In a conversation with the Compact Quarterly, Ligteringen discusses current trends in sustainability reporting, notably the broadening demographic of organizations that are engaged – expanding from mostly large OECD-based multinationals to include emerging market companies, small- and medium-sized enterprises and non-profit organizations. Additionally, he reflects on the complementary nature of the GRI and the Global Compact – a key reason behind the recently announced alliance created by the two initiatives – and responds to pessimists who question the potential of sustainability reporting. Ligteringen is confident that his is a field which will grow, reasoning that: “We will find that in today’s world we need this kind of information to make markets work, to position and prepare companies for a very different kind of future, and also to ensure that there is ongoing trust between this increasingly important institution called business and global society.”

Compact Quarterly (CQ): Why is it important for companies to take stock of environmental and social performance?

Ernst Ligteringen (EL): Sustainability reporting is a feature of the time in which we live, with a few specific drivers. Business is now playing a much more central role than it ever has in history. Fifty percent of the largest economies in the world are corporate, no longer national, economies. And with that level of influence comes evolved responsibilities which must identified in the context of today’s world where we are facing a number of unprecedented challenges.  Globalization has brought with it a growing feeling of exclusion and inequity among the poorest in the world, and we have not yet found all of the solutions.

There is stress on our environment, on our resources – from climate change and pollution issues, to determining how to handle nuclear waste. At the same time we are facing serious social challenges both globally and locally, including widespread poverty and questions about whether large numbers of people can be integrated into the labour market. It is not only a doom story. We are living in a time when there are new economies and new market opportunities; consider carbon trading, “bottom of the pyramid” markets, and the opening of China and its relations to the world economy.

Business can no longer operate as if it is isolated from these areas, claiming that such issues are just politics. Because business now has such a central role, social and environmental matters have everything to do with business: ensuring the confidence of clients, investors and employees. Sustainability is about a business’ global license to operate and creating an environment within which business can be successful.

CQ: There are two schools of thought when it comes to implementation of policy: “reporting drives action” versus “action drives reporting”. Where do you fall in this debate?

EL: What the debate implies is that reporting is a stagnant process when, in fact, reporting is dynamic. The GRI guidelines are not just about producing a report, they address the total process of collecting reliable and well-focused sustainability performance information. There is a basic wisdom: what you measure, you manage. When you start to systematically collect data, and particularly when you do so as an integral part of a cyclical business process, then it means that the data is reviewed by management, even rising to the board level. In most companies, this will begin to impact strategic discussions, potentially affecting the company’s strategy and operations. Many companies have reported to GRI that through this reporting process they have become aware of possible efficiencies and risks, as well as new opportunities for product or service portfolios.

CQ: What broad trends do you currently see in sustainability reporting?

EL: Looking at the evolution of the GRI, among the first adopters were the world’s biggest companies. The percentage of those engaged that are part the S&P 100, Fortune 100 and Fortune 500 is still rising steadily. It was an important early strategy to focus on these companies because they have such large impact and capacity. But clearly we couldn’t stop there.

No longer is it exclusively the multinationals with headquarters in rich OECD countries that are engaged; there is growing interest in the larger emerging economies – such as Brazil, Chile, India, South Korea, Mexico, Columbia, South Africa. And we also see interest extending to other emerging economies surrounding these countries. Also, no longer is sustainability reporting solely the concern of large companies, there is growing interest by small- and medium-sized companies (SMEs). It is hard to identify one driver for SME interest: some engage because they are in a supply chain where it is increasingly expected that they will demonstrate transparency on their sustainability performance, others want to establish their company as a reliable and trusted supplier in the export market, and others are responding to procurement expectations. Indeed, there are very different reasons, but we do see GRI increasingly providing specific guidance for SMEs.

Finally, we also see emerging interest by the public sector; the use of the GRI is not exclusive to business. Some of the largest non-profit organizations are beginning to report because they have quite a significant sustainability impact. In terms of the readers of sustainability reports, there is an emerging interest in the financial community, as well as business-to-business readers, particularly related to supply chain issues.

CQ: How do you respond to those who predict that non-financial reporting has limited potential for widespread implementation?

EL: There are roughly 3,000 companies in the world producing sustainability reports. Of those, about 1,000 have explicitly alerted GRI they are using our guidelines, which is a voluntary act. Of course, one way to look at the situation is that “there are only 3,000 reporters”, while tens of thousands of multinational companies are not reporting. But if you look at the total size of those that do report – and it is often the bigger companies that are leading the pack – then the percentage is already higher. But we are still looking at static pictures with this type of thinking. What is more stunning is to look at the situation over time. Ten years ago, hardly anybody was reporting. There has been considerable growth in the past five to six years.

On this basis, our prediction is that there will be growth. Even in the most pessimistic scenario, this is a practice that grows. Nobody will be able to tell you how much and how fast. That depends on many, many external factors. Human nature unfortunately works in a way that from time to time we need shocking reminders to act. Particularly in this field, we find that a bit of a crisis in one area or another focuses the mind again, and there is a spurt of activity.

But increasingly I think this activity will be proactive. We will find that in today’s world we need this kind of information to make markets work, to position and prepare companies for a very different kind of future, and also to ensure that there is ongoing trust between this increasingly important institution called business and global society. And so, it is not surprising that there is a broadening of the sectors that are interested in GRI and that are practicing sustainability reporting.

CQ: Given the growing interest by financial markets in environment, social and governance issues, how well do you think the GRI framework speaks to the mainstream financial community?

Representatives from the mainstream financial community were present for the first time at the GRI table during the development of the latest G3 guidelines, which I think suggests a shift in thinking. The social responsible investment – “SRI” – community has been involved right from the beginning. But during this round of revisions to the guidelines, we had representatives from organizations including Goldman Sachs, Citibank, UBS, FTSE and Standard & Poors. I wouldn’t overstate the shift, but I do believe that the financial community, particularly asset management institutions, has accepted that sustainability management could be material for their analysis and that it merits a closer look.

The advice of the financial community is clearly found in the G3 guidelines. For example, the guidelines now invite every reporting company to include a high-level, two or three page strategy and analysis section as part of a description of the company. In these few pages, the company gives a summary of its main sustainability challenges and strategies, including how its operations impact sustainability issues and how sustainability issues impact the company’s opportunities. Such issues might include resource scarcity, pollution limitations or workforce matters. In our dialogue with the investment community, we learned that investors found this type of information very important as an introduction to the report in order to to effectively set the stage for reading the performance data.

CQ: What other notable changes are found in the updated GRI/G3 guidelines?

The GRI guidelines are an evolutionary process, particularly important since the phenomenon of sustainability reporting is relatively new. The G3 guidelines include the experience and feedback of our users, as well as a whole network of other stakeholders. When we developed the previous version of guidelines, only a couple hundred companies and other organizations had been using them. Now, we have a network about three times as big, and many companies have several years of experience with GRI reporting. We also update the guidelines with new relevant agreements and understandings. For example, the Kyoto Protocol was signed after the last 2002 guidelines.

There are four main changes found in the G3 guidelines. First, they have become more user-friendly. An important feedback was that the 2002 guidelines were complex for beginners, so we’ve adjusted the G3 structure and the way that it is presented.

Second, the guidelines help the user produce more focused, relevant reports. Feedback showed that, too often, earlier generations of GRI reports were very thick, and sometimes not focused on the right issues. The G3 guidelines add structure and also highlight the principle of materiality. We live in an information age with a well-informed audience. Readers look at reports with specific questions and they want to learn the company’s version or explanation of the issues. If the company shies away from discussing the more critical aspects – which are often the more material aspects – they are not doing themselves a favor and don’t inspire confidence. A balanced report is often more credible, generating both trust with stakeholders and important learnings for the company.

Third, there has been consolidation of the indicators – down from 97 to 79 – as well as a reformulation of many indicators to focus on performance. A shift that depicts how sustainability reporting is coming to maturity. In the 2002 GRI guidelines, there were many indicators that asked “what is the company’s policy on …?”. Now, where possible, the company is asked to report on its performance against metrics that focus on results.

Finally, every indicator in the G3 is backed-up by a technical protocol, meaning that there are one or two pages for each indicator which give a precise explanation of the metrics that can be used. If fully adopted, then the company has the potential to develop a report that really stands up to scrutiny.

CQ: What is the value proposition for companies to adopt both the GRI guidelines and the Global Compact’s principles?

The Global Compact and the GRI are naturally complementary – both have a shared values base, are multi-stakeholder in nature, are well-tested frameworks, and are driven by a desire to find business solutions for a more prosperous future for our planet.

The Global Compact invites a commitment to principles. But commitment is only half of the story – albeit an important half which sets the targets and premise for action. Providing transparency on results is the other critical half. Without a sustainability report or a “communication on progress”, stakeholders may applaud companies for vocalizing a belief in values, but they are left wondering what changes have been made to the company’s operations, and therefore to society.

This is particularly critical in a time when the necessity of responsible corporate citizenship has finally become clear. Business must be prepared for a different future. Demonstrating corporate citizenship will be increasingly essential to be considered a trusted partner in world markets – and ultimately to ensure that markets work.

We have finally reached a stage where the frameworks – the Global Compact principles and GRI guidelines – are now well-tested. Companies that are taking a “wait and see” approach are running out of excuses, and so is the financial world. There are many relevant sustainability instruments on the market; together, the GRI and the Global Compact are committed to making these instruments available and to keeping them as advanced as possible. But now it is up to companies and investors to show that, on a voluntary basis, they can mainstream the notion of responsible corporate citizenship.

Ernst is the Chief Executive of Global Reporting Initiative (GRI). He has held this position since 2002, when GRI was established as an independent organization with an international Secretariat in Amsterdam. Ernst holds overall responsibility for GRI, including secretariat operations and the coordination of the worldwide GRI network of active stakeholders who participate in the GRI’s governance, working groups, reviews, and consultation processes.  He also is a member of GRI’s multi-stakeholder Board of Directors. Before joining GRI, Ernst had a 23-year career in various non-governmental and international organizations, including postings and missions in Africa, the Caribbean, Latin America, Asia, the Middle East and Europe. His posts included: Executive Director of Oxfam International; Director of Programme Coordination of the International Federation of the Red Cross and Red Crescent Societies; and Consultant to the World Commission on the Social Dimension of Globalization at the ILO.