for such a function and, in theirdescription ofthe fundamental processes within the company dealing with risk and internal control, give reasons for their position. In this manner, the Board evaluates the need for the specific auditing of internal controls. It is also crucial that ESG issues be raised in this evaluation. The company might be exposed to risks specifically associated with sustainability, implying that, although internal controls are otherwise sufficient, it may not be able to meet the expense of the consequences arising from any potential failures. Such risks, which are severely difficult to manage, can be found, for example, in the supply chain. According to the Swedish Code of Corporate Governance and the Swedish Annual Accounts Act, companies must prepare a Corporate Governance Report. In addition to this, the Swedish Annual Accounts Act requires that companies describe principle risks and points of uncer-

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tainty. These regulations stipulate what must be included in a Corporate Governance Report. One of the requirements is that the Board must describe, in a separate clause, the companys risk management and internal controls with respect to financial reporting.It is inadequate to limit the Corporate Governance Report to a statement describing the manner in which the quality of financial statements is ensured, although the Code doesnot, per se, extend to sustainable development.The mannerinwhich the company handles ESG issues and ensures that sustainability reporting is reliable should, however, be included in the corporate governance report.The Board comprehensively identifies the fundamental processes for risk management and internal controls, based on the companys governance model. As of 1 June 2010, over 450 companies listed on the Johannesburg Stock Exchange will be required to produce an integrated report, instead of their annual financial and sustainability reports.The King Code of Governance (King III) recommends that organisations produce an integrated report. As King III now falls within the listing requirements of the Johannesburg Stock Exchange, listed companies will have to produce an integrated report or explain why they have not done so.

7.12 Cooperation with suppliers for sustainable development

Globalisation has contributed to a change in corporate structures. Due to market and cost considerations, production takes place, to an increasing degree, in countries with poor working conditions and insufficiently implemented regulatory frameworks. The media, consumer organisations, CSOs and NGOs are becoming increasingly rigorous in their assessments of working conditions and the environmental impact of production processes in these countries and of the numerous factors which can constitute risks. It is important to identify these risks and to handle them accordingly. In its brochure for companies and organisations,24 the ICC Commission on Corporate Responsibility and Anti-Corruption defines responsible sourcing as:
Responsible sourcing, also referred to as supply chain responsibility, is a voluntary commitment by companies to take into account social and environmental considerations when managing their relationships with suppliers.
24

ICC guide to responsible sourcing - Integrating social and environmental considerations into the supply chain.

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A chain is no stronger than its weakest link!

In addition, the publication provides guidelines and a checklist for supplier cooperation:
The following guidance presents basic steps that companies can take to influence and monitor socialand environmentalperformance in theirglobal supply chains. Because not all suppliers pose risks, and many have good business practices already in place, a company should focus on high-risk areas, concentrating efforts where they are needed most and when they are most likely to bring about the desired change. 1. Selecting a supplier ^ A careful selection of suppliers is one of the best ways to ensure continuity and long-term efficiency of the global supply chain as well as enduring brand support [...]. 2. Set clear expectations on compliance with the law ^ When contracting with a supplier, companies should make it known that they expect their business partners to comply with all national laws and regulations, including labour and environmental laws, and as appropriate, to take into account principles from relevant international instruments, which may sometimes go beyond local legislation[...]. 3. Integrate responsible sourcing into buying practices ^ By integrating responsible sourcing into its own buying practices, a company should avoid undermining the capacity of suppliers to respect social and environmental standards. Inefficient practices, such as rush orders, last-

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minute changes or placing orders that surpass suppliers capabilities, which often lead to excessive overtime work and other compliance violations, should be avoided[...]. Support suppliers in setting their own business standards ^ A company should encourage suppliers to develop their own responsible practices rather than imposing requirements on them.In doing so, it is essential to stress the commercial benefits of responsible business practices on quality, productivity, contract renewals, and lowering employee turnover[...]. Track supplier compliance ^ Companies can ask their suppliers to provide comprehensive information about their social and environmental practices. On-site visits can also be organized to monitor suppliersprogress, or lack of progress, in meeting social and environmental performance objectives. Evaluating this information may become part of a companys regular assessments of business requirements, such as quality control[...]. Manage stakeholder expectations and reporting ^ To build customer trust, companies can collect information on supplier performance across markets, and publish it in an annual report or other publicly-available format. Reporting efforts should be used to measure performance and flag areas for improvement [...].

4.

5.

6.

The following checklist summarises some of the important steps that companies can take when entering supply chain relationships: ^ Check basic facts about the social and environmental legislation in the countries of production of prospective suppliers. Find out about the level of enforcement in these countries to assess production risks. ^ Check whether prospective suppliers qualify for independent certification of conformity with recognized social and environmental standards. ^ Clearly define your expectations to your suppliers. Make clear that compliance with all applicable laws is a minimum. ^ Explore potential risk areas with suppliers and agree on the desired level of performance.If necessary, use a supplier code of conduct as a benchmark for compliance and incorporate supplier requirements into commercial contracts. ^ Raise awareness among your purchasing officers of the impact that their purchasing practices might have on production at factory level. ^ Carry out assessments of suppliers facilities and practices, including through independent monitoring where appropriate, or by organizing onsite visits and worker interviews. ^ Find out about sectoral initiatives which can help conduct assessments and provide information and training to suppliers on responsible business practices.

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In its guide, the ICC also provides examples of trailblazing initiatives established to meet the needs of specific sectors or issues:
^ ^ ^ ^ ^ ^ ^ The Business Social Compliance Initiative (consumer goods) The ICTI-CARE process (toy industry) The Electronic Industry Code of Conduct The Fair Labour Association The Ethical Trading Initiative Worldwide Responsible Apparel Production SA8000 (workplace conditions)

The risks regarding sustainability in the supply chain can be analysed in three steps25: 1. By consolidating a country and sector analysis with a focus on CSRrelated issues for example, human rights, labour and environmental policies, critical risks are identified. 2. Subsequently, these risk areas are evaluated according to the probability of their occurrence and their impact on corporate objectives. Existing controls and processes established to deal with identified risks are mapped and evaluated. The result is a map of risks where those which have a high probability of occurrence, might affect the company severely or are insufficiently managed by existing controls can be singled out and prioritized. 3. A contingency action plan is established, in the case of the above prioritized risks occurring. The plan of action sets the foundation for continued work with CSR-related risks in the purchasing process, for example, defining appraisal processes for monitoring and adherence. A risk-based approach also provides guidance for appropriate CSR reporting.

7.12.1 How far does responsibility reach?

Working with suppliers on issues related to sustainability is an absolute must in many industries, forexample, within the clothing, shoe manufacturing, electronics and foodstuffs sectors. But how far does a companys voluntarily-assumed responsibility reach? Cooperation is, as mentioned, necessary with the first level of suppliers in the industries in question, but how should a company relate to liability issues associated with extended suppliers and those even further afield? The complexity of supplier networksisprofound and, inmany cases, difficult, ifnot impossible, to oversee.
25

PwC working model.

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One way of handling the responsibility issues associated with the supply chain is to encourage subcontractors to develop adequate relationships with their closest suppliers.It is important to emphasise the benefits (commercial and otherwise) arising from closer cooperation, such as improvements in productivity and quality and the increased probability of renewed contracts. If the purchaserscodes of conduct can be integrated into the supply chain so that subcontractors understand the benefits of working in this manner, there can be significant gain. Large purchasers have the greatest influence on the supply chain and dictate, to a large extent, what is required and how and when the goods/materials are needed.Consequently, working with responsibility-related issuesis a precarious situationinwhich the failure ofone suppliercanlead to the collapse of the entire chain. In this serious business, no one escapes the consequences of malpractice. Furthermore, in industries in which health, safety and security risks are identified further down the supply chain, it is especially important for companies to consider the supplier chain in its entirety.

7.13 Partnerships ^ a means of developing business

Recently there have been several examples of companies that have begun to work in partnership with UN bodies and NGOs. Before partnerships with non-profit, aid and fundraising organisations had consisted predominantly of fundraising activities. Today, however, management teams are becoming increasingly aware of the fact that the most effective and profitable partnerships are founded on active engagement and knowledge sharing. Whenit comesto a companyswork with climate issues, the provision of clean water and other such initiatives, it is important to determine the scale of the project in a manner ensuring that the efforts are worthy of the investment. In this task, an increasing number of companies are finding partners in UN bodies or other NGOs, providing legitimacy, knowledge and experience to support their projects. The synergy potential in such partnerships can be significant and the UNs Global Compact has identified three types of partnerships: ^ Core Business ^ Advocacy ^ Strategic Social Investment/Philanthropy

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An example of Core Business Partnership is the establishment of a company as a means by which to contribute to the fulfilment of the UNs millennium goals through its business activities. Volkswagen, for example, initiated a partnership with ILO to improve working conditions in the supply chain. Advocacy partnerships refer to coordinated efforts between companies and UN organisations aiming to tackle particularly difficult issues, such as the prevention of the spread of HIV/AIDS in Africa, a cause which was taken up by Shell International Limited in cooperation withThe Joint United Nations Program on HIV/AIDS (UNAIDS). An example of a Strategic Social Investment/Philanthropy partnership is found in the efforts of Deutsch Post, the German postal service, whose transportation company, TNT, invested EUR 25 million in the sharing of knowledge and skills, and in specific programmes with the World Food Programme to make deliveries and logistics more effective. TNTemployees have contributed an additional EUR 7 million to WFP School Feeding Projects, as a result of TNTs participation in several fundraising activities. Signing the Global Compact implies a commitment to future partnerships with UN bodies and other organisations supporting the UN agenda. The journal Joining Forces for Change: Demonstrating Innovation and Impact through UN-business partnerships26 describes several good examples of past partnerships.The example below describes how IKEA, in cooperation with the United Nations Childrens FUND (UNICEF), tackled the problem of child labour in India:
The Challenge There are more than 200 million children engaged in child labour today. Combating child labour is particularly difficult because it cannot be eliminated by simply removing a child from work at one factory, or terminating a suppliers contract, since the child would simply move on to a different employer and the supplier would move on to different customers. The complexity of this problem makes it difficult for companies to address alone. In the past 20 years, many multinational corporations including IKEA developed and diversified their supply sources in Asia and other developing countries. In the early 90s, increased attention was given to the risk of child labour in the supply chains of multinational corporations.With IKEAspurchasing in developing countries growing, and a strong commitment since the mid1990s to understanding and preventing child labour, IKEA has sought ways to partner with others to be part of the solution.

26

Issued by the UN Global Compact Office.

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ActionsTaken In 2000,IKEA joined forces with UNICEF in India to help prevent and eliminate child labour inthe carpet belt in the state of Uttar Pradesh, the countrys largest, most populous state, where a high level of child labour is known to exist. IKEA sources many of its carpets from Uttar Pradesh suppliers, and decided to enter into a partnership with UNICEF because of its focus on prevention rather than the conventional focus on rehabilitation. Both parties are convinced that child labour is best tackled by addressing root causes, such asindebtednessin marginalized communities, adult unemployment, poverty, disability and ill health, and childrens lack of access to quality primary education. The concrete project is focused on creating awareness and mobilizing these rural communities around strategies designed to prevent child labour. School enrolment drives have been conducted to enrol children into primary school, as well as the establishment of alternative learning centres (ALCs) as a transitional measure to formal mainstream primary schooling. Quality educational opportunities are essential to prevent child labour. The IKEA initiative complements the governments efforts to enrol all six to twelve year olds in the project area into primary school. The burden of debt, often accrued over generations, is a root cause for families feeling compelled to put their children to work. As of late 2006, IKEA had helped to establish 1,600 womens self-help groups in Uttar Pradesh, reaching almost 22,000 women. Through these groups, women learn about childrens rights, health and nutrition, saving money, and starting up a small business in order to get rid of debts and contribute income to their families. IKEA launched a further step with the self-help groups in 2005. As a strategy for economic empowerment, women from the groups earn income for embroidering cushions that are sold in IKEA stores. Benefits to SocietyThe child rights project in Uttar Pradesh has now grown to covera population of more than a million, of whom nearly 35 per cent are children under the age of 14, living in 500 villages across eastern Uttar Pradesh with intensive carpet fabricating activity. As a result of the school enrolment drives and the ALCs, more than 80,000 children previously out of school in the 500 villages now can attend primary school. IKEA and UNICEF will continue the project in the coming years, adding on villages in a planned manner to reach millions more in the region. The self-help strategy has boosted womens economic and social status, self-confidence and decision-making abilities, both within their families and in the local community.Through education and economic opportunity, women and their families have broken out of the vicious circle of debt, liberating them from child labour and the exploitative interest rates of local money-lenders. IKEA is using its unique position to leverage resources and this partnership for change.

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Benefits to the Company IKEAs partnership with UNICEF have allowed the company to achieve its business objectives while supporting children and women and their opportunities for learning and developing. Although it cannot be quantified for the bottom line, IKEAs actions have built trust, a significant intangible asset, within the communities it touches. A simple economic intervention has engendered significant social impact on the quality of life of children and women and improved their access to income-generating opportunities.

7.14 Some remarks on philanthropy

Philanthropy is, naturally, associated with virtue. As the discussion concerning companies social responsibilities has intensified, companies and management teams have chosen to distinguish the profile of their organisations through contributing financially to other organisations. Several company leaders have decided to invest their goodwill in this manner.The handing over of cheques to charitable organisations at televised gala events naturally represents a welcome contribution to the involved organisations. However, an important point is that such activity ^ unless it occurs in a co-ordinated manner, including adaptations to the companys business model ^ cannot reasonably be viewed as anything more than a marketing and publicity stunt with a view to creating a positive image. Such financial contributions should not be confused with the important partnerships mentioned earlier. In reality, despite good intentions, merely writing out a cheque (or two) cannot replace the need for the core activities ofthe company to adapt to the recent demands for sustainable development. Writing out cheques will not prompt stakeholders to demand answers to questions regarding the sustainability of operations. This makes managers accountable for the necessity of adapting the operations. Ultimately, efforts must be consistent and management teams and Boards of Directors are fundamentally responsible for creating long-term value growth through the core activities of the business.When the creation of a sustainable model has been partially accomplished, financial contributions to other organisations can increase the companys legitimacy.

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7.15 Charity-driven marketing work and social entrepreneurship

The Peoples Postcode Lottery which has a strictly commercial and highly profitable business concept, successfully communicates an image of charity by donating a portion of its profits to a number of charitable organisations. The Peoples Postcode Lottery was launched in the north east of England in June 2005, and has since expanded across Scotland and the rest of Great Britain. The lottery brand and concept is already well known in Sweden and especially in the Netherlandswhere 40% of householdsparticipate and where it all started. The Peoples Postcode Lottery exists to support local charities, while giving players the opportunity to win fantastic weekly prizes. Charity is associated with something good and pleasing and, therefore, has worked in favour of this particular lottery in several countries and the company is expanding into new countries and markets. Although many non-profit organisations are critical of the concept of charity, the majority of people associate charity with something positive, explaining the success of such marketing. The business model of the Peoples Postcode Lottery can possibly, depending on how you define social entrepreneurship, be placed in the same category as other companies which are formed with the objective of generating revenue for charitable purposes whilst offering their customers competitive products or services. Social entrepreneurship is a trend that has boomed in the United Kingdom and the United States and, in recent years, has begun to gain ground in other countries. Social entrepreneurship means that through a company, one is working to make a difference in society.To use the image of a company to propel an idea is commercial, but society also benefits ^ a win-win situation.

7.16 A business model for sustainable, profitable business development

As we have now described the Board of Directorsresponsibilities for integrating sustainability issues with corporate governance, noted the strategy guidance of the World Business Council for Sustainable Development, discussed the hands-on guidance of the ICC, described the stake-

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holder perspective, looked at the importance of engaging the supply chain and shown examples of value-adding partnerships, it is time to address the form in which this process might take:

A Responsible Business Model for sustainable development.

Phase 1. Analysis of Responsibility, Risk and Opportunity

Phase 1 involves a comprehensive analysis of the responsibility required of a companys primary stakeholders.It analyses, from a holistic perspective, the risks and opportunities for the company and its operations, products and services in the community. This analysis is integrated into the corporate governance process and is owned by the Board. The expertise of the management and the Board are crucial to the value of this work. An overview of the companys current position is ascertained through this analysis. We see how the Board maps the companys direction, that is to say, defines the companys vision, business strategy and business model for sustainable business development. The manner in which this strategy and business model need to be supported by a relationship to a code of conduct (e.g. Global Compact) and a number of other valuebased policies, becomes apparent.These procedures then set the stage for the initiation of planning and implementation.

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Phase 2. Planning
Phase 2 looks at how plans are established to govern, manage and monitor the activities expressedin the businessvision and strategy, the code of conduct and policies as well as how key indicators, terms and targets are determined. The companys position in relation to ISO standards for, amongst other things, environmental management and in relation to the ISOs other guidance documents, such as ISO 26000 Guidance on social responsibility27, the balanced scorecard28 and several control models, is determined.Decisionsregarding management andreporting systems, as well as the focus of internal audits and controls (e.g., supplier control), are considered. Once in place, we look at how these measures can be fully integrated into the customary business planning and budgeting.

Phase 3. Introduction and implementation

Phase 3 looks at how the systems and processes for management, governance, internal audit, internal control and monitoring, as determined in the planning phase, are introduced and implemented.

Phase 4. Follow-up
Phase 4 looks at internal audit reporting of internal controls, external sustainabilityand connectedreporting, independent audit andassurance.We look at the methods by which the management, the Board and the companys key stakeholders evaluate and follow-up results, and one year on, how to assess Phase 1 together with the company stakeholders ^ using the sustainability report as a tool for communication.

27 28

Draft International Standard, when this book is published. Balanced Scorecard.

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7.17 SustainableValue Creation ^ a summary

This concerns: ^ the responsibility of the Board ^ governing guidelines ^ implementation and enforcement ^ communication and connected reporting Establishing Company Guidelines for: ^ human rights ^ employee rights ^ environment and climate change ^ anti-corruption ^ responsible business ^ ethics the working environment, health and safety Responsibility of the Board: ^ adopting the guidelines ^ follow-up on issues raised in these areas ^ evaluation of the Boards ability to follow up and address the issues raised in these areas ^ these areas form part of the Boards annual risk analysis

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8 Accounting for change

Financial reporting and accounting is said to have a 1,000 year history, whilst the concept of sustainability has been in the spotlight just over a decade.The Chapterdescribes the regulatory framework of sustainability reporting, and addresses guidelines, such as the EU Modernisation Directive requirements, which refer to the disclosure of sustainability information in a separate report on climate impact. The Chapter also addresses the sustainability reporting framework Global Reporting Initiative (GRI), and Prince Charles initiative on connected reporting29, the goal of which is to integrate the reporting of ESG issues in annual reports.

8.1 From annual report via sustainability reporting to connected and integrated reporting
It is interesting to note that the standard-setter for financial accounting, the International Accounting Standards Board (IASB), does not, to date, address sustainability reporting in a clear manner in the International Financial Reporting Standards (IFRS).The closest we get to a discussion on sustainability is in the IASBs Exposure Draft ED/2009/6 ^ Management Commentary30, a draft document of non-binding guidelines on how to provide information onwhat can best be described as an administration report. Here follows a number of passages taken from the drafts, which take the form of good advice: Time frame
10. Management commentary should communicate information about an entitys economic resources, claims on those resources and the transactions and other events and circumstances that change them. It also should explain the main trends and factors that are likely to affect the entitys future performance, position and development. Consequently, management commentary looks not only at the present, but also at the past and the future.

Principles for the preparation of management commentary

12. Management commentary prepared in accordance with this framework can help users of the financial reports assess the performance of the entity and
29 30

Accounting for Sustainability, A4S. June, 2009.

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the actions of its management relative to stated strategies and plans for development. That type of commentary may help users of the financial reports to understand, for example: (a) the entitys risk exposures, its strategies for managing risks and the effectiveness of those strategies; (b) how resources that are not presented in the financial statements could affect the entitys operations; and (c) how non-financial factors have influenced the information presented in the financial statements.

Orientation to the future

17. Having an orientation to the future is about communicating, from managements perspective, the direction the entity is taking. For example, management can provide useful information to users of the financial reports by setting out its objectives for the entity and its strategies for achieving those objectives. The extent to which management commentary is oriented towards the future either through the use of narrative explanations or quantified data (forexample, projections or forecasts), will be influenced by the regulatory and legal environment within which the entity operates. Information with an orientation to the future is described in this document as forwardlooking information. 18. Management should include forward-looking information when management is aware of trends, uncertainties or other factors that could affect the entitys liquidity, capital resources, revenues and results of operations. Forward-looking information is useful when it focuses on the extent to which the entitys performance is indicative of future results and includes managements assessment of the entitys prospects in the light of that performance. 19. Management should discuss the extent to which forward-looking disclosures made in the prior period management commentary have been borne out. That discussion should explain how and why the performance of the entity is short of, meets or exceeds the forward-looking disclosures made in the previous management commentary.Forexample, if management stated targets for future performance in previous reporting periods, it should report the entitys actual performance in the current reporting period and analyse and explain significant variances from its previously stated targets as well as the implications of those variances for managements expectations for the entitys future performance.

Content elements of a decision-useful management commentary

24. Although the relevant focus of management commentary will depend on the facts and circumstances of the entity, a decision-useful management commentary includes information that is essential to an understanding of: (a) the nature of the business; (b) managements objectives and strategies for meeting those objectives;

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(c) the entitys most significant resources, risks and relationships; (d) the results of operations and prospects; and (e) the critical performance measures and indicators that management uses to evaluate the entitys performance against stated objectives. 25. The content elements are related and should not be presented in isolation. Managements perspective on the business and its analysis of the interaction of the content elements helps users understand the entitys financial statements as wellasmanagements objectives and strategies forachieving those objectives.

The IASBs draft was subject to a period of open consultation ending on 1 March 2010. It seems likely that a number of years will pass before this advisory document from the standard-setter is made public. IASBs draft is focused oninformation about trends and factorsthat may affect a companys future performance, market position and development. Risk surveys and the manner in which a company manages identified risks, as well as changes in business strategies, are important aspects of transparent information.There is a strong focus on orientation towards the future, the outlook of corporate management, and the companys chosen direction. The formulation of goals and strategies to achieve these goals are considered to be valuable information, as is the description of the most important stakeholders and relations with those stakeholders. Naturally, analysts, rating agencies and investors require futureoriented information regarding companies, as well as managements analysis and risk assessment. It is, therefore, important to explain how the Board works with the companys adaptation to sustainable development. Furthermore, it must be noted that it is remarkable that, throughout this draft, the IASB avoids explicit reference to sustainable development in terms of ESG. The fact that the IASB only implicitly communicates to the users of its advisory document that the document addresses the manner in which to approach sustainable development, has faced objections from, amongst others, the FEE (the Federation of European Accountants).The final document is said to be under development.

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8.2 Disclosure requirements on sustainability information in annual reports

In response to new EU regulations in the so-called Modernisation Directive 31, changes were made to legislations, such as the Swedish Annual Accounts Act 2005. This implies new and enhanced requirements as regards the disclosure of non-financial information. These disclosure requirements, which refer to the administration reports of annual reports, were first appliedin the financial year beginning immediatelyafter 30 April 2005. The Swedish Annual Accounts Act, for example, has not been amended since that time as regards disclosure requirements relating to sustainable development. Currently, company managers and Boards are expected to meet, as a minimum, the Swedish Annual Account Acts transparency requirements. Information about the companys expected future development should, for example, include a description of the material risks and uncertainties facing the company. Relevant non-financial information necessary for an understanding of a companys development, financial position or performance, is to be reported, including information regarding environmental and employee matters. These disclosure requirements should be viewed in light of the work undertaken within the EU on the subject of corporate social responsibility. As early as 2001, the EU Commission issued its policy paper on Corporate Social Responsibility: Promoting a European Framework for Corporate Social Responsibility. Here, the EU Commission underlined the importance of transparency, enhanced reliability and the assurance of companies CSR work.The Commission emphasised the importance of companies broadening their presentation of sustainability information and the value of this also being subject to independent scrutiny. In essence, the disclosure requirements deal with: ^ such circumstances as are important in the assessment of the development of a companys operations, financial position and results; ^ ^ ^ information regarding events of material significance to the company, information about the companys expected future development, including a description of material risks and uncertainties, non-financial information necessary for an understanding of the companys financial position, development or performance and of
The European Parliament and Council Directive 2003/51/EG from 18th June, 2003.

31

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relevance to current operations, including information regarding environmental and employee matters. Even prior to the introduction of theModernisation Directivein the Swedish Annual Accounts Act, there was a requirement for certain companies to disclose environmental information in annual reports.This requirement relates to companies involved in operations requiring a permit or notification under the Swedish Environmental Code. The information to be provided regards the impact of operations on the physical, natural environment. The Swedish Accounting Standards Board (BFN) provides a more detailed description of the environmental information to be provided in the administration report.The five most important disclosures for affected companies are, according to BFN U98:2: 1. That the company carries out activities requiring a permit or notification. 2. 3. 4. The object of a permit or notification. Full disclosure of the primary environmental impact (emissions to the atmosphere, water or land or through waste or noise). Whether significant permits need to be renewed or revised and the reason for this. Comments as to why any such permit or approved notification doesnot currently exist (if thisisthe case), and comments regarding any significant injunctions under the Environmental Code. Statement of dependence on the activities requiring the permit or notification.

5.

Decisive factors in determining which information is to be provided in the administration report include stakeholder views regarding which nonfinancialinformation is of value, and the information deemed to be essential for the assessment ofthe companys financialdevelopment.The scope of disclosure requirements should, therefore, be determined foreach individual company on the basis of relevant information. Of course, the companys size and the nature of its operations are important factors. Disclosures on environmental and employee matters and social responsibilityare also examples ofthe type ofinformation that is ofinterest to the majority of stakeholders. Environmental information may consist of relevant activities that have been undertaken during the past year, as well asinformation regarding objectives and outcome.In this context, informa-

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tion regarding the amount of input materials, emissions, as well as the environmental impact of products and services, and waste and transportation, are all relevant information. Employee information can consist of policies dealing with employment and working conditions, gender equality measures, such as salary comparisons and promotions, and the results of any follow-up measures. Furthermore, comments on goals and results regarding sick-leave, work-related accidents and injuries are of major interest to both internal and external stakeholders. Suggestions as to the social information which might be reported include ethical guidelines (codes of conduct) and how these and other social guidelines are applied within the company, for instance, in determining the selection of suppliers, partners and customers. It is always relevant to report the results of any follow-up of these guidelines. Examples of information which are of financial significance include changing market conditions, substantial renovation needs, and violation of permit conditions. If no change has occurred in market conditions, no significant reorganisation needs exist or, if the company has not violated permit conditions, it is nevertheless appropriate to recognise this socalled non-information. Note that the disclosure requirements also apply to the administration report for the group, implying that a Swedish parent company may be forced to also disclose relevant information concerning a foreign subsidiary.

8.3 UNCTADs 16 selected indicators

The UN organ, United Nations Conference on Trade and Development (UNCTAD), published the guidance report Guidance Corporate Responsibility Indicators in Annual Reports in 2008. This document was developed by UNCTADs working group, ISAR32. The sixteen indicators which ISAR propose should be presented in the annual report are: 1. Total revenues 2. Value of imports vs. exports 3. Total new investments 4. Local purchasing 5. Total workforce with breakdown by employment type, employment contract and gender
32

Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting.

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6. Employee wages and benefits with breakdown by employment type and gender 7. Total number and rate of employee turnover broken down by gender 8. Percentage of employees covered by collective agreements 9. Expenditure on research and development 10. Average hours of training per year per employee broken down by employee category 11. Expenditure on employee training per year per employee broken down by employee category 12. Cost of employee health and safety 13. Work days lost due to occupational accidents, injuries and illness 14. Payments to Government 15. Voluntary contributions to civil society 16. Numberof convictions for violations of corruption relatedlaws or regulations and amount of fines paid/payable Information regarding the companys total revenues is considered to be important for the provision of an approximate view of the companys economic importance to the economy in which the company operates.Import and export values show how the company affects the balance of payments in their country. Clearly, new investments can have both an economic and a social impact. Investments in increased production capacity reduces poverty in developing countries, whereas purchases from domestic suppliers are important in increasing local VAT transactions and employment. The number of employees shows the extent to which the company creates work in the country in which it operates.Gender distribution reflects a companys efforts to reduce discrimination. Salaries and benefits foremployees are also a means of contributing to the general development of society, and totalwages support community development through their multiplier effect. Staff turnover may reflect the job security level and employment practices of the company. The development of new technology is seen as having particular value as it increases the companys comparative advantages and plays an important role in a countrys economic development. Undoubtedly, the training of employees also contributes to the development of the local society, and employee safety and health are identified as two of the most important issues in corporate social responsibility.

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The UNCTAD guidelines provide definitions of the various indicators and describe how they can be calculated and reported. For more information on eco-efficiency indicators, see the UNCTAD publication A Manual for the Preparers and Users of Eco-Efficiency Indicators (UNCTAD/ITE/IPC/2003/7), available as a free download from www.unctad.org/isar.

UN agency UNCTADs guidelines16 Indicators to Report in Annual Reports.

8.4 Research into the identification of industry-specific sustainability indicators

In the report Revealing an Unbiased View of Businessin Society: Towards a Unifying Sustainability Reporting Model, the authors Luis R. Perera A, Prof. Alfredo Enrione C and DanielaWinicki T, all three from Chile, present and compare five basic models, stemming from different regions of the world, designed to help companies improve their external reporting process and information. The selected models have the potential to be distilled into one unifying model and to offer a new lens for a balanced view of the socio-economic dimension of corporate performance in the postcrisis role of business in society, namely:
Bilancio Sociale (Italy), (Social balance sheet) Cuarto Estado Financiero (Latin America), (Fourth Financial Statement) Estado Demostrativo do Valor Adicionado (Brazil), (Statement of Value Added)

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Global Reporting Initiative Indicator and, Accounting for Sustainability Project (UK)

These five reporting models are already in use throughout the world, and represent emerging approaches of looking at business and its redefined role in society. The models can be seen as lenses, allowing companies to improve transparency by reporting the results of their sustainability work to multiple stakeholders ^ not just shareholders, integrating financial and non-financial information. In addition to the fact that accounting frameworks and guidelines for separate sustainability reports and connected reporting are now being developed in various locations around the world, and on the basis of a variety of methods, many institutions and bodies are currently undertaking and instigating projects, such as UNCTAD with the aim of identifying the ESG indicators that are to be reported separately in the sustainability report and annual financial statements. A number of well-known initiatives are:
United Nations Conference onTrade and Development (UNCTAD) ^ Guidance on Corporate Responsibility Indicators in Annual Reports Global Reporting Initiative (GRI) Accounting for Sustainability (A4S) The Institute of Chartered Accountants in Australia, ICAA ^ The New Benchmark in Business Reporting (Broad Based Business Reporting (BBBR)) The Academy of Business in Society (EABIS) ^ Corporate Responsibility, Market Valuation and Measuring the Financial and Non-Financial Performance of the Firm The European Federation of Financial Analysts Societies (EFFAS) and Society of Investment Professionals in Germany (DVFA) ^ KPIs for ESG

Researchin this development area is expanding from year to year.Dr. Axel Hesses research project in Germany has presented questions to investors in five industries and has, in this manner, identified the industries most important sustainability indicators based on their importance for business development, market position and expected development:
Automobile industry: Fleet consumption (7 out of 7 investors/analysts). Utilities: Greenhouse gas intensity of energy production (6 out of 7).

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Transport and logistics services: Energy and greenhouse gas efficiency (6 out of 7). Consumer goods and retail: Compliance to environmental and social standards in the supply chain (6 out of 7). Pharmaceuticals: Access-to-medicine strategies for the poor (5 out of 7).

In the future, we should expect to see a large numberof initiatives attempting toidentify theColumbieggwithin this area of research, development; reporting and adaption to sustainable development. In this Chapter of the book, I have chosen to provide an overview of a number of existing initiatives within this reporting area.

8.5 Climate Reporting

The Greenhouse Gas Protocol Initiative is coordinated by The World Resources Institute33, a US-based NGO, together with the World Business Council for Sustainable Development34, an enterprise network based in Geneva with a membership of approximately 200 large companies.This initiative, launched in 1998, aims to develop and establish internationally accepted reporting and accounting guidelines for the reporting of greenhouse gas emissions.The GHG Protocol Initiative comprises two guiding documents: ^ The GHG Protocol Corporate Accounting and Reporting Standard (Corporate Accounting Standard), last updated in 2004, ^ The GHG Protocol for Project Accounting (Project Protocol), which appeared in 2005. The Corporate Accounting Standard describes, step by step, how companies can quantify and disclose their emissions. This standard covers the reporting of the greenhouse gases covered by the Kyoto Protocol ^ CO2, CH4, N2O, HFC, PFC and SF6. The GHG Protocol Initiatives Project Protocol provides guiding principles and methods for the quantification and reporting of emission reductions in projects. In addition to these two guiding documents with a focus on calculation methodology, reporting and accounting,The Greenhouse
33 34

WRI. WBCSD.

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Gas Protocol Initiative has developed a numberof other publications, surveys and guides.It is possible to view all of these on the Initiatives website.

8.6 The Carbon Disclosure Project

The Carbon Disclosure Project (CDP) is an independent non-commercial organisation, currently representing 475 institutional investors with more than USD 55 trillion (!) in managed assets. From annual surveys of companies, CDP collects climate reports from 2,500 large companies throughout the world, and manages the worlds most comprehensive database on corporate climate reporting.The project is funded by, among other entities, a number of large institutional investors. CDPs mission is:
To collect and distribute high quality information that motivates investors, corporations and governments to take action to prevent dangerous climate change.

Since its establishment in 2000, interest in CDP reports has increased yearon yeardue to the Projectsposition asthe primary source ofinformation regarding companiescarbon footprints.

8.7 The CDSB Reporting Framework

The Climate Disclosure Standards Board (CDSB)35 has representatives from, among others, the Carbon Disclosure Project (CDP), the Coalition for Environmentally Responsible Economies (CERES), the International EmissionsTrading Association, the World Economic Forum and the World Resources Institute.There is also an advisory committee and a technical work group associated with the Board. In conjunction with the World Business Summit in May 2009, The Climate Disclosure Standards Board (CDSB) Reporting Framework was published, providing guidance on the presentation of climate reporting in annual reports. The GHG Protocol Corporate Accounting and Reporting Standard has been used as a model in the development of this accounting framework for climate reporting.

8.7.1 Typico plc ^ a simulated climate report

The reporting of greenhouse gas emissions is an area which currently seemsto be evolving at a rapid pace. Asthisissue becomesmore challen35

Established at the World Economic Forum in Davos, 2007.

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ging on the political agenda and all the more clear-cut in research terms, demand for transparent accounting is increasing. Many companies already report their climate impact in the form of carbon dioxide equivalents. Reporting is voluntary, but in certain countries there are calls for mandatory accounting requirements. Sometimes, this information is included in annual reports or in sustainability reporting. Furthermore, a large amount of companiesprovide information to the CDP36, thusmaking the reportspubliclyavailable.The reporting format and presentation of climate reports vary, as this kind of reporting is at the development stage. The UK Climate Change Act of 2008 is expected to lead to obligatory reporting on behalf of the largest companies in the UK. Guidelines for reporting are evolving, but what willa Greenhouse Gas Emissions Report look like? In the autumn of 2009,PwC presented an attempt to answer this question with Typico plc, Greenhouse Gas Emissions Report, An illustration for business climate change and greenhouse gas emissions reporting. It is obviously too early to propose a reporting outline that fits all companies, but theTypico plc report can be of assistance to those companies seeking to find a form on which to base their carbon footprint report ^ a guide to generallyaccepted practice in this reporting area.It remainsthe responsibility of the company in question to determine the content it considers essential to report, based on an analysis of the impact arising from its activities. The manner in which each company chooses to publish these reports will, of course, also vary. Just as sustainability information is now presented in a separate report, there is reason to believe that climate information of interest to the annualreports target group will be presented in annual reports, with a more exhaustive climate report published separately. Another development of the climate report is, of course, that it will gain its natural place in a separate sustainability report. Regardless of the form the climate report eventually takes, it is already clear that companies whose operations have a climate impact are, more or less, compelled to publish credible reports describing the impact of their operations and how they are working to reduce this impact. This implies that they report their processes, systems, objectives and performance in this important area.

36

Carbon Disclosure Project.

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8.8 EMAS ^ The EUs Eco Management and Audit Scheme

EMAS stands for Eco Management and Audit Scheme.This scheme came into force in April 1995, and is a management tool which companies can voluntarily apply. It is a feature of the European Commissions Fifth Action Programme. The aim of EMAS is to encourage companies and organisations to further develop their environmental activities in a systematic, consistent manner, in addition to those imposed by law, this is accomplished through a detailed programme with clearly described objectives, remedial action programmes and on the basis of the evaluation of all significant environmental issues involved in the business. This new form of environmental work is an ongoing activity which will lead to continuous improvement. In the new EMAS regulation, ISO 14001 requirements are integrated into the environmental management system. EMAS is, therefore, based entirely on ISO 14001. Thus, one can consider EMAS and ISO 14001 to comprise two systems with a common foundation, but where one system, EMAS, adds a further dimension in that the results of the environmental management work are published in a certified environmental report. ISO 14001 is primarily intended as an internalmanagement tool for the quality control of a companys own environmentalwork.EMAS is also intended as a communication tool for ISO 14001-certified companies and organisations, beyond, as well as within, Europes borders.

8.9 The Global Reporting Initiative

The Global Reporting Initiative, a foundation based in Amsterdam, operates under the acronym GRI. The initiative to develop the GRI guidelines for sustainability reporting was taken in 1997 by CERES37, a Bostonbased network of investors, institutional investors, trade associations, NGOs and CSOs.The network had previously developed and issued The CERES Principles ^ a code of conduct with a focus on environmental responsibility. ^ The first version of the GRI guidelines for sustainability was made public in 2000, and some 50 companies and organisations published reports in line with the GRI guidelines that same year.
37

Coalition for Environmentally Responsible Economies.

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In 2002, GRI was established as a foundation, while second-generation GRI guidelines were launched.The first industry-specific supplements to the guidelines were also developed during the following years. GRI G3 was published in 2006.This represents the third generation of GRI guidelines, and was the most recent update at the time of this books publication.

GRIs organisation has expanded and the GRIs reporting framework has now been translated into more than twenty languages. The publication The GRI Sustainability Reporting Cycle: A Handbook for Small and Not-sosmall Organizations is included as teaching material, together with the guidelines, in the GRI-certified training courses which were launched in the Nordic countries in 2010, after having been established in Spanishspeaking parts of the world for some time. GRI promotes a variety of forms for the creation and development of sustainability reporting. A large network of stakeholders around the world contributes to the continued development of this reporting framework.

First and second-generation GRI guidelines in 2000 and 2002.

8.9.1 The purpose of sustainability reporting

Sustainability reporting is about measuring, presenting and assuming responsibility vis vis stakeholders, both within and outside a given organ-

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isation, in terms of what the organisation has achieved in its work towards sustainable development. Sustainability reporting is a broad term, synonymous with other terms used to describe the presentation of economic, environmental and social impacts. A sustainability report should provide a balanced and reasonable description of the reporting organisations sustainability performance, both positive and negative. Sustainability reports based on the GRI reporting framework disclose outcomes and results occurring within the reporting period as regards the organisations commitments, strategy and management approach. These reports may, among other things, be applied to: ^ Compare and assess sustainability performance in relation to laws, norms, codes, performance standards, and voluntary initiatives, ^ ^ Show how the organisation influences and is influenced by expectations about sustainable development, Compare performance within an organisation and between organisations over time.

8.9.2 GRI Reporting Principles

The Sustainability Reporting Guidelines consist of principles for defining report content and for ensuring the quality of reported information. The Guidelines also include Standard Disclosures comprised of Performance Indicators and other disclosure items, as well as guidance on specific technical topics in reporting. Indicator Protocols exist for each of the Performance Indicators.These Protocols provide definitions, compilation guidance, and other information and are used to facilitate the preparation of reports and to ensure that Performance Indicators are interpreted in a consistent manner. Sector Supplements complement the Guidelines with interpretations and guidance on how to apply them to a given sector, and include sectorspecific Performance Indicators. Technical Protocols have been prepared in order to provide guidance on reporting issues, such as the establishment of the report boundaries. These are designed to be applied in conjunction with the Guidelines and Sector Supplements, and cover issues facing the majority of organisations during the accounting process.

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Third Generation GRI Guidelines have been translated into more than twenty languages.

8.9.3 Overview of the GRI Guidelines

The Sustainability Reporting Guidelines consist of Reporting Principles, Reporting Guidance, and Standard Disclosures (including Performance Indicators).

8.9.3.1 Reporting Principles and Guidance

Three main elements of the reporting process are described in Part 1 of the reporting framework.In order to provide guidelines regarding the content of the report, Part 1 covers the reporting principles of materiality, stakeholder communication, sustainability context, and completeness, along with a brief set of tests foreach principle. Application of these principles, together with the standard disclosures, determines the topics and Indicators to be reported. This is followed by principles referring to balance, comparability, accuracy, timeliness, clarity, and reliability, along with tests that can be applied to help ensure the appropriate quality of the reported information. Parallel with defining the content of a report, an organisation must determine the entities (e.g., subsidiaries and joint ventures) whose performance will be described in the report. This section concludes, therefore, with guidance for reporting organisations on Boundary Setting).

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8.9.3.2 Standard Disclosures

Part 2 contains the standard disclosures which should be included in sustainability reports.The guidelines identify information that is relevant and material to most organisations and of interest to most stakeholders in reporting the three types of standard disclosures: 1. Strategy and Profile: Disclosures which set the overall context for understanding organisational performance such as its strategy, profile, and governance. 2. Management Approach: Disclosures that cover how an organisation addresses a given set of topics in order to provide context for understanding performance in a specific area. 3. Performance Indicators: Indicators that elicit comparable information on the economic, environmental, and social performance of the organisation.

8.9.4 GRIApplication Levels

The level at which the GRI reporting framework has been applied should be described in the preparation of the report, which aims to: ^ Clearly inform readers as to the extent to which the GRI Guidelines and other elements of the reporting framework have been applied in the preparation of the report. ^ Provide those preparing accounts with a vision which they can follow in order to gradually expand application of the GRI Reporting Framework over time.

Declaring the chosen Application Level ensures a clear communication as to those components within the GRI Reporting Framework which have been applied in the preparation of a report. To meet the needs of new reporters, advanced, and those somewhere in between, there are three levelsin the system.Theyare titled C,B, and A.The reporting criteria found in each level reflects an increasing application or coverage of the GRI Reporting Framework. An organisation can self-declare a plus (+) at each level (ex., C+, B+, A+) if the report is externally assured. An organisation self-declares a reporting level based on its own assessment of its report content against the criteria in the GRI Application Levels.

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In addition to this self-assessment, reporting organisations can choose one or both of the following options: ^ to appoint an assurance provider to offer an opinion on the selfdeclaration. ^ to request that the GRI check the self-declaration. Sustainability reporting is a living process and tool, and does not begin or end with a printed or online publication.Reporting should fit into a broader process for establishing organisational strategy, implementing action plans, and assessing outcomes. Reporting enables a robust assessment of the organisations performance, and can support continuous improvement in performance over time, and it also serves as a tool for engaging with stakeholders.

8.9.5 Reporting principles for defining content

Each of the reporting principles consists of a definition, an explanation, and a set of tests to guide the application of the principles. These tests are intended to serve astools for self-diagnosis, not as specific disclosure items to report against, instead, the principles should be applied together with guidance on defining content.

Materiality
Definition: The information in a report should cover topics and Indicators that reflect the organisations significant economic, environmental, and social impacts, or which would substantively influence the assessments and decisions of stakeholders.

Stakeholder inclusiveness
Definition: The reporting organisation should identify its stakeholders and explain in the report how it has responded to their reasonable expectations and interests.

Sustainability Context
Definition: The report should present the organisations performance in the wider context of sustainability.

Completeness
Definition: Coverage of the material topics and Indicators and definition of the report boundary should be sufficient to reflect significant economic, environmental, and social impacts, and should enable stakeholders to assess the reporting organisations performance in the reporting period.

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8.9.6 Reporting principles for defining quality

This section contains principles guiding choices on ensuring the quality of reported information, including its proper presentation. Decisions related to the process of preparing information in a report should be consistent with these principles. All of these principles are fundamental to effective transparency. The quality of information enables stakeholders to make sound, reasonable assessments of performance, and to take appropriate action.

Balance
Definition: The report should reflect positive and negative aspects of the organisations performance, in order to enable a reasoned assessment of overall performance.

Comparability
Definition: Issues and information should be selected, compiled, and reported consistently. Reported information should be presented in a manner that enables stakeholders to analyse changes in the organisations performance over time, and could support analysis relative to other organisations.

Accuracy
Definition: The information reported should be sufficiently accurate and detailed for stakeholders to assess the reporting organisations performance.

Timeliness
Definition:Reporting occurs according to a regular schedule and information is available in time for stakeholders to make informed decisions.

Clarity
Definition:Information should be made available in a manner that is understandable and accessible to stakeholders using the report.

Reliability
Definition: Information and processes used in the preparation of a report should be gathered, recorded, compiled, analysed, and disclosed in a manner facilitating the examination of the quality and materiality of the information by another party.

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8.9.7 Reporting guidance for boundary setting

A sustainability report should encompass all entities generating a significant sustainability impact (actual and potential) and/or all entities over which the reporting organisation exercises control or significant influence with regard to financial and operating policies and practices. These entities can be included using either Indicators of operational performance, Indicators of management performance, or narrative descriptions. At a minimum, the reporting organisation should include the following entities in its report in the following manner: ^ ^ Entities over which the organisation exercises control should be covered by Indicators of Operational Performance; Entities over which the organisation exercises significant influence should be covered by description a of management governance of sustainability issues. The boundaries for narrative descriptions should include entities over which the organisation does not exercise control/significant influence, but which are associated with key challenges for the organisation as their impact is significant The report should cover all entities within its Report Boundary. In the process of preparing its report, an organisation may choose not to gatherdata on a particularentityorgroup of entitieswithin the defined boundary for reasons of efficiency, as long as such a decision does not substantively change the final result of a Disclosure or Indicator.

8.9.8 GRI reporting structure

AGRIreport should be structured so that users of the report receive information about the context: 1. Strategy and Analysis 2. Organisational Profile 3. Report parameters ^ Report Profile ^ Report scope and boundary ^ GRI Content Index ^ Assurance 4. Governance, Commitments and Stakeholder Engagement 5. Management Approach and Performance Indicator

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Users should also receive information about the performance: ^ Economic ^ Environmental ^ Social ^ Labour Practices and Decent Work ^ Human rights ^ Society ^ Product Responsibility

8.10 Guidelines for external reporting for state-owned companies

In November 2007, the Swedish government established guidelines for the external reporting of state-owned companies. These replaced the previous guidelines adopted in 2002.With this decision, the Swedish government was the first in the world to establish guidelines for state-owned companies, which naturally attracted a great deal of attention.This type of guidelines was supplemented with expanded information and clearer requirements on sustainability information, in the manner described below:
A sustainability report in accordance with the GRI guidelines shall be published on the respective companys website in conjunction with publication of the companys annual report.The sustainability report can either be a separate report or an integrated part of the annual report document. According to the GRI guidelines, a sustainability report shall include, for example: ^ A report and brief analysis of the sustainability issues considered as important for the company and the reasons for this. ^ A clear report of risks and opportunities taking into consideration sustainability issues, in particular those non-financial risks and opportunities that are needed in order to understand the companys development, performance and position. ^ A clear report of the stakeholder analysis and stakeholder dialogue with a view to identifying and taking a position on significant risks and opportunities taking into consideration sustainability issues for the companys most important stakeholders. ^ An account of the companys strategies and adaptation to the requirements for sustainable development and how the strategyand adaptation affects the companys results and position now and in the future.

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^ A report on the positions adopted by the company in its own policy documents andin the form ofinternational conventions, such asthe UN Global Compact. An account of how active sustainability work is pursued with objectives, action plans, allocation of responsibility, education and training, and follow-up control and incentive systems. A clear report on results and objectives based on selected performance indicators.These shall be complemented by explanations in the body of the text explaining the outcome in relation to the objectives, together with a report on new objectives. Accounting principles clarifying the companys points of departure in the report and the delimitation of the same.

The sustainability report shall be quality assured through independent examination and assurance. The date for publication of the report shall be in accordance with the reporting cycle for annual reports.

8.11 The Danish government followed

In a press release from the Ministry of Economic and Business Affairs, the Danish government stated in December 2008: New law brings Denmark in the lead concerning CSR
As of today the 1100 biggest companies in Denmark must report on their work with corporate social responsibility (CSR). Today a vast majority of the Danish parliament passed a law that makes it mandatory for the 1100 biggest companies in Denmark, listed companies, state owned companies and institutional investors to report on their work with CSR. However, it is still up to the company to decide if or how they want to work with CSR.

As the Swedish and Danish governments have shown the way, we have reason to believe that more governments will follow suit with regulatory and legislative sustainability requirements. When a sufficient number of countries are in the same position, it is reasonable to assume that the standard-setters will follow up with uniform guidelines for this reporting format.

8.12 Global Compact and Communication on Progress

Any company joining the Global Compact must present an annual Communication on Progress (COP) on the Global Compact website. No absolute requirements for the format of this report exist, but the idealmethodis

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the publication by the company of a sustainability report in accordance with the GRI sustainability reporting framework. ACOPisto contain three pieces of information: a declaration of support for the Global Compact; a description of the activities the organisation has undertaken in order to introduce the Global Compact principles and the partnership projects in which the organisation is involved in support of the UNs overall objectives; and performance reports against measurable objectives in accordance with the GRIs core and additional indicators. Global Compact and GRI have jointly drawn up a guide38 as to how the GRI guidelines can be applied to report the manner in which the company has introduced and achieved results as regards each of the adopted principles. The ambition is to achieve continuous improvement in efforts to introduce the principles, as well as in the reporting of the outcome, of this work. A company that has joined the Global Compact and has reported in accordance with the COP guidance is, according to the Global Compacts classification, an active company. A company has two years from the year of confirmation in which to deliver its first COP. If a company has not submitted its COP to the Global Compact within two years or if it, subsequently, fails to deliver its annual COP, the company is considered inactive. Companies that have not submitted their COP within three years from the year of confirmation, or who have not delivered their COP at least every two years, are deleted from the active list after they have been marked with a yellow warning triangle on the Global Compacts website for one year. All that is required in order for a company to, once again, be considered active is to present a COP and submit a new application. On July 2000, a small Global Compact initiative ^ comprised of only 40 companies, as well as influential civil society, labour and employer organisations ^ set out on a mission tointroduce universalprinciples on a global basis. Ten years later, the Global Compact is the worlds largest worldwide corporate responsibility initiative, with over 8,000 signatories based in more than 135 countries. Global Compact deleted 404 companies during 2008 as they had not published their reports (COPs) in accordance with the commitment to Global Compact. In total, more than 800 companies have been deleted in this manner over the years due to the lack of reporting.The Global Com38

Making the connection ^ The GRI Guidelines and the UNGC Communication on Progress.

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pact, thus, requires commitment, activity and transparency. Companies which meet the requirements through this system can be satisfied that the Global Compact family does not allow any company afree ride.

8.13 Accounting for Sustainability, A4S

In October 2009, theAccounting Bodies Network39 which formspart of The Princes Accounting for Sustainability Forum40 had a membership comprising sixteen accountancy organisations from all over the world, including the American Institute of Certified Public Accountants (AICPA), the Chartered Accountants of Canada (CICA), the Chartered Institute of Public Finance and Accountancy (CIPFA),Hong Kong Institute of Certified Public Accountants (HKICPA), Institut der Wirtschaftsprfer in Deutschland (IDW, Germany), Institute of Chartered Accountants in Australia (ICAA) and the Japanese Institute of Certified Public Accountants (JICPA).Membership in the ABN had risen to 20 by July 2010. The Princes Accounting for Sustainability Project41 is actively pursuing development towards the integration of ESG issues into annual reporting and has received a great deal of attention for these efforts in just a few years.The accountancyorganisations are the first group of A4S members to formally sign up to the principles of the A4S. However, the principles have been designed to enable other organisations participating in the Forum (companies, public sector bodies, academic institutes and nongovernment organisations) to commit to them. In July 2009, the Forums 16 members formally accepted the following principles in the project: The principles of The Accounting for Sustainability Forum are: 1. Influence and inform
To promote accounting for sustainability and the benefits of connected reporting (reporting that connects an organisations sustainability impacts with its financial performance more clearly, concisely and consistently).

2. Lead by example
To embed accounting for sustainability within our own organisationsstrategy and operations.

39 40 41

ABN. A4S Forum. A4S or the Project.

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3. Drive thought leadership

To increase understanding of good sustainability practices by commissioning and/or participating in work related to accounting for sustainability.

4. Collaborate through the Forum

To share learning and experience with other Forum participants and to work together to advance better accounting for sustainability.

5. Incorporate accounting for sustainability within training and professional education

To incorporate accounting for sustainability in training programmes for employees, suppliers, students, members and others, in professional and academic qualifications and in professional development requirements.

The Accounting for Sustainability (A4S) objectives 2009 were to:

^ ^ ^ Develop tools to help organisations integrate sustainability considerations into mainstream reporting. Research approaches organisations have adopted to connect sustainability considerations to economic and financial operations. Build the network of accounting bodies and other organisations to contribute to the development and promotion of better accounting for sustainability. Promote work of the Project and collaborate with other organisations seeking to advance better accounting for sustainability.

At the A4S Forum meeting in December 2009, His Royal Highness The Prince of Wales called foranInternational Connected Reporting Committee to be established to bring together financial and sustainability reporting standard-setters to develop a common internationally integrated reporting framework incorporating sustainability factors into the mainstream reporting practices.This is one of the key focuses of the work during 2010. Other objectives for 2010 are to: 1. Develop thought leadership, guidance and tools which have a tangible impact on organisations ability to integrate sustainability into decision-making; 2. 3. Develop the Accounting Bodies Network and the International Network; Communicate with and engage the accounting and finance community.

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The Connected Reporting Framework (CRF) was launched in December 2007 by A4S.Connectedreporting aimsto provide a new approach to corporate reporting and to address the growing dissatisfaction, amongst both preparers and users, with the incompleteness, length and complexity of many organisationsannual reports and financial statements. A connected report should be focused on the needs of long-term investors and executive management.Reported information should identifyand explain the connection between the organisations strategic objectives, the industry, market and social context within which the organisation operates, the associated risks and opportunities it faces, the key resources and relationships on which it depends, and the governance, reward and remuneration structures in place. Furthermore, it should explain the connection between the delivery of the business strategy and its financial and non-financial performance. The CRF is a reporting model that seeks to integrate ESG information in annualreportsin order to provide a balanced overview of a companys overall performance, both financially and from a sustainability viewpoint.The starting point is a holistic approach to reporting the companys strategy and how this is controlled and managed in order to achieve results.The result is a more concise, rounded and balanced view of an organisations overall performance, which, in turn, reflects the organisations strategy and the way it is managed. The CRF principles are as follows: ^ sustainability issues need to be clearly linked to the organisations overall strategy, ^ sustainability and more conventional financial information should be presented together in a clear and concise manner, so that a more complete and balanced picture of the organisations performance is provided, ^ there should be consistency in presentation to facilitate comparability between years and organisations, ^ the reported information should be aligned with the information used to manage the business. Five key indicatorsin the environmental field are suggested to bereported (although it is important to note that these are only guidelines and are not intended to be prescriptive): 1. greenhouse gas emissions, 2. energy usage,

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3. 4. 5.

water use, waste, significant use of other finite resources.

Furthermore, CRF encourages companies to disclose how the companys business strategy is related to the goal of sustainable development, other majorimpact issues, comparisonswith competitors andhow service/product sustainability impacts upstream and downstream in the supply chain. It is wise to follow the development of A4S, as well as of GRI, if one is interested in determining the manner in which ESG issues should be reported.Thisisnot a question of using either the GRIor the CRF, but both!

8.13.1 IFAC and the Princes Accounting for Sustainability Project Collaborate to Promote Sustainable Organizations
On 4 May 2010, IFAC announced:
(New York/May 4, 2010) The International Federation of Accountants (IFAC) and The Princes Accounting for Sustainability (A4S) Project have entered into a memorandum of understanding to support the global accountancy professions role in developing sustainable organisations. Organisations are increasingly seeking new ways to maintain their economic performance and contributions to society in the face of challenge and crisis. Perhaps the most critical challenge facing business and society generally is to live within our ecological limits, while continuing to enjoy economic prosperity. IFAC and A4S believe that an essential part of the answer lies in going beyond traditional ways of thinking about performance and embedding sustainability into strategy, governance, performance management, and reporting processes. Key priorities to support the work of professional accountants in embedding sustainable practices include: x Raising awareness and facilitating sharing and collaboration across the globalaccountancy community, forexample, through the development of a community website for professional accountancy organisations, business leaders, academics, and other experts to exchange ideas and share good sustainability practice; x Establishing an international integrated reporting committee to develop a new reporting model that will better reflect the interconnected impact of financial, environmental, social, and governance factors on the longterm performance and condition of an organisation; and x Incorporating accounting for sustainability within professional training and education.

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Professional accountants in organisations support the sustainability efforts of the organisations they work for in leadership roles in strategy, governance, performance management, and reporting processes. They also oversee, measure, control, and communicate the long-term sustainable value creation of their organisations. Paul Druckman,Chairman ofthe A4S Executive Board, states,We will only be able to achieve a sustainable future if all organisations, and all individuals within those organisations, recognize the role that they can and need to play. Effective action by the accounting and finance community to betteraccount for sustainability is an essential part of the response.The collaboration between IFAC and A4S will help to make this a reality. Professional accountants play a vital role in helping to create sustainable organisations and markets, especially in the areas of accountability and measurement of results, says Robert Bunting, President of IFAC.I am delighted that our two organisations are working together to advance the role of sustainability leadership and reporting at a global level, fostering collaboration with key stakeholders and developing best practices for integrating sustainability issues in the way we do business.

8.13.2 A4S and GRIAnnounces Formation of the IIRC

On 2 August 2010, IFAC announced:
(New York/August 2, 2010) The Princes Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) announced today the formation of the International Integrated Reporting Committee (IIRC). The IIRC brings together a cross section of representatives from the corporate, accounting, securities, regulatory, NGO, and standard-setting sectors. Ian Ball, CEO of IFAC, will serve as co-chairman of the Working Group. The objective of the IIRC is to create a globally accepted framework for accounting for sustainability that brings together financial, environmental, social, and governance information in a clear, concise, consistent, and comparable format.The intention is to help with the development of more comprehensive and comprehensible information about an organisations total performance, prospective as well as retrospective, to meet the needs of the emerging, more sustainable, global economic model.

8.13.3 International Integrated Reporting Committee, IIRC

In August 2010, the following was stated on the IIRC website (www.integratedreporting.org):
The Princes Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) announced on Monday 2nd August 2010 the formation of the International Integrated Reporting Committee (IIRC).

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The world has never faced greater challenges: over-consumption of finite natural resources, climate change, and the need to provide clean water, food and a better standard of living fora growing global population.Decisions taken in tackling these issues need to be based on clear and comprehensive information, but as The Prince of Wales has said, we are at present battling to meet 21st century challenges with, at best, 20th century decision making and reporting systems. The IIRCs remit is to create a globally accepted framework for accounting for sustainability: a framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format ^ put briefly, in an integrated format. The intention is to help with the development of more comprehensive and comprehensible information about an organisations total performance, prospective as well as retrospective, to meet the needs of the emerging, more sustainable, global economic model.

8.14 Accountability
AccountAbility is a non-profit institution in London which has developed a series of processing tools, the AA1000 series framework (see below). This series consists of principle-based standards... for helping organisations become more accountable, responsible and sustainable.The series is intended for use by all types of businesses and organisations, and multinational companies, as well as by owner-governed businesses, governments and civil society organisations. At the heart of AccountAbilitys series is the value of a systematic, continuous and documented stakeholder dialogue.The AA1000-series consists of: ^ The AA1000 AccountAbility Principles Standard (AA1000APS), released in 2008 and intended to be used to better identify, understand, prioritise and respond to sustainability issues facing a given organisation. The principles were included in the 2003 edition of AA1000, while in the 2008 edition, the principles were published separately. Below are AccountAbilitys fundamental principles:
The Foundation Principle of InclusivityFor an organisation that accepts its accountability to those on whom it has an impact and who have an impact on it, inclusivity is the participation of stakeholders in developing and achieving an accountable and strategic response to sustainability.

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The Principle of MaterialityMateriality is determining the relevance and significance of an issue to an organisation and its stakeholders. A material issue is an issue that will influence the decisions, actions and performance of an organisation or its stakeholders. The Principle of ResponsivenessResponsiveness is an organisations response to stakeholder issues that affect its sustainability performance and is realised through decisions, actions and performance, as well as communication with stakeholders. The value of these principles lies in their comprehensive coverage and the flexibility of their application. They demand that an organisation actively engages with its stakeholders, fully identifies andunderstands sustainability issuesthat willhave animpact on its performance, including economic, environmental, social and longer term financial performance, and then uses this understanding to develop responsible business strategies and performance objectives. Being principles rather than prescriptive rules, they allow the organisation to focus onwhat ismaterial toits ownvision and provide a framework for identifying and acting on real opportunities as well as managing non-financial risk and compliance.

The AA1000 Assurance Standard (AA1000AS) also appeared in an updated form in 2008 and is intended to be used to examine sustainability reports. AA1000AS is described in detail in Chapter 9, Audit and Assurance. The AA1000 Stakeholder Engagement Standard (AA1000SES) was first published in 2005 and is a framework intended to help organisations and companies ensure that the processes of stakeholder involvement function well and deliver results. A continuous and systematic stakeholder dialogue contributes to better communication, better learning processes and greater opportunities for innovation. Updating of AA1000SES began in 2009, an updating process in which all interested parties can participate online.

AccountAbility has been developing tools for stakeholderengagement for many years, and has, together with the United Nations Environment Programme42, published The Stakeholder Engagement Handbook, which is a means by which to develop effective processes for stakeholder dialogue.

42

UNEP.

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8.15 Integrated reporting pays off in Globe Award ^ Leading Sustainability Awards
Globe Award ^ Leading Sustainability Awards was established in 2007 in Sweden by the international network and marketplace Globe Forum.The purpose is to support and draw attention to best practice and innovation. Four prize categories are awarded: ^ Sustainability Research Award ^ Sustainability Innovation Award ^ Sustainable City Award ^ Sustainability Reporting Award

Globe Award ^ Leading Sustainable Awards.

The Danish company, Novo Nordisk, was awarded the prize for Best Presentationin that categoryof Sustainability Award at the 2009 award ceremony.It can, therefore, be said that Novo Nordisk had the worldsbest sustainability report for the financial year 2008.The jurys reasoning was as follows:
Based on a collective assessment of the criteria, Novo Nordisk is at a highly advanced stage in integrating its sustainability activities into its reporting model. It demonstrates the long-term financial benefits to all stakeholders of the organisations, including shareholders, of its sustainability activities.

The Hong Kong company, CLP Holdings Ltd, won the sustainability reporting award in last years Globe Award contest (2009 report) on the merits of its integrated sustainability reporting.The judges praised the company for its record on staff safety and its web presence, as well as for the integrity showninits reporting of negative, aswellaspositive, information regarding investment in renewable energy generation. The sustainability reporting awardwasawarded onthe basis of sustainabilityreportingbeingintegrated into the reporting model to fulfil the stakeholdersrequirement to clearly see that an organisations sustainability activities will lead to financial benefits for everyone in the long term.The jurys reasoning was as follows:
From a very strong short list the jury has selected CLP Holdings as the winner ofthe Globe award for sustainable reporting for 2010.We were impressed with

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the report, the superb web presence, and the integrity shown by disclosing the bad news, as well as the good news stories around investment in renewable energy generation and staff safety amongst others. As a jury we were disappointed by the assurance process that CLP Holdings employed but this award is about showing leadership, not a beauty contest and with this in mind we believe that hopefully we can influence others to report as well as CLP Holdings and add thorough and credible verification and assurance.

The Globe Award Sustainability Reporting award criteria include:

Reported information is determined by its importance to the companys strategy and its impact on key business activities. The effect of sustainability trends are assessed and explained. Information is reported for each critical area of business activity with the connection between sustainabilityand financial performance demonstrated. Targets have been set and performance explained. Reported information includes upstream and downstream impacts of products and services, where these are material. Sustainability reporting is integrated. An assessment of risk/profit impact of integrating social and environmental issues into the business. The extent of independent assurance on the sustainability reporting. Reports provide data that is consistent, relevant and comparable data.

Novo Nordisk and CLP Holdings Ltd are rewarded as good examples of Integrated Reporting.

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9 Assurance on sustainability
Why is assurance on sustainability so important, and how is the assurance provided? This section discusses the role of professional accountants, whether or not sustainability information constitutes a basis for decision-making, accountancy industry standards and how they apply, and an alternative way of thinking.

9.1 The Professional Accountants Role ^ in the public interest!

Adapting business models and product and service development to the necessary requirements for sustainable development, and thus taking full responsibility for the impact the business may have in the longer term, is a strategic value-impacting issue of the utmost importance to a company and all of its stakeholders. This is a matter of responsibility for the Board. This book illustrates many initiatives taken in the last decade by several different bodies from the political as well as business world, community organisations and also consumers. The complexity and difficulty of the challenges we face in society in the context of sustainable development must not hinder a companys efforts to adapt to sustainable business development. In the long term; these issues are a matter of survival. Increasing pressure to extend the boundaries of corporate responsibility cements the importance of clear policies for the maintenance and further establishment of a position of trust, and for ensuring competitive advantages in the market. Many aspects of sustainable development include both threats and opportunities ^ business risks and opportunities ^ that must be addressed now, rather than later. The requirements for supply-chain companies are established by the contracting companies and organisations. Cooperation between companies is growing in order to achieve a uniform approach to defining this responsibility. From the supply side, these interactions are welcome as it can, otherwise, be extremely difficult to meet the varying requirements of the different purchasers. Stakeholder involvement is growing, and companies must ensure some form of systematic process as regards stakeholder analysis and

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stakeholder dialogue. The requirements for planned Total Communications Managementare growing. Value-driven business development has been discussed for many years.Never before have so many companies confirmed theiracceptance of codes of conduct.The companieschallenge is to progress from words to action, introducing commitments into the mainstream business planning process and also ensuring the reporting of the results and outcome of these commitments (see the Global Compact and requirements regarding the Communication on Progress). Information is the basis for comparing a companys earnings and performance with those of others (in the same industry or across sectors). What is the most relevant comparable information for the accurate assessment of a companys prospects relative to competitors? Investors and fund managers are now working together in joint surveys and questionnaires in order to obtain the necessary comparisons. It is becoming more and more important to respond cost-effectively to the information requirements of the stock market and other key stakeholders. Understanding how new requirements affect all aspects of the companys business before they become legally binding is necessary in order to have the foresight needed in times of constant change.It is clear that we have seen no more than the very first of the regulationsthat will be needed to achieve sustainable development. Energy taxes, carbon taxes, emissions trading, etc. are likely minor in scope in relation to what is to come. Arisk analysisperformed on the basis of correct and accurate information is, of course, a crucial aspect of preparation for the future. All dimensions of the move towards sustainable development require information. Reporting should not just reflect the big picture, that is, give a general view, but should also be sufficient in detail to form the basis for decisions. The emergence of norms for sustainability reporting (both separately and in annual reports) requires the independent review and audit of this information. The function of assurance is, as it will be in the foreseeable future, associated with the professional accountants role in business and society.Consequently, the discussion regarding the simplification of regulations and the elimination of the assurance requirement for the smallest of companies is not related to the basic principle of the value and importance of correct information in sustainability reports.The accounting professions standardisation work, which has its starting point in the IAASB

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Framework and the ISAE 3000, creates the necessary prerequisites for the industry to deliver value ^ in what is known as thepublic interest. Another way of describing this situation could be as follows: Does the accountancy profession prefer A business doing professional work or a profession doing business? This question was posed by the then Deputy Chairman of IFAC,GranTidstrm, at a seminar for professional accountants in 2009.It is true that the question of how the accountancy profession and the auditing sphere will continue to fulfil their role in the adaptation to sustainable development will determine (at least to some extent) the professional accountantslegitimacy in their quest to contribute to this development as independent parties.

9.2 FEE Sustainability Policy Statements

de ration des Experts The Federation of European Accountants, FEE (Fe ens) developed and published a series of Sustainabilcomptables Europe ity Policy Statements beginning in 2009. The first policy, Sustainability ^ The Contribution of the Accountancy Profession, acts as aportalfor several of the FEEs other policies within sustainable development. These policies determine the course of action for more than half a million accountants in Europe associated with the FEE through national accounting bodies and accountancy institutes. Below is the portal policy in its entirety: Sustainability ^ The Contribution of the Accountancy Profession
de ration des Experts comptables Europe ens ^ Federation of European FEE (Fe Accountants) wishes to share its strategy on sustainability in the form of a series of policy statements on core issues in relation to sustainability and the accountancy profession. FEE acknowledges that the urgent nature of the challenge of sustainability is becoming widely recognised. At the level of the organisation, accountants, whether in business, the public sector or within the world of professional practice, must rise to the challenge of sustainability which touches on many areas of traditional competencies.

About FEE
FEE represents 43 professional institutes of accountants and auditors from 32 European countries, including all 27 EU Member States. In representing the European accountancy profession, FEE recognises the public interest. It has a combined membership of more than 500.000 professional accountants, working in different capacities in public practice, business, government and education, who all contribute to a more efficient, transparent, and sustainable European economy.

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FEE acknowledges that the urgent nature of the challenge of sustainability is becoming widely recognised. There is a broad consensus that humanitys ecological footprintexceedsthe capacityofthe planet ^ but we only have one planet. In accounting terms we are living beyond our income and therefore we are destroying our capital. A consequence of the destruction of capital is that, even if a sustainable level of consumption is attained, it will be at a lower level than it need have been if capital had not been destroyed. Each year of unsustainable living will reduce long term sustainable prosperity. At the level of the organisation, accountants, whether in business, the public sector or within the world of professional practice, must rise to the challenge of sustainability which touches on many areas of traditional competencies. These include not only financial reporting and assurance, but also corporate governance, management accounting, systems and controls. In addition there is an increasing demand on organisations to provide non-financial information and indicators, including sustainability indicators, as part of their annual reporting, strategic planning and decision making. The accountancy profession should be, and increasingly is, developing connected reporting models which link financial and non-financial metrics.The profession is also applying its expertise in providing independent assurance to innovative corporate reporting in the area of sustainability. Accountants within and outside organisations should help operationalising this general concept of sustainability at the level of strategy formulation, process improvement and performance measurement. Key areas to be considered, all of which are touched by the concept in very pragmatic ways, include: corporate policies, accountability and reporting, the need for stakeholder engagement, impacts of voluntary codes, supply chain pressure, rating and benchmarking, and the influence of regulatory measures including eco-taxes, subsidies and tradable permits. The accountancy profession acts in the public interest to provide information, and assurance on information, in order to guide the careful stewardship of resources, and to form a basis fordecision making.Thisinformation may be financial or non-financial. FEE believes that the profession should build on the broad and important role it already plays regarding the relevance and reliability of financial and other information.

By the time this book is published, a total of eleven sustainability policies, listed below, will have been adopted and issued in a series of policy statements by the FEE: ^ The Contribution of the Accountancy Profession ^ Cost Internalisation ^ Non-Financial Information ^ Multiple-Stakeholders: The Essence of MultidisciplinaryTeams ^ Shaping a Sustainable Economy

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^ ^ ^ ^ ^ ^

Towards a Sustainable Economy: the Contribution of Assurance Carbon Emissions Information Embedding Sustainability into Corporate Governance Towards a sustainable economy: the contribution of assurance Embedding sustainability into corporate governance Carbon emissions information

9.2.1 A Provocation!
Accountants play an important role in efforts to achieve the sustainable development of society. However, no chain is stronger than its weakest link. Consequently, all parties have a personal responsibility to live up to the requirements of the policies jointly established by the national accounting associations in the FEE Council. BPs share value is in free fall since the oil catastrophe in the Gulf of Mexico. It will be possible to calculate the value loss to shareholders, but correctlyassessing the financial consequences of the damage to ecosystems and the industriesthat depend on ecosystem serviceswillbeimpossible.The USD 20 billion that Barack Obama levied on BP is no ceiling on the compensation issue. Also, as is known, GMs shares have not been traded on the stock market for a period, as the company has been undergoing a reorganisation in response to, amongst other things, requirements on vehicle CO2 emissions. Of course, these examples contribute to the realisation that environmental concerns and other issues regarding sustainable development have a real impact on value. The application of the concept going concern takes into account all available information regarding the company and the future, which, in practice, encompasses a period of at least twelve months from the end of the accounting period, but which can also extend much longer. It is worth noting that the auditor, in the Auditors Report dated 4 March 2009 attached to GMs annual report, stated:
The Corporations recurring losses from operations, stockholdersdeficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern.

Whilst undoubtedly certain aspects of the above-described issues surrounding going concern are dependent on a companys business model, product development, ability to adapt to the market, etc., BP and GM

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clearly illustrate that sustainability issues will now become a part of auditorsreality. Half a million (!) accountants from 43 national accounting associations in 32 European countries have, in the FEEs highest governing body, the FEE Council, discussed and adopted a series of policies with a focus on the accountants role in efforts to achieve sustainable development. During 2009 and until the summer recess in 2010, eleven policies have been adopted and more are in draft form for discussion and adoption in the autumn. Statements, opinions, and commitments that are already public are to be complied with by accountants and accounting firms. All words and no action, you could say. One could also say that words lead to action, so lets withhold judgment. The total cost of loss of biodiversity and the degradation of ecosystems is estimated at between USD 2 and 4.4 billion for 2008, equivalent to between 3.3 and 7.5% of the worlds gross domestic product (according to a Briefing Paper which was prepared by PwC for the World Economic Forum in Davos earlier this year). The consequences of this degradation of ecosystems affect not just the companies directly using natural resources but also the supply chain and growth of the majority of industries, both in the developed world and in developing countries.With a global population of 6.8 billion, increasing to 9.1 billion by 2050 (according to UN population projections) andwith the continued and acceleratedloss of ecosystem services, it is difficult to imagine that this would have no impact on businesses, i.e. auditorsclients. Although executives and auditors primarily consider relatively shortterm risks, there is now good reason to analyse the business risks inherent in failing to convert to sustainable business development.In any case, that is what the members of the FEE have determined. The question we should ask ourselves in the accountancy and consulting profession is how we live up to the agreed policies within our audit methodology and professional practice. As no chain is stronger than its weakest link, all members of the profession have an ethical responsibility to comply with the adopted policies. Unless we, as a profession, are perceived to be insightful and knowledgeable concerning sustainable business development, as well as other issues, and unless we understand the importance of ESG issues (Environmental, Social, Governance) in the planning and implementation of

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the audit process, we are, of course, not living up to the motto in the public interest. It seemsthat the manner in which the accounting and consulting industry assumes its role in the adaptation to sustainable development will determine, at least in part, accountants legitimacy in their efforts to contribute to a sustainable society and sustainable social development as an independent party. It is time, therefore, to readdress, reassess and develop the audit of the future!

9.3 A basis for decision making?

So far, we have seen that Eurosif is urging the EU tointroduce directives on sustainability reporting.The reason for this is that investors need reporting as a foundation for decision-making. A growing number of investment banks and asset managers have begun to request companies sustainability reporting, and rating indices43, and analyst firms44 request sustainability information for their analyses. EFFAS has developed specific guidance for ESG analysis of companies. The Swedish Society of Financial Analysts (SFF), for example, recommends that companies disclose information in accordance with the GRI Sustainability Reporting Guidelines. In a joint survey, Sustainable Value Creation, thirteen institutional investorsin Sweden asked the one hundred largest listed companies on the Stockholm Stock Exchange to disclose information via a questionnaire on the importance of ESG issues for their operations. As owner of the state-owned companies, the Swedish government is ultimately responsible for ensuring that those companies report in accordance with the GRI. The GRIs reporting guidelines recommend independent assurance, and pressure on companies to disclose their approach to sustainable development has never been greater. There is hardly a well-informed person today who doubts that this reporting is used as the basis for decision-making. The reporting of management and Board decisions is required, as well as decisions made by interested parties and stakeholders in the company, such as investors and analysts. This logic leads to the almost obvious conclusion that the information
43 44

Dow Jones, FTSE4 Good, NASDAQ QMX etc. GES Investment Services, Ethix etc.

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should be subject to quality assurance. There are, of course, different approaches for ensuring the quality of reporting and accounting.

9.4 What doesgoing concernmean in the context of sustainability?

The notion of going concern in terms of accounting is described in IASBs Framework for the Preparation of Financial Statements as follows (paragraph 23):
Going concern 23 ^ The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations; if such an intention or need exists, the financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed.

One may tentatively conclude that the foreseeable futurein this description is meant to imply a long-term perspective.However, this is not necessarily the case. When referred to in accounting standards, this notion is assigned a shorter time perspective. For example, in IAS 1 Presentation of Financial Statements, the notion of going concern is referred to as follows in paragraphs 25 and 26:
Going concern 25 ^ When preparing financial statements, management shall make an assessment of an entitys ability to continue as a going concern. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entitys ability to continue as a going concern, the entity shalldisclose those uncertainties.When an entitydoesnot prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern. Going concern 26 ^ In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period. The degree of consideration depends on the facts in each case. When an entity has a history of profitable operations and ready access to financialresources, the entity may reach a conclusion that the going concern basis of accounting is appropriate without detailed analysis. In other cases, management may need to consider a wide range of factors relating to

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current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.

The insertion of a minimum period of twelve months in the text above may make it clear that going concern in accounting terms is different from what is generally meant by this concept in sustainability reporting. Thus, although going concern, as applied in sustainability reporting, looks towards the future on a long-term basis, it may refer to a considerably shorter period when used in an accounting context. In accounting the notion exists in order for the reporting entity to be able to assess whether normal accounting principles under IFRS should apply or whether the financial statements should be prepared on an alternative basis. An application of going concern considers all available information regarding the company and the future which, in practice, covers at least twelve months from the end of the reporting period, but which can also cover a longer period of time. The cases of BP, and General Motors, as discussed in the Chapter entitled A Provocation!are relevant in this context, and it is worth noting that the auditors who produced the auditors report in GMs annual report dated 4 March 2009 stated:
...the Corporations recurring losses from operations, stockholders deficit, andinability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern.

Certain aspects of the issues surrounding going concern, regarding which auditors must take a standpoint, are related to the companys business model, product development, capacity for market adjustment, etc. A ' vis susdiscussion regarding the companys capacity for adaption vis a tainable development requirements is obviously well outside the issues around going concern, but BP and GM clearly illustrate that sustainability issues have now become a seriouspart of auditorsreality.It would, it must be said, be valuable ^ from a sustainability perspective ^ to expand the time frame of the going concern concept from its current short-term status (12 months) to a requirement based on a long-term time perspective!

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9.5 GRIs recommendations

Under the section Assurance in the GRIs Sustainability Reporting Guidelines is stated: Choices on assurance
Organisations use a variety of approaches to enhance the credibility of their reports. Organisations may have systems of internal controls in place, including internal audit functions, as part of their processes for managing and reporting information. These internal systems are important to the overall integrity and credibility of a report. However, GRI recommends the use of external assurance for sustainability reports in addition to any internal resources. A variety of approaches are currently used by report preparers to implement external assurance, including the use of professional assurance providers, stakeholder panels, and other external groups or individuals. However, regardless of the specific approach, it should be conducted by competent groups or individuals external to the organisation.These engagementsmay employgroups or individuals that follow professional standards for assurance, or they may involve approaches that follow systematic, documented, and evidence-based processes but are not governed by a specific standard. GRI uses the termexternal assurance to refer to activities designed to result in published conclusions on the quality of the report and the information contained withinit.Thisincludes, but isnot limited to, consideration of underlying processes for preparing this information.This is different from activities designed to assess or validate the quality or level of performance of an organisation, such as issuing performance certifications or compliance assessments. Overall, the key qualities for external assurance of reports using the GRI Reporting Framework are that it: ^ Is conducted by groups or individuals external to the organisation who are demonstrably competent in both the subject matter and assurance practices; ^ ^ Is implemented in a manner that is systematic, documented, evidencebased, and characterized by defined procedures; Assesses whether the report provides a reasonable and balanced presentation of performance, taking into consideration the veracity of data in a report as well as the overall selection of content; Utilizes groups or individuals to conduct the assurance who are not unduly limited by their relationship with the organisation or its stakeholdersto reach and publish an independent and impartial conclusion on the report; Assesses the extent to which the report preparer has applied the GRI Reporting Framework (including the Reporting Principles) in the course of reaching its conclusions; and

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^ Results in an opinion or set of conclusions that is publicly available in written form, and a statement from the assurance provider on their relationship to the report preparer.

Asindicatedin Profile Disclosure 3.13, organisations should disclose information on their approach to external assurance.

9.6 A brief history

9.6.1 This is how the standards on independent assurance of sustainability reporting emerged
The Federation of European Accountants,FEE, together with the Swedish accountancy body Far, the Dutch equivalent Royal NIVRA and the German Institute IDW have initially driven the development of standards for the assurance of environmental and sustainability reporting. As early as 1996, several years before the GRI published the first guidelines on sustainability reporting, and long before the standards on the assurance of environmental/sustainability reporting had even been considered, the first assurance report was published in a Swedish listed companys separate environmental report for the financial year 1995. The company was Stora Kopparbergs Bergslags AB (today Stora Enso), and this was the first listed company in Sweden to include an environmental report for which independent assurance was provided as a genuine appendix to its Annual Report and the Annual General Meeting.In the same year (1995), FEE published the first survey in this field, Environmental Accounting, Reporting and Auditing: Survey of current activities and developments within the Accountancy Profession. Developments in Sweden were noted in four lines in this survey:
Some members have initiated consultancy work in the field of environmental accounting. No details of the scope of this work are known. One firm has also published a survey on environmental issues included in the annual reports of public companies.The same firm has made environmental accounting a profile area of activities in their external marketing.

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The first assurance statement in a Swedish listed companys environmental report arrived as early as 1995 ^ Stora Kopparbergs Bergslags AB.

In 1996, the FEE Research Paper on Expert Statements in Environmental Reports ^ Executive summary was published, with the following introduction:
An increasing number of companies issue environmental reports both at corporate and site level on a voluntary basis. Often an expert statement is attached to these reports in order to enhance their credibility. However no standards exist on auditing environmental reports or for the wording of the expert statement...

FEE, thereupon, initiated a discussion on the role of professional accountantsin this audit-related field and published, in 1999, a discussion paper45 which was distributed to all of the accounting bodies and interested parties in Europe. In 2000, Analysis of Responses to FEE Discussion Paper ^ Providing Assurance on Environmental reports published in October 1999. For the 2002 UN conference in Johannesburg46, FEE published a report entitled FEE Discussion Paper Providing Assurance on Sustainability Reports, 2002. Gran Tidstrm, the then President of FEE, wrote in the foreword:
... This Discussion Paper Providing Assurance on Sustainability Reports, focuses on a key element in the wide scale acceptance of sustainability reporting, namely independent, third partyassurance provision. As an essen45 46

FEE Discussion Paper ^ Providing Assurance on Environmental Reports. UN World Summit on Sustainable Development.

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tial part of the reporting process, it is vital that preparers, stakeholders and other users are fully aware of the issues surrounding assurance provision. By issuing thispaper,FEEslong-term goalisto raise the qualityand the credibility of sustainability reporting.The accountancy professions relevant experience is an essential element in providing assurance on sustainability reports. Achieving generally accepted, high quality reporting requires an inclusive multidisciplinary approach, (indeed many accountancy firms already use multi-disciplinary teams when providing sustainability assurance).Therefore, FEE encourages multi-stakeholder dialogue on the issues raised in this paper...

Following on from many years of FEE-led discussions on guidance in the sustainability assurance field, the Swedish Institute for the Accountancy Profession, Far, started to develop a set of Swedish recommendations on assurance issues. Draft recommendation ^ Independent assurance on voluntary separate sustainability reporting was, the worlds first national recommendation with regards to the assurance of sustainability reporting.This was published in Fars Samlingsvolym (Collection volume) 2004. Shortly thereafter, the Dutch auditing association, Royal NIVRA, the German IDW and also one of the French accountancy bodies published their respective national standards for the independent assurance of environmental and sustainability reporting.

Far was the first organisation in the world to publish a national recommendation regarding independent assurance of sustainability reporting, 2004.

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That same year, 2004, FEE issued a call47 to stakeholders throughout the world to draw attention to the necessity of developing this assurancerelated field. Amongst other requests, two were particularly addressed to the International Federation of Accountants (IFAC):
^ IFAC has no standard specifically for assurance for sustainability. Only one Guidance Note supports AA1000 Assurance Standard. We call on IFAC and AccountAbility to co-operate and not to compete so as to move speedily to provide high quality and usable standards for assurance on sustainability. ^ International Standards on Auditing (ISAs) deal with the responsibility that auditors have towards other information in the annual report containing the financial statements. There is a growing trend to include sustainability information in annual reports and financial statement auditors necessarily have to consider such disclosures to discharge their responsibilities. We call on IFAC to consider whether the guidance in International Auditing Practice Statement 1010 The consideration of environmental matters in the audit of financial statements should be extended to sustainability matters.

In the press release, the following comments were presented:

Commenting on the launch ofthe issuespaperFEE Call for Action:Assurance for Sustainability, Chairman of the FEE Sustainability Assurance Group, Mr. Lars-Olle Larsson stressed that:CSR reporting without assurance, is rightly seen as little more than advertising. FEE, which represents leading practitioners in CSR reporting, believes that credible assurance is the key to increasing confidence in such reporting in the eyes of the worlds capital markets.

Before the GRI (Global Reporting Initiative) published the third-generation reporting guidelines (known as the GRI G3), in 2006, the FEE Discussion Paper ^ Key Issues in Sustainability Assurance, An Overview, was published. This overview discussed four new national standards and the need for these to be coordinated. Once again, the FEE expressed the need for an international standard. For several years, there had been a general standard for assurance procedures, ISAE 100, which was updated in 2004 by the standard-setter for financial auditing and assurance, IAASB48, in the framework International Framework for Assurance Engagements, and the general standard International Standard on Assurance Engagements 3000 (Revised) ^ Assurance Engagements Other than Audits or Reviews of Historical Financial Information, ISAE 3000 (R).This fra47 48

FEE Call for Action: Assurance for Sustainability. International Auditing and Assurance Standards Board.

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mework and standard are still, at the time of writing, applied by auditors throughout the worldin the assurance of sustainability reports.The Swedish equivalent, RevR 6, was updated in accordance with ISAE 3000 in 2006, before being updated to its present form in 2008/2009. Royal NIVRA developed the Dutch national standard and published the standard 3410N (also issued in English) in 2007.This was translated into Swedish by Far and adapted to the generally accepted auditing principles as developed in Sweden over many years. In 2009, Fars publishing company, Far Frlag, published the most recently-issued (at the time this book is written) national standard, RevR 6 Bestyrkande av hllbarhetsredovisning (Assurance of Sustainability Reports). In addition to reviews, this standard also permits the auditing of sustainability reporting, in the manner prescribed by the ISAE 3000 and the Dutch standard 3410N. Work on these standards is likely to continue in pace with the development of generally accepted auditing practice in this assurance area, and generally accepted auditing practice will develop in pace with the yearon-year increase in the number of reports for which assurance is provided. Reports from ESRA (the European Sustainability Reporting Association) indicate a rapidincrease in the numberof sustainability reports, including assurance statements over the past three years.In 2006, barely 10% sustainability reporting in Europe was independently assured. In 2007, the amount was approximately 16% and in 2008, a total of 25% was quality-assured through independent assurance. The trend is clear ^ each year, an increasing number of sustainability reports are subject to independent assurance.

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9.7 3410N Assurance Engagements Relating to Sustainability reports

In July 2007, the Dutch federation of accountants Royal NIVRA, published the national standard 3410N Assurance Engagements Relating to Sustainability Reports. This standard has been translated into English. With the permission of the Royal NIVRA, we provide below the official translation of the Dutch standard in its entirety: Introduction Scope of this Standard ( T1 and T2)
1. This Standard provides guidance to the auditor when performing an assurance engagement relating to a companys sustainability report. It applies to assurance engagements relating to a sustainability report where the objective of the engagement is to obtain reasonable assurance (an audit engagement), as well as to those whose objective is to obtain limited assurance (a review engagement). A hybrid of the two types of engagement also falls within the scope of the Standard.In the case of a hybrid engagement, the audit elements must be clearly distinguished from the review elements. As this Standard applies to audit engagements as well as review engagements, the differences between the requirements and the disclosures for the two types are stated explicitly, insofar as this is necessary. 2. The objective of an assurance engagement relating to a sustainability report is that a public auditor examines the information in the report to determine whether it meets the relevant reporting criteria.The perspective of the intended users of a sustainability report is central to assurance engagementsinvolving such reports.

Objective
3. The objective of the auditor is to form a reasonable basis for his conclusion that the sustainability report provides a reliable and adequate presentation of the reporting organisations policy for sustainable development, as well as the activities, events and performance of the organisation relating to sustainable development in a reporting period.

Definitions
4. The following definitions apply in this Standard ( T 3 toT 10): ^ External expert: an expert not employed by the reporting organisation. ^ Intended users and usergroups: the interested parties for the conduct of the organisation and for the content of the organisations sustainability report. ^ Legitimate information needs: the information that an average representative of the intended users or user groups can demand based on legislation, generally accepted reporting standards, case law, or agreements between the reporting organisation and these intended users or user groups.

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^ Sustainability report1: a publication for a reporting period in which a reporting organisation informs and renders account to intended users about its policy regarding sustainable development, as well as its activities, events and performance relating to sustainable development. Reporting organisation: an organisation that is responsible for the preparation and publication of a sustainability report and that engages an auditor to undertake an assurance engagement relating to the sustainability report. Reporting criteria: reporting criteria are the benchmarks used in assessing or validating the sustainability report, including, insofaras theyare relevant, the principles observed by the reporting organisation in preparing the report.

REQUIREMENTS General and engagement acceptance Engagement letter ( T 11 toT 17)

5. Before accepting the assurance engagement, the auditor should verify that: ^ he is independent of the engaging party; ^ there is a rational purpose for the engagement; ^ he satisfies the requirements regarding the expertise for performing the engagement; ^ it is justifiable to assume that the management of the reporting organisation is acting in good faith; ^ it is justifiable to assume that the reporting criteria used by the reporting organisation are suitable; ^ it is justifiable to assume that adequate assurance evidence can be obtained for the purpose of the engagement. 6. The auditor should focus the assurance engagement on the both the accuracy and completeness of the information in the sustainability report. The auditor is permitted to accept limitations that might relate to the aspects of accuracy and/ or completeness. Such limitations should be explained in the sustainability report, as they might relate to limitations in the report itself or in its examination. 7. When accepting the engagement, the auditor should reach agreement with the management of the reporting organisation on the action to be taken if negative findings arise during the examination of the sustainability report. 8. If the engaging party wishes to change an audit engagement into a review engagement while it is being performed, the auditor should ascertain whether the reasons for the change are acceptable and logical. The auditor is not permitted to accept such a change if its purpose is to prevent an adverse conclusion or a disclaimer of conclusion. 9. The auditor should take appropriate steps to allow him to bear undivided responsibility for performing the assurance engagement. If he intends to involve

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external experts, this should be stated in the engagement letter. The undivided responsibility of the auditor is expressed by his signing of the assurance report. If he involves internal experts, these persons and the auditor can jointly sign the assurance report. 10. The auditor should state in the engagement letter that he will report timely in writing on allhis relevant findingsthat could be of significance to the management of the reporting organisation or the body charged with governance, as the case may be. 11. The auditor should state in the engagement letter that, if he finds indications of fraud, he will act in accordance with the regulations applying to auditors.

Review of the reporting criteria ( T 18 toT 24)

12. The auditor should ascertain whether the generally acceptable and specifically developed reporting criteria selected by the organisations management are suitable. If the auditor considers that the criteria selected are not suitable or not sufficiently suitable, he should not accept the engagement or state the reservations in his assurance report. 13. The auditor should assess the decision-making process of the organisations management concerning the selection and depth of information in the sustainability report (reporting materiality) and, at a minimum, verify that the report is not misleading, or could be, owing to under-emphasis or over-emphasis on certain groups of intended users, topics and/or information on these topics, and that it satisfies the legitimate information needs of the reports intended users.

Expertise ( T 25)
14. The auditor or the assurance team, as the case may be, should have the expertise needed to perform the assurance engagement, i.e. knowledge, experience and skills in the following areas: auditing; the subject matter of the examination; management and information systems; external reporting and reporting standards, as well as the relevant social and political issues. 15. The auditor should assemble an assurance team with sufficient experience and competency in the above-mentioned areas of knowledge, to enable it to identify and collect the required assurance evidence.The team can be multidisciplinary, including persons from outside the auditing profession (experts). The auditor should have sufficient understanding of the relevant topics in the sustainability report to enable him to take responsibility as the leader of an assurance team.

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Collaboration with external experts ( T 26 and T 27)

16. If the auditor involves an external expert, he (the auditor) should act in conformity with ISA 620,Using the Work of an Expert. 17. If the auditor involves an external expert, he should agree with the expert that they conduct joint consultation on the planning and performance of the engagement and that the expert reports his finding in writing to the auditor. The auditor should review the work of the expert and the results produced by it.

Collaboration with internal auditors

18. If the auditor involves an auditor who is employed by the reporting organisation, he (the auditor engaged) should act in conformity with ISA 610,Considering the Work of Internal Audit.

Risk analysis ( T 28 toT 35)

19. The auditor should obtain a good understanding of the sector in which the reporting organisation operates and of the characteristics of the organisation itself, including the important business risks relating to sustainable development and the reporting on these risks. 20. The auditor should obtain a good understanding of the corporate governance, internal control environment and control procedures. He should obtain sufficient understanding of the internal control environment to be able to verify the integrity of the management, supervisory directors and executive officers, as well as the standpoint of the bodies charged with the governance for which account is rendered in the sustainability report. 21. The auditor should evaluate the inherent risks and the internal control risks, focusing on the factors that could be material for the content of the sustainability report.

System-related procedures ( T 36 toT 43)

22. The auditor should assess whether the relevant information systems satisfy the requirements set for them.If they do not, he should ascertain whether by performing substantive procedures, he would be able to obtain adequate assurance evidence. If this is not possible, he should determine what implications this will have for his assurance report. 23. Audit engagements: If the auditor can and wishes to rely on the internal controls, he should obtain sufficient evidence concerning their operating effectiveness. Review engagements: Testing the operating effectiveness of the internal controls is not part of a review engagement.

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Substantive procedures ( T 44 toT 46)

24. Irrespective of the assessedlevel of inherent risk and internal controlrisk, the auditor should perform certain substantive procedures. Audit engagements: The main types of procedure in this case are: ^ inquiries; ^ analyses (analytical reviews and tests of relationships); ^ verification of information against documents and other primary sources of assurance evidence; ^ tests of details. The auditor should determine the scope and timing of these procedures based on the understanding gained of the systems and his professional judgement. Review engagements: The main types of procedure in this case are: ^ inquiries; ^ analyses (analytical reviews and tests of relationships); ^ comparing information with documents. If the auditor has reason to believe that the information under review contains material errors, he should perform the additional procedures necessary for him to make a professional judgement.

Overall presentation of the sustainability report ( T 47)

25. The auditor should assess the overall presentation of the sustainability report. To this end, he should ascertain at a minimum that the information provided is not misleading, the content is balanced, and the topics dealt with are explained clearly and adequately.

Special factors concerning multi-locations ( T 48 and T 49)

26. For the planning and performance of proceduresin the case of multi-location organisations, the auditor should consider distinguishing between group entities according to their relevance in terms of activities, size and/or specific risks.

Obtaining additional assurance evidence ( T 50)

27. The auditor should obtain a written representation from management confirming its responsibility for the content of the sustainability report and stating that it considers the organisations reporting policy and criteria used adequate and that the report contains all the information it believes to be of material importance to the intended users. 28. If the organisation has a supervisory Board, when the auditor holdshismeeting with this Board he should ask the Board for its views on the organisations reporting policy, reporting criteria and the adequacy of the sustainability report as a whole. 29. If the management of the reporting organisation refuses to issue a written representation or the supervisory Board refuses to meet with the auditor to discuss the sustainability report, the auditor should consider the consequences of this for the wording of his conclusion.

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30. The auditor should ascertain that the sustainability report clearly shows which parts of it have been audited, which parts have been reviewed and which parts are not considered to be within the scope of the engagement. 31. The auditor should critically read allinformation published in conjunction with the sustainability report, to ascertain that none of this information contradicts the report.

Documentation
32. The auditor should record in his working papers all significant considerations and decisions concerning acceptance of the engagement, any changes to the engagement, the planning of the procedures, and the findings that were obtained during the performance of the procedures, in line with the concept of ISA 230, Audit Documentation.

Assurance report ( T 51 toT 67)

33. The auditor should state which parts of the sustainability report have been audited, which parts have been reviewed and which parts are not considered to be within the scope of the engagement. An assurance report has to contain certain basic elements. 34. If the examination or the report is subject to limitations, the auditor should state this in his assurance report and refer to the reasons for the limitations expressed by management in the sustainability report. 35. If while performing the engagement the auditor reaches the conclusion that the reporting criteria used are unsuitable, he should state this in his assurance report. 36. If the auditor states in his assurance report that external experts were involved, he should add that he bears undivided responsibility for the entire engagement. 37. For a review engagement, the auditor should state that the procedures performed are more limited than those for an audit engagement, so that he sought and obtained less assurance than for an audit engagement. 38. In the case of a combined audit and review engagement, an all-embracing conclusion must not be given.

Specific public sector aspects

39. If an auditor performs an assurance engagement and is not independent of the engaging organisation (being an internal auditor or public sector auditor), he should apply this Standard including a specific reference in his assurance report to the directions of footnotes 2 and 4 to ISA 3000,Assurance Engagements Other Than Audits or Reviews of Historical Financial Information.

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APPLICATION NOTES Sustainability report ( 1 and 2)

T 1 This Standard has similarities to and differences from standards applying to the audit of historical financialinformation.The differencesmainly concern the following: ^ The quantitative information disclosedin a sustainability report isnot generally measured in monetary units, but in units that are mutually independent (for example performance indicators for carbon dioxide emissions and performance indicators for supplier screening using respect for human rights as a criterion). ^ The quantitative information disclosed in a sustainability report cannot usually be derived from a closed accounting system. The double-entry bookkeeping system, which in many respects determines the approach to auditing historical financial information, is often absent. A closed valuation cycle is often not in place and the records are generally stand-alone. ^ The qualitative information (e.g. policy and management) is of equal significance as the quantitative information. ^ Internal control systems for risk management and data collection comparable to the systems for historical financial information are not available for all topics covered by a sustainability report. Systems for risk management and information collection that are in place often provide fewer guarantees of completeness and accuracy than a system for reporting historical financial information. ^ A sustainability report is aimed at a significantly wider and less homogeneous group of users than a report on historical financial information. The intended users or user groups of a sustainability report might differ considerably in terms of their aims and expectations regarding their legitimate information needs. ^ The reporting criteria for sustainability reports are usually more recent and less developed than those applying to historical financial information. ^ As yet, there is no statutory obligation for the audit of sustainability reports. T 2 Compared with an audit of historical financial information, the above leads to the following features characterising an audit or review of a sustainability report: ^ Specific expertise criteria apply. The knowledge, experience and skills required for the examination of a sustainability report mean that the work is often performed by multidisciplinary teams. ^ The choices of the reporting organisation concerning the content of the sustainability report are more important than those in the case of historical financial information. The auditor pays special attention to the consistency of the choices made by the reporting organisation.

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^ It can make financial sense to omit certain topics from the audit or review of the sustainability report if their inclusion necessarily entails disproportionate costs. The engagement is subject to more professional and financial limitations, which requires their clear explanation in the assurance report to avoid an expectation gap. The risk approach component of the procedures remainsimportant but is, in part, implemented differently, owing to attention being given more explicitly to the interests of the various groups of intended users. As relatively more information in a sustainability report is qualitative, the emphasis for this information will be on interviews, its evaluation using the internal control system, the assessment of the integrity of the company officers responsible for the information, assessment of compliance with codes of conduct, and similar matters. The wording of the conclusionsin the assurance report cannot (yet) be standardised in the form of uniform texts.

Definitions ( 4)
T 3 The intended users form the core aspect both for the reporting organisation and for the auditor.This Standard uses the following concepts ^ intended users (or user groups); ^ legitimate information needs; ^ average representatives of intended users (or user groups).

Intended users (or user groups)

T 4 The reporting criteria are defined from the perspective of the intended users. The criteria also reflect the role of the intended users (or user groups) in relation to the reporting organisation. T 5 The reporting organisation could hold regular, formal dialogues with intended users to determine their legitimate information needs. Other sources are just as feasible, however, such as the normal communication with intended users and other stakeholders via the organisations website or the process for handling customer complaints.The works council can act as an important source to define the information needs of employees. The views of intended users and other stakeholders might emerge via the organisations supervisory Board or the media. T 6 Matching information to the needs of intended users can be effected by dividing them into the following six user groups, partially achieving the same end as formal user dialogues. ^ suppliers of goods and services (the procurement market), including any partners for the joint procurement of goods or services; ^ employees of the reporting organisation; ^ customersand endusers of supplied goods and services (the salesmarket);

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^ ^ ^ stakeholders in the context of the reporting organisations impact on social aspects of society; stakeholders in the context of the reporting organisations impact on the environment; financial and economic stakeholders, such as shareholders and other investors.

T 7 An intended user can belong to more than one user group. For example, an employee is a stakeholder of the organisation as a member of groups b, d and e. Dividing users into groups simplifies the practical application of a test of completeness. T 8 The following three questions are important for the test of completeness used: ^ Does the sustainability report address all six intended user groups? ^ For each of the six intended user groups of the sustainability report, does it dealwith the topicsthey need to have coveredin order to obtain an adequate view, taking into account any biases in the material to be presented? ^ At a minimum, is the relevant information provided for each topic so that an adequate view in relation to them can be obtained? If these completeness requirements are not met, it could have implications for the assurance report.

Legitimate information needs

T 9 To ascertain that the legitimate information needs of the intended users are met, the following procedures can be performed: ^ ascertain whether the organisations reporting criteria are being complied with in terms of objective and content; ^ perform a test of completeness relating to the sustainability report; ^ determine that available internal and external sources of information on the interests of intended users are referenced in preparing the sustainability report, with enquiries of the supervisory Board being one such source; ^ assess whether the organisations handling of whistleblower reports and/or external complaints is adequate, and determine any effect they have on the content of the sustainability report.

Average representatives of intended users (or user groups)

T 10 The use of the expression average representatives of intended users (or usergroups)isintended to convey that the materiality principle applies.Extreme requirements placed on the organisation regarding the content of its sustainability report do not have to be satisfied. However, it is recommended that an organisation accounts for its conduct as much as possible in relation to such requirements, thustakinginto account the perspectives of allparties concerned.Reporting transparency is important to all stakeholders.

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General and engagement acceptance Engagement letter ( 5 to 11)

T 11 When accepting the engagement, the auditor discusses with the management of the reporting organisation how the latter intends to define the reporting criteria. The purpose of the discussion is to remove all differences of opinion in advance concerning reporting policy and/or relevance, completeness and degree of accuracy applying to certain areas. T 12 On acceptance of the engagement, it is agreed that adverse findings are communicated as quickly as possible to the management of the reporting organisation, as well as to the supervisory Board. T 13 If an assurance report contains adverse conclusions or disclaimers of conclusion and the management decides not to publish the report after the engagement has been completed, the auditor considers whether or not to renew the assurance engagement in subsequent years.The reason is that the primary aim of the engagement is to inform third parties about all significant findings from an examination of the sustainability report. T 14 Althoughit isnot mandatory to state in the engagement letter that experts of the auditors organisation (internalexperts) willbeinvolved, it is recommended to do so. T 15 During the performance of the engagement, the auditor and/or the engaging party might conclude that a limitation of the scope isnecessary, concerningall or part of the engagement.In such cases, the auditor consults the engaging party on the extent of the limitation to ensure that the engagement as a whole remains acceptable and viable.The auditor must not accept limitations during the performance of the engagement if he considers their sole or main purpose is to prevent the assurance report containing adverse conclusions or disclaimers of conclusion. General guidance for such situations is given in the General Framework for Assurance Engagements and in ISA 3000. T 16 The auditor can accept the following limitations: ^ Limitations in the (content of the) sustainability report: for example, the report does not (yet) address all the relevant groups of intended users, does not (yet) apply to all countries where the organisation operates, or does not (yet) include all performance indicators of relevance to the intended users. ^ Limitations on the examination: for example, although certain topics and performance indicators are included in the report, they are not (yet) sufficiently controlled and, for this reason, the auditor and the engaging party agree it is not logical to audit or review the information concerned, at least not at present.

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T 17 Acceptance of these types of limitationis subject to the following conditions: ^ the management of the reporting organisation explains and justifies clearly what the limitations in the sustainability report are, stating, if possible, how they will be dealt with in the future. ^ the auditor considers that the engagement is still viable in relation to the intended users, providing it is reasonable to assume that they are unlikely to be misled because of the limitations.

Review of the reporting criteria ( 12 and 13)

T 18 An assurance engagement comprises several essential elements, one of them being the existence of suitable criteria (see 34 to 38 of the General Framework for Assurance Engagements). When deciding whether to accept an engagement, the auditor reviews the reporting criteria being used. T 19 The five characteristics in the General Framework for Assurance Engagements concerning the suitability of reporting criteria are relevance, completeness, reliability, neutrality and understandability. T 20 The standards2 available for sustainability reportsinclude Guide to Sustainability Reporting (Handreiking voor Maatschappelijke verslaggeving) of the Dutch Accounting Standards Board (DASB), the Sustainability Reporting Guidelines of the Global Reporting Initiative (GRI), the standards of the World Business Council for Sustainable Development (WBCSD), and the standards of the Institute for Social and Ethical Accountability (AccountAbility). In preparing its Guide to Sustainability Reporting, the DASB drew on the GRI Guidelines (2002 edition). The GRIs Sustainability Reporting Guidelines were created by an authoritative and recognised body of experts, using a transparent multistakeholder process, and are accessible to everyone. T 21 The management of the reporting organisation is responsible for the selection of suitable reporting criteria. If the reporting organisation selects reporting criteria for its sustainability report other than those of the GRIs Sustainability Reporting Guidelines, the auditor is recommended to base his assessment of the suitability of the organisations reporting criteria on part 1, Defining Report Content, Quality and Boundary, and part 2, Standard Disclosures, of the GRIs (G3) Guidelines, in conjunction with the DASBs Guide to Sustainability Reporting.In such cases, the professional opinion of the auditoras an expert on external reporting is of decisive importance. T 22 Reporting criteria are the most important means for establishing the legitimate information needs of the intended users, and hence for the content of the sustainability report. Moreover, management has the responsibility to take into account other sources of additional requirements for the content of the sustainability report, such industry-wide agreements and covenants concluded with the government. The criteria selected and reporting principles applied by man-

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agement are described in the organisations reporting policy. The Guide to Sustainability Reporting of the DASB and the Sustainability Reporting Guidelines of the GRI both require information to be provided on the reporting policy. T 23 The auditor reviews the appropriateness of the reporting policy.When doing so, the areas he gains insight into include: ^ the process for identifying the scope andlimits ofthe reporting organisation; ^ the dialogue processes for internal and external stakeholders; ^ the understandability of the choices made concerning the topics to be reported and the methodology to be used, as well as transparency concerning limitations applying to these topics or their reliability; ^ the consistency of the reporting policy. T 24 If information that might be relevant to certain groups of intended users is absent from the sustainability report, the reporting organisation must provide adequate justification for this omission in the report itself. One argument might be the need to keep sensitive information confidential, this argument also being accepted by the auditor.

Expertise ( 14 and 15)

T 25 The expertise of the auditor required for the examination of a sustainability report comprises the following elements: Knowledge of auditing ^ Knowledge of, and experience in, providing assurance on information other than financial information in general and in the field of sustainability reporting in particular, including the application of the relevant IFAC and/or Royal NIVRA assurance standards. ^ A general understanding of assurance standards of non-accountancy organisations, such as the AA1000 Assurance Standard of the Institute of Social and Ethical Accountability (AccountAbility); ^ Knowledge of the sector. ^ Familiarity with the social environment of the reporting organisation. Knowledge of subject matter ^ Knowledge of environment issues and of the associated technical risks. ^ Knowledge of the socialand economic aspects considered, or which should be considered, by the sustainability report. ^ Knowledge of current environmental, social and/or employment legislation, as well as of sectoral, national and/or international agreements, rules, conventions and/or protocols. ^ Knowledge of sustainability risks in the relevant chain, associated standards and international developments.

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Knowledge of management and information systems ^ General understanding of relevant management systems, such as environmentalmanagement systems or health and safety systems, as well as of the relevant standards, such as ISO 14001 and SA 8000; ^ Knowledge and experience of assessing the adequacy of internal information systems for collecting and reporting on the intended information, including the internal control aspects. Knowledge of external reporting and reporting standards, as well as of the relevant social and political issues ^ Knowledge ofthe relevant standards forexternalreporting, such asthe sustainability reporting manual of the DASB, the GRIsSustainability Reporting Guidelines, and other comparable nationalor internationalreporting standards and recommendations. ^ Understanding of the current major social and political issues in the area of sustainable development, both national and international. ^ Understanding of the opinions, views and interests of intended users, including their legitimate information needs. ^ Familiarity with the social environment of the reporting organisation.

Collaboration with external experts ( 16 and 17)

T 26 The undivided responsibilityof the auditor takespriority.If an externalexpert is used, the auditor states that he (the auditor) has undivided responsibility, even in those cases where the work of the expert is performed under the direction of the organisation. T 27 The auditor is recommended to refer in his assurancereport to the contribution of external experts with respect to the relevant parts of the engagement, for example, by including a description of the work. This reference is useful for the intended readers of the assurance report and can increase the credibility of the auditors conclusions.The reference does not impair the undivided responsibility of the auditor to the intended users of the sustainability report, nor does it affect the intended meaning of the assurance report. If the contribution of an external expert ismentionedin the assurance report, it is also stated that the auditor takes undivided responsibility for the entire engagement. Moreover, the auditor alone signs the assurance report.

Risk analysis ( 19 to 21)

T 28 In principle, the auditor applies the same concepts, methods and procedures to an assurance engagement whose subject matter is a sustainability report as to the examination of historical financialinformation.The concepts particularly relevant to the performance of the engagement are set out in ISAs 300 to 330 on risk estimation and the treatment of estimated risks. T 29 Many organisations that commission an assurance engagement relating to their sustainability report will also engage an auditor to audit their financial state-

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ments. During the discussion of the auditor with other auditors involved with the reporting organisation, he introduces the subjects of the quality of the corporate governance, the control environment and the control activities at the organisation. In addition, he takes cognisance of the significant elements of the risk analysis, aswellas ofthe findings by the auditorof the financial statements and by the internal auditor, insofaras theyare (or could be) relevant to the examination of the sustainability report. T 30 Consultation between the auditor who audits or reviews the sustainability report and the auditor of the financial statements in no way reduces the full responsibility of the former for performing his examination. When accepting the engagement concerning the sustainability report, it is agreed with the engaging party that information exchange between the auditors is allowed, with this being confirmed in writing by the engaging party. T 31 If the auditor of the financial statements is the same person auditing or reviewing the sustainability report, it is clear that the risk analysis for the assurance engagement concerning the sustainability report draws on the results of the risk analysis being performed for the audit of the financial statements. As a consequence, the auditor will determine those aspects of the examination of the sustainability report that require a detailed risk analysis to be made. T 32 Sources forobtaining an understanding of the sectorand the specific nature of the organisation, including the most significant risks to which it is exposed, include the local or central compliance officers and the local or central sustainability or environmental managers. Other sources are the relevant laws, regulations, codes of conduct and standards, insofar as they are significant for the content of the sustainability report. Also important for this purpose are the organisationspolicydocuments and codes of conduct. Additionalinformation on the sector and the organisation is available in the form of study reports and open information on the Internet. Many international laws, codes of conduct, and standards relating to aspects of sustainability performance are also available on the Internet. T 33 Estimating the inherent risk is affected by the following and other factors: ^ the size and the complexity of the reporting organisation, its business processes and their possible impact on the environment and society (forexample environmental risks resulting from the consumption of raw materials, energy and water and the effect of this on biodiversity); ^ the presence of multiple locations or locations in various countries or in areas with different cultures, statutory provisions, legal precedents, etc.; ^ the sensitivity of information as perceived by the reporting organisation on the one hand and the intended users on the other. Widely ranging interests can lead to the risk of differences of opinion on, for example, the completeness of the information provided;

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^ the perception of the intended users regarding the direct and indirect economic effects on them and on the economic systems. It should be noted that the indirect effects in particular cannot always be determined accurately; the extent to which judgments and estimates have been used to determine the reported information.

T 34 When obtaining an understanding of the internal control environment, the auditor determines the commitment of the organisations management to sustainable development and hence for maintaining the right balance between achieving financial objectives and the wider economic, social and environmental impact of the decisions taken in this context by the organisation. The auditor ascertains that the business strategy, business principles, including the codes of conduct based on them, the attitude of senior management and the sustainability awareness within the organisation are in line with each other. The auditor also determines whether procedures are in place for collecting and processing sustainability information. The aspects here include: ^ the way in which the sustainability information is managed by the managers responsible for it (for example, in accordance with ISO 14001 and SA 80003); ^ the way in which the responsibilities for management of the main sustainability issues are assigned to the company officers of the reporting organisation; ^ the way in which the organisation complies with environmental and social laws and regulations, including reporting requirements, regulations and international treaties (such as the Kyoto Protocol and the Universal Declaration of Human Rights), codes of conduct for preventing unethical acts, and industry conventions on voluntary environmental reporting (such as the Responsible Care programme of the chemical industry). ^ the way in which company officers or departments specifically responsible for contributing to the control environment operate, such as internal auditors, operational auditors and/or compliance officers. T 35 ^ ^ ^ ^ The reasons internal control risks arise include: internal controls are absent from the design of the internal control system; existing internal controls are not complied with; significant internal deviations are not identified early enough; measurement systems can fail or have not been designed to take measurements during exceptional circumstances (such as accidents or during the start-up of a factory or process, which can lead to incompleteness of the available environmental data); the management of the reporting organisation circumvents or ignores the correct performance of important internal control procedures by overruling the relevant company officers. For example:

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^ the notification of undesirable situations is not followed-up adequately by senior management because it knows that the supervisory authorities tolerate certain violations of emission standards. Sensitive information is deliberately withheld.

System-related procedures ( 22 and 23)

T 36 The auditor can assess the design of the information systems and the internal controls by interviewing the most senior managers responsible for the financial, environmental and social policies of the reporting organisation, as well as by studying the descriptions of the related internal controls. In doing so, the auditor considersthe way inwhich the reporting organisationsmanagement approaches sustainable development and the associated reporting, as well as the internal supervision of compliance with laws, regulations, codes of conduct and standards.The auditor substantiates findings based on interviews as much as possible with descriptions of the internal controls. Audit engagements: In the case of audit engagements, the auditor primarily considers the design and existence of the policy objectives and controls that the management of the reporting organisation sets for its own performance (known askey managerial controls), including a review of the irreplaceable internal controls. Regarding the examination of the key managerial controls, the auditor determines the extent to which his examination will include the design and existence of other internal controls. Review engagements:In the case of review engagements, the auditor reviews only the design of the policy objectives and controls that the management of the reporting organisation sets for its own performance (known as key managerial controls), including a review of the irreplaceable internal controls. T 37 Audit engagements: The auditor can ascertain the existence of the information systems and the relevant internal controls by performing walk-throughs. In the case of an audit engagement, the auditor tests the effectiveness of the relevant internal controls. Review engagements: In general, a review engagement does not involve testing the effectiveness of the relevant internal controls. T 38 In practice, the internal control systems for the information included in a sustainability report are often not as developed as those for financialinformation. Thismeansthat the examination of such systems usually hasless significance for the work to be performed, than for an audit of the financial statements. If this is so in a particular case, the auditor determines whether, and to what extent, substantive procedures can produce adequate assurance evidence.If the evidence is not sufficient, the auditor willissue an assurance report other than an unqualified one without an emphasis of matter paragraph.

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T 39 It is important that adequate systems are in place to collect information for the sustainability report, including a sufficient degree of internal control. The types of information collection requiring this internal control depend on the legitimate information needs of the intended users, the materiality of the information, and the related risks. T 40 If the auditor considers that the internal controls are of sufficient quality that he wishes andis able to use them in his work, he examines them to obtain enough understanding of theirdesign andimplementation to be able to estimate the internal controlrisk.Examples of internal controlsin relation to subjects for inclusion in the sustainability report are the procedures in place for: ^ supervising compliance with general laws and regulations, environmental and/or health and safety legislation, and compliance with business principles and codes of conduct, whether or not performed by separate compliance officers; ^ performing internal audits in accordance with ISO 14000 and SA 8000, and monitoring their effects in practice; ^ creating proper audit trails; ^ performing internal analyses and tests of relationships on production volumes and/or energy consumption, waste and emissions, using the relationships with the financial accounting records to the fullest extent possible; ^ the collecting of samples by recognised external laboratories or skilled inhouse staff. T 41 The depth of understanding required for the above-mentioned internal controls depends on the specific objective of the sustainability report and the user groups for whom it is intended. In the case of a sustainability report that is mainly aimed at localor regionalgroups ofintended users, the results oflocal ISO and/or SA audits, for example, might be more important than in the case of the global report of a multinational. T 42 The work referred to in sectionT 40 includes interviews with the most senior managers responsible for the environmental and social policyof the reporting organisation, with attention focusing on the internal supervision of compliance with relevant laws, regulations, codes of conduct, etc. If necessary, interviews are also held with company officers for whom the results of the examination are not directly relevant, R&D managers for example. T 43 If the auditor concludesthat he cannot relyon the internal controls, he determines what effect this will have on the nature, planning and scope of the substantive procedures, and/or on the type of assurance report he will issue.

Substantive procedures ( 24)

T 44 A substantial amount of information in a sustainability report is generally qualitative (for example, information on the strategy of the organisation, its policy

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and code of conduct, and its relationships with groups of intended users).For this kind of information, the auditor obtains assurance evidence by using a combination of procedures, often involving: ^ holding interviews with the most senior managers responsible for the environmental and social policy of the reporting organisation and with the company officers responsible for internal supervision and/or independent assessment of the acceptability of the information obtained in this way; ^ studying internal and external sources, such as policy documents and Internet pages, and verifying in the case of an audit engagement or confirming in the case of a review engagement that the documents and data provide adequate substantiation for the information included in the sustainability report and for the scope of the examination; ^ studying the minutes of the meetings of the Management Board and the Supervisory Board, as well as ofother meetingsthat are relevant to the content of the sustainability report, such as meetings relating to the implementation of human resources and social policy. T 45 Examples of analytical procedures are: ^ analytical reviews of performance in relation to available standards or formulated objectives, and data trend analyses; ^ comparisons with the data of other entities in the organisations sector; ^ confirming the existence of a relationship between the financial data and the data in the sustainability report (for example, the relationship between the quantity of natural gas consumed and the quantity of carbon dioxide emitted). T 46 Examples of tests of details are: ^ examining documentation and data and verifying in the case of an audit engagement or confirming in the case of a review engagement that the documents and data provide adequate substantiation of the information concerned. This documentation and data can be in the form of internal as well as external documents. Verification based on external documentation can be used relativelyoftenin auditing the environmentaldata in the sustainability report. Some examples are the examination of statements or service contracts with waste management services showing the type, frequency and extent of the work performed by third parties (such as invoices for refuse disposal). Examples relating to internal documentation are checking consistency of data with records, and comparing the results of emission registrations with data contained in publications of the reporting organisation (such as documents on the Internet or filed with supervisory authorities) and similar media. ^ investigating the correct use of established methods and formulas to derive the relevant information (forexample, formulas for calculating the quantityof heavy metals in wastewater discharged);

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^ ^ investigating whether key data are entered in the systems on time; re-calculating and/or re-measuring significant emissions into the air or the production of hazardous waste.

Overall presentation of the sustainability report ( 25)

T 47 To assess the overall presentation of the sustainability report, it generally makes sense for the auditor to conduct focused media research.This is particularly important for a test of completeness on the topics addressed by the sustainability report.

Special factors concerning multi-locations ( 26)

T 48 An assurance engagement relating to the sustainability report of a group of companies that comprise geographically diverse locations and/or different legal entities or business units, referred to below asmulti-locations, entails a number of special considerations. Some of them relate partly to differences in culture, statutory provisions and legal precedents. Others relate to the structure of the reporting organisation, such as: ^ the degree of centralisation of authority; ^ the existence of centralised guidelines; ^ the organisations control over local processes; ^ the existence of central and local compliance officers. The above-mentioned special considerations might apply to the sustainability report as a whole and to individual sections of it. T 49 The selection of group entities to be examined separately depends on the total set of circumstances, including: ^ the nature and the comparability of the business processes; ^ the effectiveness of the internal control environment, in particular the direct involvement of head-officemanagement in monitoring the activitiesrelevant to the sustainability report that are conducted by the group entities in question; ^ the quality of the local internal control systems.

Obtaining additional assurance evidence ( 27 to 31)

T 50 The purpose of a letter of representation from the management of the reporting organisation is to confirm that no information has been withheld from the auditorand that from the end of the reporting period until the date ofthe assurance report no events have occurred whose consequences have been erroneously excluded from the sustainability report. The views of the Supervisory Board on issues relating to the sustainability report can be recorded in the minutes of the relevant meeting that the auditor has with the Board, as well asin other documents.The auditor keeps the above-mentioned minutes in his files.

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Assurance report ( 33 to 38)

T 51 ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ The essential parts of an assurance report are: title; addressee; identification and description of the subject matter of the assurance engagement; statement of the reporting criteria; limitations on the examination; responsibilities of the responsible party and of the auditor; reference to the use of this assurance standard; summary of the procedures performed; conclusion of the auditor; date of the assurance report; name and registered place of business of the audit firm and/or the auditor.

T 52 The standard textsinclude fourexamples of assurancereports.The wording of the examplesisnot compulsory, but hasbeen formulated only toillustrate a few types of reporting. Equally, they do not cover every conceivable situation.

Title
T 53 The title of the assurance report clearly expresses the extent of the conclusion. For a qualified conclusion, the title could be Assurance report with a qualified conclusion on the sustainability report of the company XYZ.

Addressee
T 54 The assurance is preferably directed to the intended users of the sustainability report or, if desired, to the stakeholders of the reporting organisation.

Identification and description of the subject matter of the assurance engagement

T 55 Proper identification and description of the topics included in the subject matter of the assurance engagement is particularly important if: ^ a limitation has been placed on the examination; ^ some parts of the sustainability report have been audited, while others have been reviewed; ^ a combined financial and sustainability report has been published, but the financial information was not part of the subject matter of the assurance engagement. T 56 It is also stated that the engagement was performed as an audit engagement or as a review engagement. Procedures performed to obtain a limited level of assurance are aimed at determining the plausibility of information and are less extensive than those performed to obtain a reasonable level of assurance.

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Statement of the reporting criteria

T 57 If the reporting criteria applied in a specific case are not generally accepted as standard, the auditor forms a conclusion on their suitability. If the auditor considers the criteria unsuitable, he does not issue an unqualified assurance report.

Limitations on the examination

T 58 If the content of the sustainability report is limited, the assurance report refers to the pages of the sustainability where the explanation for the limitation is given. T 59 There might also be a limitation on the examination.This can occur if parts of the sustainability report were omitted from the examination. For example, the information on employment relating to the closure of a group unit cannot be adequately audited because it is entirely based on rough estimates made by management.The assurance report preferably includes a reference to the section of the sustainability report that includes the description of this limitation on the examination. Such limitations can also be fully described in the assurance report. T 60 If forward-looking information is included in the sustainability report, it is stated whether this information is part of the subject matter of the assurance engagement.If it is, the scope can only include an assessment of the reasonableness of the assumptions underlying the forward-looking information. In many cases, this is reflected in the assurance report by a negatively formulated statement on whether the assumptions actually form a reasonable basis for the forward-looking information.

Responsibilities of the responsible party and of the auditor

T 61 The responsibilities of the management of the reporting organisation and those of the auditor are stated explicitly in the assurance report.

Reference to the use of this assurance standard

T 62 The auditor states in his assurance report that the procedures were performed in accordance with Dutch law, including the Dutch Assurance Standard 3410,Assurance engagements relating to Sustainability Reports.

Summary of the procedures performed, including the involvement of experts

T 63 Examples of how to refer to the procedures of the auditor are given in the standard texts.If experts were involved, this is preferably stated in the assurance report. In cases where internal experts were involved, the formulation of the statement depends on the office procedures of the auditor. If an external expert wasinvolved, the auditoraddsthat he (the auditor) bears undivided responsibility for the entire engagement.

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Conclusion of the auditor ^ unqualified

T 64 Foran audit engagement, the conclusionis formulated positively. An unqualified assurance report can be issued if the examination has led to the conclusion that the sustainability report as a whole complies with all the relevant requirements. Although the wording of the conclusion can be freely chosen, it is strongly recommended to use one of the two formulations given below. The use of the expressiontrue and fair view is strongly discouraged4.

Example 1: unqualified conclusion for an audit engagement

Based on our procedures performed, we conclude that in all material respects the sustainability report provides a reliable and adequate presentation of the policy of XYZ NV for sustainable development, as well as of the activities, events and performance of the organisation relating to sustainable development during the reporting year under review, in accordance with the applicable reporting criteria, known as name of the criteria used5.

Example 2: unqualified conclusion for an audit engagement

Based on our procedures performed, we conclude that in accordance with the applicable reporting criteria, known as name of the criteria used5: ^ the reporting principles are acceptable and have been applied consistently; ^ the events described took place during the reporting period and are presented fully, accurately and in good time; ^ the information is presented fully, accurately and adequately in all material respects.

Conclusion of the auditor ^ unqualified, but including an emphasis of matter paragraph

T 65 In some cases, an emphasis of matter paragraph can refer to information in the sustainability report that is of major importance to the correct interpretation of the overall view evoked by the report.This might be necessary, for example, if the reporting organisations internal information systems are not yet sufficiently adequate for an unqualified conclusion to be made, provided this fact is clearly explained by the reporting organisation in its sustainability report.

Conclusion of the auditor ^ not unqualified

T 66 From his examination of a sustainability report, the auditor cannot always reach an unqualified conclusion in all respects. Based on his professional judgment, the auditor formulates a qualified conclusion, a conclusion with disclaimer of conclusion or an adverse conclusion.

Conclusion of the auditor ^ review report

T 67 For a review engagement, the conclusion is formulated negatively. An unqualified assurance report can be issued if the examination has not led to the conclusion that the sustainability report as a whole does not comply with all the

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relevant requirements. Although the wording of the conclusion can be freely chosen, it is strongly recommended to use one of the two formulations given below. The choice of wording depends on the legitimate information needs of the intended users. It is recommended that the auditor for a review engagement explicitly statesin the section on the scope of his examination the limited objective of a review engagement compared with the objective of an audit engagement.

Example 3: unqualified conclusion for a review engagement

Based on our procedures performed, we have no reason to conclude that in all material respects the sustainability report does not provide a reliable and adequate presentation of the policy of XYZ NV for sustainable development, or of the activities, events and performance of the organisation relating to sustainable development during the reporting year, in accordance with the applicable reporting criteria, known as name of the criteria used5.

Example 4: unqualified conclusion for a review engagement

Based on our examination, we have no reason to conclude that in accordance with the applicable reporting criteria, known as name of the criteria used5: ^ the reporting principles are not acceptable or have not been applied consistently; ^ the events described did not take place during the reporting period or are not presented fully, accurately and in good time; ^ the informationisnot presented completely, accuratelyand adequately in all material respects. Footnotes 1 In practice, a sustainability report is also referred to as a corporate (social) responsibility report or triple bottom line report. Following the example of the DASB in its manual, this standard uses the termsustainability report. A sustainability report can be published in various ways. This standard assumes that it will take the form of a stand-alone report. If publication conforms to other generally accepted criteria, the instructions in this Standard are applicable. 2 The criteria for sustainability reports are still at the development stage. 3 The ISO issues standards on quality (ISO 9000 series) and the environment (ISO 14000 series). SA 8000 has been issued by the human rights organisation Social Accountability International (SAI) and contains standards for the rights of employees.These standards include the requirements specified in conventions of the International Labour Organization (ILO).

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4

The use of the expression true and fair view in the conclusion of an assurance report on a sustainability report is strongly discouraged because it is reserved for the issuing of an opinion by an auditor on a set of financial statements.The expression has a generally accepted meaning, but only in the latter context. These reporting criteria can be established or specifically developed for sustainability reporting. In either case, the criteria must cover the five characteristics specified by the General Framework for Assurance Engagements of relevance, completeness, reliability, neutrality and understandability.

9.8 Sustainability Assurance

All types of business, public and voluntary bodies, investors, governments, tax authorities, market participants and their stakeholders need to rely on credible information flows to make decisions. Confidence suffers when there is uncertainty about the integrity of information or its fitness for the given purpose.The ICAEW Audit and Assurance Faculty is a leading authority on various types of assurance services beyond statutory audits. Following is an extract, reproduced with the permission of ICAEW, from SUSTAINABILITY ASSURANCE: YOUR CHOICE, a valuable booklet issued 2010 by ICAEW Audit & Assurance Faculty. To find out more about the assurance services provided by this organisation, go to www.icaew.com/assurance. What do we mean by an independent assurance service?
A professional accountant assesses sustainability information provided by you and gives an independent opinion on the outcome: this is what an assurance service is about. An assurance service should build trust in your sustainability information. To do this, a professional accountants assessment needs to be independent from management which is responsible for business sustainability and for providing sustainability information. This is likely to be important for users of your sustainability reporting; an independent viewpoint is more credible than one that is too closely associated with the business and its information. Independent professional accountants can carry out the various stages of an assurance service while objectively considering usersneeds.This includes considering criteria, gathering evidence, and reaching a conclusion on your sustainability report (for example, on it being fairly stated).

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A three-party relationship ^ management, users, and the professional accountant ^ is a key aspect of an assurance service. ^ Management prepares the sustainability information to be reported. ^ The professional accountant independently evaluates the information and issues an assurance conclusion in a separate report. ^ Users of information will have confidence in sustainability reporting that is accompanied by an independent assurance report.

Why should I use a professional accountant for an assurance engagement?

A professional accountant who provides assurance services has important skills that enhance the quality of those services. For example, a professional accountant uses professional judgement when performing an assurance service. Professional judgement should be ethical and applied with the relevant knowledge for specific situations. It is essential that the professional accountant can understand and assess the reliability of information and have the strength of character to challenge management if concerns arise. Where appropriate, the professional accountant should bring specialists into the team to deal with technical matters. Professional accountants have come through a rigorous regime of training, and have broad practical experience, which enables them to apply sound judgement to a wide range of services, including assurance. They follow well-established and widely recognised standards when conducting their work, which allows a consistent and more readily understandable approach to the work they perform. They are bound by a strict code of ethics and are subject to regular assessment by regulators. Their commitment to professional competence and due care requires them to offer high-quality services to businesses and to act in the public interest.This is why a sustainability report with a clean assurance conclusion from a professional accountant is seen as credible in the marketplace.

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What standards does a professional accountant follow when delivering an assurance service?
The accountant follows a framework issued by the International Auditing and Assurance Standards Board (IAASB).This includes the IAASB International Framework for Assurance Engagements (the Assurance Framework) and IS AE 3000, Assurance engagements other than audits or reviews of historical financial information. Having this framework ensures that professional accountants provide assurance services that are consistent and meet a high standard. This reduces the risk of misunderstanding between you, the professional accountant, and the users of your sustainability report.

Matters for consideration: Choosing what to report on sustainability

^ ^ ^ Report information people need and wont have if you dont report it. Use published guidelines to promote balanced and consistent reporting. Know whether your reporting is credible in helping people make decisions.

Choosing whether to ask a professional accountant for assurance

^ ^ ^ Assurance from an independent professional accountant makes reporting credible. You can expect professional accountants to apply sound judgement and expertise. Professional accountants use a common set of international assurance standards.

Choosing between a professional accountants assurance services

^ ^ ^ All services require reporting to be supported by sufficient and appropriate evidence. You can choose an opinion that your report is fairly stated or a limited alternative. Accountants can provide other services to help you get ready for sustainability assurance.

9.8.1 Assurance of sustainability reporting in practice

Standardisation of the process and methodology, helps to ensure that professional accountants work in a uniform manner. The development of assurance methodology and the application of standards can, of course, take a different form depending on the accountancy firm in question. Knowledge of the facts presented in a sustainability report is obviously of major importance, and, in order to meet this requirement, the work is performed in multi-disciplinary expert teams. In principle, assurance of a

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sustainability report is performed in the manner shown in the illustration, that is, in three process stages: planning, execution and reporting.Before an assignment can begin at all, it is ensured that the professional accountant and the team are independent in relation to the company being audited, for this analysis, there are specific process stages. It is important to analyse and understand the risk assessment, that is, both the assessment of the reporting companys sustainability risks, and the risks taken by the auditor (audit risk), in order to subsequently assess the criteria that the company has selected as the basis for its reporting.In the risk assessment, the audited company should, after completing a stakeholder analysis through dialogue with key stakeholders, gain knowledge regarding the stakeholdersdemands on the company, and should adopt a suitable position, responding to these demands.Transparency is the key word in sustainability reporting and this is why the criteria for reporting are so important. The GRIs criteria for sustainability reporting are now almost the norm and it is, therefore, safe to apply them, although nothing prevents a company from definingits own appropriate criteria.It is important to keep in mind that it is the company (management and Board) who are responsible for the report. The professional accountants role functions as a provider of a statement on assurance. When the risk assessment is complete and the professional accountant feels comfortable with the companys risk analysis and concludesthat he/ she is in agreement with the company regarding what, in the context of sustainable development, is essential for the company to control, account forand report on, then a plan for the assurance engagement is prepared.In the planning stage major work is involved in the risk assessment; including the reporting companys sustainability-related business risks, the risk that the report does not adequately reflect the companys activities in the context of sustainability, the audit risk, etc. The scope of the continuous review of the quality of information in the reporting to be included in the compiled accounts is determined in the planning stage. In cases in which the internal audit review has also included a review of the internal control regarding sustainability reporting, this is of real assistance and simplifies the external professional accountants work. The number of site visits is determined in the planning stage, in consultation with the client.

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The three stages in the process of assurance and auditing of sustainability reports.

After the planning of the assignment, the execution begins, which includes interviews, site visits, a possible review of ITsystems for collecting data and information, possible participation in stakeholder dialogues, contact with suppliers, analysis ofthe foundation of calculations, review of internal controls, substantive testing and, if the accounting is established according to the GRI, a comparisonwith that whichis stipulated by the GRI Framework regarding the principles for accounting, application levels (C +, B +, A +), etc. Much of the assurance work can be undertaken in an ongoing manner prior to the report being drafted. The assurance work is often complicated by the fact that there are no systems for the internal control and reporting of sustainability data, and also by the fact that information on sustainability reporting may be both qualitative and quantitative.We should, of course, bear in mind that when we accept the engagement, the entire sustainability report is subject to the professional accountants review. Depending on how the assignment has been formulated, an audit can be carried out with a greater degree of certainty than is the case for an assurance engagement. An audit and a review can be performed in combination, which implies that certain parts of a sustainability report (for example, certain indicators) may be subject to an audit, and others to assurance.This depends on the type of evidence existing in support of the indicators. In such assignments, the professional account-

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ants statement makes clear distinctions between the audit/assurance procedures and conclusions for the respective reliability levels.When the report is finally available, the assignment is ended with a consolidation review, in order to ensure that the compilation ofinformation has occurred without significant errors. In the reporting stage of the assignment, communication is formalised between the client and the professional accountant.In a specific letter, the Representation Letter, the CEO states that he/she can certify that the report is essentially correct in all material respects, and reflects a true picture of reality. One copy of the final sustainability report should also be signed by the CEO and the professional accountant and shall serve as the original, against which the professional accountants statement is prepared and authenticated. The audit team presents its report to management and to the Board, as appropriate. The final reporting to the client of the assignment is conducted on the basis of the experience obtained in the execution of the assignment. Suggestions for improvement are presented and discussed. The assurance statement is endorsed and intended for publishing as part of the sustainability report, which should bereleased by the companys Board, and a short description ofthe assurance assignment can easily be made at the Annual General Meeting. There may be some who object to this brief description of the review process. However, this description has hopefully made it clearer to those who cannot be bothered to read the standards!

9.8.2 Assurance on a Greenhouse Gas Statement

The International Auditing and Assurance Standards Board, IAASB, with support from an expert panel, SEAP49, have, over the course of a few years, developed a proposed assurance standard to apply in auditing the reporting of greenhouse gases in annual reports. The proposed new standard, Assurance on a Greenhouse Gas Statement, was published as a Consultation Paper in October 2009, before the climate negotiations in Copenhagen. The standard has, naturally, arisen in order to meet companies and stakeholders desire to present a fair view of the climate impact, as presented by a company in their annual report. The standard, for which the consultation period is now concluded, refers, similar to many other auditing standards, to ISAE 3000.
49

Sustainability Experts Advisory Panel.

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9.8.3 AA1000 Assurance Standard

AccountAbility was established in London in 1995, with the aim to promote accountability innovations for sustainable development. In 1999, the AA1000 Framework was launched, in 2003, the AA1000 Assurance Standard and in 2008 an updated version of AA1000 AS and AA1000 AccountAbility Principles Standard was introduced. These standards, in the development of which professional accountants participated but which have yet to be formally accepted as standards by the auditing profession, have, after a decade (with a few exceptions), been applied by only a few UK consultancies in the verification of British companiesCR reports. The application of the AA1000 ASisnot a matterofassuring the reliability of reported results; rather, it seeks to verify that a number of essential principles have been applied: Inclusivity, Materiality and Responsiveness. In the following paragraph, the introductory descriptions of these principles are stated: The Foundation Principle of Inclusivity
For an organisation that accepts its accountability to those on whom it has an impact and who have an impact on it, Inclusivity is the participation of stakeholders in developing and achieving an accountable and strategic response to sustainability. The commitment to Inclusivity was the bedrock of the 2003 standard and it retains that position of primacy in the 2008 standard. However, the consultation process indicated it wasnt a very well understood concept. The 2008 standard has made it more accessible and understandable by providing a clearerdefinition of what inclusivity means to an organisation in practice. Inclusivity remains much more than a stakeholder engagement process as it is the organisation enabling stakeholders to participate throughout the decision making process.

The Principle of Materiality

Materiality is determining the relevance and significance of an issue to an organisation and its stakeholders. A material issue is an issue that will influence the decisions, actions and performance of an organisation or its stakeholders. The principle of Materiality has been revised and updated to embrace developments in understanding. Materiality now links strongly to business performance, through analysis of both the relevance and significance of issues, which will help organisations become more strategic in dealing with sustainability issues. Stakeholder concerns remain at the heart of materiality and it requires organisations to take a longer term and deeper view of materiality.

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The Principle of Responsiveness

Responsiveness is an organisations response to stakeholder issues that affect its sustainability performance andis realised through decisions, actions and performance, as well as communication with stakeholders.The principle of Responsiveness is still about acting and communicating.The new standard places additional emphasis on the understanding behind the response. The criteria in the standard focus on the processes used to develop responses as well as the responses themselves. As communications is part of Responsiveness, this principle also links to the use of reporting frameworks and guidelines.

These guiding principles are, to a large degree, the criteria that are available to consultantsin their verification.It is, of course, difficult to verify that a given organisation operates in accordance with these principles, which is why the accountancy profession continues to apply ISAE 3000 and national standards, rather than AA1000 AS. Naturally, it is correct to start with how a company, through stakeholder dialogue, identifies the most pertinent sustainability issues, and how it decides to respond to the stakeholders requirements, in order to then govern, guide and evaluate these issues. In this sense, AccountAbilitys integrated thinking is very well-suited as a procedural tool, which is, in fact, the manner in which it is most frequently used.Today, no one knows how AA1000 AS will, in the future, gain entry into the market as the verification standard it is intended to be. As has been mentioned, the accountancy profession already hasits applicable standards. Is it possible that the consulting industry could attempt to introduce AA1000 AS?

9.9 Assurance of sustainability reporting in an international perspective

In 2008, KPMG conducted a study50 which included the 250 largest companiesin the world (G250), and the 100 largest companiesin 22 countries (N100). The countries surveyed were: Australia, Brazil, Canada, Czech Republic, Denmark, Finland, France, Hungary, Italy, Japan, Mexico, Norway, Portugal, Romania, South Africa, South Korea, Spain, Sweden, Switzerland, the Netherlands, the UK and the US.The following information is taken from the survey and describes the market for the evaluation of sustainability reports elsewhere in the world.
50

KPMG International Survey on Corporate Responsibility Reporting.

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G250 Who examines sustainability Major accountancy organisation 70% reports?51 Certification Body 13% Other 6% Specialist Assurance Provider 4% Reports containing formal investigation report Reports containing statements from a third party 40% Stakeholder Panel 15% Academics 20% Individual experts 29% NGOs 13% Other stakeholder group (e.g. community) 7% Other 16% Which standard is applied? ISAE3000 62% AA1000AS 33% Other 19% Who signs (individual or business) Level of integration of sustainability information in financial statements See Question 2 & 3 None 40% N100 Major accountancy organisation 65% Certification Body 18% Other 4% Specialist Assurance Provider 11% 39% Stakeholder Panel 17% Academics 18% Individual experts 23% NGOs 18% Other stakeholder group (e.g. community) 3% Other 20% ISAE3000 54% AA1000AS 36% Other 21% See Question 2 & 3 None 55%

Technical experts firm 13% Technical experts firm 11%

Limited (CR section in the Annual Report only) 49% Combined (CR reporting combined with Annual Report) 8%

Limited (CR section in the Annual Report only) 33% Combined (CR reporting combined with Annual Report) 9%

Fully Integrated (CR report- Fully Integrated (CR reporting fully integrated into the ing fully integrated into the Annual Report) 3% Annual Report) 3%

51

The attentive reader sees, of course, that the listed percentages do not always add up to exactly 100. This is due to the fact that the percentages reflect that there were a number of possible replies to the questions.

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10 Brand building, communication, and practicing what you preach

Its all about trust. A companys reputation, and trust in a brand, can never be negotiated. A company can be insured against liability claims, and being involved in a lawsuit does not, necessarily, need to be so terribly damaging. Economic damage can be negotiated. However, damage to a companys reputation can never be negotiated so that it completely disappears! The accounting and consulting giant, Arthur Andersen was erased from the map in half a year as a result of the collapse of confidence in the company. If a companys reputation is damaged, it can be fatal. Brand building and global communication is ultimately about working with the culture of the company, and working appropriately with corporate culture, i.e. the companys values, protects against brand damage.

10.1 The deep impact of CSR communication

Each year, the Swedish communication consultant, Hallvarsson & Halvarsson, ranks business websites based on the information required by stock analysts and financial journalists. Here information related to CSR and sustainability issues plays an increasingly important role. Out of the 150 largest listed companies in Europe, a total of 97% have pages on their website regarding CSR and sustainability.Thisimplies that, today, nearly all major companies in Europe work with CSR and sustainability issues, and among the 700 largest firms, the proportion is 80%. A clear trend is the application of the GRI reporting guidelines. Of the 150 largest firms, the proportion applying GRIis around 50%, and among the 700 largest firms this proportion is 25%. Compared with previous years this is an increase of around 5%. Among Swedish companies, 80% have CSR or sustainability pages on their website and the proportion of Swedish companies having a GRI report is approximately 20%. Broadly speaking, Swedish companies are relatively positive, compared with other European companies, when it comes to the reporting of CSR and sustainability information. Overall, Swedish companies come in at fifth place in the ranking of 21 countries in the Hallvarsson & Halvarsson 2009 survey, on average, Finnish, British and Dutch companies provide the majority of the requested information.

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10.2 The role of communication

Societys and, therefore, companiesrequirement of, and dependence on, communication is already immense and continues to grow. The expanding, ever faster and more globally accessible flow of information has meant that what companies do, or dont do, immediately becomes public knowledge, regardless of where the company in question operates. Offences instantaneously become news on television and in the newspapersin a companyshome market, or worldwide, if the companyisglobally known. In the eyes of the world, unacceptable behaviour (which need not involve violation of the law) results in protest and may lead to demonstrations and boycotts and perhaps to badwill, which both costs money and affects value. Communication is a tool to ensure that a company is working with the right issues in the right manner, and good conduct and morally correct behaviour earn a company nobrownie points, unless they are well communicated.Without communication and stakeholder dialogues, companies would not receive structured and preventive feedback describing the expectations of consumers, customers, suppliers, shareholders, politicians, and society at large. When expectations are met, companies become not only legally correct but also legitimate, and without communication and stakeholder dialogues, businesses risk receiving negative responses and global reactions that can be difficult to manage. Awell-known example of thisis Shells handling ofthe oilplatformBrent Spar. The companys reputation was seriously damaged, although the proposed dumping of the platform in the North Sea was, in all respects, perfectly legal, and perhaps also the most environmentally friendly way to dispose of it. The measure, however, lacked support and thus legitimacy and Shells reluctance to act on the wishes of the outside world contributed to Shell being subjected to a major degree of negative news coverage over a prolonged period of time and, virtually, across the entire world. Insufficient preventive dialogue had been held with interest groups and the outside worlds reaction clearly appeared surprising in Shells eyes. It is entirely possible that an open and insightful dialogue with one of the driving forces behind the protests, Greenpeace, could have led to a different and better result for Shell. As it turned out, the discussions and analysis of the problem actually led, in the end, to Greenpeace offering an apology! But by that time, the damage had already been done and the

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apology, of course, did not have quite the same impact and effect as the original protests. The role of communication in business activities is, obviously, very important no matter the direction in which it is progressing. One must ensure that incoming information is appropriate and adequate, and one must spend time in interpreting and analysing the information as objectively as possible. It is obviously pleasing to receive praise, but reasoned criticism and constructive requirements are, perhaps, more useful in a long-term perspective. The companys own information can and should, of course, be controlled in a completely different manner but, nevertheless, should be subject to certain ethical rules. The international association for public relations professionals, IPRA (International Public Relations Association) and ICC have set ethical guidelines for both general and specific environment-related communication and information.

10.3 The need for Total Communications Management

Companies do not operate in a vacuum! The importance of communication in the work with a companys ESG issues cannot be overemphasised, and communication is a continual process, inherent in each phase of the work. This implies that the process includes the first internal announcement made by the company, for example, in determining to begin work with stakeholder dialogues, to the development of a public commitment related to environmental and social responsibility, through to the education and information efforts related to implementation and enforcement and, finally, to reporting, independent assurance and the managements evaluation of results. Thereafter, the communication process continues in parallel with the ongoing work and, consequently, has no real end.Part of this communication is purely internal, certain aspects are mainly external, and much of it is both internal and external.The target groups vary, as well as the individual messages and the channels through which those messages reach stakeholders. The work on environmental and social responsibility and the communication surrounding this is not an independent operation but should, rather, be integrated into the companys entire business operations. Consequently, information about this work should also be included in the Total Information and Communication effort ^ that is, in what is

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known as Total Communications Management. The company operates as an integral part of society, locally, regionally and globally, implying that society and the companys stakeholders are affected and/or affect society and its development and rules of play. When the company identifies itself as a stakeholder in society and sees itself as influential as all other stakeholders, then it becomes natural to work in partnership with selected stakeholders to communicate and impact developments in the desired direction.The company is, thus, not in the centre; instead, society and its key stakeholders comprise the core focus. Questions rarely answered by companies today but which will be important to answer in the future include: ^ How extensive is our business contribution to local, regional and national social usefulness? ^ How great is our groups joint contribution to societal development? ^ How does growth in investments affect the national economy? ^ How important is the value of the business operations to the municipal/regional economy?

10.4 What isTotal Communications Management?

Total Communications Management is an umbrella term covering all information and communication, both the information that the company, itself, is disseminating and the information it receives; in other words, everything that is said about the company, its products, services, leadership, personnel, etc. Total information, therefore, also includes commercial, social media, investor relations and other forms of single or twoway transmissions of information or knowledge, bothinternallyand externally. Specialised information, such as financial information and nonfinancial information, is also included within the concept of total information. This is due to the fact that all information is based upon the entire operations common business plans and their short and long-term goals; hence, information relating to environmental and social responsibility is included in the concept of Total Information. Asis seen, the overallrole of Total Informationbecomes complex asit must cover a wide range of areas, reach and engage in dialogue with many different stakeholder groups, work with targeted messages and it must be communicated through many types of channels.

208 Brand building, communication, and practicing what you preach

10.5 Socialmedia is an essential part of Total Communications Management

The time has passed when companies through marketing, advertising and public relations efforts could determinea brands position and value. If employees in various Electrolux Home stores do not meet customers in the manner in which the customer expects to be treated, or if the employees of Electrolux Customer Services are not perceived as servicefriendly by the customers, no numberof advertising campaigns, sponsorship efforts or statements by company management and business managers will help.In todays situation, the customer and the companys other stakeholders have total power. Facebook, Twitter and YouTube provide customers with power that is entirely new.The information disseminated from person to person through digital networks now surpasses the power of the analogue media, especially among younger target groups. Companies must have the same level of understanding of new media (or new world) communication as they do of traditional (old world) marketing. Storytelling has quickly become a buzzword in the advertising industry and one should pay attention to the new methods of communication.With this background, it has never been more important for all employees, employees of client companies, or supplier companies to tow the line and practice what the companys business ethics policies and principles preach. Only when this is reality, is the company immune from a crisis of confidence and only then can it devote all of its energies to ensuring that a positive image spreads freely. When union leaders in Sweden52 asked more than a thousand business managers to describe their view of social media, nearly 50% said that they primarily felt that this was a disturbing trend, which would not result in any benefits.This is not, of course, a proactive way of thinking! It is important to establish a strategy for social media, and a confident senior management removes all barriers in terms of allowing their own staff to communicate. As a minimum, the company should initially: ^ Establish a strategy for social media. ^ ^ Establish a policy for blogging and social media. Test socialmedia toolsin theirTotal Communications Management.

52

via Novus Opinion, 2009.

Brand building, communication, and practicing what you preach 209

Establish monitoring of selected blogs in the social media related to their own company, its products, services and experience of customer satisfaction and image. Continuously analyse and follow up the perception of the company communicated via social media.

When these foundations have been laid, the company may proceed via: ^ An active dialogue within social media and by expounding their own issues in this dialogue. ^ ^ Identifying personnel who have the skills necessary to communicate in these networks. Establishing this aspect of communication as a planned component ofthe companysTotal Communicationsand, thereby, actively working on brand building through social media. Actively participating in the exchange of experience and learning for knowledge acquisition. Undertaking pilot projects and taking the lead in the development of these communication channels.

^ ^

Everything in this aspect of overall communication is about the single individualsimpact of sharinginformation andrequiring total transparency.In a world in which the climate, environment, social responsibility, ethics and transparency determine the image of a company and impact the customersand consumerschoice of products and services, it is obvious that companieswho do not perceptively set the agenda for contributing to sustainable development will not reach the level of commercial success they expect, or wish, to achieve.

10.6 Essential socio-environmental analysis

For information and communication to function as intended, it must be based on an adequate, relevant and credible socio-environmental analysis. Such an analysis, including applicable stakeholder dialogues, contributes to the companys information being sufficient in scope, relevant and credible. By including publicly available external information through networks, contacts and stakeholder dialogues, the company continuously creates an image of the environment in which it operates, of the demands

210 Brand building, communication, and practicing what you preach

of the outside world and of the manner in which it, the company, is perceived as meeting these requirements. Naturally, all background analysis must be, to the greatest extent possible, based on facts.But analysis should also be characterized by creativity ^ in finding sources of information, in evaluating information and when drawing conclusions ^ and in this context the requirements on analysis are at their peak in terms of identifying and acting upon premises based more on intuition than on well-documented facts. Many far-sighted management decisions have been based less on historical facts and more on instinct; agut feelingas regards the future.

10.7 Risk,Culture and Communication

Risk preparedness is more important than ever in all enterprises.The globalisation of business has, on the one hand, brought with it an enormous potential for the development of commercial operations but, on the other hand, it has left the door open to very different risks than those we have been accustomed to manage. Standard & Poors credit rating has included companies Enterprise Risk Management (ERM) since 2005 and since that time, S&P has increasingly focused on ERM in its analysis. S&P analyses two areas, the risk management culture within the company and the companys strategic risk management. Culture is all about the level of insight and the feelings within a company, as well as its implementation of business ethics, corporate culture has historically proven to be critical to risk exposure.This is less about policies, standards, reporting and internal controls, etc., than about the underlying values expressed in actually determining the conditions in the company. Clearly, this aspect of communication is obviously crucial for achieving credibility. Strategic risk management is about how management decisions are made and if the decision makers weigh-up the risks.The Board and management of the company must respond to S&Ps interest in values, culture and risk management.This includes making their own assessment of the risk management process in order to identify the most significant risks which the company must manage.It is the Boards responsibility to ensure these efforts. Skipping this homework is punished by lower ratings in the short-term and by uncertainty among investors and analysts in the longterm.

Brand building, communication, and practicing what you preach 211

10.8 Sustainable value growth

Sustainable Value is the title of the report published by the European Academy of Business in Society, EABIS in September 2009. The twoyear research project funded by EABIS studied the relationship between corporate performance and ESG issues management, and how these matters affect the business model development and investors handling of information. The Value creation Framework53 sorts six CR values, beliefs & activities:
1. 2. Organisational drivers Work content, Job design, Knowledge management, Safety and stability Commitment, Satisfaction and Motivation. Customer drivers Transparency and reliability, Open dialogue, Mutual understanding, Quality and innovation Trust, Reputation, Identification and Satisfaction. Society drivers Engagement and dialogue, Community development, Sustainable supply chain management License to operate and Social capital. Natural Environment drivers Impact control, prevention and assessment, Managerial tools and strategies Compliance, Reliability, Reputation and Sustainability. Innovation drivers Social and environmental programs, Operational changes New product and process development. Corporate Governance Voluntary disclosure, Governance and engagement Transparency and Reliability.

3.

4.

5. 6.

On the basis of this framework, the project has illustrated the ESG factors which build value.This is presented in a clearly pedagogical manner, specified according to non-financial parameters: ^ Human capital ^ Customer relations ^ Society ^ Environment ^ Innovation ^ Corporate governance

53

Perrini et al., 2009.

212 Brand building, communication, and practicing what you preach

In a single diagram, the EABIS Research Project illustrates the ESG factors which must be correctly managed in order to achieve the overall goal ^ a higher market value.It is easy to see that plannedTotal Communications Management is a prerequisite for success in managing the complexity of this issue.

SustainableValue, EABIS Research Project, September 2009.

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11 Concluding remarks and a look into the future ^ what can we expect?
It has not been my intention to primarily highlight my personal opinions and ideas in this book.The aim has, rather, been to serve you, the reader and user of this handbook, with a description of the current state of affairs regarding sustainable development based on facts and to present guidelines and standards that can be applied in corporate governance and business development. I do, of course, realise that it is not possible to write about these issues without the presentation being coloured by my own perceptions, based on my experience and my acquired knowledge. It is, therefore, important to establish that in those comments where my views and values are evident, these are solelymyown and donot represent an expression ofthe views of any other entities, be those of the publisher, Far Frlag, PwC, or the individuals contributing to the Foreword and Preface. For this final section, however,I have chosen to be even more emphatic in pointing out that I am presenting you with my own thoughts in terms of what we can expect in the future.The following are my reflections, based on my feelings, more than on facts.

11.1 The climate change issue must be solved...

The solving of the climate change issue is likely to remain at the top of the political agenda. A total of 7% of the worlds population accounts for 50% of CO2 emissions, whilst 50% ofthe worldspopulation accounts for 7% of CO2 emissions.The taskof politiciansisto establish frameworks and business rules, and the integrated climate and energy policy agreement adopted at the summit of the Council of Europe in 2007, which has come to be known as20-20-20, is an example of such a framework.Within the EU, it was agreed that by 2020, a 20% reduction in greenhouse gas emissions would be reached (compared with 1990), that 20% of energy consumption would come from renewable energy sources54 and that a 20%
54

The Renewable Energy Directive 2009/28/EC aims to increase the share of renewable energy from 8.5% to 20% in the period 2005-2020.

214 Concluding remarks and a look into the future ^ what can we expect?

improvement in energy efficiency would be achieved. Emission trading is becoming an effective tool in combination with tax regulations. The difficulties in reaching a consensus on the financial issues surrounding the resolution of these problems will escalate, and the solution to energy issues ^ taking us away from fossil fuels ^ will force innovation, new technology and new infrastructures. Scientific research will continue to tell us whether we are on the right track. When this book was being edited we saw how Pakistans land mass, amongst other impacted areas, had been severely hit by manmade disasters and climate effects. Parallel with the international communitys and aid organisationsactivities now being organised to help the millions of people hit by this flooding, we must come to an agreement on how we should work to solve climate issues and how to avoid disasters of this kind.

11.2 ...but this is, nevertheless, only the tip of the iceberg
A holistic view of the necessary changes towards sustainable development must not, and will not, be overshadowed by the issue of climate change.

11.3 An ever-increasing number of people do not have food for the day
By 2050, the worlds population willhave grown by 2.3 billion, and willhave become wealthier. Meeting the demands of 9 billion people requires 70% more food than we produce today, and climate change may reduce agricultural production by up to 20% in developing countries.Increased competition for land, natural resources, not the least for water, further complicates the situation. We are increasingly beginning to understand that the ecosystems, on which we so heavily rely, are not delivering as they have in the past.We must turn the tide of this development.

Concluding remarks and a look into the future ^ what can we expect? 215

11.4 The reduction of poverty and the development of democracy

Sharing limited resources and creating a fair system for the sustainable use of the planets common resources is essential for stability and peace in the world. The development of democracy is part of the solution and will, therefore, continue to be the mantra of the international community.

11.5 The multicultural, global society

In a global world where goods, services, money and people, as the ultimate goal, bridge their national boundaries, it goes without saying that we must also accept and appreciate the local multicultural community. The road towards this goal is as clear as it is challenging, and to accept varying viewpoints and cultural differences, as well as getting to know and accept religious beliefs, is a challenge requiring decades of work towards adaptation and renewal.

11.6 The Recycling Society will become a reality

The impact of transportation on the climate, together with food production and the need for sustainable urban development, will lead us towards a recycling-oriented society. Sustainable development is very much about infrastructure.

11.7 Changes in consumption patterns

Material consumption will increase sharply. Global vehicle production, for example, is expected to double by 2030! Todays green cars will, therefore, seem hopelessly obsolete in just five years! In all industries and product development, the market victory will go to those companies who can succeed in meeting customer preferences, which are now rapidly moving towards ethics, quality and ecological sustainability. Questions concerning the production conditions of supply chains based in developing countrieswillhave an even greater importance as regardsthe impact of certain brands in the clothing industry. For example, the fashion industry will, in line with consumersgreater awareness of problems, reshape and rebuild its values when it comes to supply-chain issues.

216 Concluding remarks and a look into the future ^ what can we expect?

11.8 Our lifestyle is changing ^ the dinosaurs are dying out!

It is purported that crises make people wiser. It is also said that the Chinese character for the word crisis can be interpreted either as a dangerous risk or as dangerous but with the possibility of positive development. Margot Wallstrm, previously ten years as EU Commissioner and today UN Special Representative on Sexual Violence in Conflict, criticized in an interview with Dagens Industri (a daily Swedish business newspaper), those puttingthe brakes on climate efforts, and said that:
They are like dinosaurs.The financial crisis is a real blow to the head for shortterm thinking.

Surely the necessary transformation to sustainable development requires that in our private lives, we change our lifestyles. A good friend and colleague of mine told me that his family considers carbon dioxide as a poison and that view now impacts the entire familys lifestyle. An increasing number of people will relate to this way of thinking in terms of their own ecological footprint!

11.9 Research, progress and innovation lead the way

In line with the decline in the ecosystems ability to produce natural goods (fish, cereals, clean water, clean air, etc.), we will be forced to listen to the facts of science.Facts Can Move Mountains,said Dr. Susan Solomon in her acceptance speech when she received the Volvo Environmental Prize in 2009. Just as politicians listened to the researchers findings regarding CFC issues and, subsequently, ratified the Montreal Protocol to phase out ozone-depleting gases, a very successful process, it will be possible to achieve political progress through the acceptance and integration of new knowledge. Innovative solutions to old problems will be industrys path to profitability and sustainable growth.

Concluding remarks and a look into the future ^ what can we expect? 217

11.10 The market economy will remain, but will be more heavily regulated
In the current market economy, it is sometimes said that it is usually the producer who benefits from the revenues, with any significant costs being shared between the environment, theThird World and the future.The cost of our use of fossil fuels is visible in such things as open cast mines, oilcontaminated land and marine areas and in carbon dioxide emissions, and the profits go to oil companies, airlines, car manufacturers and others. Seen in the perspective of sustainability, this is, of course, a systems failure which has come to the fore and which will continue to be regulated. Capitalist business practices, of course, are not likely to change as a result. Businesses will be forced to report their external impact in terms of sustainability. Sustainability and climate reporting is in its infancy, but covering up climate impact will not be acceptable, nor will the failure to be transparent in all other sustainability obligations. External impacts will be internalised and the true cost of each activity affecting sustainability must be paid by companies, in this context, biodiversity will be the next really big issue for debate and regulation.

11.11 Risk issues will increase and become the responsibility of the Board ^ internal control becomes ever more important
Environmental and climate issues have already climbed the ladder of corporate agendas. These questions will grow in importance at general meetings of shareholders, and Board responsibility for risk issues will be made clear. Consequently internal guidance and control are becoming increasingly important issues that will also be regulated by new laws, ordinances and guidelines in the wake of the financial crisis. After compensation issues and the question of an acceptable level of female representation on Boards of Directors has been sorted out in a balanced manner, the sustainable development of investor/shareholder governance and corporate governance issues will grow in importance. This is not the least due to Professor Lars G. Hassel, Program Manager for SIRP within the global Foundation for Strategic Environmental Research, Mistra, and other leading scientists, who will continue to pro-

218 Concluding remarks and a look into the future ^ what can we expect?

vide key evidence that companiesmanagement of emissions, energy efficiency and transparency in environmental and sustainability issues all affect value. Even now, companies going beyond statutory legal requirements are valued more highly on the stock exchange, according to a study published at the time this book was being written. Investors on the Stockholm Stock Exchange are willing to pay a premium, a higher price than warranted by the financial situation, if a company shows an exemplary environmental standing. The results of a study regarding Stockholm Stock Exchange companies support those of previous international studies. Lars G. Hassel states the following in an interview for Dagens Industri (daily Swedish business newspaper):
The relationship today is clear, but so far rather weak. But after 2012 we will see a major impact on the valuation of companies.

On the other hand, this study did not show any direct relationship between socialresponsibilityand a higher market value.However, thisis something I believe will become clear within a few years.

11.12 Investors, fund managers, analysts and credit rating companies will choose sustainable business
It is that simple. No one will want to hold shares in companies whose business model, products and services are in conflict with the necessary requirements for conversion to sustainable development. We have seen this in the car industrys conversion. For example, the development in the value of sharesin Ford and GM, and the governments emergency loansto save jobs in these companies on a short-term basis, have certainly created a new awareness among portfolio managers of how quickly stock market values can collapse. It is clear, politicians and consumers will force innovation for products and services in all industries. A holistic approach, encompassing the entire life cycle of the product, and, consequently, the value of the shares of companiesthinking in terms of continuingbusiness as usual, willhave difficulty winning the trust of analysts and investors. The SRI (Socially Responsible Investments) funds will remain at the forefront and will show the way for the traditional mainstream investors.

Concluding remarks and a look into the future ^ what can we expect? 219

Take, for example, Eurosif55, a Pan-European stakeholder network encouraging and developing sustainable and responsible investment and better corporate governance. Eurosif has identified biodiversity as the next key risk area for stakeholders. According to WWF, the total number of species declined by 30% between 1970 and 2005. The continued loss of many species is obviously disastrous, and absolutely not sustainable. Eurosif believes that the following commercial processes are a threat to biodiversity: agriculture and food production, industrial raw materials, the forestry industry, real estate/building/construction and tourism infrastructure.

11.13 The EU will provide guidance in matters of CSR, ESG and sustainability reporting
In a statement issued by the EC in January 2009,The State of Sustainability Reporting in Europe, the introduction reads as follows: Latest European Commission thinking on sustainability/corporate social responsibility
One of the key influences on sustainability, and in particular on corporate social responsibility (CSR), in the European Union was the publication in March 2006 of the European Commissions Communication Implementing the partnership for growth and jobs: making Europe a pole of excellence on corporate social responsibility.This communication defines CSR asa concept whereby companies integrate social and environmental concerns in their business operations and in their interactions with their stakeholders on a voluntary basis. In line with and as a complement to the Lisbon strategys renewed emphasis on growth and jobs, the Communication openly encouraged business, in cooperation with stakeholders, to lead the way in attaining social and environmental goals by action undertaken on its part on a free will basis. The validity of this approach will be capable of being recognized and assessed only if it isbacked byadequate reporting of actions undertaken.The Commissions view of reporting requirements can be traced back to Directive 2003/51/CE (June 2003) on annual company accounts, which for the first time invited companies to take the opportunity to publish non-financial data on environmental and social matters in addition to the financial requirements. The March 2006 Communication confirmed this approach by encouraging enterprise ^ especially large enterprise ^ to voluntarily (not obligatorily) make information available to all stakeholders on their CSR strategies, initiatives, and their results or best practices.
55

European Sustainable Investment Forum.

220 Concluding remarks and a look into the future ^ what can we expect?
The Commission wishes to help stakeholders to develop their capacity to assess and evaluate CSR practices.We hope that this action will enhance transparency, visibility, and credibility of CSR practices. The March 2006 Communication in addition gave backing to a business-led coalition, the European Alliance for CSR, whose aims include to address the challenge of transparency and communication to make companies non-financial performance more understandable and better-integrated with their financial performance, and to address sectoral CSR reporting.

In the spring of 2009, the Directorate for Enterprise and Industry of the EU Commission made an appeal to a large numberof stakeholders, including the European Federation of Accountants, FEE, with an invitation to participate in EuropeanWorkshops on Disclosure of Environmental,Socialand Governance (ESG) Information. Below is the description of the background, purpose and methodology of this initiative which will be completed in 2010 or, at latest, in 2011: Background
The number of companies disclosing information on their environmental, social and governance performance has grown very significantly in recent years. For large multinational companies, disclosure of ESG information has become a mainstream phenomenon. The quality of this disclosure varies however. A number of leading companies have developed innovative practices for effective ESG disclosure. However, some target stakeholder groups for such information (e.g. investors and analysts, campaigning NGOs, consumers) still often state that their needs are not adequately met. There are a number of international and European initiatives that seek to provide different kinds of guidance for companies in this field.There has been a certain degree of communication and coordination between some of these initiatives, but there is room to do more in this respect. Additionally, some EU Member States make legal requirements on certain kinds of companies to disclose information on their ESG performance that go beyond the basic requirements of European law (Accounts Modernisation Directive 2003/51/EC). Transparencyand disclosure of ESGinformation emerged as a key issue at the plenary meeting of the European Multistakeholder Forum on CSR on 10 February 2009.These issues have taken on particular importance in the context of the current economic and financial crisis.Greater transparency can playa role in helping to restore trust in business. Enterprises themselves increasingly recognise the value of ESG disclosure in driving internal change. Some organisations see a need and an opportunity to refocus management systems and to base investment practices and measures of business success on longer-term issues, including ESG issues.

Concluding remarks and a look into the future ^ what can we expect? 221

Objectives
The European Commission is proposing to organise a series of workshops to: ^ Identify the most effective and efficient way(s) to promote a better and more widespread disclosure of ESG information, which should be useful for the companies that disclose it and for stakeholders that may require it. Without pre-judging any outcomes, this willinvolve, amongst other things, exploring both the desirability and the feasibility of stakeholders moving towards an agreed core set of KPIs for ESG performance. ^ Facilitate better coordination and communication between existing initiatives in the field of ESG disclosure. ^ Deepen the understanding of all stakeholders, including the European Commission, of the issues at stake, recent developments and current good practice. The conclusions of these workshops will be discussed during the conference to be organised by the Spanish Presidency on 25-26 March. They will also be discussed in a plenary meeting of the European Multistakeholder Forum on CSR in the second half of 2010 or early 2011.

Methodology
The European Commissionwill convene 5 one-day workshopsbetween September 2009-March 2010. Each workshop will focus on a common set of core questions, but examined from the perspective of a different stakeholder group in each case. The guiding orientation of this work will be the information needs and demands of enterprises themselves and their stakeholders. The core questions to be addressed would be: 1. What are the legitimate information needs of the stakeholder group in question? Why is this information needed and to what use is it or would it be put? What difference does or would the provision of (better) information make? 2. To what extent do current disclosure practicesmeet the information needs of the stakeholder group in question? Who are companies trying to communicate with and provide information to? What is current best practice from the company point of view and from the point of view of the stakeholder group in question? What needs to change to better meet the information needs, and can companies make those changes? Are transparency and materiality common goals and what needs to happen for those goals to be achieved? 3. Is it important for the stakeholder group in question that disclosure of ESG information be linked to financial reporting? Why? What technical / IT tools are available (or to be developed) to ensure the most efficient preparation and dissemination of such information?

222 Concluding remarks and a look into the future ^ what can we expect?
4. Is a common set of comparable non-financial KPIs desirable? If so, to what extent is it feasible to achieve, and what would then be the ideal balance between cross sectoral and sector-specific indicators? What are/could be the most effective and efficient mean(s) to promote a better and more widespread disclosure of ESG performance information, which should be useful for the companies that disclose it and for stakeholders which may require it? What are the costs and benefits of different approaches? Should these means be national, EU-wide or global? What might be the added value, if any, of action at EU level? How should the particular needs and circumstances of SMEs be addressed? How can the needs of stakeholders outside the EU be addressed?

5.

The EU Commissions interest in actively discussing the development of transparent reporting of ESG issues indicates for me that we are now coming even closer to an EU Directive on sustainability reporting being introducedin the member countriesannualreportingrequirements.Other regions in the world will follow.

11.14 Sustainability Reporting is integrated and established

TheVoluntary Initiatives Global Reporting Initiative (GRI), and Accounting for Sustainability (A4S) will continue the important work in the development of the accounting format for the reporting of ESG issues. The work is supported by the UNs Global Compact, Carbon Disclosure Project and several other initiatives ^ and also by emerging initiatives, such as the International Integrated Reporting Committee (IIRC), which is also supported by the International Federation of Accountants (IFAC).GRIs role in continuing to drive the evolution of reporting focused on ESG issues is helpful, but care is required in order to position the initiative as part of a more connected reporting picture. We must understand how this connected reporting evolution can be achieved by putting ESG data andinformation into the mainstream of reporting.There is a need to ensure that the US and China get on board with broader thinking about connected reporting, including sustainability. A balanced and inclusive approach to developing reporting standards is required. Communication to the market requires connected or integrated sustainability reporting and corporate governance disclosure in annual reports, as well as independent accounting formats, depending on the target groups the companies are

Concluding remarks and a look into the future ^ what can we expect? 223

addressing. Notably, the development of financial accounting with integrated ESG is taking place through communication with the financial market. The International Corporate Governance Network (ICGN) and the Non-financial Business Reporting Committee (NFBR)56 clearly expressed the following requirements for corporate accounting in December 200857: Basic requirements from a shareowner and investor perspective
1. 2. 3. 4. 5. 6. 7. Be genuinely informative and include forward looking elements Be material, relevant and timely Describe your strategy, and associated risks and opportunities, and explain the Boards role in assessing and overseeing these Make reporting accessible and appropriately integrated with other information Use key performance indicators that are linked to strategy and facilitate comparisons Use objective metrics where they apply, and evidence-based estimates where they do not Undergo independent assurance to give greater credibility

The standard setting body for financial reporting, the IASB (The International Accounting Standards Board) will slowly, but certainly, have to emphasise the importance of future-directed statements and will take into account the long-established frameworks and guidelines for sustainability reporting that have already been established. It may seem a little strange that the standards on sustainability assurance and accounting are being provided prior to the standard setting body for financial reporting issuing the first integrated sustainability accounting/reporting guidelines, although this is actually the case. If informationisto be used fordecision-making, it must beimpartial and accurate and, consequently, the professionalaccountantsrole, to provide assurance, is becoming increasingly important in the context of sustainable development.

56 57

International Corporate Governance Network (ICGN), London. ICGN Statement and Guidance on Non-financial Business Reporting.

224 Concluding remarks and a look into the future ^ what can we expect?

11.15 The best chance ever!

It should be obviousto everyone that wehave come tothe end oftheroad, and that an adjustment of former business models is necessary. Product and service development must be steered towards renewability to create a carbon free society.We are in a time of change and must find alternative solutions to the problems we face. This is the best chance ever to secure discerning companies and a visionary business environment! Politicians have, through laws, regulations and taxation, established the rules for industry and citizens. These rules must be based on what Nature can tolerate. Companies with vision have, on the basis of good international analysis and a continuous dialogue with stakeholders, identified what is to come in terms of the moulding of public opinion, standard setting and regulation. Clearly, companies with an understanding of the need to shift towards sustainable development win in their markets.This applies to larger companies, as well as to SME (small and medium-sized enterprises). All are eventually caught up in what can be seen as a mission with little margin for error, to be completed within a short period of time, and one in which the ecosystems will ultimately determine the rules, regardless of whether any applied policies are brave and tough enough to act sufficiently quickly on our latest scientific knowledge. The era of mobile telephone communication began around twenty years ago, and already, today, a major portion of the worlds population is equipped with this communication tool. Is there anyone who doubts that the services and manufacturing sectors will be able to deliver innovative solutions for currently known, and unknown, problems? With insight into the necessary changes, and with support in the form of necessary price incentives, we will hopefully come to be a truly sustainable global society. The accounting professions standardisation work, which has its starting point in the IAASB Framework and the ISAE 3000, creates the necessary prerequisites for the industry to deliver value ^ in what is known as the public interest. The question of how the accountancy profession will continue to fulfil its role in the adaption to sustainable development will determine, at least to some extent, the professional accountants legitimacy in the quest to contribute to that development as independent parties. Does the accountancy profession prefer a business doing professional work or a profession doing business?

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12 Websites and links

A ACCA, the Association of Chartered Certified Accountants www.accaglobal.com AccountAbility,The AA1000 Series, www.accountability.org/aa1000series Accounting for Sustainability, Project www.accountingforsustainability.org/home/ Amnesty International Human Rights Principles for Companies, www.amnesty.org B Business Social Compliance Initiative, BSCI, www.bsci-eu.org C Carbon Disclosure Project, CDP, www.cdproject.net Caux Round Table, www.cauxroundtable.org Ceres Principles, www.ceres.org CFA Institute, www.cfainstitute.org Clean Clothes Campaign, CCC, www.cleanclothes.org CLP Holdings Limited, www.clpgroup.com ECPAT International, www.ecpat.net Code of Conduct for the Protection of Children from Sexual Exploitation in Travel and Tourism, www.thecode.org/ Common Code for the Coffee Community Association, 4C Association, www.4c-coffeeassociation.org Corporate Register, www.corporateregister.com CSR Europe, www.csreurope.org

226 Websites and links

D Danish Institute for Human Rights www.humanrightsbusiness.org Dow Jones Sustainability Indexes, www.sustainability-indexes.com E EFFAS, www.effas.com EFRAG, www.efrag.org EMAS, www.ec.europa.eu/environment/emas ESRA, European Sustainability Reporting Association, www.sustainabilityreporting.eu Ethix SRI Advisors, www.ethix.se European Sustainable Investment Forum, Eurosif www.eurosif.org Extractive IndustriesTransparency Initiative, EITI, www.eitransparency.org F Fair Labor Association, FLA, www.fairlabor.org Fairtrade Labelling Organizations International, FLO, www.fairtrade.net Far,The Institute for the Accountancy Profession, www.far.se FEE,The Federation of European Accountants www.fee.be Forest Stewardship Council, FSC, www.fsc.org FTSE4Good, www.ftse.com G GES Investment Services, www.ges-invest.com

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Global Reporting Initiative, GRI Sustainability Reporting Guidelines, www.globalreporting.org Global SustainableTourism Criteria Partnership, www.sustainabletourismcriteria.org Globe Award ^ Leading Sustainability Awards, www.globeaward.org Greenpeace Sweden, www.greenpeace.org I ICAEW, Institute of Chartered Accountants in England and Wales, www.icaew.com ICAEW Audit & Assurance Faculty, www.icaew.com/assurance IDW, Institut der Wirtschaftsprfer, www.idw.de IFAC,The International Federation of Accountants, www.ifac.org IFAC Sustainability Framework, web.ifac.org IKEA IWAY Standard, www.ikea.com International Business Leaders Forum, IBLF, www.iblf.org International Chamber of Commerce, ICC, www.iccwbo.org International Cocoa Initiative, www.cocoainitiative.org International Council of Chemical Associations Responsible Care, www.responsiblecare.org International Council on Mining and Metals, ICMM, www.icmm.com International Federation of Accountants, IFAC, www.ifac.org International Labour Organization, ILO, www.ilo.org

228 Websites and links

International Petroleum Industry Environmental Conservation Association, IPIECA, www.ipieca.org International Road Transport Union, www.iru.org International Integrated Reporting Committee, IIRC, www.integratedreporting.org M Marine Stewardship Council, www.msc.org Mistra,The Foundation for Strategic Environmental Research, www.mistra.org N NASDAQ OMX, www.nasdaqomx.com Novo nordisk, www.novo.dk O OECD, www.oecd.org P Partnering against Corruption Initiative, PACI, www.weforum.org/en/initiatives/paci/index.htm Plan International, www.plan-international.org PricewaterhouseCoopers, www.pwc.com PricewaterhouseCoopers, Corporate Reporting, www.corporatereporting.com Principles for Responsible Investment, PRI, www.unpri.org Programme for the Endorsement of Forest Certification schemes, PEFC, www.pefc.org Public Accountants in Business Practice, PAIB, www.ifac.org

Websites and links 229

R Rainforest Alliance, www.rainforest-alliance.org Royal NIVRA, Koninklijk Nederlands Institut van Registeraccountants, www.nivra.nl S SCA, www.sca.com Social Accountability International, SAI, www.sa-intl.org Sustainable Investment Research Platform, SIRP, www.sirp.se SwedWatch, www.swedwatch.org Swedens Financial Analysts Association, SFF, www.finansanalytiker.se T The Business & Human Rights Resource Centre www.business-humanrights.org The Equator Principles, www.equator-principles.com The Ethical Trading Initiative, www.ethicaltrade.org The European Sustainability Reporting Association, ESRA, www.sustainabilityreporting.eu The Federation of European Accountants, FEE www.fee.be The Global Sullivan Principles of Social Responsibility, www.thesullivanfoundation.org/gsp/default.asp The International Federation of Accountants, IFAC, www.ifac.org The Southern African Chapter of the Institute of Directors/The King Report and Code of Governance in SA 2009, www.iodsa.co.za The Stern Review, www.hm-treasury.gov.uk

230 Websites and links

The Swedish Society for Nature Conservation, SSNC, www.naturskyddsforeningen.se TheVoluntary Principles on Security and Human Rights, www.voluntaryprinciples.org Transparency International,TI, www.transparency.org Tllberg Foundation, www.tallbergfoundation.org The Economics of Ecosystems and Biodiversity,TEEB, www.teebweb.org U UNEP Finance Initiative, UNEP FI, www.unepfi.org United Nations Conference onTrade and Development, UNCTAD, www.unctad.org United Nations Global Compact, www.unglobalcompact.org W WBCSD and World Resources Institute,WRI, www.ghgprotocol.org Wolfsberg Group, www.wolfsberg-principles.com World Business Council for Sustainable Development,WBCSD, www.wbcsd.org World Wide Fund for Nature,WWF, www.wwf.org

231

13 FEE Publications
All of the following publications issued by the Federation of European Accountants are available for free download on www.fee.be. FEE Policy Statements on Sustainability: Accountants driving sustainable changes in the public sector (January 2010) Equipping accountants for a sustainable future (January 2010) Small and sustainable: opportunities for SMEs (January 2010) Shaping a Sustainable Economy (July 2009) Towards a Sustainable Economy:The Contribution of Assurance (July 2009) Carbon Emissions Information (July 2009) Embedding Sustainability into Corporate Governance (July 2009) The Contribution of the Accountancy Profession (January 2009) Cost Internalisation (January 2009) Non-Financial Information (January 2009) Multi-Stakeholders:The Essence of MultidisciplinaryTeams (January 2009) Other FEE Papers, Contributions, Comment Letters, Call for Actions, Discussion Papers, Alerts and Position Papers: Swedish accounting firms help SMEs to strengthen their businesses and adopt sustainable business practices, at the same time! FEE Paper (March 2010) FEE Position on ESG Disclosure, FEE contribution to EC ESG Disclosure Workshop of 25 February 2010 (February 2010) FEE Comment Letter on Integrating sustainability further in the learning outcomes and knowledge of the Common Content Project,FEE Comment Letter to Common Content (January 2010)

232 FEE Publications

Call for Action ^ Need to Increase Education in Sustainability for Accountants and Management! , FEE Call for Action (December 2008) Discussion Paper Sustainability InformationinAnnual Reports ^ Building on Implementation of the Modernisation Directive, FEE Discussion Paper (December 2008) Key Issues in Sustainability Assurance ^ An Overview, FEE Discussion Paper (June 2006) FEE Alert ^ Emissions Trading, FEE Alert Regarding EU Greenhouse Gas EmissionsTrading Scheme (January 2005) Assurance for Sustainability, FEE Call for Action Paper (June 2004) Benefits of SustainabilityAssurance, FEE Position Paper (February 2003) Providing Assurance on Sustainability Reports, FEE Discussion Paper (April 2002)

233

14 Appendix
14.1 Bold words, big commitments
Solutions to the human and environmental problems the world is facing are being sought in variousinternational forums.This type of work begins, of course, with agreeing on how things should (or must) be done. Words precede action, and words which have actually been agreed upon between governments become decisive for action. When declarations and conventions are introduced, these words also serve as guidance (or even, also, as mandatory regulations) for organisations, enterprises, governments, agencies and institutions. The following sections explain certain key concepts for companies work with sustainable business development. We will begin in the political arena and end where it all began.

14.1.1 The Millennium Declaration and the Millennium Development Goals (MDGs)
An international, mutually agreed upon, agenda for global development, entitled the Millennium Declaration, was signed by the worlds heads of state and government in 2000. The Millennium Declaration affirms that global development requires a holistic approach. Efforts for poverty reduction, education, health, peace, security, environment, human rights and democracy are inter-related. In order to achieve the Declarations intentions, eight so-called Millennium Development Goals were drawn up which are measurable and time-bound. Supporting these goals are eighteen sub-goals and a number of measurement indicators. The UN coordinatesthe work with the MDGs directly under the Secretary General through a project involving three areas: follow-up, separate research, and a public campaign to motivate all countries to increase their understanding of the objectives and, in this manner, rally public opinion in favour of the achievement of these objectives.The eight MDGs [each of which has specified targets which must be complied with by 2015] are:
1. 2. 3. 4. 5. Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality and empower women Reduce child mortality Improve maternal health

234 Appendix
6. 7. 8. Combat HIV/AIDS, malaria and other diseases Ensure environmental sustainability Develop a global partnership for development

The MDGs are specified according to 18 quantified targets, measured on the basis of 48 indicators. All countries are bound to report to the UN on how the work of achieving these targets is progressing.This applies particularly to the manner in which the work progresses with the eighth goal which, among other things, deals with increased aid, fair trade rules and eased debt burdens in developing countries.

14.1.2 The Rio Declaration and Agenda 21

In a more overarching perspective, the Rio Declaration and the Agenda 21 document can also be seen as rules of conduct for countries, regions and communities with a focus on sustainable development. The Rio Declaration is a recommendation issued by the UN conference in Rio de Janeiro in 1992 in the form of 27 principles aiming to:
^ Establish a new and equitable global partnership through the creation of new levels of cooperation among States, key sectors of societies and people, Work towardsinternational agreements which respect the interests of all and to protect the integrity of the global environmental and developmental system, Recognizing the integral and interdependent nature of the Earth, our home.

Agenda 21 is also a document from the Rio Conference, an Agenda for the 21st Century covering 40 chapters divided into four main sections:
Section 1: Social and economic dimensions Section 2: Conservation and management of resources Section 3: Strengthening the role of major groups Section 4: Means of implementation.

There are no detailed descriptions of Agenda 21 in this book, however, in the section Customers, consumers and consumption patterns in flux references are made to Agenda 21.

14.1.3 Human Rights are Fundamental

In addition to the UN Charter and its Universal Declaration of Human Rights (1948), binding conventions dealing with human rights have been

Appendix 235

developed by the United Nations. The Convention on Civil and Political Rights and the convention on Economic, Social and Cultural Rights were both adopted in 1966. Other conventions deal with the rights of the child (1989), abolition of all forms of discrimination against women (1979) and the prohibition of torture (1984) and Racial Discrimination (1965). Human rights are part of the international law governing statesand international organisationsactions and the relationship between them. These are the rights which states must, through international agreements, ensure as regards the individual. The state is to protect the individual from interference with their fundamental freedoms, from various types of assault or encroachment and shall fulfil their basic needs. The environmental responsibility which, along with social responsibility is covered by the concept of sustainable business development, is based, in essence, on the United Nations Universal Declaration of Human Rights and the UN Convention on the Rights of the Child. As we are discussing corporate responsibility, we should include the ILOs58 Declaration on Fundamental Principles, the eight core conventions, in addition to theUnited Nations Package:
^ ^ ^ ^ ^ ^ ^ ^ Forced Labour Convention, 1930 Freedom of Association and Protection of the Right to Organise Convention, 1949 Right to Organise and Collective Bargaining Convention, 1949 Equal Remuneration Convention, 1951 Abolition of Forced Labour Convention, 1957 Discrimination (Employment and Occupation) Convention, 1958 Minimum Age Convention, 1973 Worst Forms of Child Labour Convention, 1999

In addition to these, ILO adopted 185 different conventions between 1919 and 2003 (although not detailed in this book).To theUnited Nations Package and the ILOs core conventions should also be added the Organisation for Economic Co-operation Developments (OECD) Guidelines for Multinational Enterprises59.These guidelines are formed through recommendations by OECD countriesgovernments to corporate entities.Thus, the foundation is laid for the determination of a companys responsibility. Following is an exploration of selected aspects of theresponsibility package.
58 59

International Labour Organization. Organisation for Economic Co-operation and Development.

236 Appendix

14.1.4 United Nations Universal Declaration of Human Rights

The Declaration was adopted on 10 December 1948 and its introduction concludes as follows:
Now, therefore the General Assembly proclaims this Universal Declaration of Human Rights as a common standard of achievement for all peoples and all nations, to the end that every individual and every organ of society, keeping this Declaration constantly in mind, shall strive by teaching and education to promote respect for these rights and freedoms and by progressive measures, national and international, to secure their universal and effective recognition and observance, both among the peoples of Member States themselves and among the peoples of territories under their jurisdiction.

In the following pages, the thirty articles are presented in their entirety: Article 1
All human beings are born free and equal in dignity and rights.They are endowed with reason and conscience and should act towards one another in a spirit of brotherhood.

Article 2
Everyone is entitled to all the rights and freedoms set forth in this Declaration, without distinction of any kind, such as race, colour, sex, language, religion, political or other opinion, national or social origin, property, birth or other status. Furthermore, no distinction shall be made on the basis of the political, jurisdictional or international status of the country or territory to which a person belongs, whether it be independent, trust, non-self-governing or underanyother limitation of sovereignty.

Article 3
Everyone has the right to life, liberty and security of person.

Article 4
No one shall be held in slavery or servitude; slavery and the slave trade shall be prohibited in all their forms.

Article 5
No one shall be subjected to torture or to cruel, inhuman or degrading treatment or punishment.

Article 6
Everyone has the right to recognition everywhere as a person before the law.

Appendix 237

Article 7
All are equal before the law and are entitled without any discrimination to equal protection of the law. All are entitled to equal protection against any discrimination in violation of this Declaration and against any incitement to such discrimination.

Article 8
Everyone has the right to an effective remedy by the competent national tribunals for acts violating the fundamental rights granted him by the constitution or by law.

Article 9
No one shall be subjected to arbitrary arrest, detention or exile.

Article 10
Everyone is entitled in full equality to a fair and public hearing by an independent and impartial tribunal, in the determination of his rights and obligations and of any criminal charge against him.

Article 11
1. Everyone charged with a penal offence has the right to be presumed innocent until proved guilty according to law in a public trial at which he has had all the guarantees necessary for his defence. No one shallbe held guiltyofany penaloffence on account of anyact oromission which did not constitute a penal offence, under national or international law, at the time when it was committed. Nor shall a heavier penalty be imposed than the one that was applicable at the time the penal offence was committed.

2.

Article 12
No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence, nor to attacks upon his honour and reputation. Everyone has the right to the protection of the law against such interference or attacks.

Article 13
1. 2. Everyone has the right to freedom of movement and residence within the borders of each state. Everyone has the right to leave any country, including his own, and to return to his country.

Article 14
1. 2. Everyone has the right to seek and to enjoy in other countries asylum from persecution. This right may not be invoked in the case of prosecutions genuinely arising from non-political crimes or from acts contrary to the purposes and principles of the United Nations.

238 Appendix

Article 15
1. 2. Everyone has the right to a nationality. No one shall be arbitrarily deprived of his nationality nor denied the right to change his nationality.

Article 16
1. Men and women of full age, without any limitation due to race, nationality or religion, have the right to marry and to found a family. They are entitled to equal rights as to marriage, during marriage and at its dissolution. Marriage shall be entered into only with the free and full consent of the intending spouses. The family is the natural and fundamental group unit of societyandis entitled to protection by society and the State.

2. 3.

Article 17
1. 2. Everyone has the right to own property alone as well as in association with others. No one shall be arbitrarily deprived of his property.

Article 18
Everyone has the right to freedom of thought, conscience and religion; this right includes freedom to change his religion or belief, and freedom, either alone or in community with others and in public or private, to manifest his religion or belief in teaching, practice, worship and observance.

Article 19
Everyone has the right to freedom of opinion and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers.

Article 20
1. 2. Everyone has the right to freedom of peaceful assembly and association. No one may be compelled to belong to an association.

Article 21
1. 2. 3. Everyone has the right to take part in the government of his country, directly or through freely chosen representatives. Everyone has the right of equal access to public service in his country. The will of the people shall be the basis of the authority of government; this will shall be expressed in periodic and genuine elections which shall be by universal and equal suffrage and shall be held by secret vote or by equivalent free voting procedures.

Appendix 239

Article 22
Everyone, as a memberof society, has the right to social securityand is entitled to realization, through national effort and international co-operation and in accordance with the organisation and resources of each State, of the economic, social and cultural rights indispensable for his dignity and the free development of his personality.

Article 23
1. 2. 3. Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment. Everyone, without any discrimination, has the right to equal pay for equal work. Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection. Everyone has the right to form and to join trade unions for the protection of his interests.

4.

Article 24
Everyone has the right to rest and leisure, including reasonable limitation of working hours and periodic holidays with pay.

Article 25
1. Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control. Motherhood and childhood are entitled to special care and assistance. All children, whether born in or out of wedlock, shall enjoy the same social protection.

2.

Article 26
1. Everyone has the right to education. Education shall be free, at least in the elementaryand fundamental stages.Elementaryeducation shallbe compulsory.Technical and professional education shall be made generally available and higher education shall be equally accessible to all on the basis of merit. Education shall be directed to the full development of the human personality and to the strengthening of respect for human rights and fundamental freedoms. It shall promote understanding, tolerance and friendship among all nations, racial or religious groups, and shall further the activities of the United Nations for the maintenance of peace. Parents have a prior right to choose the kind of education that shall be given to their children.

2.

3.

240 Appendix

Article 27
1. 2. Everyone has the right freely to participate in the culturallife of the community, to enjoy the arts and to share in scientific advancement and its benefits. Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author.

Article 28
Everyoneis entitled to a socialandinternationalorder inwhich the rights and freedoms set forth in this Declaration can be fully realized.

Article 29
1. 2. Everyone has duties to the community in which alone the free and full development of his personality is possible. In the exercise of his rights and freedoms, everyone shall be subject only to such limitations as are determined by law solely for the purpose of securing due recognition and respect for the rights and freedoms of others and of meeting the just requirements of morality, public order and the general welfare in a democratic society. These rights and freedoms may in no case be exercised contrary to the purposes and principles of the United Nations.

3.

Article 30
Nothing in this Declaration may be interpreted as implying for any State, group or person any right to engage in any activity or to perform any act aimed at the destruction of any of the rights and freedoms set forth herein.

14.1.5 The Norms for corporate responsibility

On the initiative of Amnesty International, the UN Sub-Commission discussed a document, The Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights: however, this declaration was never adopted.The Norms, which were presented to the Sub-Commission in 2003, are a compilation of existing human rights conventions which had been re-worked and adapted with the intention of adding a corporate responsibility component.In order for these standardsto become binding, there was a requirement that they not only be adopted by the UN Commissioner for Human Rights (which did not take place) but that they also be approved and ratified by the Member States (which did not take place). An argument against the adoption of The Norms is that responsibility for compliance with documents, such as the United Nations Universal Declaration of Human

Appendix 241

Rights, must continue to lie with governments (and not primarily with companies). Anticipating that the process of discussing and ratifying The Norms may be reinitiated, they are now seen by certain stakeholders as a valuable guide as to where corporate responsibility begins and ends. The Norms (which were, admittedly, not adopted) include the following headings: ^ Non-discrimination ^ Protection of civilians and laws of war ^ Use of security forces ^ Workersrights ^ Corruption, consumer protection and human rights ^ Economic, social and cultural rights ^ Human rights and the environment ^ Indigenous peoplesrights As a practical consequence of the discussion surrounding The Norms, Harvard Professor John Ruggie was appointed as representative for the UN Secretary General, with the explicit mandate to keep working on these issues. The new mandate should be reported by 2011 and reads as follows:
(a) To provide views and concrete and practical recommendations on ways to strengthen the fulfilment ofthe dutyofthe State to protect allhuman rights from abuses by, or involving, transnational corporations and other business enterprises, including through international cooperation; (b) To elaborate further on the scope and content of the corporate responsibility to respect all human rights and to provide concrete guidance to business and other stakeholders; (c) To explore options and make recommendations, at the national, regional and international levels, for enhancing access to effective remedies available to those whose human rights are impacted by corporate activities.

In the Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises (9 April 2010), John Ruggie reports back to the UN Human Rights Council; Business and Human Rights: Further steps toward the operationalization of theprotect, respect and remedy framework.The conclusions read as follows:

242 Appendix

VI. Conclusion
120. Resolution 8/7 extended the Special Representatives mandate to 2011. The Councilasked him to operationalize theprotect, respect andremedyframework with a view to providing more effective protection to individuals and communities against human rights abuses by, or involving, transnational corporations and other business enterprises. 121. In deciding how best to pursue this task, the Special Representative found wisdom in the words of Nobel laureate Amartya Sen: what moves us, Sen writes,is not the realization that the world falls short of being completely just ^ which few of us expect ^ but that there are clearly remediable injustices around us which we want to eliminate.52 This perspective, which resonates well with the Special Representatives own approach of principled pragmatism, leads one to inquire how to improve actual lives, Sen continues, rather than to theoretical characterizations of perfectly just societiesor institutions, which in any case remain illusory. Accordingly, this report has addressed how States and companies can become more responsive and effective in dealing with business and human rights challenges. Identifying such practical measures also provides a basis for assessing the performance of States and companies, by each other, and by other stakeholders. 122. The United Nations protect, respect and remedy framework lays the foundations of a system for better managing business and human rights. It comprises State duties and corporate responsibilities. It includes preventative and remedial measures. It involves all relevant actors: States, businesses, affected individuals and communities, civil society and international institutions. 123. Progress within any one pillar will trigger and reinforce progress in the others. States and business have independent obligations, thus neither needs to, nor should, wait for the other to move first. As States do a better job of fulfilling theirduty to protect, that will facilitateand begin to ensure that all companiesmeet their responsibility to respect. As companies internalize the responsibility to respect, they will increasingly support State efforts to bring laggards along. As access to remedy improves, companies and States alike will learn how better to prevent corporate-related abuses in the first place. And so on. 124. In his 2011 report, the Special Representative will provide a set of guiding principles for the operationalization of the frameworks distinct yet complementary and interactive elements and processes. 125. The finalreport also willpresent options andrecommendationsto the Council regarding possible successor initiatives to the mandate. The Special Representative will engage extensively with Member States and others in developing these ideas. Nevertheless, to sustain the momentum the mandate has achieved, he is flagging one recommendation now.

Appendix 243
126. Beyond the area of labour standards, the Special Representative has become the de facto United Nations focal point for business and human rights. States, companies, United Nations organisations and other national and international entities regularly seek his advice regarding their own corporate-related human rights policies and practices. Resource constraints limit how much he and his small team have been able to do. However, even those limited efforts will come to a halt once his mandate ends unless an advisory and capacity-building function is anchored firmly within the United Nations. Logically, this should rest with OHCHR. But the Office would need to become equipped to provide the leadership and guidance that stakeholders require and expect. The Special Representative urges early consideration of this matter by the Council.

14.1.6 The main international rules of conduct

The following provides an account of some of the codes of conduct for determining corporate responsibility which have been developed over several years. These codes are variously referred to as recommendations, principles or guidelines, and their common feature is that for the companies/organisations, these rules of conduct constitute the basis for commitments which are, only voluntary. However, these rules are, in turn, largely based on existing national legislation or other mandatory regulations. Examples of this include national environmental and working environment legislation, union agreements and international law, such as the ILOs core conventions and other international conventions, i.e. the UNs Universal Declaration of Human Rights. The codes presented have been produced from a variety of bodies, such as the UN, OECD, industry associations and others, and are not defined by law. For companies, the most suitable use of such conventions is as a base for formulating their own codes of conduct. Of course, it is important to actively consider and determine the extent to which a company adheres (or does not adhere) to these codes.

14.1.7 Global Compact

The then General Secretary of the UN,Kofi Annan presented, at theWorld Economic Forum in Davos in 1999, nine principles on the conduct of companies and organisations and their approach to human rights, labour and the environment. A tenth principle has, since that time, been added regarding attitudes toward corruption, extortion and bribery. The Global Compact is based on the UN Universal Declaration of Human Rights, the International Labour Organization, ILOs, Declaration

244 Appendix

on Fundamental Principles (the eight core conventions) and Rights at Work, as well as the Rio Declaration on Environment and Development and Agenda 21.The process of signing up to the Global Compact involves the Chairman/CEO of the company writing a letter to UN SecretaryGeneralin which he/she expresses a clear commitment that the company will operate in accordance with the Global Compacts ten principles, as well as confirming a willingness to participate in the Global Compacts activities. A company must submit a statement of objectives, results and experience in what is known as a COP Communication on Progress. This is used to assess whether the company lives up to its commitment (the UN is not responsible for this). If an enterprise does not submit a COP, the company is cautioned before it is deleted from the list of affiliated companies.This process (cautioning and deletion process) is fully visible on the Global Compact website. Global Compacts ten principles
Human Rights Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and; Principle 2: make sure that they are not complicit in human rights abuses Labour Standards Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labour; Principle 5: the effective abolition of child labour; and Principle 6: the elimination of discrimination in respect of employment and occupation. Environment Principle 7: Businesses should support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote greater environmental responsibility; and Principle 9: encourage the development and diffusion of environmentally friendly technologies. Anti-Corruption Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.

Appendix 245

14.1.8 OECD guidelines for multinational enterprises

The OECDs guidelines for multi-national companies were adopted in 1976 andupdatedin 2000.OECDs guidelines for multinational companies are recommendations produced by governments directed towards this category of company. These guidelines provide voluntary principles and standards for the responsible undertaking of business operations complying with applicable laws, that is, the established policy of the country in which they operate.The goal of the guidelinesis to ensure that the multinational companiesoperations are coordinated with government policies in the countries in which they operate, thereby strengthening the basis of mutual trust between companies and the societies in which they operate, contributing to an improved climate for foreign investments and increasing the contribution to sustainable development provided by multinational companies.The ten guidelines are presented in summary form below. I. Concepts and Principles
A precise definition of multinationalenterprisesis not required for the purposes of the Guidelines. These usually comprise companies or other entities established in more than one country and so linked that they may co-ordinate their operations in various ways. Governments wish to encourage the widest possible observance of the Guidelines. While it is acknowledged that small- and medium-sized enterprises may not have the same capacities as larger enterprises, governments adhering to the Guidelines nevertheless encourage them to observe the Guidelines recommendations to the fullest extent possible. The Guidelines are addressed to all the entities within the multinational enterprise (parent companies and/or local entities). Governments adhering to the Guidelines set them forth with the understanding that they will fulfil their responsibilities to treat enterprises equitably and in accordance with international law and with their contractual obligations. Governments adhering to the Guidelines should not use them for protectionist purposes nor use them in a way that calls into question the comparative advantage of any country where multinational enterprises invest. Governments adhering to the Guidelines will promote them and encourage their use. They will establish National Contact Points that promote the Guidelines and act as a forum for discussion of all matters relating to the Guidelines. The adhering Governments will also participate in appropriate review and consultation procedures to address issues concerning interpretation of the Guidelines in a changing world.

246 Appendix

II. General Policies

Enterprises should take fully into account established policies in the countries in which they operate, and consider the views of other stakeholders. In this regard, enterprises should: 1. Contribute to economic, social and environmental progress with a view to achieving sustainable development. 2. Respect the human rights of those affected by theiractivities consistent with the host governments international obligations and commitments. 3. Encourage local capacity building through close co-operation with the local community, including business interests, as well as developing the enterprises activities in domestic and foreign markets, consistent with the need for sound commercial practice. 4. Encourage human capital formation, in particular by creating employment opportunities and facilitating training opportunities for employees. 5. Refrain from seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to environmental, health, safety, labour, taxation, financial incentives, or other issues. 6. Support and uphold good corporate governance principles and develop and apply good corporate governance practices. 7. Develop and apply effective self-regulatory practices and management systems that foster a relationship of confidence and mutual trust between enterprises and the societies in which they operate. 8. Promote employee awareness of, and compliance with, company policies through appropriate dissemination of these policies, including through training programmes. 9. Refrain from discriminatory or disciplinary action against employees who make bona fide reports to management or, as appropriate, to the competent public authorities, on practices that contravene the law, the Guidelines or the enterprises policies. 10. Encourage, where practicable, business partners, including suppliers and sub-contractors, to apply principles of corporate conduct compatible with the Guidelines. 11. Abstain from any improper involvement in local political activities.

III. Disclosure
Enterprises should ensure that timely, regular, reliable and relevant informationis disclosed regarding their activities, structure, financial situation and performance. Enterprises should also disclose material information on: a) The financial and operating results of the company. b) Company objectives. c) Major share ownership and voting rights. d) Members of the Board and key executives, and their remuneration. e) Material foreseeable risk factors.

Appendix 247
f) g) Material issues regarding employees and other stakeholders. Governance structures and policies.

IV. Employment and Industrial Relations

Enterprises should, within the framework of applicable law, regulations and prevailing labour relations and employment practices: 1. a) Respect the right of their employees to be represented by trade unions and other bona fide representatives of employees, and engage in constructive negotiations, either individually or through employers associations, with such representatives with a view to reaching agreements on employment conditions. b) Contribute to the effective abolition of child labour. c) Contribute to the elimination of all forms of forced or compulsory labour. d) Not discriminate against their employees with respect to employment or occupation on such grounds as race, colour, sex, religion, political opinion, national extraction or social origin, unless selectivity concerning employee characteristics furthers established governmental policies which specifically promote greater equality of employment opportunity or relates to the inherent requirements of a job. 2. a) Provide facilities to employee representatives as may be necessary to assist in the development of effective collective agreements. b) Provide information to employee representatives which is needed for meaningful negotiations on conditions of employment. c) Promote consultation and co-operation between employers and employees and their representatives on matters of mutual concern. 3. Provide information to employees and their representatives which enables them to obtain a true and fair view of the performance of the entity or, where appropriate, the enterprise as a whole. 4. a) Observe standards of employment and industrial relations not less favourable than those observed by comparable employers in the host country. b) Take adequate steps to ensure occupational health and safety in their operations. 5. In their operations, to the greatest extent practicable, employ local personnel and provide training with a view to improving skill levels, in co-operation with employee representatives and, where appropriate, relevant governmental authorities. 6. In considering changes in their operations which would have major effects upon the livelihood of theiremployees, in particular in the case of the closure of an entity involving collective lay-offs or dismissals, provide reasonable notice of such changes to representatives of their employees, and, where appropriate, to the relevant governmental authorities, and co-operate with

248 Appendix
the employee representatives and appropriate governmental authorities so as to mitigate to the maximum extent practicable adverse effects. In light of the specific circumstances of each case, it would be appropriate if management were able to give such notice prior to the final decision being taken. Other means may also be employed to provide meaningful cooperation to mitigate the effects of such decisions. In the context of bona fide negotiations with representatives of employees on conditions of employment, or while employees are exercising a right to organise, not threaten to transfer the whole or part of an operating unit from the country concerned nor transfer employees from the enterprises component entities in other countries in order to influence unfairly those negotiations or to hinder the exercise of a right to organise. Enable authorised representatives of their employees to negotiate on collective bargaining or labour-management relations issues and allow the parties to consult on matters of mutual concern with representatives of management who are authorised to take decisions on these matters.

7.

8.

V. Environment
Enterprises should, within the framework of laws, regulations and administrative practices in the countries in which they operate, and in consideration of relevant international agreements, principles, objectives, and standards, take due account of the need to protect the environment, public health and safety, and generally to conduct their activities in a manner contributing to the wider goal of sustainable development. In particular, enterprises should: 1. Establish and maintain a system of environmentalmanagement appropriate to the enterprise, including: a) Collection and evaluation of adequate and timely information regarding the environmental, health, and safety impacts of their activities; b) Engage in adequate and timely communication and consultation with the communities directly affected by the environmental, health and safety policies of the enterprise and by their implementation. c) Assess, and address in decision-making, the foreseeable environmental, health, and safety-related impacts associated with the processes, goods and services of the enterprise over their full life cycle. d) Consistent with the scientific and technical understanding of the risks, where there are threats of serious damage to the environment, taking also into account human health and safety, not use the lack of full scientific certainty as a reason for postponing cost-effective measures to prevent or minimise such damage. e) Maintain contingency plans for preventing, mitigating, and controlling serious environmental and health damage from their operations, including accidents and emergencies; and mechanisms for immediate reporting to the competent authorities.

Appendix 249
f) g) h) Continually seek to improve corporate environmental performance, Provide adequate education and training to employees in environmental health and safety matters Contribute to the development of environmentally meaningful and economically efficient public policy, forexample, by means of partnerships or initiatives that will enhance environmental awareness and protection.

VI. Combating Bribery

Enterprises should not, directly or indirectly, offer, promise, give, or demand a bribe or other undue advantage to obtain or retain business or other improper advantage. Nor should enterprises be solicited or expected to render a bribe or other undue advantage.

VII. Consumer Interests

When dealing with consumers, enterprises should act in accordance with fair business, marketing and advertising practices and should take all reasonable steps to ensure the safety and quality of the goods or services they provide.

VIII. Science and Technology

Enterprises should: 1. Endeavour to ensure that theiractivities are compatible with the science and technology (S&T) policies and plans of the countries in which they operate. 2. Adopt, where practicable in the course of their business activities, practices that permit the transfer and rapid diffusion of technologies and know-how, with due regard to the protection of intellectual property rights. 3. When appropriate, perform science and technology development work in host countries to address local market needs, as well as employ host country personnel in an S&T capacity and encourage their training, 4. When granting licenses for the use of intellectual property rights or when otherwise transferring technology, do so on reasonable terms and conditions and in a manner that contributes to the long term development prospects of the host country. 5. Where relevant to commercial objectives, develop ties with local universities, public research institutions, and participate in co-operative research projects with local industry or industry associations.

IX. Competition
Enterprises should, within the frameworkof applicable laws and regulations, conduct their activities in a competitive manner. In particular, enterprises should: 1. Refrain from entering into or carrying out anti-competitive agreements among competitors: to fix prices; to make rigged bids (collusive tenders); to establish output restrictions or quotas; or to share or divide markets by allocating customers, suppliers, territories or lines of commerce.

250 Appendix
2. 3. 4. Geographic or business area Conduct all of their activities in a manner consistent with all applicable competition laws. Co-operate with the competition authorities of such jurisdictions by, among other things and subject to applicable law and appropriate safeguards, providing as prompt and complete responses as practicable to requests for information. Promote employee awareness of the importance of compliance with all applicable competition laws and policies.

5.

X. Taxation
It is important that enterprises contribute to the public finances of host countries by making timely payment of their tax liabilities. In particular, enterprises should comply with the tax laws and regulations in all countries in which they operate and should exert every effort to act in accordance with both the letter and spirit of those laws and regulations.

14.1.9 ILOs Core Conventions

The International Labour Organization (the ILO) is the UN body for work life issues. ILO is devoted to advancing opportunities for women and men to obtain decent and productive work in conditions of freedom, equity, security and human dignity. Its main aims are to promote rights at work, encourage decent employment opportunities, enhance social protection and strengthen dialogue in handling work-related issues. In promoting social justice and internationally recognized human and labour rights, the organisation continues to pursue its founding mission that labour peace is essential to prosperity.Today, the ILO helps advance the creation of decent jobs and the kinds of economic and working conditions that give working people and business people a stake in lasting peace, prosperity and progress. The ILO is a tripartite body, which implies that governments, trade unions and employers are represented. The ILO promotes employment and better working conditions and protects trade union rights and freedoms. In the ILO, governments are represented together with unions and employers, and the parties negotiate conventions and recommendations on the subject of working conditions.The ILO has adopted nearly 200 conventions on rights in the workplace. Not all conventions apply in all countries; instead, each country ratifies each convention separately, and not all countries have ratified all conventions. It is the countriesgovernments that ratify the conventions andit is the governments that have responsibil-

Appendix 251

ities forany crimes against the conventions.If a company violatesthe conventions, it is the government of the country in which the crime occurs that can be held accountable, and not the company.The ILO has, however, no significant penalties. The eight most important conventions were gathered in 1998 into what is commonly referred to asthe eight core conventions.These constitute a minimum standard applying to all countries and covers all workers throughout the world. The difference between the core conventions and other conventions is that the core conventions apply in all of the ILOs Member States, not only in the countries whose governments have ratified the conventions. The Core Conventions can, therefore be regarded as basic human rights in the workplace. The eight core conventions are divided into four areas: 1. Freedom of association and the right to collective bargaining
ILO Convention No. 87 ^ Freedom of Association and Protection of the Right to Organize, 1948 ILO Convention No. 98 ^ Right to Organize and Collective Bargaining, 1949 The right of workers and employers to form and join organisations of their choice is anintegralpart of a free and open society.It is at the core of ILOsvalues and also a right proclaimed in the Universal Declaration of Human Rights (1948). It is a basic civil liberty that serves as a building block for social and economic progress. Linked to this is the effective recognition of the right to collective bargaining. Sound collective bargaining practices ensure that employers and workers have an equal voice in negotiations and that the outcome will be fair and equitable.Voice and representation are an important part of decent work. The existence of independent organisations of workers and employers serves as a foundation to the ILOs tripartite structure, and their involvement in ILO actions and policies reinforces freedom of association, directly and indirectly. From advising governments on labour legislation to providing education and training for trade unions and employersgroups, the ILO is regularly engaged in promoting freedom of association. The ILOs Committee on Freedom of Association was set up in 1951 to examine violations of workersand employersorganizing rights.The committee has examined more than 2000 cases, including allegations of murders, disappearances, physical attacks, arrests and forced exile of trade union officials. The committee is tripartite and handles complaints in ILO member Stateswhetheror not they have ratified freedom of association Conventions.Through the Committee on Freedom of Association and other supervisory mechanisms, the ILO consistently defends the rights of trade unions and employersorganisations. In many cases, these organisations have played a significant role in their countriesdemocratic transformation.

252 Appendix

2. Forced labour
ILO Convention No. 29 ^ Forced Labour, 1930 ILO Convention, No. 105 ^ Abolition of Forced Labour, 1957 Although forced labour is universally condemned, millions of people around the world are still subjected to it.It takes different forms, including debt bondage, trafficking and other forms of modern slavery.The victims are the most vulnerable ^ women and girls forced into prostitution, migrants trapped in debt bondage. The ILOis also pressing foreffective nationallaws and strongerenforcement mechanisms, such aslegal sanctions andvigorousprosecution against those who exploit forced labourers. By raising public awareness, the ILO seeks to highlight such human and labour rights violations.

3. Discrimination
ILO Convention No. 100 ^ Equal Remuneration, 1951 ILO Convention No. 111 ^ Discrimination (Employment and Occupation, 1958 Millions of women and men around the world are denied access to jobs and training, receive low wages or are restricted to certain occupations simply on the basis of their sex, skin colour, ethnicity or beliefs, without regard to their capabilities and skills. Freedom from discrimination is a fundamental human right and is essential for workersto choose theiremployment freely, to develop their potential to the full and to reap economic rewards on the basis of merit. Combating discrimination is an essential part of promoting decent work, and success on this front is felt well beyond the workplace. ILO standards on equality provide tools to eliminate discrimination in all aspects of the workplace and in societyas a whole.They also provide the basis upon which gender mainstreaming strategies can be applied in the field of labour.

4. Child Labour
ILO Convention No. 138 ^ Minimum Age Convention, 1973 ILO Convention No. 182 ^ Worst Forms of Child Labour, 1999 There are more than 200 million children working throughout the world, many fulltime.They are deprived of adequate education, good health and basic freedoms. Of these, 126 million ^ or one in every 12 children worldwide ^ are exposed to hazardous forms of child labour, work that endangers their physical, mental or moral well-being. As with other aspects of decent work, eliminating child labour is a development as well as a human rights issue. ILO policies and programmes aim to help ensure that children receive the education and training they need to become productive adults in decent employment.

Appendix 253

14.1.10 ICC, International Chamber of Commerce

The International Chamber of Commerce (ICC) (also known as the World Business Organization), the worlds largest professional body for business, develops principles, rules of conduct and guidance to assist companies worldwide to cooperate and develop businesses and trade. This section presents two of the ICCs guiding principles and codes of conduct with reference to sustainable business development. Some of the guidance documents which ICC has developed as self-help tools for businesses are described in other sections of this book. The Business Charter for Sustainable Development ^ 16 principles
The following 16 principles make up ICCs Business Charter for Sustainable Development. They provide businesses worldwide with a basis for sound environmental management.The charter has been translated into 28 languages.

1. Corporate Priority
To recognize environmental management as among the highest corporate priorities and as a key determinant to sustainable development; to establish policies, programmes and practices for conducting operations in an environmentally sound manner.

2. Integrated management
Tointegrate these policies, programmes and practicesfully into each business as an essential element of management in all its functions.

3. Process of improvement
To continue to improve corporate policies, programmes and environmental performance, taking into account technical developments, scientific understanding, consumer needs and community expectations, with legal regulations as a starting point; and to apply the same environmental criteria internationally.

4. Employee education
To educate, train and motivate employees to conduct theiractivitiesin an environmentally responsible manner.

5. Prior assessment
To assess environmental impacts before starting a new activity or project and before decommissioning a facility or leaving a site.

6. Products and services

To develop and provide products or services that have no undue environmental impact and are safe in their intended use, that are efficient in their consumption of energy and natural resources, and that can be recycled, reused, or disposed of safely.

254 Appendix

7. Customer advice
To advise, and where relevant educate, customers, distributors and the public in the safe use, transportation, storage and disposal of products provided; and to apply similar considerations to the provision of services.

8. Facilities and operations

To develop, design and operate facilities and conduct activitiestakinginto considerationthe efficient use of energyand materials, the sustainable use of renewable resources, the minimisation of adverse environmental impact and waste generation, and the safe and responsible disposal of residual wastes.

9. Research
To conduct or support research on the environmental impacts of raw materials, products, processes, emissions and wastes associated with the enterprise and on the means of minimizing such adverse impacts.

10. Precautionary approach

To modify the manufacture, marketing or use of products or services or the conduct of activities, consistent with scientific and technical understanding, to prevent serious or irreversible environmental degradation.

11. Contractors and suppliers

To promote the adoption of these principles by contractors acting on behalf of the enterprise, encouraging and, where appropriate, requiring improvements in their practices to make them consistent with those of the enterprise; and to encourage the wider adoption of these principles by suppliers.

12. Emergency preparedness

To develop and maintain, where significant hazards exist, emergency preparedness plans in conjunction with the emergency services, relevant authorities and the local community, recognizing potential transboundary impacts.

13. Transfer of technology

To contribute to the transfer of environmentally sound technology and management methods throughout the industrial and public sectors.

14. Contributing to the common effort

To contribute to the development of public policy and to business, governmental and intergovernmental programmes and educational initiatives that will enhance environmental awareness and protection.

15. Openness to concerns

To foster openness and dialogue with employees and the public, anticipating and responding to their concerns about the potential hazards and impacts of operations, products, wastes or services, including those of transboundary or global significance.

Appendix 255

16. Compliance and reporting

To measure environmental performance; to conduct regular environmental audits and assessments of compliance with company requirements, legal requirements and these principles; and periodically to provide appropriate information to the Board of Directors, shareholders, employees, the authorities and the public.

14.1.10.1 ICC Rules of Conduct to Combat Extortion and Bribery

Combat extortion and bribery: ICC Rules of Conduct and Recommendations was published in 2005 by the ICC Commission on Anti-Corruption (today the ICC Commission on Corporate Responsibility and AntiCorruption). This Code is intended as a method for self-regulation of the business environment against the background of existing nationallegislation regarding extortion and bribery. Part I contains substantive rules and implementation procedures for voluntary application by enterprises: Part I: Rules of Conduct to Combat Extortion and Bribery Introduction
These Rules of Conduct are intended as a method of self-regulation by business against the background of applicable national laws. Their voluntary acceptance by business enterprises will promote high standards of integrity in business transactions, whether between enterprises and public bodies or between enterprises themselves. These Rules will play an important role in assisting enterprises to comply with their legal obligations and with the numerous anticorruption initiatives at international level. They will also provide an appropriate basis for resisting attempts at extortion. These Rules of Conduct are of a general nature constituting what is considered good commercial practice but are without direct legal effect. All enterprises should conform to the relevant laws and regulations of the countries in which they are established andin which they operate, and should observe both the letterand the spirit of these Rules.While the highest priority should continue to be directed to ending large-scale extortion and bribery involving politicians and senior officials, the 2005 revision of the Rules also provides for action against facilitation payments to lower-level officials. For the purposes of these Rules, the termenterpriserefers to any person or entity engaged in business and other economic activities, whether or not organized for profit, including any entity controlled by a state or a territorial subdivision thereof; it includes a parent and its controlled subsidiaries.

256 Appendix
The success of the ICC Rules will depend on thetone at the top: a clear message from the chief executive that briberyand extortion are prohibited and that an effective compliance programme will be implemented. To provide further guidance on the implementation of these Rules, the ICC Commission on Anti-Corruption has publishedFighting Corruption: A Corporate Practices Manual. Each of the articles below includes a short cross reference to the relevant chapters of this Handbook.

Article 1: Prohibition of Bribery and Extortion

Enterprises should prohibit bribery and extortion at all times and in any form, whether direct or indirect, including through agents and other intermediaries: a) Bribery is the offering, promising, giving or accepting of any undue pecuniary or other advantage to or by: ^ a public official, at national, local or international level; ^ a political party, party official or candidate; and ^ a director, officer, employee or agent of a private enterprise in order to obtain or retain a business or other improper advantage, e.g., in connection with regulatory permits, taxation, customs, judicial and legislative proceedings. b) Extortion or solicitation is the demanding of a bribe, whether or not coupled with a threat if the demand is refused.Briberyas used in these Rules shall include extortion. c) Enterprises should not (i) kick back any portion of a contract payment to government officials or to employees of the other contracting party, or (ii) utilize intermediaries such as agents, subcontractors, consultants or other third parties, to channel payments to government officials, or to employees of the other contracting party, their relatives, friends or business associates. Defining bribery is the central theme of C Chapter 3 ofthe Handbook.The prohibition of private-to-private bribery is covered in Chapter 6.

Article 2: Agents and Other Intermediaries

Enterprises should make their anti-corruption policy known to all agents and other intermediaries and make it clear that they expect all activities carried out on their behalf to be compliant with their policy. More particularly, enterprises should take measures within their power to ensure: ^ that any payment made to any agent represents no more than an appropriate remuneration for legitimate services rendered by such agent; ^ that no part of any such payment is passed on by the agent as a bribe or otherwise in contravention of these Rules of Conduct;

Appendix 257
^ that agents agree explicitly not to pay bribes. Enterprises should include in their contracts provisions to terminate agreements with agents if a bribe is paid, except for agreements with agents performing routine administrative or clerical tasks; that they maintain a record of the names, terms of employment and paymentsto allagentswho are retained by themin connectionwith transactions with public bodies, state or private enterprises.This record should be available for inspection by auditors and by appropriate, duly authorized governmental authorities under conditions of confidentiality.

The foregoing provisions should be applied to all agents or other intermediaries used by the enterprise to obtain orders and permits, including sales representatives, customs agents, lawyers and consultants. Chapter 4 of the Handbook looks specifically at issues raised by the use of agents and other intermediaries.

Article 3: Joint Ventures and Outsourcing Agreements

Enterprises should take measures within their power to ensure that anti-bribery provisions consistent with these Rules of Conduct are accepted by joint-venture partners as applicable to the joint venture and by parties to outsourcing agreements. Chapter 3 (p50-52) touches upon the role of joint ventures.

Article 4: Political and Charitable Contributions and Sponsorships

Enterprises should only make contributions to political parties, party officials and candidates in accordance with applicable laws, and all requirements for public disclosure should be fully complied with.The amount and timing of political contributions should be reviewed to ensure that they are not used as a subterfuge for bribery. Enterprises should take measures within their power to ensure that their charitable contributions and sponsorships are not used as a subterfuge for bribery. Charitable contributions and sponsorships should be transparent and in accordance with applicable law. Enterprises should establish reasonable controls and procedures to ensure that improper political and charitable contributions are not made. Special care should be exercised in reviewing contributions to organisations in which prominent political figures, or their relatives, friends and business associates are involved. Political contributions are further discussed in Chapter 7 of the Handbook.

258 Appendix

Article 5: Gifts, Hospitality and Expenses

Enterprises should establish procedures covering the offer or receipt of gifts, hospitality or expenses in order to ensure that such arrangements (a) are limited to reasonable and bona fide expenditures, and (b) do not improperly affect, or might be deemed to improperly affect, the outcome of a procurement or other business transaction. Gifts, hospitality and expenses are one of the four critical issues analyzed in Chapter 3 (p49^50).

Article 6: Facilitation Payments

Enterprises should not make facilitation payments.In the event that an enterprise determines, after appropriate managerial review, that facilitation payments cannot be eliminated entirely, it should establish controls and procedures to ensure that their use is limited to small payments to low-level officials for routine actions to which the enterprise is entitled. The need for the continued use of facilitation payments should be reviewed periodically with the objective of eliminating them as soon as possible. The critical issue of facilitation payments is also explored in Chapter 3 (p43^ 48) of the Handbook.

Article 7: Corporate Policies

In order to prevent bribery and extortion, enterprises should implement comprehensive policies or codes reflecting these Rules of Conduct as well as their particular circumstances and specific business environment. These policies or codes should: ^ provide guidance and traininginidentifying and avoiding briberyorextortion in the daily business dealings of the enterprise; ^ offer confidential channels to raise concerns, seek advice or report violations without having to fear retaliation; ^ include disciplinary procedures to sanction misconduct; and ^ apply to all controlled subsidiaries, foreign and domestic. Chapter 2 of the Handbook examines the responsibilities of enterprises in providing the means to fight extortion and bribery.The issue of parent company responsibility for controlled subsidiaries is addressed in Chapter 3 (p50-51).

Article 8: Financial Recording and Auditing

All financial transactions must be properly and fairly recorded in appropriate books of account available for inspection by Boards of Directors, if applicable, or a corresponding body, as well as auditors. There must be nooff the booksor secret accounts, nor may any documents be issued which do not properly and fairly record the transactions to which they relate.

Appendix 259
Enterprises should take all necessary measures to establish independent systems of auditing, whether through internal or external auditors, in order to bring to light any transactions which contravene these Rules of Conduct. Appropriate corrective action must then be taken. Enterprises should comply with all provisions of national tax laws and regulations, including those prohibiting the deduction of any form of bribe payment from taxable income. Chapter 5 of the Handbook offers further guidance on financial recording and auditing issues.

Article 9: Responsibilities
The Board of Directors or other body with ultimate responsibility for the enterprise, should: ^ take reasonable steps to ensure compliance with these Rules of Conduct, including ^ making resources available and supporting management in implementing the corporate policies reflecting them; ^ establishing and maintaining proper systems of control and reporting procedures, including independent auditing; ^ sanction violations and take appropriate corrective action; and ^ make appropriate public disclosure of the enforcement of its anti-corruption policies or codes. The audit committee of the Board or other body with similar responsibility should conduct regular independent reviews of compliance with these Rules of Conduct and recommend corrective measures or policies as necessary.This can be done as part of a broader system of corporate compliance reviews. Chapter 2 of the Handbook deals specifically with the responsibilities of enterprises in the fight against corruption.

14.1.11 The Caux Round Table Principles for Business

The Caux Round Table (CRT) was established by a group of international business leaders from Europe, Japan and the United States which first met in 1986 in Caux, Switzerland, to discuss business ethics. There were, among others, Frederik Philips, former CEO of Philips Electronics, Ryuzaburo Kaku, then Chairman of Canon, Inc. Japan, Alfredo Ambrosetti, President of the Ambrosetti Group, Italy, and Neville Cooper, former Vice President of ITT. In 1992, The Principles for Business, rules of conduct for companies with a focus on responsible business development, was presented.The Caux Round Table believes that the world business community should play an important role in improving economic and social conditions. Through an extensive and collaborative process in

260 Appendix

1994, business leaders developed the CRT Principles for Business to embody the aspiration of principled business leadership.The CRT Principles for Business are a worldwide vision for ethical and responsible corporate behaviour and serve as a foundation for action for business leaders worldwide. As a statement of aspirations,The CRT Principles aim to express a global standard against which business behaviour can be measured.The Caux Round Table has sought to begin a process that identifies shared values, reconciles differing values, and thereby develops a shared perspective on business behaviour acceptable to and honoured by all. These principles are rooted in two basic ethical ideals: kyosei and human dignity.The Japanese concept of kyosei means living and working together for the common good, enabling cooperation and mutual prosperity to coexist with healthy and fair competition. Human dignity refers to the sacredness or value of each, individual person in their own right, not simply as a means to fulfil other peoplespurposes, or even the good of the majority. PRINCIPLES FOR RESPONSIBLE BUSINESS
(published: March 2009, updated May 2010)

INTRODUCTION
The Caux Round Table (CRT) Principles for Responsible Business set forth ethical norms for acceptable businesses behaviour. Trust and confidence sustain free markets and ethical business practices provide the basis for such trust and confidence. But lapses in business integrity, whether among the few or the many, compromise such trust and hence the ability of business to serve humanitys needs. Events like the 2009 global financial crisis have highlighted the necessity of sound ethical practices across the business world. Such failures of governance and ethics cannot be tolerated as they seriously tarnish the positive contributions of responsible business to higher standards of living and the empowerment of individuals around the world. The self-interested pursuit of profit, with no concern for other stakeholders, will ultimately lead to business failure and, at times, to counterproductive regulation.Consequently, businessleadersmust always assert ethicalleadership so as to protect the foundations of sustainable prosperity. It is equally clear that if capitalism is to be respected, and so sustain itself for global prosperity, it must be both responsible and moral. Business therefore needs a moral compass in addition to its practical reliance on measures of profit and loss.

Appendix 261

THE CRT PRINCIPLES

The Caux Round Tables approach to responsible business consists of seven core principles as detailed below.The principles recognize that while laws and market forces are necessary, they are insufficient guides for responsible business conduct. The principles are rooted in three ethical foundations for responsible business and for a fair and functioning society more generally, namely: responsible stewardship; living and working for mutual advantage; and the respect and protection of human dignity. The principles also have a risk management foundation ^ because good ethics is good risk management. And they balance the interests of business with the aspirations of society to ensure sustainable and mutual prosperity for all. The CRT Principles for Responsible Business are supported by more detailed Stakeholder Management Guidelines covering each key dimension of business success: customers, employees, shareholders, suppliers, competitors, and communities. These Stakeholder Management Guidelines can be found at Attachment A below.

PRINCIPLE 1 ^ RESPECT STAKEHOLDERS BEYOND SHAREHOLDERS

x A responsible business acknowledges its duty to contribute value to society through the wealth and employment it creates and the products and services it provides to consumers. A responsible business maintains its economic health and viability not just for shareholders, but also for other stakeholders. A responsible business respects the interests of, and acts with honesty and fairness towards, its customers, employees, suppliers, competitors, and the broader community.

x x

PRINCIPLE 2 ^ CONTRIBUTE TO ECONOMIC, SOCIAL AND ENVIRONMENTAL DEVELOPMENT

x x A responsible business recognizes that business cannot sustainably prosper in societies that are failing or lacking in economic development. A responsible business therefore contributes to the economic, social and environmental development of the communities in which it operates, in order to sustain its essential operatingcapital ^ financial, social, environmental, and all forms of goodwill. Aresponsible business enhances society through effective and prudent use of resources, free and fair competition, and innovation in technology and business practices.

262 Appendix

PRINCIPLE 3 ^ BUILDTRUST BYGOING BEYONDTHE LETTEROF THE LAW

x x Aresponsible business recognizes that some business behaviors, although legal, can nevertheless have adverse consequences for stakeholders. A responsible business therefore adheres to the spirit and intent behind the law, as well as the letter of the law, which requires conduct that goes beyond minimum legal obligations. A responsible business always operates with candor, truthfulness, and transparency, and keeps its promises.

PRINCIPLE 4 ^RESPECT RULES AND CONVENTIONS

x Aresponsible business respectsthe local cultures and traditionsin the communities in which it operates, consistent with fundamental principles of fairness and equality. A responsible business, everywhere it operates, respects all applicable national and international laws, regulations and conventions, while trading fairly and competitively.

PRINCIPLE 5 ^ SUPPORT RESPONSIBLE GLOBALISATION

x x Aresponsible business, as a participant in the globalmarketplace, supports open and fair multilateral trade. A responsible business supports reform of domestic rules and regulations where they unreasonably hinder global commerce.

PRINCIPLE 6 ^ RESPECT THE ENVIRONMENT

x x A responsible business protects and, where possible, improves the environment, and avoids wasteful use of resources. A responsible business ensures that its operations comply with best environmental management practices consistent with meeting the needs of today without compromising the needs of future generations.

PRINCIPLE 7 ^ AVOID ILLICITACTIVITIES

x x A responsible business does not participate in, or condone, corrupt practices, bribery, money laundering, or other illicit activities. A responsible business does not participate in or facilitate transactions linked to or supporting terrorist activities, drug trafficking or any other illicit activity. A responsible business actively supports the reduction and prevention of all such illegal and illicit activities.

Attachment A: STAKEHOLDER MANAGEMENT GUIDELINES

The Caux Round Tables (CRT) Stakeholder Management Guidelines supplement the CRT Principles for Responsible Business with more specific standards forengaging with key stakeholder constituencies.

Appendix 263
The key stakeholder constituencies are those who contribute to the success and sustainability of business enterprise. Customers provide cash flow by purchasing good and services; employees produce the goods and services sold, owners and other investorsprovide funds for the business; suppliersprovide vital resources; competitors provide efficient markets; communities provide social capital and operational security for the business; and the environment provides natural resources and other essential conditions. In turn, key stakeholders are dependent on business for their well-being and prosperity.They are the beneficiaries of ethical business practices.

1. CUSTOMERS
A responsible business treats its customers with respect and dignity. Business therefore has a responsibility to: a) Provide customerswith the highest quality products and services consistent with their requirements. b) Treat customers fairly in all aspects of business transactions, including providing a high level of service and remedies for product or service problems or dissatisfaction. c) Ensure that the health and safety of customers is protected. d) Protect customers from harmfulenvironmentalimpacts of products and services. e) Respect the human rights, dignity and the culture of customers in the way products and services are offered, marketed, and advertised

2. EMPLOYEES
A responsible business treats every employee with dignity and respects their interests. Business therefore has a responsibility to: a) Provide jobs and compensation that contribute to improved living standards b) Provide working conditions that protect each employees health and safety. c) Provide working conditions that enhance each employees well-being as citizens, family members, and capable and caring individuals d) Be open and honest with employees in sharing information, limited only by legal and competitive constraints. e) Listen to employees and act in good faith on employee complaints and issues. f) Avoid discriminatory practices and provide equal treatment, opportunity and pay in areas such as gender, age, race, and religion. g) Support the employment of differently-abled people in places of work where they can be productive. h) Encourage and assist all employees in developing relevant skills and knowledge. i) Be sensitive to the impacts of unemployment and work with governments, employee groups and other agencies in addressing any employee dislocations.

264 Appendix
j) Ensure that all executive compensation and incentives further the achievement of long- term wealth creation, reward prudent risk management, and discourage excessive risk taking. Avoid illicit or abusive child labor practices.

k)

3. SHAREHOLDERS
A responsible business acts with care and loyalty towards its shareholders and in good faith for the best interests of the corporation. Business therefore has a responsibility to: a) Apply professional and diligent management in order to secure fair, sustainable and competitive returns on shareholder investments. b) Disclose relevant information to shareholders, subject only to legal requirements and competitive constraints. c) Conserve, protect, and increase shareholder wealth. d) Respect shareholder views, complaints, and formal resolutions.

4. SUPPLIERS
A responsible business treats its suppliers and subcontractors with fairness, truthfulness and mutual respect. Business therefore has a responsibility to: a) Pursue fairness and truthfulness in supplier and subcontractor relationships, including pricing, licensing, and payment in accordance with agreed terms of trade. b) Ensure that business supplier and subcontractor activities are free from coercion and threats. c) Foster long-term stability in the supplier relationships in return for value, quality, competitiveness and reliability. d) Share information with suppliers and integrate them into business planning. e) Seek, encourage and prefer suppliers and subcontractors whose employment practices respect human rights and dignity. f) Seek, encourage and prefer suppliers and subcontractors whose environmental practices meet best practice standards.

5. COMPETITORS
A responsible business engages in fair competition which is a basic requirement for increasing the wealth of nations and ultimately for making possible the just distribution of goods and services. Business therefore has a responsibility to: a) Foster open markets for trade and investment. b) Promote competitive behavior that is sociallyand environmentally responsible and demonstrates mutual respect among competitors. c) Not participate in anti-competitive or collusive arrangements or tolerate questionable payments or favors to secure competitive advantage. d) Respect both tangible and intellectual property rights. e) Refuse to acquire commercial information through dishonest or unethical means, such as industrial espionage.

Appendix 265

6. COMMUNITIES
As a global corporate citizen, a responsible business actively contributes to good public policy and to human rights in the communities in which it operates. Business therefore has a responsibility to: a) Respect human rights and democratic institutions, and promote them wherever practicable. b) Recognize governments legitimate obligation to society at large and support public policies and practices that promote social capital. c) Promote harmonious relations between business and other segments of society. d) Collaborate with community initiatives seeking to raise standards of health, education, workplace safety and economic well-being. e) Promote sustainable development in order to preserve and enhance the physical environment while conserving the earths resources. f) Support peace, security and the rule of law. g) Respect social diversity including local cultures and minority communities. h) Be a good corporate citizen through ongoing community investment and support for employee participation in community and civic affairs.

14.1.12 King I, King II and King III

In 1994, the King Committee on Corporate Governance published The King Report on Corporate Governance for South Africa. This was followed in 2002 by the King II report and was updated to King III in 2009. The King Report on Corporate Governance is the first governance code in the world that clearly emphasizes the importance of environmental issues and social responsibilities in entrepreneurship. Companies listed on the South African stock exchange JSE (which is the largest stock exchange in Africa), have to comply withThe King Report which, among other things, includes a requirement to report in accordance with GRI guidelines on sustainability reporting. The King Report, with the appendices, covers 356 pages, and is managed by the South African Institute of Directors (IoD) and consists of six sections:
Section 1 ^ Board & Directors Section 2 ^ Risk Management Section 3 ^ Internal Audit Section 4 ^ Integrated sustainability reporting Section 5 ^ Accounting & Auditing Section 6 ^ Compliance & Enforcement

266 Appendix

14.1.13 The Global Sullivan Principles of Corporate Social Responsibility

In 1971 the Baptist pastor, Leon H. Sullivan, became the first African American to have a seat on the Board of a Fortune 500 company. That company was General Motors. He utilised his position in GM to launch an international campaign to reform apartheid in South Africa known as The Sullivan Principles. This was a code of conduct stressing human rights and equalrights for workers regardless of skin colourandis considered to have contributed significantly to the final abolition of apartheid. In 1999, Sullivan launched together with UN Secretary General Kofi Annan, The Global Sullivan Principles of Social Responsibility. The aim was to support human rights, create social justice and contribute to economic justice worldwide. The principles are now integrated in the Global Compact 10 Principles. Although the King Report can be said to have become a more established code,The Global Sullivan Principles of Social Responsibility was one of the first codes of conduct in the world, and its principles should rightfully beincluded here in thisbook as a fitting conclusion to this review of Bold Words and Commitments: The Principles
As a company which endorses the Global Sullivan Principles we will respect the law, and as a responsible member of society we will apply these Principles with integrity consistent with the legitimaterole of business.We willdevelop andimplement company policies, procedures, training and internal reporting structures to ensure commitment to these Principles throughout our organisation. We believe the application of these Principles will achieve greater tolerance and better understanding among peoples, and advance the culture of peace. Accordingly, we will: ^ Express our support for universal human rights and, particularly, those of our employees, the communities within which we operate and parties with whom we do business. ^ Promote equal opportunity for our employees at all levels of the company with respect to issues such as color, race, gender, age, ethnicity or religious beliefs, and operate without unacceptable worker treatment such as the exploitation of children, physical punishment, female abuse, involuntary servitude or other forms of abuse. ^ Respect our employees voluntary freedom of association. ^ Compensate our employees to enable them to meet at least their basic needs and provide the opportunity to improve their skill and capability in order to raise their social and economic opportunities.

Appendix 267
^ ^ ^ Provide a safe and healthy workplace; protect human health and the environment; and promote sustainable development. Promote fair competition including respect for intellectual and other property rights, and not offer, pay or accept bribes. Work with governments and communities in which we do business to improve the quality of life in those communities ^ their educational, cultural, economic and social well-being ^ and seek to provide training and opportunities for workers from disadvantaged backgrounds. Promote the application of these Principles by those with whom we do business.

We willbe transparent in our implementation of these Principles and provide information which demonstrates publicly our commitment to them.

14.2 Of all these bold words ^ which ones should we choose to follow?
The simple answer is the Global Compact. By committing to the Global Compact, a company also inherently says Yes to the United Nations package, the ILO package, the Rio Declaration and Agenda 21. Furthermore, it commits itself to transparent reporting regarding the manner in which it works with sustainability issues and the progress of its efforts.

14.3 SustainableValue Creation: The Investors Questions

Belowis a translation ofthe questionnaire whichwasput by thirteeninvestors to the 100 largest listed companies on the Stockholm Stock Exchange in September 2009. Companies working their way through these types of issues in a serious manner can identify the path towards sustainable business development, as this is an excellent start-up package with which the Board can work. 1. How do you evaluate the companys strategic business opportunities within sustainable value creation? With sustainable value creation, we mean a value creation that takes into account the balance between economic, environmental and social values.

268 Appendix

2. Has the company signed the UN Global Compact? United Nations Global Compact is a framework for the industry where companies are committed to operate in accordance with the ten principles concerning human rights, labour standards, the environment and anti-corruption. For more information, see www.unglobalcompact.org. 3. Is the company considering the OECD Guidelines for Multinational Enterprises? OECD Guidelines for Multinational Enterprises are joint recommendations for companies from 40 governments. These guidelines cover many areas relating to corporate activities and responsibilities. For more information, see www.oecd.org. 4. Does the company have policiesrelating tohumanandlabourrights in the following areas? Human rights ^ general. Labour rights ^ general. Minimum age for workers/child labour. Forced labour. Freedom of association and the right to collective bargaining. Fair and equal treatment (anti-discrimination). Responsibilities in relation to regimes that violate human rights. The Companys relation to the police, military and private security forces. Rights of indigenous peoples. Working time and leave. Minimum wages/salaries. Living wage. 5. Does the company have guidelines relating to climate and external environmental impact within the following areas? Environment ^ general. Climate ^ specifically. Atmospheric emissions. Emissions into water and soil. Energy and resource consumption. Waste handling.

Appendix 269

6. Does the company have guidelines covering anti-corruption in the following areas? Independence in decisions and decision-making processes. Indirect and direct financial support. Business entertaining and gifts. Use of agents/retail dealers. Facilitation payments. Whistle blowing function. 7. Does the company have guidelines covering responsible business ethics in the following areas? Those areas are included in the OECD Guidelines for Multinational Enterprises. Payment of taxes and fees. Consideration of consumer and customer interests. Reporting/Disclosure of information. Competition issues. Research and Development. 8. Does the company have guidelines covering working environment, and health and issues relating to the following areas? Safety in the workplace. Healthcare. 9. If the company has guidelines in one or more of the fields below, for whom are the guidelines apply? Human rights. Labour Rights. Environment. Anti-Corruption. Responsible business ethics. Working environment, health and safety. 10. If the company has guidelines in one or more of the fields below, who has determined the guidelines? Human rights. Labour Rights. Environment. Anti-Corruption. Responsible business ethics. Working environment, health and safety.

270 Appendix

11. If the company has policies in one or more of the fields below, how often are these guidelines evaluated? Human rights. Labour Rights. Environment. Anti-Corruption. Responsible business ethics. Working environment, health and safety. 12. How does the company organize efforts to ensure that the guidelines within sustainable value creation are respected? Here we are looking for the organisational governance of decisions and reporting in the above mentioned fields. 13. Has the company integrated sustainability considerations into the following strategies? Personnel Strategy. Sales and Marketing Strategy. Products and Production Strategy. Information and Communication Strategy. Purchasing and Supplier Strategy. Finance Strategy. 14. Does the company have a management system, including goal management, which includes the following areas? Human rights. Labour Rights. Environment. Anti-Corruption. Responsible business ethics. Working environment, health and safety. 15. If human rights are covered by the companys control procedures, do the control procedures include the following? The parent company. Subsidiaries. Suppliers. Key business partners, such as agents, joint ventures, etc. The companys products or services. Financial investments.

Appendix 271

16. If labour rights are covered by the companys control procedures, do the control procedures include the following? The parent company. Subsidiaries. Suppliers. Key business partners, such as agents, joint ventures, etc. The companys products or services. Financial investments. 17. If the environment is covered by the companys controlprocedures, do the control procedures include the following? The parent company. Subsidiaries. Suppliers. Key business partners, such as agents, joint ventures, etc. The companys products or services. Financial investments. 18. If anti-corruption is covered by the companys control procedures, do the control procedures include the following? The parent company. Subsidiaries. Suppliers. Key business partners, such as agents, joint ventures, etc. The companys products or services. Financial investments. 19. If responsible business ethics are covered by the companys control procedures, do the control procedures include the following? The parent company. Subsidiaries. Suppliers. Key business partners, such as agents, joint ventures, etc. The companys products or services. Financial investments. 20. If the work with the working environment, health and safety are covered by the companys control procedures, do the control procedures include the following? The parent company. Subsidiaries.

272 Appendix

Suppliers. Key business partners, such as agents, joint ventures, etc. The companys products or services. Financial investments. 21. To what extent will the performance in, or non-compliance with, the following areas have an impact on executive compensation and bonuses? Human rights. Labour Rights. Environment. Anti-Corruption. Responsible business ethics. Working environment, health and safety. 22. How is work within the following areas communicated internally? Human rights. Labour Rights. Environment. Anti-Corruption. Responsible business ethics. Working environment, health and safety. 23. Does the company report externally on its efforts in the following areas? Human rights. Labour Rights. Environment. Anti-Corruption. Responsible business ethics. Working environment, health and safety. 24. Does the Board follow up on issues within the following areas? Human rights. Labour Rights. Environment. Anti-Corruption. Responsible business ethics. Working environment, health and safety.

Appendix 273

14.4 SustainableValue Creation: The AnalystsRecommendations

Following is SFFs Recommendations (The Swedish Society of Financial Analysts) SFFs RECOMMENDATION ON CORPORATE RESPONSIBILITY
(Revised 2007)

1. WHY CORPORATE RESPONSIBILITY? DEVELOPMENTAND RATIONALE 1.1 Introduction 1.1.1 Definitions

Anumberof different approaches and definitionshave emergedin relationto what responsibility a company should take. The three most commonly used concepts are Corporate Responsibility (CR), Corporate Social Responsibility (CSR) and Sustainability. Over the last year the definition Environment-Social-Governance (ESG) has beenincreasingly used.In this recommendation SFFis using the concept Corporate Responsibility (CD) to denote clearly our broad perspective of the subject. The CR concept is based on the principle of an interest model, in which a companys relationships with its most important interested parties are in focus. This also encompasses the environment.CR is about ascertaining what responsibility a company has with regard to its most important interested parties, such as customers, employees, subcontractors, theenvironment and the local community. The sustainability concept is based on a model that includes economic responsibility, environmental responsibility, and social responsibility. This is known as the Triple Bottom Line, according to which a companys result is reported in three dimensions. It is a model, which is often used, in a financial reporting context. It can be viewed as an extension of environmental reporting in order to encompass social responsibility issues. This model is influential in the environmental field, where the sustainability concept has been expanded to mean that a business should not only be environmentally but also socially sustainable. In the long term this view is about making not only businesses but also society in general more sustainable. The sustainability concept can with preference be used for company reporting, and where there are a great proportion of environmental issues amongst a companys responsibilities. In addition to environmental and social responsibility, the ESG concept also includes governance issues. This means that it encompasses issues relating to an organisations ethics and the ethics of executive and owner management. ESG is used in the UNs Principles for Responsible Investments (PRI) initiative.

274 Appendix

1.1.2 Development
Corporate responsibility has been discussed before, probably as long as corporations have existed. But since the start of the new millennium demands for companies to take responsibility have increased. There are several reasons for this development.The antiglobalisation movement led the UN to launch its Global Compact, which consists of a number of principles on responsibility for global corporations. Corporate scandals in the U.S. and Europe have created a greater need for more transparent owner management and for ethical attitudes in organisations. The Sarbanes Oxley Act and the Swedish Code of Corporate Governance are examples of regulatory initiatives aimed at this. The dramatic fall in share prices related to the Internet and telecom bubbles also weakened the publics confidence in companies and markets. In general, companies have responded to this lack of confidence caused by the anti-globalisation movement, stock exchange crashes, and corporate scandals by establishing strategies for taking greater responsibility both in relation to interested parties and internally. The business case for CR is currently the greatest driver behind the development in this area.Following the global crisis of confidence at the turn of the millennium, CR is seen as a way of bolstering confidence in the business community in general and individual companies specifically. This is expressed as the importance, for a company, to obtain a license to operate from the companys key interested parties. By developing greater responsibility a companys value is deemed to increase. The expressionenlightened shareholder valuemeans that a companys value is strengthened in the long term by having very good relations with its most important interested parties. Maximising value is a companys overriding goal, and to achieve this it needs to have good relations with key interested parties, including shareholders, customers, employees, subcontractors, creditors and the community. A CR strategy may be viewed as a quality assurance system that bolsters the brand and competitive strength, reduces operating risk, attracts new kinds of investors, and, in the longer term, increases the value of a corporation. The rationale for developing a strategy to take greater responsibility can be dividedintwo; partlyas away to handlerisks, and partly to make use ofopportunities.There are a number of value drivers. The key to a successful CR strategy is that it is founded on a value-based leadership, and that this is communicated both internally and externally in a way that invokes credibility.

1.2 Taking advantage of opportunities 1.2.1 Business development

CR can help companies to increase their revenues.CR can be seen as something innovative, allowing companies to develop products to, for example, tackle poverty in regions where they have a presence, or to help other companies to take responsibility fora positive environmentalimpact.Keeping up-to-date with custo-

Appendix 275
mers altered preferences enables companies to develop new products. The development of environmentally friendly carsin response to increasing customer demands for environmental considerations is one example.

1.2.2 Direct competitive advantage

Sound CR strategies can enable companies to win orders from customers that demand environmental responsibility from their suppliers. Customers CR demands have increased with time since many are being required to take more responsibility than in the past for the actions of their suppliers. This applies not least to export markets in emerging economies, where CR demands are high in order to be considered a possible candidate during procurement processes. Demands for CR considerations are being increasingly made during public procurement processes from authorities and other parties.

1.2.3 Brand
A companys CR work can have a direct link to the brand and the markets perception of the company.This applies today both for consumer goods companies with private individuals as customers, as well as for B2B companies, where public opinion can swiftly alter the customer companys preferences. Customers of all categories can have particular demands as to the company exercising environmental awareness in order for them to buy the product. Environmental responsibility for transport firms and good working conditions for suppliers to the retail trade are two such examples.

1.2.4 Attractive employer

A CR strategy can facilitate the recruitment of experienced employees and boost employee motivation. The companys fundamental value system, ethics and responsibilityare often mentionedin surveys onwhat makes apreferred employer. Companies that are known for representing something worthwhile find it easier to recruit and retain staff, which increases their competitive advantage. Employees are motivated and get involved if the company is considered to be something good that many want to be a part of.

1.2.5 Attract investors

The market for Socially Responsible Investments, SRI, has increased considerably over the past ten years. Just over 10 per cent of the capital being managed in Europe and the USA is invested using SRI criteria.This means that companies that want to attract these investors must live up to CR demands.The process has been strengthened in recent years by the launch of the UNs Principles for Responsible Investments (PRI), and by the fact that more major institutional investors are adopting ethical investment criteria. Inclusion in ethical indices such as the Dow Jones Sustainability Index or FTSE4Good offers access to more shareholders globally and is seen as an aspect of good investor relations. Here

276 Appendix
we use the definition ESG, which means that demands are also made on good owner management, in addition to social and environmental responsibility.

1.2.6 A mark of quality

CR strategies can be seen as a general mark of quality. CR could be said to be a quality assurance system that, together with other management systems, strengthens a company. If a companys CR is good, it may be an indication that the companys other management processes are also good. The company demonstrates that it can meet a new global selfregulation that has developed at the initiative of institutions such as the UN, OECD, ICC, and ILO and many others. The company shows that it isCR savvyand, therefore, equipped to operate in a global environment, and with complex relations with interested parties.

1.2.7 Effective management of resources

By viewing environmental and sustainability issues, in terms of responsibility, a project can be immediately profitable for a company through energy saving and making production processes more efficient. By being at the cutting edge of environmental thinking, a company benefits directly through lower costs and other positive effects, such as becoming more competitive and increasing trust among interested parties.

1.3 Handling risks 1.3.1 Operating risk

There are a number of risks related to how a company handles CR issues. Environmental risks are an example, where breaking environmental laws can lead to costly legal processes. Breaching regulations, or ones own self-regulatory initiatives, can also lead to expensive lawsuits or consequences. Hidden risks in connection with mergers and acquisitions may damage the parties involved and influence valuations of transactions.

1.3.2 Brand risk

Breaching ones own self-regulatoryguidelines on CR canlead to negative coverage in the media, which risks significantly damaging a companys brand. There are examples of companies that have not coped with such negative publicity. It can even be a matter of whether or not the company survives. Companies that have not established a management system relating to CR issues runs significant risk of being hit by scandals that reduce the companys value.

1.3.3 Risk of losing oneslicense to operate

In the long term, a company that deals with CR issues badly will become less competitive.The company runs a risk of losing its position on the market because of a significant lack of confidence around the companyandits business.It may, for example, be due to a customer boycott, owners selling shares, staff leaving the company or local communities not cooperating.

Appendix 277

2. THE ANNUAL ACCOUNTS ACT

There are several paragraphs in the Swedish Annual Accounts Act that relate directly to CR issues. This chapter looks at requirements for sustainability information in the report of the directors, and also some special issues of particular interest, including provisions for environmental liabilities of various kinds, an aspect of the Corporate Governance Code and auditing.

2.1 Requirements of the Annual Accounts Act in relation to CR information

In chapter 6 of the Annual Accounts Act there is a requirement that companies shall provide information on sustainability issues of various kinds in the directors report. This information requirement has three perspectives: general, environmental and a specific perspective, which focuses on non-financial relations.

2.1.1 The general perspective (AAA chap 6, 1, section 2)

This focuses on information about relations that are important in order to assess the development of the companys business, position and profit. These include essential environmental and sustainability issues, e.g. changed market conditions, significant decontamination requirements or breach of permit conditions. Information shall also be submitted about the companys expected future development, including a description of key risks and risk factors.The legislator states that these risks may regularly include climate change, chemical legislation, permit assessment, etc.

2.1.2 The environmental perspective (AAA chap 6, 1, section 4, second sentence)

This focuses on how hazardous the business is in relation to the environment. Companies that run businesses that are obliged to apply for a permit in accordance with the Environmental Code are required by law to report on the impact of the business on the environment. The information requirement is completely independent of the information that is considered important for an assessment of the businesss capacity to develop. The Accounting Standards Board (BFN U98:2) states that information on indirect environmental impact should also be submitted, as well as businesses impacting on the environment at installations based abroad. The information requirement mainly covers the environmental impact of production processes and does not relate directly to the environmental impact of the products when used or when they become waste.

2.1.3 The non-financial perspective (AAA chap 6, 1, section 4, first sentence)

This highlights social and environment-related aspects of the companys business. The directors report shall contain such non-financial information as is required in order to gain an understanding of the companys position, development or result and which is relevant to the current business, including information on environmental and personnel issues. In recent years the sort of material that

278 Appendix
should be included in an annual report has been extended so that the line between financial and non-financial factors has to a certain extent been erased. The legislator points out that there were other requirements previously for information that are not of obvious significance for the companys financial relations in the traditional sense, including sickness reporting and reporting on the gender distribution among top managers. There are currently no established criteria or norms for what should be reported, but rather support should be sought in texts relating to the relevant laws. 2.1.3.1 Information adapted to interested parties The requirement to provide information is that the current informationis required for an understanding of the companys development, position and result, which according to the legislator shall be given a broad interpretation. It is thus not the companys own assessment that isthe keyelement but rather the assessment criteria that may be assumed to be of significance to the various interested parties. 2.1.3.2 Social issues The legislator offers some examples of information that the company may be obliged to submit: x Measurestakenin relation to equality, working environment and skills development x staff turnover x Policy on employment and working conditions x The existence of a collective agreement x Ethical guidelines that apply in the company or in the developing world x The companys choice of partners, customers and suppliers. 2.1.3.3 Environmental issues There is no general requirement in terms of figures. In relation to information on environmental issues, the legislator points out that it may often be appropriate to report quantified information about targets and results in relation to emissions, waste and energy consumption, for example. The EU Commission recommends in 2001/453/EG 1 that larger companies report openly on: x The policies and programmes that the company has on environmental issues, mainly in order to prevent environmental destruction, x Improvements and protection measures carried out for key environmental areas, x Environmental performance within energy consumption, use of materials and waste and emissions to air, ground and water. 2.1.3.4 Subsidiaries The reporting requirement also relates to foreign subsidiaries. The legislator states that a Swedish parent company may be required to submit information of the sort mentioned above in the group report for subsidiaries as well, both Swedish and foreign. The reporting requirement also covers environmental and staff

Appendix 279
relations at the subsidiaries that participate in the groups production processes. The parent company is thus required to obtain information about its subsidiaries. The legislator states that it may at times be appropriate for the parent company to report in its group annual report on measures taken in order to secure just and reasonable employee conditions at the foreign subsidiaries, and on the companys policy on such issues.

2.2 Environmental debts

The companys handling of environmental damage may also relate to the impact on the companys position, reputation and continued development. If there is a possibility of liability for environmental damage, information shall be submitted in the directors report, and it may be necessary to make provisionsin the balance sheet.60

2.2.1 Liability
There are a number of contaminated areas in Sweden.The regulations in the Environmental Code and the practices of authorities aim to ensure that ground surveys and decontamination work is conducted without impacting on the state budget, and that decontamination is carried out in the event of a property sale. Contaminated area refers to land, water areas (both ground and surface water), buildings or installations that are so contaminated that they may inconvenience the public or present a public health or environmental risk. Since August 1, 2007 the Environmental Code also covers responsibility for biological diversity and a specified responsibility for serious environmental damage.The law does not specify what is meant bya contamination.Thisis determined at any given point in time by the relevant ecological and toxicological knowledge. Surveys and repair/after treatment (decontamination) are often associated with significant costs and can thus amount to a considerable item in the balance sheet and income statement. Liability for after-treatment2 involves a commitment to carry out or finance the after treatment measures required in order to remedy/counter the damage or inconvenience to health and the environment. For a business to be held liable for after-treatment, the businesss actual operations must have continued beyond June 30, 1969. This can mean liability for damage that may have occurred long before 1969.The liability is extensive and far-reaching, both in terms of time and cost, it does not expire and is not affected by agreements according to civil law or by whether or not the business had a permit. Liability for after-treatment of contaminated areas lies first and foremost with the person who is running or ran the business that was responsible for the contamination. The purchase of assets could also been seen as carrying a liability for the purchased businessprevious effect on the environment. A business operators liability is ongoing. Liability remains after the business has ceased operating.
60

On the reporting, valuation, and submission of information about environmental aspects in acompanys annual report and management report, May 30, 2001.

280 Appendix
The purchase after 1998 of contaminated properties can carry subsidiary liability if no business operator can carry out or cover the cost ofthe after-treatment. This is also the case if the properties were sold later on. Liability is not affected by agreements according to civil law.The buyer of a property could thus be liable for carrying out and covering the cost of the decontamination of areas affected by pollution caused by another party.

2.2.2 Reporting
There is often uncertainty over environmental damage with regard to liability, the cost of investigation and after-treatment, and the decision over when an outflow of funds will occur. IFRS contains rules on provisions (IAS 37), i.e. liabilities that are indeterminate in terms of the amount or the point in time they will be settled. Environmental liabilities are reported in the balance sheet x when there is a legal commitment as a result of an event, i.e. there is suspected or reported Environmental damage for which the company is liable. or x when there is an informal commitment as a result of an event, i.e. there is suspected or reported environmental damage for which the company has claimed responsibility and it is likely that funds will need to be released to settle the commitment. This means that a commitment should be reported61 x if it islikely that the company willneed to cover the cost of various measures taken, and x if a reliable estimate of the amount can be made. It is not acceptable to not report environmental commitments simply because it is difficult or impossible to calculate their extent. In almost all cases independent experts can be called upon to estimate the amount. The company shall submit a description and information for every kind of provisions on their value at the beginningand end of the year, provisionsmade during the year, any increases in value on previous provisions, amounts that have been requisitioned for measures during the period and increases in the amount due to the effects of discounting.In additioninformation shall be submitted on uncertainties and significant commitments that have been made. The amounts can be reported as a combined total. If liability for environmental damage is possible but unlikely, information is submitted in the form of a liability commitment, provided that the likelihood that the company may be forced to rectify any damage is not extremely small. For each kind of liability commitment information must be submitted on the character of the undertaking and its financialimpact, as well asindications of any uncertainty about the amount and timing. The amounts can be reported as a combined total.
61

This description of liability is not fully comprehensive and cannot be used for the analysis of definite liability.

Appendix 281

2.2.3 Information about contaminated areas in the directors report

If no complete provision is made the company must report in the director report what assessments have been made of environmental liabilities, whether the work is ongoing, what the expected result is, what the timeframe is, as well as what amounts have so far been identified in the balance sheet and what obligations remain that are difficult to estimate. It may also be appropriate to report those provisions that have been carried out in full.

2.3 Producer liability

Many companies have a legal producer liability for electric and electronic products, cars, tyres etc., but there may also be voluntary commitments.The liability often includes an obligation to take responsibility for and finance the collection, processing, reuse, recycling or final processing of the product when it has reached the end of its useful life.The sale of products can sometimes go hand in hand with requirements for financial guarantees. It may in many cases be difficult to estimate the size of the undertakings, but they can amount to significant amounts and stretch over long periods of time. Information should be submitted in the directors report on the undertaking and provisions made.

2.4 Emissions rights

A system of trading in emissions rights has been introduced in order to reduce emissions of greenhouse gases. For the 2008^2012 period the trading system relates to all states that have ratified the Kyoto Protocol. Reporting of emissions rights has been the subject of much discussion.Various reporting methods exist, from reporting solely the actual requirement to buy emissions rights to reporting rights that have been obtained free of charge as an asset with a market value.The company should state which reporting method has been used.

2.5 The Swedish Corporate Governance Code

The Code has several overriding purposes.One purpose is that is shall contribute to improved management of Swedish companies and allow foreign players on the international capital market to obtain knowledge of and confidence in Swedish corporate management. The Code comprises regulations relating to internal control.These regulations naturally include CR issues. It is the executive board that must ensure that the company has a sound system of internal control, and the board must keep itself informed about and evaluate how well that system functions.The board shall submit an annualreport onhowinternal controls are organised for the part that relates to the financial reporting, and how wellit has functioned during the previous financial year.The board and CEO shallprovide an assurance that the annualreport has been compiled in accordance with good accounting practices, and that it includes a description of the key risksand areas of uncertainty that the company faces.This assurance is now regulated by the Securities Business Act (2007:528).

282 Appendix

2.6 Auditing
The annual report comprises an auditors report and thus also covers sustainability information provided in the directors report. The auditing standard in Sweden contains a rule, which means that the corporate management shall sign a statement to the auditors confirming the truth and accuracy of the annual report.This statement also covers CR issues. The annual report may be included in a printed publication, which is also referred to asthe Annual Report.The printed product usually contains other informationin additionto the annual financialreport.Suchinformation may sometimes include voluntary CR information, e.g. sustainability reporting. The Corporate Governance Code requires a clear distinction to be made so that it is clear what, in the printed annual report, is the audited annual report and what isother information, which is, thus, not audited. According to Swedish auditing standard RS 720, which deals with other information in documents that contain an audited annual report, an auditor shall, however, read such other information in order to identify material discrepancies with the audited annual report. If such discrepancies exist, the auditor shall provide details of this in the auditors report. SFF set outs in section 3 of this document the value of providing a separate sustainability report.

3. PROVIDING REPORTING BEYOND LEGAL REQUIREMENTS

How should a company provide reporting regarding sustainability issues, i.e. issues relating to the environment, human rights and ethics? In the previous section we described the legalrequirements for reporting.This section is about information that a company should provide beyond what it is legally required to. To assess a companys business risk and obtain a view of sustainabilityrelated business opportunities, analysts need access to basic information about a companys business.The company should therefore list what sustainability factors in its sector and immediate environment are deemed to be significant for the business and carryout a thorough risk analysis.The company shouldreport onits standpoints on issues of sustainability and list work being carried out that is related to sustainability issues and the result of this work. An independent assurance of quality of reported information increases the credibility of the reporting. The CR reporting provided in addition to the audited annual report should therefore be verified. A detailed external review as to what extent the company is meeting its targets and is working from its plan of action is valuable. Clearly, an explanation as to how the information has been externally reviewed should be included.

3.1 Business risk, business environment, and risk analysis

Basic information about a companys business can be used to create a sustainability-related risk profile or to assess the business possibilities within the area

Appendix 283
of sustainability. The following basic information about the business that can be used: x Products and services. Business concept. x Staff location, gender, age, turnover. x Manufacturing, bothinternaland by suppliers.Where it isbased andwhether manufacturing occurs in countries that are deemed higher risk from the point of view of sustainability. Manufacturings environmental impact. x A geographical breakdown of suppliers, their involvement in higher-risk industries and countries, as well as information on the size of their business and its revenues. x A breakdown of customers by geography, what percentage are in higherrisk industries and countries, what industries they operating in, and how big they are. A company should produce a short analysis of what sustainability factors in its sector and immediate environment are deemed as significant for the business. Examples include: x Current and forthcoming legal requirements. x Demands among, for example, customers and interested organisations. x Risks of negative publicity. A company should also carry out a brief review of key risks in the area of sustainability.This should include: x Environmental risks related to products or manufacturing within ones own business or that of suppliers. x Social and human rights risk within ones own business or that of suppliers. x Sustainability risks related to customers business activities. x Business ethics risks. In its report, the company should also comment on those cases where it has only small sustainability risks.

3.2 Standpoints and active work

A company should report its standpoints in the form of support for international conventions and in its own policy documents and overall strategies within the area of sustainability. Examples of areas in which a company is expected to be able to account for its standpoints are the external environmental, work conditions, the work environment, equality, diversity, and business ethics both for its own business and among suppliers. A company should review how work on sustainability is carried out. Targets, action plans, allocation of responsibility, training and management and monitoring systems should be included.If any of these elements are missing, an explanation should be given. The companys priorities should also be reported and explained.

284 Appendix

3.3 Results
A company should report the results of its sustainability work in both qualitative and quantitative terms: x The reporting of the results should be done according to the companys overall goals and strategies. For each major issue the company should list its policy, strategy, responsibility, management and monitoring systems and results.Comments should be included, including those factors affecting forthcoming work. x The report should be carried out at group level.If relevant, it can be complemented with an overview of business facilities, subsidiaries, or business areas. x If possible, comparisons should be made with other companies in the same industry.It is considered positive if comparative key figures within the industry can be provided. x Comparisons should be made of how the companys work has developed over time. x Key ratios can be used both as utility ratios (for example, the percentage of facilities with environmental certification) or result-based key ratios (for example, greenhouse gas emissions). x For concrete examples of key ratios, please refer to the GRI guidelines on sustainability reporting (see box below). x Information should be provided on the extent to which the company is meeting its targets and how closely it is working with its action plans.

Global Reporting Initiative Sustainability Reporting Guidelines

GRIs guidelines for sustainability reporting are the only reporting recommendations in the area of sustainability used throughout the world.GRI splits key ratios into core ratios and extended key ratios.There are also special guidelines for certainindustries.Note that the definition of key ratiosis comprehensive but not complete, so use what is relevant for your company. www.globalreporting.org

3.4 Points for the company to consider

x Only use essential, verifiable and reliable information so that analysts can make an assessment of your company and the industry (ies) it operates within. Analysts are not only interested in hard facts but also in, for example, risk analyses, strategies and priorities. Be careful to state the limitations of the reporting. For example, does it include associate companies, joint ventures, the supplier chain, distributors and users? The report should be balanced and honest.Do not only report positive information ^ a credible report, which includes reporting on various problem areas, gives a betterimpression.

x x

Appendix 285
x Who are the companys interested parties, and what do they want the company to report? Carryout a surveyand prioritise the most important aspects for the company. It may be practical here to look at the various questionnaires and surveys of the ethical fundsin order to incorporate some of these in the companys report.However, a financial analyst is seldom asinterested in information required by ethical funds as a basis for their selections. The voluntary part of the report should be verified for increased credibility. The information should be included in the annual report or be accessible via the annual report with clear instructions as to where it can be found (for example, in a separate sustainability report or on the companys website). It should be made clear whether or not the information reported in another placebesides the annual report has been verified. Provide notice of when you plan to publish the next report.

x x

x x

Links:
GRI: www.globalreporting.org Dow Jones Sustainability Index: www.sustainability-indexes.com Global Compact: www.unglobalcompact.org ILO: www.ilo.org OECD: www.oecd.org ICC: www.iccwbo.org PRI: www.unpri.org FTSE4Good: www.ftse.com/Indices/FTSE4Good_Index_Series

Sustainable Business Development The Future Next Exit This handbook addresses the How, not the Why, of sustainable development for management, boards, accountants, analysts and investors interested in value growth. The author is Lars-Olle Larsson. www.farforlag.se