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Sustainability Reporting: Challenges for Japan

Tags: CSR , Environment , Business Management , Standards , Corporation

Terasaki, Naomichi

January 25, 2016

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With the help of the United Nations Environment Program, the Global Reporting Initiative was established in the United States in 1997 to provide international guidance on sustainability reporting. It was the brainchild of Ceres, an environmental nonprofit organization, and the Tellus Institute, a research and policy NPO.

Environmental Accountability

Ceres was founded in 1989 by small group of pension funds, investment trusts, and other investors following the Exxon Valdez tanker oil spill. It published the Ceres Principles—a 10-point code of environmental conduct for companies aiming to minimize the negative impact of their activities. It also set up a GRI department to encourage environmentally responsible behavior and established an accountability mechanism.

What began as a small, private investment framework gradually expanded to involve many other stakeholders, including business enterprises. Today, more than 130 organizations are members of the Ceres network, including the Natural Resources Defense Council and other environmental protection groups, NPOs like Oxfam, and associations of institutional investors. More than 80 companies endorse the Ceres Principles, a third of which are among the Fortune 500.

Ceres also organizes the Investor Network on Climate Risk, created in response to rising awareness among investors of the risk to corporate activities posed by climate change. Over 100 institutional investors—handling assets totaling nearly $10 trillion—are members of the INCR. With its huge assets and considerable influence, Ceres continues to scrutinize and promote the environmental conservation practices of corporations.

In 1998 Ceres established a multistakeholder steering committee charged with overseeing efforts on issues other than the environment, and this became the basis on which the GRI guidelines were developed. Ceres widened its focus to include issues related to society and governance, leading to the GRI concept of a “triple bottom line” to evaluate not only environmental impact but also the economic and social aspects of corporate behavior.

A Standard for Sustainability Reporting

A public draft of the Ceres Sustainability Reporting Guidelines was issued in 1999, and the first full guidelines (G1) were published in 2000, with GRI becoming an independent organization in 2001. The reporting guidelines and other guidance provided by the GRI soon secured a position as the standard framework for sustainability reporting.

In 2002 the GRI published the second-generation (G2) guidelines and moved its headquarters to the Netherlands following official recognition by the UN secretary general as a partner organization of the UN Environment Program.

The third-generation (G3) guidelines were compiled in 2006 as a truly multistakeholder undertaking with input from more than 3,000 experts from the business world, civil society, labor organizations, and multilateral institutions. The G3 guidelines dramatically bolstered international awareness and understanding of the guidelines, leading to strategic partnerships with the UN Global Compact, the Organization for Economic Cooperation and Development, and the International Organization for Standardization (ISO). The partnership with the Global Compact, which promotes fundamental corporate responsibilities through its 10 Principles relating to human rights, labor, the environment, and anti-corruption, was aimed at enabling private businesses to proclaim a culture of integrity through their institution of comprehensive, organized, integrated, and near-universally accepted management strategies.

The G3 guidelines were revised in 2011 to incorporate changes to performance indicators for gender, community, and human rights. The modifications were limited, though, and the new guidelines became known as G3.1.

Sustainability across the Supply Chain

In 2006, around the time that it strengthened its partnership with the GRI, the Global Compact also entered into a similar agreement with the ISO, bringing a degree of unity—if not complete convergence—to international CSR initiatives that had previously been carried out independently.

The latest guidelines, called G4, were published in May 2013 as the first major revision since 2006. In drafting the new guidelines, the GRI spent nearly three years engaging with a broader range of stakeholders—including from developing countries—representing the views of the business community, civil society, labor organizations, institutional investors, and international organizations.

The gist of the revisions was an emphasis on materiality, with organizations being given the option of choosing between two sets of standards—“core” and “comprehensive”—in preparing their sustainability reports “in accordance with” the guidelines. The new compliance standards called for the disclosure only of information relating to “identified material aspects,” defined as the activities that have a dramatic economic, environmental, or social impact or a significant influence on stakeholder evaluations or decisions regarding the company.

Reporting organizations are not obliged to disclose other information, but they must show the process by which they selected the material issues to be disclosed and a list of the material aspects that were identified as a result of that process. Such information is to be reported for the items and indicators specified in the Disclosure on Management Approach (DMA).

Of the performance indicators measuring economic, environmental, and social impact, the G4 guidelines include 6 additional environmental indicators and 10 new social indicators. Many of these relate to suppliers, including “supplier environmental evaluation” in the environment category and “supplier evaluation for labor practices” and “supplier human rights assessment and grievance mechanisms” in the social category. These additions reflect a growing awareness that in today’s global society companies usually cannot address sustainability challenges alone and that standards need to deal with issues of social compliance across the entire value chain, including suppliers and subcontractors.

Issues addressed in the social category, such as child labor and other employment practices, fair working conditions, and human rights, have recently emerged as major challenges for companies based in industrial countries that are operating in the developing world. The 2013 factory collapse at Rana Plaza in Bangladesh made clearer than ever the need to ensure that suppliers comply with standards on working conditions and reduce environmental impact.

The addition of indicators for suppliers no doubt reflects the GRI’s awareness that individual companies find it difficult to resolve social issues involving the entire supply chain on their own. As Western companies needed to collaborate with one another in the wake of the Rana Plaza tragedy, there are clearly limits to what any one company can achieve in fulfilling its corporate responsibilities. There is a need for greater coordination among multiple companies to ensure the sustainability of corporate operations. These latest revisions can be seen as evidence of the need for companies to engage in CSR efforts across the entire supply chain.

Apart from these issues, the chief characteristic of the G4 revisions was the large number of items calling for additional disclosures on governance issues.

Challenges for Japanese Companies

The GRI guidelines are intended as a practical manual outlining reporting principles, disclosure standards, and approaches to drawing up sustainability reports. Around 800 companies endorsed the GRI guidelines when G3 was published in 2006, and the number increased to 3,000 in 2013, when G4 came out. Clearly, the guidelines have emerged as an important set of standards that companies around the world use in compiling their sustainability reports.

The guidelines have been developed in line with the concerns of stakeholders mainly in Europe and North America and represent an important standard for sustainability reporting. Such efforts merit praise, along with the GRI’s ongoing dialogue with stakeholders and in-depth analysis and its efforts to encourage the use of these guidelines through collaborative and cooperative undertakings with private businesses.

How, then, should Japanese companies make use of the GRI guidelines? The social category items that were added in the G4 guidelines, such as labor practices, fair working conditions, and human rights, are not normally regarded as issues in Japan, so very few companies make references to them in their sustainability reports. Generally speaking, Japanese companies tend to be strong in the environment (E) category and weaker in the social (S) and governance (G) areas of ESG. Strengthening these components of socially responsible management will be a challenge for the future.

The guidelines, regrettably, do not make references to the many progressive initiatives taken in Japan in the field of the environment, such as laws promoting efficient energy use and global warming countermeasures. So they do not allow Japanese companies to draw on the areas where they enjoy an advantage. This may be one reason why they have been noncommittal about embracing the GRI guidelines thus far.

In the face of a rapidly globalizing and extremely competitive business environment, though, nearly all Japanese companies—not just the big multinationals—are part of the global economy today, since they rely, in one way or another, on the worldwide supply chain. It would surely make sense for more companies to consider adopting the internationally accepted disclosure and evaluation standards contained in the GRI guidelines in compiling their sustainability reports. This would make the information offered easier to use and compare, enabling stakeholders to make informed decisions.

The GRI guidelines are not exclusively for the biggest companies. Embracing the guidelines would allow all companies, irrespective of sector or size, to respond more effectively to stakeholder expectations in those countries that have played a leading role in developing standards for CSR.

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