Quantitative Versus Qualitative Disclosure

For sustainability reporting, a performance measurement system includes the complete set of indicators (metrics, numbers, percentages, and ­monetary amounts) used to quantify how well an organization fulfilled its intentions as suggested in its policy statements. The indicators are a source of learning not only for external stakeholders but also for the internal stakeholders (management and other employees). See how Dell reports its progress in Figure 5.2.

In addition to the three sustainability dimensions (economic, social, and environmental), organizations may also be interested in reporting on other commitments they have made. Although the Global Compact and the Sustainable Development Goals (SDGs) fall under the broad umbrella of sustainability, often organizations will bring attention to the indicators that apply to those specific commitments in their sustainability reports.

However, sometimes the numbers cannot tell the entire story. Just as a company’s annual financial statements are accompanied by the Management, Discussion and Analysis and the Notes to the Financial Statements, sustainability reports should also contain narrative and notes to interpret the activities that are difficult to quantify or need further explanation. Quantitative indicators and qualitative discussion work together for an in-depth understanding of performance.

Linking Indicators to Policy

As mentioned earlier, organizations develop indicators from the various topics that flow from the company’s policy statements, which are developed through stakeholder engagement, especially the materiality process. The policy statements should also reflect material aspects, given the business model and context in which the company operates, such as the industry and region.

First time or young reporting companies are challenged to find the data in their systems necessary for the indicators. It takes time to develop information systems; however, that should not deter the company from beginning its sustainability reporting. The company might already have safety statistics, greenhouse gas (GHG) emissions/energy, and air quality information that are reported to an industry association or regulatory body. Likely, organizations already report donations, training costs, water use, and energy use in some form in the financial statements, and these items are good candidates for indicators. An organization can start small and their systems can evolve over time through continuous improvement. More indicators can be added to their systems once they have gained some experience in reporting.

We learned that the Global Reporting Initiative’s (GRI) reporting standards are the most widely recognized source for sustainability indicators. A multi-stakeholder group periodically updates the GRI Standards to meet the changing needs of stakeholders and the reporting entities. In contrast, some countries, such as China and Japan, create their own standards for sustainability reporting.

The GRI provides guidance for reporting for any type of entity: for-profit, nonprofit, governments and their agencies, and others. However, each industry and entity type has a different business model and operating context. Consequently, sometimes the general indicators do not fit the exact needs of the reporting organization in a particular industry. To customize the GRI standards for each industry, multi-stakeholder groups familiar with the industry work with industry representatives to develop appropriate indicators. The GRI Sector Disclosures are available on GRI’s website.

GRI provides a broad set of indicators on economic, environmental, and social dimensions of reporting. Recall that other organizations provide more specific detail for reporting certain aspects of sustainability, such as GHG emissions. The Sustainability Accounting Standards Board, the Task Force on Climate-related Financial Disclosures, and the Climate Disclosure Standards Board all provide more detail on reporting of GHG emissions because many feel the topic is a top priority, especially for those companies that extract or use natural resources as part of their production system. Note how Canon, a leader in digital imaging solutions, also links its targets to the SDGs (Figure 5.3).

Characteristics of Good Indicators

If indicators are appropriate for reporting an organization’s material topics, they will add credibility to the report. Also, using a standard set of indicators for an industry or sector supports credibility because they are more comparable. If indicators are difficult to interpret and understand, they might lead to a poor impression. Therefore, the choice of indicators is important. Organizations will look to their peer companies to determine which indicators they are using for certain aspects of sustainability. Whether reporting to external stakeholders or internal managers for monitoring and tracking progress, indicators should hold certain characteristics to ensure maximum learning. Possessing good indicator characteristics also supports better internal decision making. One set of characteristics uses the acronym SMART, which we will use here.

Specific

Measurable

Achievable

Relevant

Timely

Let’s understand how each of these characteristics applies to indicator development and selection.

Specific means that an indicator can pinpoint an action associated with a certain aspect of sustainability, and it is not confused with other aspects that can make the indicator invalid. The connection between the action measured and the indicator should be direct, clean, and clear, making it comparable to another company and understandable. Readers can interpret if the trend is going in the right direction. For example, if a company is attempting to measure employee satisfaction, the number of employee complaints or employee turnover is likely NOT specific to employee satisfaction. Employees who are dissatisfied might not be willing to register a complaint or an employee might leave his or her job because a family member needs help in a distant location. In contrast, many companies measure employee satisfaction with a survey to each employee using specific questions about satisfaction with their working conditions.

Measurable indicates that the data used to calculate the indicator are fairly easy to collect or are already collected in some form. An organization can also use a good proxy that represents the aspect to be measured. A proxy would be a stand-in or valid representative of the actual aspect. For example, it is impractical for an organization to measure actual climate change or temperature change; therefore, organizations measure GHG emissions instead. There is considerable evidence (although still some skeptics) that the amount of GHG emissions are linked to climate change. Because GHG emissions come from many different sources, it is also difficult to measure them directly through a gauge or meter such as water. Consequently, organizations use formulas to calculate the amount of GHG emissions based on the type and amount of fuel and electricity that was consumed because GHG emissions increase and decrease with energy used. Indicators are measurable when they are specific (previous characteristic). Therefore, having one characteristic might lead to ensuring other characteristics exist in the indicator as well. Even though GHG emissions are not highly specific or measurable, energy used is a good proxy and, for the most part, is specific and measurable. Despite the difficulty of measuring GHG emissions, they are very relevant and therefore an important indicator for organizations.

Achievable means that the target behind the indicator can be reached. Good management of the indicator is critical to achieve the target. Similar to indicators that evaluate the performance of managers on purely financial performance, sustainability indicators should be within the ability of a management team if they have the appropriate commitment and capability (Chapter 4). Assigning an indicator to an employee’s responsibilities helps to ensure commitment. If the indicator is showing a trend in the wrong direction, an employee should be capable of changing the direction of the indicator.

Be a critical thinker when looking at targets and their level of achievement. If Company A reports that it achieved its target and Company B reports that it did not, investigate if the targets were equally challenging for the two companies. Targets can be easy or challenging to achieve. Therefore, it is best to compare with another peer company’s performance. Be sure if a company compares its performance to a benchmark that the benchmark represents a peer group of companies appropriate for comparison.

Relevant means that the aspect of sustainability the indicator represents is important to the operations of the company and to its stakeholders (Chapter 3). If the organization’s policy statements were prepared with stakeholder engagement, relevant indicators should evolve from the policy.

Timely means that the organization reports the indicator frequently enough to take corrective action, if necessary (hourly, daily, weekly, monthly or yearly). The indicator should act as a warning sign internally (e.g., a gas line leak). Externally, it should also be available for shareholders’ timely decision making, usually every year. Schneider Electric provides timely updates on its performance similar to financial reporting (Figure 5.4).