Welcome to the Centre’s first Newsletter for 2007. I trust that the New Year has started well for you. Like many organisations, the Centre has had an extremely busy start to the year. Some of our work is identified inside this Newsletter, along with other international and national developments in the broad fields of sustainability reporting. The Centre has just celebrated its ‘second anniversary’, and it is an exciting time for us as we work with our members, develop our professional services capability, and promote sustainability reporting as widely as possible.

Two key themes in so many discussions about sustainability reporting are whether it should be mandatory or voluntary, and whether it is primarily about managing risk or something more. I am of the opinion that it is still too early in the development phase to become a mandatory requirement, that it is difficult to mandate ‘quality reporting’, and that it involves much more than risk and compliance. Let me explain by way of several examples.

In November 2006, the ASX Corporate Governance Council released proposed changes to the Principles of Good Corporate Governance and Good Practice Recommendations. Among various proposals was Principle 7 that companies should ‘establish a sound system of risk oversight, risk management and internal control.’ In terms of disclosure, reporting on Principle 7 would be included in the corporate governance section of an annual report.

The ASX identified ‘Material business risks’ as including but not limited to ‘financial reporting risks’ and ‘other risks’, such as ‘operational, environmental, sustainability, compliance, strategic, external, ethical conduct, reputation or brand …’. (I am not sure how sustainability in its broadest sense can be grouped with other areas e.g. environment, given it is such an over-arching concept, but more on that another day.)

The ASX Principles and Recommendations are described as ‘non-prescriptive’ and are designed ‘to improve the efficiency, quality and integrity of Australian corporate governance practices’ which is to be encouraged. If a company considers that particular Recommendations are not appropriate to its circumstances, it has the flexibility not to adopt them – under an ‘if not, why not?’ approach – as long as it explains why.

The extension of the ‘if not, why not’ approach to sustainability (and related) disclosures, and treating sustainability from a risk-based perspective, raises a number of concerns. In an excellent submission to the ASX Council, Insurance Australia Group (IAG) made several critical observations: ‘Organisations cannot evolve to become ‘sustainable’ by simply ‘bolting’ on some new processes, writing a sustainability code, and then proclaiming that they are a sustainable organisation. It requires an extensive rethinking of not only what the organisation does, but how and why it does these things. It needs to be integrated within the company purpose, goals, strategy, processes and culture. It is only through this process that a company can start to develop a sound and mature sustainability/CR understanding, commitment and framework’ (IAG Submission to ASX Council 2007, p. 6).

Sustainability should not be viewed from just a risk-based perspective as this severely limits its potential value. Active consideration and implementation of sustainability involves changes to an organisation’s culture and direction, and redesigning of systems and processes. This will bring new opportunities for value creation and innovation as demonstrated by leading companies working in this area.

In terms of mandating reporting obligations, lessons from the public sector are salutary. In the United Kingdom, major departments and agencies have been required to report on sustainable development for several years. However, the most recent UK Sustainable Development Commission assessment of progress identifies that many departments continue to under perform – quite simply, the departments are not adequately responding to the mandatory obligations for reporting. It may be a mandatory requirement, but it has not brought necessary organisational and behavioural change.

On its own, a mandated sustainability management and reporting requirement will not bring required changes to organisational values, direction and approach. Instead, there is a significant chance of a minimalist and perfunctionary response that will not assist the advancement of either sustainability or reporting. Potentially, it could devalue both concepts with limited, compliance-driven responses.

Sustainability reporting definitely requires further impetus, but an organisation that voluntarily considers and sees value in reporting is likely to make a deeper and long lasting commitment. This is the challenge for all organisations, and especially public agencies as they individually consider the merits and value of sustainability reporting. The Centre will drive and assist this, wherever possible.

Phil Hughes, Director