By Ellie Winninghoff

What do Sweden's state-owned enterprises have in common with companies listed on the Johannesburg stock exchange?

They share a requirement for the mandatory disclosure of sustainability factors such as carbon emissions or the percentage of significant suppliers and other business partners that have undergone human rights screening.

Sweden's companies must publish reports that comply with guidelines issued by the Amsterdam-based Global Reporting Initiative, or GRI. The GRI has emerged as the de-facto standard for environmental, social and governance (ESG) reporting.

And companies in South Africa must issue "integrated reports" that include information related to ESG issues as well as financial data.

Welcome to the fast-changing world of sustainability reporting-one that could culminate in nothing less than the total transformation of how companies report performance in the 21st century.

This will be a three-part series. Part one will trace the trajectory of the GRI, a multi-stakeholder-based, consensus-seeking global institution that has developed and continues to refine frameworks and guidelines for ESG reporting.

Despite its usefulness, ESG data--like the rest of the data collected by the investment industry--has become its own separate silo, unconnected to the whole. Ultimately, the idea is to help corporations, as well as investors and other stakeholders, to connect the dots between a company's ultimate strategy and various ESG and financial issues.   

Part two will discuss some of the tricky issues related to verification/assurance by accounting firms and others of the information contained in corporate sustainability reports.

And part three will look at efforts to create "integrated reports" designed to help investors analyze a company's strategy and connect the dots between the complex and inter-related environmental, social, governance and financial issues that determine a company's success. The players here range from Prince Charles and the Financial Accounting Standards Board to the GRI and Harvard University.

Dawn Of A Concept

In effect, the GRI story harks back to the Exxon Valdez oil spill in Prince William Sound in l989. By then, there were discussions in the Social Investment Forum about how to apply the lessons of the South African divestment movement to the environment.

Socially responsible investment pioneer Joan Bavaria, founder of Boston-based Trillium Asset Management, pulled together a coalition of leading environmental activists and social investors. Christened the Coalition for Environmentally Responsible Economies (later re-branded Ceres), the idea was to ask companies to go beyond the letter of the American law to practice what she called an "environmental ethic."

Later that year, Ceres issued the so-called Valdez Principles (later renamed the Ceres Principles), a framework for environmental conduct. The principles addressed issues such as using natural resources in a sustainable fashion, reducing and properly disposing of waste, and environmental restoration.

It soon became clear that principles without accounting would be vacuous. In response, Ceres developed an initial framework for environmental measurement and disclosure. But according to Allen White, Senior Fellow at the Tellus Institute, which consulted for Ceres on the endeavor, only about 15 companies had signed on after Ceres had engaged with American companies for five or six years.

"The whole idea of environmental disclosure was still very new," he says.

Beer-Inspired Inspiration

The GRI was conceived in a Chicago bar on a summer night in l997. White and then-Ceres president Bob Massie, now a Democratic candidate in Massachusetts for the U.S. Senate, had just left meeting with yet another reticent American company.

"We came out of the meeting frustrated, and it was not the first time we were frustrated," White recalls, adding that the two men had an "epiphany over a couple of beers and a profound sense of frustration."

The epiphany: Don't wait for the US to catch up with the idea of environmental disclosure. Be bold. Go global. Go where they believed they would have more interest and more readiness. In particular, White says, there were already several initiatives in Europe.

Massie describes the eureka moment as a more deliberative process. "We said, 'Let's just back up. If we could have anything we wanted, what would it be?

"We started to imagine the project," he continues. That image was a generally accepted system of environmental measurement and disclosure like GAAP-one that's managed, expanded and improved by a standard setting body like FASB.

In late l997 and early 1998, Ceres became what Massie calls the "honest broker and custodian of an experiment." Five years later, the Global Reporting Initiative, as that experiment came to be called, became an independent entity based in Amsterdam.

Why Amsterdam? Massie and White knew the U.S. wasn't the best place to host such an organization due to the lack of interest among U.S. companies in the "environmental ethic." So they held a competition among different cities to make a case for why GRI should be based in their city. Amsterdam's relative central location and enthusiasm for the project's mission won the day.

By then, thanks to its Herculean multi-stakeholder process, GRI standards had been expanded beyond environmental issues to include social issues such as human rights and workplace safety, as well as corporate governance.

GRI Takes Shape

Back in l997, Massie says, he began raising initial funding to support the effort from a family patriarch. "He said, 'Let me get this straight, you are suggesting that if we give you $100,000, you are going to bring about a complete transformation of the global system of accounting?' I looked at him, and I didn't blink. 'Yes, that's what we're going to do.'"

Ceres began by forming a tight alliance with the United Nations. Over time, it garnered millions of dollars to support the effort from top U.S. and international foundations-Ford, MacArthur, the UN Foundation and others.

But it was an early decision to use the power of the Internet (something that was still quite new) to pull together an international group of committed people who worked to create exposure drafts and have discussions in real time. They moved with lightning speed, and had a working draft within a few months.

"We met internationally, but mostly we did these things through the friendships and connections that the Internet made possible," Massie says.

In the beginning, there were naysayers who told Massie the project was going to fail. "You're probably right," he says he told them. "But it would be less likely to fail if you would contribute your vision of what should happen and if you offered us solutions to the many problems we're facing."

The process was open, meaning that anybody who wanted to could participate. As co-founder of the GRI with White and chair of its steering committee, Massie's job was to bring together people from different communities (businesses, activists, accounting societies, financial advisors, and people from the labor movement, among others) and different cultures (Europe, North America, South Asia, Japan, Brazil and others).

"We designed a process that could receive and process peoples' suggestions from around the planet," Massie says. "We were able to move forward on this partly because people became passionately interested in this, and they contributed a huge amount of intellectual capital."

GRI Today

In 2008, when the GRI held a global conference in Amsterdam, there were officials and other representatives from 77 different countries focused on how to implement GRI's guidelines.

According to "Carrots and Sticks: Promoting Transparency & Sustainability," a 2010 report produced by KPMG, the United Nations Environmental Program and the University of Stellenbosch business school, there are now a total of 142 country standards or laws related to sustainability, and about two-thirds of those are mandatory and the rest voluntary. Ten governments have a formal reference to GRI in their governmental guidance related to corporate social responsibility.

"The GRI was a big step forward in terms of its immediate mission, which was accountability," says White, who served as CEO until 2003. "It really has made a difference. The question is no longer, 'why report,' but 'why don't you report?'"

The GRI has a fairly complex governance structure. It has a board of directors, technical advisory groups, a stakeholder council, and dozens of working groups. These all need to be balanced in accordance with various stakeholders.

"If we were going to stand tall among all these global initiatives and say we were serious about inclusiveness, keeping the tent wide open, and transparency to and by all parties, we said let's err on the side of hyper-democracy instead of coming up short," says White. "We took a chance doing it because every time you make something more complex, you make it more costly."

But as Clark University professor Halina Brown and her colleagues point out in a paper entitled "The Rise of the Global Reporting Initiative as a Case of Institutional Entrepreneurship," the founders' vision was to set in motion more of a process than an end-product.

The GRI's guidelines, they write, are a "living document"--produced "by the users and for the users." Like software, the Guidelines continue to be revised. There was G1, G2, G3, and now G3.1. The process for G4, which is expected to include developing more guidance regarding the collection of data from supply chains and other things, is just beginning now.

The GRI was founded as a global organization, and the number of companies officially reporting on sustainability issues grew from 50 to about 2,000 today. But White says the U.S. was never forgotten, and last November the GRI established a presence in this country called Focus USA. It was launched at the New York Stock Exchange, which itself has published its own sustainability report and is working on its second as it contemplates sustainability guidelines for companies listed on the exchange.

"There is a huge global movement to re-think our economy that is being effected all over the world," Massie says, "and that's exciting and dynamic and perfectly in keeping with America's idea of innovation and reinvention. And yet it's not part of the [American] political debate right now.

"The U.S., in this area as in many areas," he continues, "has squandered an opportunity for leadership."

A former investment banker and veteran financial reporter, Ellie Winninghoff writes a blog at: http://www.DoGoodCapitalist.com. She can be contacted at: [email protected].