Reporting on Sustainable Development: A Preparer's View.

Keywords: assurance; sustainable development; social reporting; social verification.

In this paper, I share with you the recent experiences of the Shell Group with sustainability reporting. The full story about Shell's commitment to contribute to sustainable development and what we

did to add substance to that commitment has become quite long because we have been really active over the last three years. Therefore, I have to go through it with gigantic steps. In fact, I will disregard most of my standard presentation and concentrate on the reporting and verification aspects and, in particular, on the social verification that is, by anybody's standard, the most complex issue in sustainable development reporting. I will not address environmental verification; suffice it to say that we have made important progress in that area as well. The topics I discuss are the following: context and content, why reporting, some general and verification experiences, and some of the issues and features that will emerge over the next couple of years.

CONTEXT AND CONTENT

One publicly stated objective of The Shell Report(1) is that eventually it aims to evolve into the Shell annual report including the full financial report, as well as reports on the environmental and social performance of the Shell Group, hopefully in a fully integrated manner. There is still a long way to go, but that is the long-term aspiration. However, for the immediate future we have decided to focus on sustainable development and to try to report openly and honestly on the impact of our activities on and our performance in the three dimensions of sustainable development: economic, environmental, and social. In practice, there is an emphasis on the latter two. One feature has been that The Shell Report, from day one, does contain verified information that conventionally has not been verified.

The first report was "Profit and Principles: Does There Have To Be A Choice." This document caused a bit of a stir within and outside the corporate world because it followed an approach and contained material that no multinational company had ever presented before. In it we published a road map in which we set out our commitments over time and positioned them within the concept of sustainable development. That is to say it identified and highlighted the three dimensions of sustainable development. However, it also began to focus on the individual components of social accounting and reporting, e.g., stakeholder engagement processes, standards, and verification. Essentially, the central context was the question "How does one translate this difficult and abstract concept into day-to-day reality in the business?"

To provide an overview of The Shell Report 2000, "How do we stand? People, Planet & Profits," Table 1 contains a summary of the content of the report. As can be seen, the report focuses on reporting various aspects of sustainable development and "provides evidence and documents the actions we have taken in 1999 in striving to meet our commitments" (The Shell Report 2000, 1). In particular, note that page 5 contains the independent report of the verifier.

TABLE 1
Contents of The Shell Report 2000

Topic                       Pages   Details

Message from the Chairman    2-3    The chairman's perspective on
                                    where we stand on sustainable
                                    development and how we measure up
                                    against our targets.

Transparency                 4-5    We explain transparency and
                                    techniques to improve credibility.
                                    The independent report of our
                                    verifiers can be found here.

Why sustainable
development?                 6-7    Look here for what sustainable
                                    development means to us.

Economic                     8-13   How do we perform financially? How
                                    do we contribute to the economic
                                    progress of society as a whole?
                                    Look here for our targets and our
                                    performance.

Environmental               14-19   Emissions, spills, fines, flaring.
                                    Here you find our verified
                                    environmental performance data.

Social                      20-27   How do we stand on health and
                                    safety, human rights, armed
                                    security, child labor, and social
                                    investment?

Managing our business       28-33   Taking our Business Principles
                                    seriously and managing our
                                    business with integrity.

Shell view of the future
and the way forward         34-35   We explain the scenarios that help
                                    us plan our strategy.

Business focus              36-47   Find out here the progress each
                                    of our businesses has made in
                                    integrating sustainable
                                    development thinking, the issues,
                                    and dilemmas they face, and their
                                    strategy for moving forward.

Annex                       48-50   Details about what we have
                                    reported, data to support the
                                    charts.

"Tell Shell"                 51     We really do want to hear your
                                    views on Shell.

WHY REPORT?

Why do we report on sustainable development? There is an increasing call for companies to be more accountable for their actions to society. The words "ethics," "social responsibility," "honesty and openness," and "fairness and balance" are fast becoming common currency in discussions on corporate behavior. There is a heightened demand for enterprises to accept responsibilities over and above maximizing shareholder value, and for corporate legitimacy to be built on a broad base of social and ethical accountability. This demand is increasingly accepted as something that business needs to take seriously, that cannot be dismissed as just the language of a few noisy interest groups.

We at Shell have had the core values of honesty, integrity, and respect for people at the heart of our approach to business for more than a hundred years. They are the bedrock on which our business principles are based. These principles were codified and published more than 20 years ago and have been updated regularly.(2) They apply to all transactions, large or small, and describe the behavior expected of every employee in every Shell Company in the conduct of business. The Business Principles are an important part of our corporate glue. Along with such things as scenario planning and the Shell brand, they provide cohesion, common purpose, and shared values for a global and decentralized organization.

The Principles make clear our balanced approach to business. For example, we undertake to "provide an acceptable return [to shareholders]" not a maximum one, and "criteria for investment decisions are not exclusively economic in nature, but also take into account social and environmental considerations." The Principles make clear: our total rejection of bribery and corruption in any form; our support for free enterprise and competition; and our policy of no payments to political parties. Commitments to Health, Safety, and the Environment, the societies in which we operate, and to open communications are also clearly articulated.

We have long believed that responsible businesses must have principles and be seen to be living up to them. It was, thus, particularly painful for us then when in 1995 we were perceived to be lacking on both counts in our handling of the Brent Spar saga and the tragic events in Nigeria. We believe we acted honorably in both cases, but the public perception was very different.

We asked ourselves "what went wrong, how had we failed to match up to expectations?" To find answers, we undertook a major engagement exercise. This involved a series of roundtable discussions all around the world in what became known as the Society's Changing Expectations workshops. We listened very hard and placed this learning in how we saw the world evolving and the forces that were driving that change. The picture that emerged was one of rapid movement from what we dubbed a "Trust Me" to a "Show Me" world. There was evidence of a steady erosion in trust for established authorities: governments, doctors, scientists, judiciary, schoolteachers--even churches and parental authority. All these institutions are being questioned as never before. It is no longer acceptable for authorities to say, "We know best, trust us." As trust diminishes, so increases the demand for transparency in the form of assurance mechanisms (see Exhibit 1). This trend is most advanced in North America and Europe, with other parts of the world catching up fast.

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The trend discussed above occurs in a world subject to three potent forces: liberalization, technology, and globalization. There is no alternative but to recognize these forces. We have dubbed this reality TINA (There Is No Alternative). There is no escaping TINA. Successful companies will manage the challenges TINA presents and grasp the opportunities or fail.

These forces are making the world a much smaller place. We live in a "CNN-world" where actions and reactions are increasingly visible and immediate. Companies are in the spotlight as never before. With it comes the growing realization that business is gaining power and influence at the expense of government. The "retreat of the state" because of TINA (as typified by deregulation, privatization, and more joint public/private ventures) is resulting in business taking on responsibilities for activities that were previously considered the preserve of government. With this new found "power" comes not only responsibility, but also new accountability, to wield that power as a "force for good" in the world. Not all multinational companies welcome such a role--but whether they like it or not, it is increasingly expected of them. We believe that the surest, most credible way for companies to meet these expectations is to place principles at the heart of their business practices.

SOME GENERAL AND VERIFICATION EXPERIENCES

After the external crises that hit Shell in the mid-90s, intensive stakeholder contacts and internal deliberations followed. At the end of that a decision was taken to incorporate two new commitments into our Business Principles: a commitment to contribute to sustainable development and a commitment to respect fundamental human rights. I will not discuss human rights here, although that is a very interesting story in its own right. We also brought the components of social accounting and reporting on board, which effectively determined the "how" to proceed. The stakeholder model, reporting openly, honestly, and transparently, and verification are critical elements.

This is a new game in business and one that doesn't always come naturally. I sometimes quote George Bernard Shaw: "It is not easy to be sincere, unless you happen to be stupid as well." Well, we are not stupid, but the organization has to learn to deal with the entirely new approach to openness and transparency that we try to introduce in the way we report. Of course, the central question remains delivery, because The Shell Report, proud though that I may be of it, is just a document. Unless you carry on and translate the ambitions stated into practice, it has no meaning.

If you were to ask me today about verification--that is, "What are the objectives?"--I would probably say this: providing assurance to stakeholders, not just shareholders, and that we are carrying out our business in line with their expectations. The discovery we have made over the last couple of years is that reporting on sustainable development is not only a very rewarding process, but also one that is beginning to evolve into a very valuable internal management tool. You can use it as such once the processes are in place, and once the organization is over the initial shock of someone looking over your shoulder, who wasn't there before. You can use it to your advantage in order to eventually achieve, or begin to improve, your performance. Of course, in the final analysis it is about credibility and establishing, or if you like, re-establishing trust.

The terminology in this area tends to be confusing at times. There are many phrases used and they are different at either side of the Atlantic Ocean. They are even different within one country. We tried our hand at it and this is what we came up with. Social auditing is the overall activity, especially as the term is used in the U.K. Verification is about the accuracy of data and assurance about the quality of data. We started to use that last distinction in our first Shell Report, but eventually we abandoned that fine distinction for the simple reason that it created as much confusion as it tried to resolve. We simply talk about verification, but the assurance element relating to quality is still there.

If you are as big as we are,(3) you need proper structure in order to move forward in this area. Exhibit 2 presents a top-down perspective starting off with values or "what you stand for," a crucially important start. These need to be translated consistently and credibly into what ultimately becomes performance improvement. Without such a structured approach, one is likely to end up with corporate anarchy, or at least a highly inefficient and expensive system.

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The last few years we have spent a great deal of time on the top three elements of Exhibit 2. Of course, verification should eventually become the focus in the bottom three areas (performance, improvement targets, and performance improvement). This can be illustrated with a dilemma we had late 1997. We had announced that we were going to publish the first Shell Report, and we had already publicly committed ourselves to verification. However, there were no standards in the social area, and no internal structures to provide the sort of consistency of approach that could lead to verifiable data. We ended up, and we still do, having processes verified still early in the chain. There is an advantage to that: once you get these processes under control, it does provide the credible foundation on which future data streams are founded.

However, we believe that verified Key Performance Indicators (KPIs) are the real solution to the verification problem. Early on in the process we committed ourselves to creating, together with outside stakeholders, a number of KPIs that reflected our performance in the three dimensions of sustainable development that would be fully verified. This has proved to be a very substantial exercise that we are still working on. Given the importance of this subject, and still in the absence of real performance data, we decided to make the very process of creating these KPIs the subject of verification. To give you a flavor of what we have done in The Shell Report 2000, the draft KPIs are shown in Exhibit 3. The results of our internal preparations, the input by stakeholders, and the process that we have gone through to reach that point are documented in the report. That entire story was scrutinized by our verifiers and reflected as such in the report.

EXHIBIT 3
Key Performance Indicators

Economic Performance

* ROACE

* Total Shareholder Return

* Customer Satisfaction

* Innovation

Wealth Creation

*  Quality of Social Investment

Management of
environmental impacts

* Critical Environmental Data

* Acceptability of Performance

Potential impact on climate
change

* Greenhouse Gas Emissions

Respect for people

* Critical Health and Safety Data

* Staff feelings on how the company
  respects them

* Diversity and Equal Opportunities

* Human Rights

Integrity

* Staff believe that the Business
  Principles protect them and
  encourage them to act with integrity

* Reputation

* Degree of alignment of business
  processes with SD principles

Engagement

* Stakeholder perception of quality of
  engagement

You will see that a number of quality-related indicators are included. One of the comments made by stakeholders was that they do not just want to hear about "hard" quantitative data. They do want to know about the quality of performance and some of the softer, intangible elements of the indicators. Therefore, the stakeholder engagement processes were very important in this creative process. Altogether we engaged about 45 different stakeholders in this process. Incidentally, even the stakeholder perception of the quality of engagement is emerging as a separate KPI.

The very dimension "engagement" is also visible in an important tool we designed internally to allow our people to introduce sustainable development into the way they conduct their business: the Sustainable Development Management Framework (SDMF) (see Exhibit 4). In the series of suggested sequential steps verification of the eventual reporting is also an element.

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This is a summary of our first experiences with verification. Given the absence of standards, we began with some difficult questions that we have tried to resolve more or less satisfactorily. However, we also see several opportunities in the current situation. For example, by building up our own direct experiences and by being active in the public debate, you can influence the debate and the eventual outcome. There is no doubt, however, that it is a very steep learning curve for us, as well as for our verifiers, KPMG and PricewaterhouseCoopers.(4)

Until their skills and competencies are broadened to cater to the new requirements, financial auditors will remain financial auditors; they are not instinctively social verifiers. Equally, it must be said that the credibility of reporting definitely was enhanced with their involvement, in spite of the occasional claim by some of the more critical observers that they do not believe that a company's financial auditors are truly independent.

I already spoke about the shift in thinking about verification from "it exists to satisfy an external expectation" to "this is a valuable activity that a company can put to its own use by positioning it as a management tool." In addition, questions such as "is it worth the effort," "does one really have to verify as much as maybe some others think," and "does it add value" do exist. Costs are high, because auditors are an expensive lot. In the final analysis, it can be done in different ways; one does not necessarily require professional auditors to provide the level of assurance we are looking for. There are many issues on which the jury is still out, but the learning process has started in a substantial way. There is no doubt, however, about one issue: once a decision is made to go for environmental verification, and certainly social verification, different professional skills are required.

SOME ADDITIONAL ISSUES

I would like to highlight two additional issues: the need for standards on sustainability reporting, and the question of which parties can verify sustainability reports. Regarding the first issue, the necessity is clear and several organizations are working to develop standards (GRI, ISEA, and others). However, given the multitude of existing standards in many other areas that already sometimes overlap, plus those in the pipeline, there is a definite need for more coordination and focus. For instance, one feature that has come out (nongovernmental organizations [NGOs] and other stakeholders say the same thing) is a shift in interest from verified data per se to benchmarking. Stakeholders want to be able to compare the performance of different companies, or even entire industries, in these areas, which can only be done with uniform underlying standards. Business should not accept, nor support, a proliferation of many different standards, however well intentioned.

The second issue has a bearing on the profile of the verifier and could be put provocatively as follows: If what you are after is establishing trust and credibility with outside stakeholders, then do you really need professional accountants? That goal can be achieved in various other ways and we have started to philosophize about that question, even in the Shell Report. An increasing number of other expert organizations are offering their services to verify. In addition, it would be conceivable to approach an NGO and propose to them something along the following lines: "Have a hard look on how we implement our human rights policy in the world, you draw up a report of your findings, and we commit ourselves up front to print that." Clearly, this approach would not only require some firm ground rules, but also there would be no doubt about the credibility of the output, and the corresponding assurance provided. Another alternative could be to define a group of global experts and ask them the same set of questions every year on a particular topic, normalize the outcome, and report the findings each year, thus establishing a base on which to assess performance. Countermanding all this, of course, might be the trend toward truly integrated annual reports, including all the financial performance data, which is likely to be preceded by regulation, and a possible confirmation of a broader role of the traditional financial auditor.

FEATURES THAT WILL EMERGE OVER THE NEXT FEW YEARS

Integrated online reporting is going to be the trend and will be globally recognized, but not necessarily (globally) regulated. The integration would cover those areas that are now contained in The Shell Report and in the full financial report. Internet reporting of course is the one of the biggest challenges to the accounting profession since part of the trend is expected to be continuously updating. How will the statement by the auditors, traditionally covering the fixed period of a year, have to be adapted to conform with this new world? In fact, in a small way we face that issue right now, which is why part of the verifier statement has been removed from the Internet because we have already improved and added data that are no longer covered by the verifiers' statement. I have no doubt that over time these questions will be resolved. The pressure to move to integrated Internet reporting eventually will be too high.

The shift from process to performance data and eventually to control mechanisms will also take place in the social verification arena. Finally, I expect the trend toward a mixture of different approaches to verification, not just verification by financial auditors, to materialize as well.

Although I have concentrated on the verification aspects, it is clear that all this constitutes a significant departure of conventional corporate practices. At this point people often ask, "Why is Shell doing this?" I guess the answer is, "There is not only a moral dimension to it--because we think it is the right way to do business--but we also believe that it is good for business. We are convinced that future companies conducting their business in this manner will be rewarded by the market place. In addition, we are convinced that companies operating in this manner will be able to attract the top talent from the recruitment market because there is an increasing body of evidence that young people want to work for companies they feel good about."

Another way of putting it, we believe that our commitment to contribute to sustainable development, of which engagement processes, transparent reporting, and verification are integral elements, holds the key to our long-term business success. It is conceivable that when trust in companies is beginning to increase again as a result of a new way of conducting business and the reporting thereof, the question might come up whether verification of social data is still required. Time will tell, but quite apart from anything else, we have no doubt that society will benefit from the irreversible changes taking place, and the business performance of the companies concerned will improve as well, creating significant long-term shareholder value in the process.

This paper is based on a presentation at a plenary session of the 6th International Symposium on Audit Research, Maastricht, The Netherlands, July 7, 2000.

(1) The first one was published in early 1998.

(2) Current Business Principles can be found in The Shell Report 2000 inner back of cover.

(3) We operate in more than 130 countries, with 100,000 people, five major businesses, 2,500 companies of which a growing number are joint ventures with governments.

(4) See Wallage (2001) for an auditor's perspective on verification of sustainability reporting.

REFERENCES

The Shell Report (TSR) 2000. 2000. How do we stand? People, Planet & Profits. Available at: http://www.shell.com.

Wallage, P. 2001. Assurance on sustainability reporting: An auditor's view. Auditing: A Journal of Theory & Practice (Supplement): 53-65.

Tom Delfgaauw is the Vice President Sustainable Development at Shell International