Redefining Value: Measurement, Valuation and Reporting led by the WBCSD proposal to members March 2014 Redefining Value Team WBCSD
This paper was created in response to the outcome of the Measurement, Valuation and Reporting (MVR) workshop in Geneva on 27 th and 28 th January 2014. This paper was also used as the basis of the webinars with members on 17 th and 19 th March and is currently being reviewed and updated as necessary following the feedback received. 1
Table of Contents The need to Redefine Value... 3 A transformation is required... 3 WBCSD is uniquely placed to channel the efforts of business... 3 The WBCSD Proposal... 4 The WBCSD Vision, and how we propose to achieve it... 4 WBCSD role and program objectives... 6 Program Structure... 7 1. Solid foundation to redefine value... 7 2. Technical work stream... 7 3. Changing the rules of the game... 7 4. Education and capacity building... 8 5. Integrated Reporting Fast-Track... 8 Program Delivery Phase 1 (2014-2017)... 8 Key activities... 9 Delivery Timeline Phase 1 (2014-2017)... 10 Resources and Governance... 11 Resourcing options... 11 Governance Model... 12 2
The need to Redefine Value A transformation is required The world is facing a sustainability crisis as a result of human mismanagement of the planet s stocks and flows of natural and social capital: climate change, biodiversity loss, increasing social inequalities are but a few of the consequences that we must address. In addition, the current economic system does not incentivize positive behavioural change to address these challenges: instead it rewards short-term financial gain and speculation. In order for 9 billion people to live well, within the boundaries of the planet, these capitals need to be measured and valued only then will they be effectively and responsibly managed. The main focus of WBCSD moving forward is supporting the scaling up of business solutions within Action2020 s six Priority Area Clusters. Achieving such scale will require collaboration and stronger business leadership, but this must be supported by an improved business case for sustainability, so that more sustainable companies are recognized and rewarded, becoming more successful as a result. Measuring, valuing and reporting corporate performance needs to adapt to reflect integrated performance management - looking beyond short-term financial gain to the broader set of capitals a company depends on, such as natural and social capital. The WBCSD s work to date on natural and social capital will be incorporated into an aligned work program, across all Action2020 priority areas: this work program will develop measurement, valuation and reporting that focuses on putting a true value on these natural and social capitals, allowing for them to be measured and factored into business decisionmaking. In recent years, a flurry of initiatives have appeared that aim to create solutions for elements of natural and social capital accounting. However, a disproportionate effort has been placed on external reporting both businesses, civil society and regulators. While the WBCSD believes in transparent and proportionate disclosure on sustainability commitment, performance and strategy, it is at least equally important that we focus on the business decision making in a way that sustainability is managed on a day-to-day basis within an organization. No business can be managed without access to reliable, accurate and timely information in the form of management accounting and reporting. The WBCSD is aware that even forward-looking businesses are only capturing data on social and natural capital priorities, usually only once or, at best, twice a year. This needs to change and it is intended that the WBCSD initiative will support businesses in scaling up their sustainability initiatives with accurate, timely, reliable and comparable management information. WBCSD is uniquely placed to channel the efforts of business The WBCSD believes that "what gets measured gets managed" and has a strong track record in developing innovative business-led tools and approaches over the past 15 years (e.g. GHG Protocol with WRI, Guide to Corporate Ecosystem Valuation with IUCN, the Global Water Tools with Ceres, Measuring Impact Framework with IFC, etc.). These tools and guides have been central to WBCSD s emergence as the business partner of choice for many players in this field. 3
In the space of measuring, valuing and reporting, there are many initiatives underway (or in the planning stages) to develop tools, methodologies, frameworks, standards etc. for measuring and valuing natural and/or social capital, not to mention a plethora of existing and emerging reporting frameworks. The landscape has therefore become very busy with many businesses concerned that the large number of players (along with their divergent objectives and perceived competitive positioning) have lost sight of the end-goal : achieving improved business sustainability by avoiding the mismanagement of natural and social capitals, at the same time as improving the business case for sustainability. Again, WBCSD has experience of clarifying the landscape of tools and initiatives: for example, Measuring socio-economic impact: A guide for business (2013); Eco4Biz (2013) on ecosystems and biodiversity tools, and; Water4Biz (version 3 in 2012) on water initiatives and tools. The WBCSD initiated a financial capital work stream in 2012, partially in order to cut through the haze of the various different reporting frameworks being developed. One of the core objectives of this work stream was to provide members with clarity around reporting initiatives such as GRI, SASB and IIRC, as well as to ensure that the business voice was directly incorporated into the development of frameworks that business would ultimately be expected to use. A second strand of this reporting work was to help members improve their reporting practices so as to deliver sustainability gains as well as to benefit their own businesses, so for the first time, the WBCSD reviewed and benchmarked all of its members sustainability reports, extracting and sharing the key learnings in Reporting Matters (2013). In a January 2014 workshop, WBCSD members indicated that business needs to lead the measuring, valuing and reporting agenda. They have given WBCSD the mandate to work with strategic partners to cut through the noise of the various initiatives that are underway, and bring leadership and harmonization to the issue. WBCSD is independent and is uniquely positioned to consolidate the business voice, work with experts to advance business-focused solutions, and push forward the development of tools that are fit for purpose, open source and non-proprietary, providing business with education on their use. The WBCSD Proposal The WBCSD Vision, and how we propose to achieve it WBCSD s vision for the economy is that by 2050 a business should be measured by its True Value and that businesses disclose and use True Costs and True Profits in their internal and external reporting. This means that economic growth is decoupled from environmental and material consumption and re-coupled to sustainable economic development and meeting needs. Profit and loss, progress and value creation, are redefined to consider longer-term environmental impacts as well as personal and societal well-being. Most importantly, prices reflect all externalities costs and benefits 1. WBCSD s policy recommendations for achieving Vision 2050 were set out in Changing Pace (2012). The paper advised that the three pillars of sustainability the Economy, Society and the Environment need realignment. True value pricing of natural assets, pollution and 1 WBCSD, Vision 2050 (2010). http://www.wbcsd.org/web/projects/bzrole/vision2050-fullreport_final.pdf 4
emissions impacts would encourage sustainable production and consumption patterns associated with more sustainable global development 2. To achieve this vision we will need to develop new measures of progress, to integrate environmental, social and governance (ESG) indicators into corporate performance, to establish the true costing of externalities, at the same time as implementing new management and financial accounting and reporting standards. By redefining good corporate performance beyond financial indicators and collaborating with investors to support new metrics, we have the potential to unlock and attract capital that will accelerate the transition to a sustainable 2050. The end-game is a system where natural and social capital are being managed as effectively as, or perhaps even better than, financial capital. On the journey to this system we will leverage financial accounting systems to explore what can be built upon and where gaps exist, always working to ensure that more sustainable businesses are recognized and rewarded with success. Colleagues at PwC contributed a valuable mapping of the components of a managing and reporting landscape (see below). Fig. 1: Components of a managing and reporting landscape, developed and presented by Malcom Preston, PwC On the left of the map, we see the familiar Financial Accounting Systems and their relevant stakeholders while, on the right, we see the corresponding elements that are emerging, or 2 WBCSD, Changing Pace: Public policies to achieve Vision 2050 (2012). http://www.wbcsd.org/changingpace.aspx 5
would need to be developed to account for social and natural capitals. For example, the GASP (Generally-Accepted Sustainability Principles), which relate to the current GAAP (Generally- Accepted Accounting Principles) for financial accounting, would need to be developed and regulators, civil society and governments are likely to be the stakeholders who are interested and/or responsible for this. Our members have confirmed that the most valuable first step for WBCSD will be to drive the development of management accounting approaches that integrate natural and social capital in business strategies and internal decision-making. As this will depend on the availability of scientifically-robust data systems guiding better decision making, WBCSD will work very closely with data technology providers (e.g. Google, SAP) to improve their understanding of corporate users needs. Furthermore, we are involved with ongoing efforts to bring together available data under a single global system (the Earth Genome project) and will continue to support leading initiatives, such as the E P&L, in developing more mainstream offerings. Work on management accounting will inform and align with the broader evolving landscape of reporting standards. WBCSD role and program objectives To put us on a path to Vision 2050, and achieve the various goals that are set out in the Action2020 priority areas, WBCSD, together with strategic partners, will play a leading role in the following areas: Consolidating the business voice and convening a platform for greater alignment across tools, frameworks and standards, and amongst policy-makers, standard-setters, regulators, reporting platforms, and stock exchanges. Catalyzing the development and harmonization of tools and frameworks for integrated decision-making supported by integrated management accounting that are fit-for-purpose, open source, and encourage external integrated reporting over time. Managing a safe space for members to learn, exchange, promote innovations and showcase leadership, articulate and strengthen the business case, and build capacity on the use of the accounting and decision tools. As a result, WBCSD will be positioned as the recognized centre of excellence for all issues related to corporate measurement, valuation and reporting. 6
Program Structure The diagram above illustrates the foundation and pillars that are the essential elements supporting progress at scale towards the WBCSD 2050 vision of true value, true cost, and true profit in corporate decision-making, disclosure and reporting. These foundations and pillars represent five interlinked work streams: 1. Solid foundation to redefine value A fundamental component: we will establish a neutral space, strengthen the business case, clarify and agree on definitions, convene and align partners and platforms allowing for different starting points, experience and level of maturity critical in order for us to progress the other work streams. 2. Technical work stream A dual work stream consisting of aligned components for natural and social capital, developing the harmonized measurement and valuation approaches required by business for integrated performance management and decision-making. 3. Changing the rules of the game A phased advocacy and engagement component, aligning the actions of stakeholders such as policy-makers, standard-setters, regulators, reporting platforms, and stock exchanges. with the WBCSD vision. 7
4. Education and capacity building An education, exchange, and communication component that will share member experiences, ensure business is equipped for the transition and enable WBCSD member companies to lead the way. 5. Integrated Reporting Fast-Track A parallel component to support the implementation of integrated thinking and reporting amongst WBCSD members that are already involved in the IIRC pilot groups (currently 17). Program Delivery Phase 1 (2014-2017) In order to progress in a practical way, we suggest a three-year stage to build the solid foundation for redefining corporate value and progress on the main pillars. Outcomes of Phase 1 include: Equipping forward-looking companies with the technical knowledge to scale up integrated performance and risk management, using these to improve decisionmaking. Achieving progress on aligning standards on core concepts and definitions through business input and leadership. Increasing the number of companies that are implementing integrated reporting progressively and moving towards reflecting integrated performance management. 8
Key activities 1. Solid foundation to redefine corporate value: Convene a selection of members from the other work streams to play an integration role, Articulate the overall business case for redefining value and consolidate business needs into a position paper, Discuss, draft and agree common terminology, Maintain the overview of landscape mapping in this space. 2. Developing initial harmonized measurement and valuation approaches for integrated performance management and decision-making for both social and natural capital through two separate but aligned streams: Convene players to catalyze progress (members, solution providers), Confirm the social and natural capital priority areas to focus on for phase 1 (e.g. water, ecosystems, climate, jobs and skills), Complete the landscape of existing tools and players and define those that WBCSD will adopt, align with, build upon, or contribute to (e.g. protocols, existing indicator libraries), Increase awareness and roll out of E P&L and S P&L, including definitions of the additional tools required, which WBCSD will develop, Conduct an iterative development and pilot process of tools and methodologies in order to produce: o An understanding of data requirements and gaps o Harmonized KPIs o Harmonized valuation methods o Agreed minimum standards o Overarching frameworks and processes for integrated performance management and decision-making. 3. Changing the rules of the game: Strategic analysis of partnerships required to deliver on objectives, Inform external stakeholders of the WBCSD program, plans and relevance to their work Prepare communication and engagement plans for key stakeholders, Align engagement plans with technical delivery e.g. o Engage standard setters and data providers on drafts/definitions of KPIs and data needs, o Engage academics and civil society in validation of valuation approaches, o Engage policy makers, civil society, governments and international organizations in the integration of minimum standards, Advocate externally for support and adoption of vision and tools - integrated thinking, including new integrated management accounting approaches. 9
4. Education and capacity building: Provide a safe space for member learning and sharing, Establish newsletter and communications platforms, Establish training and education programs, Support members in showcasing leadership and conducting external advocacy efforts. 5. Integrated Reporting: Create a WBCSD <IR> working group to share best practice and discuss common challenges, Consolidate the development of sector-based material KPIs in those sectors that the WBCSD leads, and liaise with SASB and GRI on alignment, Develop and advocate business recommendations on how to improve existing reporting frameworks, including proposing a common understanding of value, improved and aligned materiality processes and boundary setting, Monitor, evaluate and share initial targets and results of <IR> through, for example, future editions of Reporting Matters. The delivery of activities will depend on partnerships that will help scale business efforts. We recognize the importance of working with other key organizations in this space, and our teams are already doing so (e.g. Natural Capital Coalition on the Natural Capital Protocol, The B Team on the SP&L, the IIRC on Integrated Reporting). As we develop our specific work plans, we will include the most relevant partners. Those we have been engaging with to date include: The B Team Natural Capital Coalition (former TEEB for Business Coalition) The Gordon and Betty Moore Foundation SASB IIRC Global Reporting Initiative CDP Climate Disclosure Standards Board, CDSB IUCN UNEP-Finance Initiative WRI OECD IFC CPSL Delivery Timeline Phase 1 (2014-2017) We anticipate this program will run for at least 6 years (until 2020). This proposal focuses on the first phase (2014-2017), which will be structured as follows: 10
Resources and Governance Resourcing options - WBCSD core staff: This is a flagship project for the WBCSD and we are setting up an internal team from the different capitals. Rodney Irwin will be responsible for this area, with (currently) four FTEs assigned (including Reporting Matters management). Depending on the availability of external funding, additional technical staff including will be added, including an environmental economist and a PhD trained social scientist with considerable knowledge of social science data sources. - Member secondments: We welcome secondments from all WBCSD member companies for this project. - External funding: We will not request additional member fees for this project beyond the core membership fees, as this is a cross-cutting program of work. We will seek funding externally, which will be dependent on membership engagement and ambitious and clearly defined deliverables that we will monitor and report on. 11
Governance Model We suggest a governance model served by the following roles. As we set up the program, we will test this with members companies and confirm whether this structure needs to be adapted. Role Members Responsibilities Governance Board 8-10 CEO and/or CFO of member companies, representing (as far as possible): Provide high-level guidance Make key decisions which affect the strategy and success of the project Geographic Approve final deliverables Project Oversight / Management Team Advisory Panel Member working groups (in workstreams) spread Sector spread Capital (FC/NC/SC) spread WBCSD staff, with potential member secondments if possible. Each workstream can be set up with additional partners playing this role, e.g. The B Team on SP&L, IIRC on <IR> Independent experts and partner organizations Some individuals may be more engaged in specific work streams, but will still be included in the full program. Representatives from WBCSD members, as well as potential members (TBD) Supervise, monitor and ensure connections between the workstreams Overall project management and oversight, reporting to Governance Board: Recruitment of and liaison with Advisory Panel Recruitment of and liaison with member companies Recruitment and management of technical contractors and review and approval of deliverables in each workstream Strategic positioning of project externally Provide an independent source of expertise and experience Make recommendations to the Governance Board and project teams Connect with Action2020 measurement and reporting framework Pilot test when possible Share learnings, perspectives, data, contacts, etc. 12