Leading Sustainable Organizations
The recent release of the latest Global Reporting Initiative G4 standard has again focused many managers’ attention on the perennial issue of sustainability reporting. When first envisioned in the 1990s, sustainability reporting seemed to be a logical extension of traditional financial reporting. But imitating financial reporting was easier said than done.
The dream of a single nonfinancial reporting standard is that sustainability metrics can do what financial metrics do: offer easy comparisons among companies over time. For example, The Coca-Cola Co.’s price-to-earnings ratio, when compared to PepsiCo’s, tells investors something about the relative attractiveness of each company. But it’s important to remember that financial metrics get their relevance from relative performance. Any MBA will tell you that financial ratios should be used only to compare companies with similar characteristics. That usually means limiting ratio analysis to companies in the same industry. Comparing financial data from Tyson Foods with data from Cisco Systems is likely to get an investor in trouble. Comparing companies using nonfinancial metrics is even more problematic due to the fact that sustainability measures cannot be reduced into simple dollars, yen, or Euros.
With financial metrics, business executives and financial analysts can manage to a single bottom line. Sustainability managers have a more complicated challenge. No one can manage a list of 100 sustainability indicators, so a way to narrow down the list to the ones that move the needle for a company is needed.
An emerging solution has been found in the concept of materiality. Again, it was financial reporting that initially struggled with the question of what merits reporting, and this is where the concept of materiality first developed. Regulators define information as “financially material” if its omission would mislead an investment decision. Failure to expense a $10 wastebasket, for example, is not material for a company like Walmart. But the recent revelation that biotech company Theranos failed to reveal problems with its blood-testing technology is certainly material, and has cost investors billions of dollars.
As the materiality concept has expanded to include sustainability considerations, many have overlooked the fact that nonfinancial materiality is both issue- and stakeholder-centric. Financial materiality is itself stakeholder-centric. It’s designed to serve the interests of a special class of stakeholders: investors. Investors are increasingly interested in financially material sustainability information and recognize its usefulness.