The Global Reporting Initiative—the non-profit organization that has developed the de facto set of standards for sustainability reporting—recently rolled out the next generation of reporting guidelines, known as G4. The guidelines, while voluntary, serve as a roadmap for any company that is serious about giving investors and the public more information about its sustainability efforts and details on its environmental, social, and governance (ESG) practices.

The new standards, unveiled at a May GRI conference in Amsterdam, call for new measures of materiality for what gets disclosed and less fluff. In other words the GRI is asking companies to say what they are really doing and dispense with glossy, four-color reports full of soft, feel-good information designed to make investors more comfortable with the company's social responsibility efforts and enhance its reputation and brand.

It's a step in the right direction. Research by the U.S. Sustainability Accounting Standards Board (SASB) finds that 60 to 70 percent of ESG data is immaterial based on the U.S. Supreme Court's definition of materiality—that is, information for which there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to take some action with respect to a company's securities.

It should be noted that the GRI standards are voluntary from a compliance standpoint. Whereas, the SASB guidelines help companies determine what sustainability information should be included in the Form 10K under Management's Discussion and Analysis. SASB's full set of standards for 88 industries will not be completed until 2015.  However, there is hope that these will result in companies being able to avoid the multitude of complex surveys they receive annually from investor groups, activist investors, and customers by providing the requested information in their Form 10-K.

Do institutional investors care about ESG reporting? Apparently, companies believe so as evidenced by a substantial increase in the number of U.S.-based companies that are issuing annual sustainability and corporate social responsibility reports over the past year, according to the Governance and Accountability Institute, which tracks them. And some companies are issuing an integrated report combining traditional financial reporting with information on non-financial factors such as sustainability. A 2003 study by Yale, Stanford, and Harvard professors discovered that companies with the strongest corporate governance strategies provided an annual rate of return 8.5 percent higher than companies that did not focus on it. More recently, a 2012 Deutsche Bank review of 100 academic studies of socially responsible investing found, “Those companies with high ESG ratings also have a lower cost of capital for both debt and equity.”  The review also found that funds dedicated fully to sustainability investment fared as well as conventional funds.

According to, “Sustainable investment is growing because investors and other stakeholders recognize the ability to deliver returns and influence corporate behavior,” says Lisa Woll, a member of the Forum for Sustainable and Responsible Investment in the U.S. She adds that investors, “have encouraged investment strategies that promote economic development and expand financial services in poor communities.” Woll notes that 1,200 asset owners, investment managers, and professional service partners have signed the United Nations backed Principles for Responsible Investment and are starting to disclose their ESG performance and  that 88 U.S. money managers with $4.9 trillion in assets under management are asking their portfolio companies about what they are doing with respect to sustainability reporting.

Meeting the New GRI Standards

To address the new G4 materiality standards, a company must evaluate its top sustainability concerns driven by operations and unique to its industry. For example, a beverage producer may review information about water usage. A retailer will look at safety compliance in its supply chain as a material concern. Recent disasters in manufacturing facilities in Bangladesh, India, China, and Indonesia, for example, have increased the demand for reporting on similar risks and how companies are addressing them. Microsoft, for example, uses the GRI Reporting and Framework Guidelines to provide insight into its suppliers' social and environmental performance. Starting in October 2011, the company asked some 20 top hardware suppliers and service providers to use the GRI's Disclosure on Management Approach framework to report on how they meet the standards in Microsoft's Vendor Code of Conduct. These standards address environmental and social issues such as business ethics, labor, human rights, and respect for intellectual property.

I strongly believe that with the new emphasis on materiality, the corporate compliance officer, corporate counsel, and the IRO need to be involved to a greater degree than they may have been in the past when CSR and sustainability reports were produced more as a “feel-good” document.

Volkswagen AG's vision of ecological sustainability is taking shape in its new manufacturing facility in Chattanooga in the heart of the environmentally sensitive Tennessee Valley. The manufacturing facilities are focused on increasing energy efficiency and reducing emissions, water, and material usage. In its Think Blue sustainability effort, the facility that produces the VW Passat, is using the latest in high-energy efficient robotic manufacturing equipment and process management systems. Volkswagen management is investing at least $500 million to sustainability at its global operations, mostly in renewable energy projects. Managers' bonuses are tied to achieving the Think Blue goals.

So, what should companies do to implement the G4 materiality guidelines? IMS Consulting Director Graham Sprigg, who helps companies plan sustainability strategies and communicate them to investors, recommends that companies follow a four-step process: First, identify the issues, (2) prioritize them, (3) validate why they are included, and (4) review them in terms of whether they meet the materiality standard. For U.S. companies, they may use the SASB standard. For Sprigg, “It's all in the preparation.”

What should a good report look like? Emphasis should be on delivering value by clearly defining material issues the company considers important for meeting its sustainability goals. Too often, Sprigg says, sustainability reports “read like they were produced to meet a marketing need or to plug a gap in corporate communication.” So, a slick four-color publication containing all of the feel-good words that companies want their investors to know, may not be the way to go if it doesn't adhere to the materiality guidelines. Companies might be better off by toning down their reports to more of a “plain vanilla” look that coincides with the sustainability goal of resource conservation.

What are investors looking for in these reports? “Investors are interested in lowering energy costs, achieving more production efficiencies, expanding use of alternative and renewable fuels, products that are differentiated because they are more sustainable, and how the company is organized to become more efficient through its sustainability strategies,” says Hank Boerner, chairman of the Governance  and Accountability Institute. “Investors and stakeholders are also interested in lower employee turnover, lower injury rates, better community relations, expanded or enhanced stakeholder relations and responses to shareholder's issues they put on the table.” Boerner says that these are factors that companies need to integrate in their presentations when meeting with institutional investors and portfolio managers even if they don't ask about them.

A proactive approach to providing investors more information on core ESG issues is further underscored by the fact that investors are listening and factoring sustainability efforts in when making investment decisions, even when they don't specifically ask about environmental, social, and sustainability factors during one-on-one meetings. I believe investor relations officers mistakenly take this as a sign that investors don't care. According to a BNY Mellon 2012 global IR survey, IROs too often duck the opportunity to discuss CSR and sustainability issues in management's presentations and in the development of these reports.

I strongly believe that with the new emphasis on materiality, the corporate compliance officer, corporate counsel, and the IRO need to be involved to a greater degree than they may have been in the past when CSR and sustainability reports were produced more as a “feel-good” document.