Merck’s core areas of sustainability focus
A version of this piece was originally published on the CSR Reporting Blog.
By: Elaine Cohen
The Global Reporting Initiative has never met the challenge of developing great and focused sector guidance. With just a small number of sectors for which specific guidance is available
, we might be inclined to say that GRI has missed the boat. Even with the seemingly hastily put-together publication on Sustainability Topics
, which could use a good edit, and a little formatting, the GRI is still nowhere near catching up with the times when sectors, not companies, rule the world.
Or as we fondly refer to it: The Sustainability Accounting Standards Board.
Almost before we could blink, SASB set itself up, inspired us with a vision (“SASB envisions a world where all forms of capital are accounted for and managed
“), played on our aversion to information overload and irrelevant content in Sustainability Reports, created a strong governance structure and network, made bold, measurable and time-bound declarations about what it would accomplish, remained focused on a singular goal of “creation and dissemination of sustainability accounting standards for use by publicly-listed corporations in disclosing material sustainability issues for the benefit of investors and the public,
” achieved accreditation by the American National Standards Institute (ANSI), published a first set of healthcare standards, and even started to generate a revenue stream by selling off its industry briefs that were used in the development of the new standards
In short, SASB has done for sustainability materiality in a couple of years what GRI has struggled to do for 15 . Despite the fact that GRI published the G4 guidelines before SASB released the new healthcare standards, its first real output, the SASB hype has done more to focus the debate around materiality.The new SASB Healthcare Standards
were published last month and include six specific standards:
- Medical Equipment and Supplies
- Health Care Delivery
- Health Care Distributors
- Managed Care
A neat matrix of sustainability issues on the healthcare sector radar is freely available on the SASB website (as are all the standards). A cursory glance will tell you that there is nothing rocket-science-ish about this. The same fairly generic issues that GRI has incorporated for years and years feature in the SASB matrix: energy, water and waste efficiency, product safety, corruption and bribery, manufacturing and supply chain management, employee recruitment, development and retention, ethical marketing and more, alongside sector-specific issues such as patient safety in clinical trials, counterfeit drugs, climate change impacts on human health and patient privacy and electronic health records. Clearly, and not surprisingly, although SASB is focused on the SEC disclosures of U.S. publicly listed corporations, there is some overlap with existing sustainability reporting frameworks.
I took a deeper look at the SASB Standard for Pharmaceuticals, a sector I know quite well. The first thing that strikes you is that the document is only 34 pages short. Wow. Only 34 pages. That’s one tenth of the totality of the G4 guideline materials. Guess they had a good editor. The second thing is that the pharmaceutical industry, according to SASB, has 11 material topics.
Interestingly, climate change is not considered material for the pharma industry so no data on carbon emissions is required to be disclosed by the SASB Pharma Industry Standard.The SASB Standard says about these issues: “Sustainability disclosures are governed by the same laws and regulations that govern disclosures by securities issuers generally. According to the U.S. Supreme Court, a fact is material if, in the event such fact is omitted from a particular disclosure, there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of the information made available.” SASB has attempted to identify those sustainability topics (above) that it believes may be material for all companies within the Pharmaceuticals Industry. SASB recognizes, however, that each company is ultimately responsible for determining what is material to it.”
In other words, there is an expectation that every pharma company will disclose on these issues, as they all appear to be relevant for pharma companies. Beware, if you do not disclose, the U.S. Supreme Court may make your life very difficult.
Drilling down into the nuts and bolts of the SASB Pharma Standard, you fairly soon start to feel that familiar disclosure-related headache coming on. The 11 issues beget 30 metrics, and metrics they are. Try HC0102-03 (Drug Safety and Side Effects): List of products listed in the FDA’s MedWatch Safety Alerts for Human Medical Products (Drugs and Therapeutic Biological Products) database, including those products with Potential Signals of Serious Risks or that have New Safety Information identified by the FDA Adverse Event Reporting System (FAERS) or HC0102-08: Number of FDA Clinical Investigator Inspections of investigators used for clinical trials during the past year that resulted in: (1) Voluntary Action Indicated (VAI) and (2) Official Action Indicated (OAI). This is seriously sector sector. But is it sustainability? Or is SASB getting so granular that we will all need a PhD in PII (Pharmaceutical Industry Impacts) to understand it?
A comparison with G4′s General Standard Disclosures and Specific Standard Disclosures yields the observation that roughly 14 of the thirty SASB HC metrics are exclusively sector specific, while the remainder are broadly comparable to GRI metrics in contained in G4. In some cases, the wording is a little different and one or two of the details required for disclosure are not directly comparable, but, broadly speaking, less than half of the SASB Pharma Standard metric are exclusively sector specific. The ones that are include Drug Safety and Side Effects, Clinical Trials and Counterfeit Drugs, as well as certain specific aspects of Manufacturing and Supply Chain. The 16 SASB indicators for which I see a certain correlation with G4 are shown in the table below.
The implications of this for G4 Pharma reporters that are publicly listed in the U.S. and wish to comply with both SASB standards for reporting to the SEC in their Forms 10-K or 20-F, and wish to deliver a G4 “In Accordance” G4 Sustainability Report, is that they will need to take into account the material issues identified for their own company through due process as well as the thirty SASB sector indicators.
If a pharma reporter accepts the material issues identified by SASB, and wishes to report at G4 CORE or COMPREHENSIVE level, then the following matrix applies:
This seems to indicate, then, that the G4 CORE option seems to be the most sensible for U.S. pharma reporting companies that wish to meet both the relevant, non-overload desires of the regulatory and investor community, while meeting the needs of the sustainability reporting community with no additional massive effort. Why prepare 100 disclosures when 64 will do?
Of course, it’s not as simple as that. Life never is. The G4 process requires more of an effort to identify material issues than copying a “this is one we prepared earlier” version directly out of the SASB Standard. In G4, Material Aspects should be the result of a discussion with stakeholders, not materiality-by-proxy, using the list that SASB developed. Of course, the SASB standards represent fabulous guidance for the pharma industry, not just publicly traded U.S. companies, but for all pharma companies around the world. Once SASB becomes more established, and there are more standards out there, we will definitely see a leakage to sustainability reporting, with SASB-defined material issues lists being a key input to, if not a key output of company materiality matrices.
Is it appropriate to use this materiality-by-proxy approach in G4? If companies choose to do this, then we will possibly see G4 CORE reports referring to G4 disclosures reported under the SASB banner in 10Ks and 20Fs (as companies currently refer to Annual Reports), leaving the G4 sustainability report to include only the General Disclosures and Disclosures on Management Approach for the relevant issues. This could have the effect of continued fragmentation of sustainability information and perhaps, relegation of the sustainability report direct content to general approaches, policies and plans, with no teeth, leaving all the quantitative information to the regulatory disclosures. Might this make Sustainability Reporting redundant? For 10K and 20F companies, that’s a possibility.
However, we must remember that the SASB definition of materiality is different from the G4 definition. SASB focuses on material events which “will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations” while GRI focuses on material issues which are defined as ”those that reflect the organization’s significant economic, environmental and social impacts; or that substantively influence the assessments and decisions of stakeholders.“ In a G4 report, we might see, for example, a pharma company not identifying corruption and bribery as currently material to their business. In this case, SASB would require disclosure but G4 would not. On the other hand, climate change might be seen as material by a pharma company, so G4 disclosure would be required where SASB would not.
To get a sense of what happens now, I took a look at Merck’s 2012 Sustainability Report
, a self-declared Application Level A G3.1 report, which also reports against the Access to Medicine Index, Millennium Development Goals and UN Global Compact Principles, as well as the Carbon Disclosure Project carbon and water disclosures.
In addition to reporting against 6 frameworks mentioned above, Merck lists 36 key performance indicators or KPIs,
some of which are relevant in the SASB line-up, some in GRI, and some in none, such as two indicators on employee volunteerism. And yet, when I tried to find a response to a specific G4 Energy disclosure, total energy consumption by source, I had to download the company’s CDP submission which records energy consumption by source in MWH whereas Merck’s Sustainability Report refers to total consumption in trillion BTUs (G3-EN3). In other words, more may not be more. More may be confusing.
The Abbott report is GRI-referenced (does not disclose an Application Level), reports on fewer indicators than the Merck report, and, in addition to the GRI Index
, provides a list of 27 key metrics
in financial, social and environmental performance. The presentation is user-friendly with interactive graphs so that I could quickly find, for example, total energy consumption in gigajoules, the preferred reporting unit for GRI, although some of the Abbott metrics appear in no other published framework, for example, global vehicle accident rate, and U.S. employee giving campaign results. Are these company-specific material issues?
Will Abbott and Merck gain by using the materiality-by-proxy reporting method in the future? Merck was represented on the SASB Healthcare Standards Working Group
but Abbott was not. Maybe that’s a hint. There is no doubt that the SASB approach could serve to reign in and align the disclosures of pharma companies around what are probably most of the core sustainability issues that affect the industry. In that sense, SASB does corporate sustainability reporting a good service, and perhaps may help achieve some sort of comparability which G4 does not. On the other hand, sustainability issues by sector are not necessarily sustainability issues by company, and the SASB route applied to sustainability reporting may leave some gaps. If innovation is material to Abbott, whereas employees are material to Merck, we may see very different materiality priorities, and probably, very different G4 reports but similar SASB disclosures.
By now, I guess you are expecting me to answer the question, will SASB make G4 redundant?
Well, like any good blogger, I am going to hedge my bets. With both SASB Standards and the G4 guidelines seeing the light of day earlier this year, and with only one non-corporate G4 report
having been published to date, the jury is out regarding the level to which both frameworks will be taken up by corporates. Will SASB be widely adopted? Will G4 be widely adopted at CORE level once G3 is killed at the end of 2015? If so, will companies align the two? Will companies use due process to determine material aspects and aspect boundaries, or will they use the materiality-by-proxy approach? Or will GRI and SASB finally get around a table and issue a new set of guidelines, called G5-SASB, which converts G4 into a suite of linked sector specific guidelines which incorporate both G4 and SASB disclosures by sector, for use as a basis for both G4 Sustainability Reports and 10K-20F corporate reporting?
Either way, we perhaps ought to remind ourselves what Sustainability Reporting was designed to do in the first place. Account for company impacts on all stakeholders. Both GRI and SASB have an important contribution, I feel. The shame is that both appear to live on different planets, while the companies that are reporting are all on the same planet, and, more importantly, we are too!
Elaine Cohen is a CSR Consultant and Sustainability Reporter, founder/manager of Beyond Business Ltd and author of the CSR Reporting Blog
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