On Corporate Sustainability Reporting - Case of Electric Utilities

On Corporate Sustainability Reporting Case of Electric Utilities Marta Maria Fontes Guerra da Mota Dissertation submitted to the Faculty of Engineering of University of Porto in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Sustainable Energy Systems Dissertation*Supervisor:*Professor*Eduardo*de*Oliveira*Fernandes* Full*Professor*at*the*Department*of*Mechanical*Engineering** Faculty*of*Engineering,*University*of*Porto* Dissertation*Co@Supervisor:*Professor*Maria*Isabel*Rebelo*Teixeira*Soares* Full*Professor*at*the*Department*of*Economic*Science** Faculty*of*Economics,*University*of*Porto Porto 2013 On Corporate Sustainability Reporting ii On Corporate Sustainability Reporting iii To*my*sons,*light*of*my*life* On Corporate Sustainability Reporting iv On Corporate Sustainability Reporting i Acknowledgements The work of this thesis, developed over the past four years, was a endurance path full of challenges and exciting discoveries. The arrival to a good end was only possible with the valuable support of all who have followed this journey and to whom I wish to express my most sincere gratitude. First and foremost, to my supervisor, Professor Oliveira Fernandes, my gratitude for the trust, the tireless support, the valuable guidance and the wise inspiration. To Professor Isabel Soares, my co-advisor, I will never thank enough the serene dedication, the inspired suggestions, the always constructive support and the sincere friendship. I am sincerely grateful to Professor Vitorino Martins for the availability and friendliness and by the carefully guidance into the intricacies of the econometrics and statistics tools. His support has been crucial for this investigation. I also thank to the entire team of teachers in the Program, with a special thank to Professor António Martins for his contagious enthusiasm, encouragement and inquisitive irreverence on the issues under study. To my colleagues Ana Neves, Carlos Sousa, Filipa Carlos Gustavo Sousa, Manuel Rocha, Maria Kapsalaki, Miguel Silva and Pedro Silva, who closer shared this challenge, my thanks for the friendship and for the stimulating discussions on issues of sustainability and energy. To my parents, Isabel and Francisco, my gratitude for the always attentive support and care and for their solid, unifying and peaceful presence at the core of our large family. To my brothers, my sister, theirs families and friends, thanks for believing in me and for our lively and heated debates, which certainly contributed to apprehend other postures and positions. To my sons, Afonso e Rodrigo, source of my inspiration and perseverance, thank you for the comprehension and love. To my husband Orlando, my deepest gratitude for the patience, the availability and the unconditional support, for the calm and lucid presence in all moments, for the companionship on my wanderings, even in the roughest roads and in the stormy tides. Thank you all On Corporate Sustainability Reporting ii On Corporate Sustainability Reporting iii Abstract This thesis presents a proposal to address the environmental, social, economic and financial information, generically reported by European utilities for electricity production and concentrate that information on a limited set of indicators, capable of widespread application. These indicators represent the activities and contributions of these companies in terms of internal and external sustainability. A current challenge for companies is the measurement of social, environmental and economic performance which, in corporate scenario, is being considered fundamental for business success. Besides, corporations are recognized as sized actors of environmental disturbance, either by direct action as by indirect action through the induction of social and economic effects. European electricity utilities were chosen as the object of the present study, both because having a large impact on social, economic and environmental issues and because integrated in a regulatory and market specific context. Although several frameworks are available for reporting on Sustainability and on Corporate Social Responsibility (CSR), they still appear incomplete mainly due both to a lack of maturity in the concepts and to the shortage of operational disclosure tools. In general, indicators commonly presented by companies to monitor their economic, environmental and social performance, exhibit a great diversity of metrics, calculation formulas and basic concepts even within the same sector. Monitoring the evolution of the global behavior of each company is still hampered by the use of a very broad set of indicators, some of them with a qualitative character, which in most cases do not relativize the differences according to the company size and production capacity. For these reasons, company’s individual performances and achievements are hardly compared. Consequently, the focus of the work presented in this thesis is on the application of multivariate techniques, in order to condensate a large amount of data into a set of electricity industry representative indicators, with the minimum loss of information. The use of Principal Components Analysis technique allowed to identify, from a large set of relativized indicators, those with a stronger explanatory power, which act as representatives of all the other. The principal components identified, showed to be aligned with the conceptual foundation of the corporate contribution for sustainability, adopted in this thesis. The methodology, which presents a quite innovative character when applied to sustainability indicators, proved to be adequate and provided valuable outputs. Keywords: Corporate reporting, sustainability, corporate social responsibility, European electricity industry, factor analysis, principal components analysis, industry performance indicators. On Corporate Sustainability Reporting iv On Corporate Sustainability Reporting v Resumo A presente tese apresenta uma proposta para tratar a informação ambiental, social, económica e financeira, genericamente reportada pelas empresas europeias produtoras de electricidade e concentrá-la num conjunto limitado de indicadores, susceptíveis de utilização generalizada. Estes indicadores representam as actividades desenvolvidas e os contributos destas empresas quer em termos da sustentabilidade interna, quer externa. Um desafio corrente para as empresas é a medida do seu desempenho económico, financeiro, ambiental e social, que no cenário corporativo é crescentemente assumido como fundamental para o sucesso dos negócios. Por outro lado, as corporações são reconhecidas como agentes dimensionados de perturbação ambiental, quer por acção directa, quer indirecta, através dos efeitos que induz ao nível económico e social. As utilities europeias de produção de energia eléctrica foram escolhidas como objecto do presente estudo, quer por apresentarem uma influência significativa que decorre das suas actividades, em termos sociais, económicos e ambientais, quer por integrarem um contexto específico em termos regulatórios e de mercado. Embora diversas linhas de orientação estejam disponíveis para estruturar o reporte da sustentabilidade e da responsabilidade social corporativa (CSR), carecem ainda de complitude e representatividade, principalmente devido à imaturidade dos conceitos e à escassez de ferramentas operacionais para apresentação da informação. Em geral, os indicadores comummente apresentados pelas empresas para monitorizar a sua performance económica, ambiental e social, exibem uma grande diversidade de métricas, fórmulas de cálculo e conceitos básicos, mesmo entre as empresas de um único sector de actividade. A monitorização do comportamento global corporativo baseia-se ainda na utilização de vastos conjuntos de indicadores, alguns com carácter qualitativo, que em geral não relativizam as diferenças associadas à dimensão ou capacidade produtiva. Por estas razões, o desempenho e as realizações de cada empresa, são dificilmente comparáveis com os das suas congéneres. Consequentemente, o trabalho apresentado nesta tese centra-se na utilização de técnicas multivariáveis, com o objectivo de condensar um vasto conjunto de dados, num conjunto de indicadores representativos do desempenho da indústria de produção de electricidade, com uma perda mínima de informação. O uso da técnica Análise de Componentes Principais permitiu identificar as variáveis com maior poder explicativo, que actuam como representantes de todas as outras. Os componentes principais identificados, demonstraram estar alinhados com a fundamentação conceptual da contribuição corporativa para a sustentabilidade, adoptada nesta tese. A metodologia, que apresenta um carácter inovador pela aplicação aos indicadores de sustentabilidade, provou ser adequada às questões de investigação e proporcionou relevantes resultados. Palavras-chave: Reporte corporativo, sustentabilidade, responsabilidade social corporativa, indústria europeia de electricidade, análise factorial, análise de componentes principais, indicadores de performance para o sector. On Corporate Sustainability Reporting xii On Corporate Sustainability Reporting xiii Abbreviations and acronyms General CFP Corporate Financial Performance CEO Chief Executive Officer CO2 Carbon dioxide. CSR Corporate Social Responsibility CSRR Corporate Social Responsibility Report EC European Comission EGS Environmental, Social and Corporate Governance EU European Union GDP Gross Domestic Product GHG Greenhouse gas GIC Gross inland consumption GNP Gross National Product IEA International Energy Agency EVD Economic value distributed IFRS International Financial Reporting Standards. KPI Key Performance Indicators NOx Nitrogen oxides OECD Organisation for Economic Co-operation and Development PPA Power Purchase Agreement SKPI Sustainability Key Performance Indicators SO2 Sulphur dioxide SR Sustainability Report TSO Transmission System Operators From Methodology SFA Stochastic frontier analysis OLS Ordinary least squares FA Factor analysis DEA Data envelopment analysis PC Principal component PCA Principal component analysis CFA Common factors analysis On Corporate Sustainability Reporting xiv On Corporate Sustainability Reporting 1 1. Introduction Generically sustainability describes the characteristic of a process that can be maintained indefinitely at a certain level. The concept as the intrinsic meaning of preserve, resist and endure. It is a rather new concept that firstly acquired particular visibility under the environmental perspective. After the industrial revolution, the increasing consumption of natural resources was followed by the corresponding generation of waste, in such quantity and with such characteristics that could not be entirely processed by ecosystems. The depletion of resources has been accompanied by the awareness of its scarcity. The pollutant emissions were soon associated with issues of loss of quality of life. Due to human intervention the functions of ecosystems have been affected and accordingly the environmental balance changed (Arrow et al. 1995; Schumacher 1973; Singh et al. 2009). For some, the sustainability of earth and consequently of humankind was compromised (Schnaiberg 1980; Brown et al 2010; Schumacher 1973). Although the concept of sustainability is widely used, it is likely to be interpreted in different ways. Accuracy still lacks in its definition. Most interpretations of sustainability take as their starting point the consensus reached by the World Commission on Environment and Development (WCED) in 1987 (Brundtland Report) and, since then, the concept was subject of several interpretations in some cases with mutually exclusive meaning depending on the context, the user or the goals to achieve (Redclift 2005). The fully operationalization of the sustainability concept as taken a long way until the 2004 Johannesburg Conference, when it was assumed as having a three-fold expression: environmental, social and economic. Is this perspective, the demand for long-term equilibrium implies the development of consistent management of resources over time, not simply through the use of resources at a rate, which could be maintained without diminishing the levels for future generations, but meeting the environmental, social and economic impacts in short and long term. Given the aforementioned problems, the concept suggests a reminder for the intergenerational equity of opportunities and resources. The options taken in the present will affect the future generations opportunities and welfare, as also it conditions the range of available options. The capacity of ecosystems perform their functions and the level of resources to bequeath to future generations will affect their own ability to survive (Weinberg, Pellow and Schnaiberg 1996; Gray and Milne 2002). On Corporate Sustainability Reporting 2 Social and environmental issues have intertwined impacts that transcend national boundaries. Most of environmental issues are reflected in the overall level, regardless of their geographical origin (Egri and Ralston, 2008). The globalization of trade has raised several questions referring regional disparities, namely those related to environmental performance, human rights, working conditions, resource exploitation or business ethics (Logsdon and Wood, 2002; Williams and Aguilera, 2006). Human activities appear to be the main driver for much of the present imbalance, once they have environmental, economic and social implications and in the reverse way, human activities are also increasingly conditioned by this disequilibrium. Global problems, such as climate change, are now well known and are increasingly understood as threats to human kind survival. Yet, neither public nor private agents act at one dimension and in isolation. The corporate sector integrates complex organisms (companies) whose activity implies large social, environmental and economic impacts, in some cases at a worldwide scale. Following Porter and Kramer (2011), business is commonly perceived as building its profit at the expense of the exploitation of common resources. The legitimacy of business is increasingly questioned, as they are given responsibility for much of the environmental and social problems resulting from its activities. Corporations, from their side, are certainly part of the commitment to promote the sustainable development. They are asked to recognize sustainability as a concept to be applied to the development of their own activities and long-term strategies, while assuming greater responsibility toward society and environment. The fact that they are organized structures may favor the process of change towards a more sustainable behavior, if in the presence of the right conditions and motivation. The concept of sustainability applied to business may be faced from two interconnected and interdependent perspectives . An inner vision, which refers to the company's ability to survive on a long-term and an broader vision, which refers to the company's contribution for the sustainability of the planet. If on one hand, the internal sustainability depends on the understanding of the present, on the apprehension of the emerging trends and on the development of appropriate strategies, on other hand it conditions and it is largely constrained by external context. The aforementioned, results into a systemic, interactive and holistic vision, whereby companies integrate a grid of relationships that they influence as economic agents, but in turn they are conditioned by the context in which they move. This represents an increasing awareness of the dual role of companies as resource consumers and polluters, but also as key elements in the construction of collective welfare and therefore essential agents for the sustainability of the planet. On Corporate Sustainability Reporting 3 The energy sector is fundamental for sustainability. The sector's contribution both for the depletion of natural resources, for the pollutant emissions and for the creation of social well-being is undeniable (Azapagic and Perdan 2000; Azapagic 2003). The challenges that the sector is presently facing are closely related to environmental, economic and social issues. Strategic investment decisions, relevant to ensure industry competiveness and social welfare, are being made with increasing attention on aspects such as global warming or renewable energy sources. A new energy paradigm is being designed and promoted. It is based on the use of renewable energy, the flexibility of distribution networks, the integration of individual producers, the investment in energy efficiency, the promotion of research and the application of technological developments. However, although having recorded significant improvements in the efficiency of resource use and in promoting the use of renewable sources, the sector is still heavily dependent on raw materials of fossil origin, largely from external sources. A worldwide increasing in electricity demand is a trend perfectly defined for the next decade that will be countered with new investment and hopefully with increased efficiency, either in production and in use. Electricity production requires high investments and is responsive to long-term risks. These risks arise from the expected useful lifetime of production units, which is sensible to changing factors, as the access to scarce raw materials or the emerging constrains, namely those relating to water, waste or air emissions. As generation units, for example, are expected to operate for several decades, energy industry managers have to foresee operational long-term horizon while having to deal with rapidly changing incentives and restrictions. The electricity industry in Europe plays a central role in European sustainability scenario. European electricity production is still largely based on fossil fuels and on nuclear generation, which implies long-run impacts mainly associated with green gas emissions and waste management. The impact on the environment, health and safety from nuclear power plants have led some European countries to define policies leading to the decommissioning of its nuclear sites. Moreover, most European countries have followed a liberalization agenda in the sector. This situation, coupled with further deregulation, demands the setting of benchmarks to assess potentials for international efficiency improvement among electricity market agents. On Corporate Sustainability Reporting 4 The standpoint of the consumer is that electricity is, by own nature, a uniform product. Seemingly the price is the only differentiation factor. However, the growing information and consumer awareness about environmental and social issues, may sustain decision-making based on sustainability performance of the electricity generator. Intrinsic differentiation can be built from the weighting of different primary energy sources in the production mix, the externalities not assumed or the relations with the community and employees. In a foreseeable future, those and other issues may become constraining for the consumer's decision when selecting the generator of electricity. Consumers, investors, managers and regulators are looking for credible, reliable, relevant, usable and comparable data, to use for the decision making, the definition of strategies, the evaluation of performance or benchmarking (Edvardsen and Førsund 2003), (Jamasb and Pollitt 2003). From the above, can be concluded that a strong business model for electricity, requires a real concern about the ability to survive the very long term, while assuming and dealing with the responsibilities arising from the activities performed. Success over time depends also on addressing stakeholder’s needs and expectations as much as to secure confidence in the company. As larger resource users and world impacters (on economic, social and environmental dimensions), electricity industries play a main role on leading the way for maintain and improve world’s sustainability. Long term survival, stakeholders engagement, confidence, contribution and corporate responsibility, align the concept of sustainability that is being developed in this study. On Corporate Sustainability Reporting 5 2. Research Questions Sustainability is being increasingly assumed as a responsibility for public and for private corporate entities. The corporate sector comprises complex organisms whose activity implies large social, environmental and economic impacts, in some cases at a worldwide scale. As economic agents, they are an important part of the sustainable development process. Therefore corporations are no longer asked simply to act as good citizens by complying with the mandatory rules and regulations. Instead, they are asked to recognize sustainability as a concept to be applied while developing their own activities and long-term strategies. This means a compromise usually materialized in several corporate documents, from which Sustainability Reports (SR´s) and Corporate Social Responsibility Report (CSRR) are assuming an increasing importance both at corporate level and business overall concerns. The objective of those reports is to assess and disclose to stakeholders and the community in general, the standard of sustainable performance that the organization achieved including environmental, social and economic information in the context of the defined long-term strategies, goals and compromises. But, the same way an accounting report doesn’t guarantee by itself a good financial situation, a SR does not guarantee that good practices represent the main stream within a corporation. On one hand, Sustainability Reports seem to contain many hard-to-verify or incomplete statements. A close survey of the available models of disclosure and reporting proved to be unreliable: the term "sustainability reporting" is being used in a partial way, once it refers only to deliberately exposed issues. In these cases, it subverts the aim and misleads the readers (Gray 1997; 2001; Kolk 2004; Meehan et al. 2006; Adams 2004; 2007; 2008; Adams and Evans 2004; Larrinaga-Gonzalez and Bebbington 2001; Bebbington et. al. 2007; Owen et al. 2000, Hess and Dunfee 2007, Martins et al 2007, Doane 2005; Arnold 2008; Hubbard 2009a); Rahman and Post 2011). On the other hand it is still not clear that the market recognizes and values the companies that are keen to become more sustainable, or even that the market distinguishes the efforts made by those companies (Alniacik et al 2010; Eccles and Krzus 2010; Weber 2008; Soppe 2009, Doane 2005, Arnold 2008). Moreover, some actions taken in the framework of corporate strategies for sustainability don’t have directly to do with the intrinsic obligations of the company (e.g. the distribution of milk for African children should not be seen as a compensation for unfair labor practices or environmental pollution). In fact, reports may present only the positive On Corporate Sustainability Reporting 6 aspect of the overall behavior of the company, deliberately leaving certain practices that relate directly to the core activity of the organization in the dark (Adams and Evans 2004; Gray 2001; Owen et al. 2000; Meehan et al. 2006; Cooper and Owen 2007; Hubbard 2009a; Rahman and Post 2011). Frequently, the questions resulting from the way business is conducted, which directly affect communities, are not properly addressed (Doane 2005). Depending on the SR addressee’s, internal sustainability issues are exposed (those referring to the ability to survive), but not the issues related to the contribution of business for global sustainability. Yet, SR and CSRR are elaborated following international guidelines to assure standardization of form and contents. Business have available a panoply of tools and methods to assess, manage and report their sustainable performance, depending on the aim, the context and even the corporate own culture. However, several frameworks, codes of conduct or management standards, in some cases, overlap or present different focus. That makes difficult to discern and to make a proper judgment of what is being actually reported. There is a mosaic of approaches and methods that can lead to different results and therefore can induce to distortions on the evaluation and pursuit of corporate sustainability. The apparent completeness of the current ‘templates’ may sometimes, if not always, hide the essentials, namely the indicators and the criteria to select and rank those that must be taken into consideration. This is not only a difficulty that results from the diversity of activities and sensitivities of actors from different regions of the Globe. The question is essentially related with the eventual hierarchy of sustainable values and the way to balance them (Gasparatos et al. 2008; Adams 2008; Arnold 2008; Hubbard 2009b)). Probably, the mix and the weighting of those criteria may differ from region to region. However, the issue of how to establish a proper framework to do that is still far from being fully accomplished. Some authors reinforce the suspicions that remain on credibility of reports, mainly due to the interests of management and their influence over the reporting process, which undermines accountability and transparency before stakeholder groups (Adams and Evans 2004; Gray 2001; Owen et al. 2000). The business adoption of CSR was mostly implemented in those areas offering economic gains in prejudice of other, in part, because adequate conceptual resources, to help managers integrate other aspects of CSR into their corporate strategies and operations, are still missing (Meehan et al. 2006). Given the concerns about the content of the report and the assurance practices, other authors believe that this is a time for a theoretical thinking and an empirical examination focusing in particular on how to enhance accountability and transparency to stakeholder groups (O'Dwyer and Owen 2005; Adams 2008, Kolk 2004, Hess and Dunfee 2007). On Corporate Sustainability Reporting 7 The definition of a methodology to identify industry specific issues to report is leading to legitimate decision-making and ultimately to improve the overall level of industry performance (O'Dwyer and Owen 2005; Adams 2008, Kolk 2004; Bebbington et al. 2007; Ilinitch et al. 1998; Hubbard 2009a; Arnold 2008; Azapagic 2003; Lydenberg et al. 2010). Other authors, such Lee and Saen (2012), reinforced that companies find hard to measure and integrate in a systematic way the issues of sustainability, which is due to the insufficiency of tools to support operational integration. They urged the definition of a framework for sustainability focused on corporative practices and on operational performance assessment. European countries have shown a long-term concern with environmental and social issues, namely those related with global warming, emissions of CO2 and other greenhouse gases. However, they have not been accompanied by appropriate studies at the European level. Because the recent interest in CSR in Europe, there are few studies at the continental level (Azapagic 2003; Falck and Heblich, 2007; Delbard 2008, Ziegler et al. 2011). Meanwhile, on the peculiar case of electric utilities there are few academic papers that address the key issues of CSR reporting. Public Utilities by their own nature and scope are intended to be accountable to various stakeholders. Because of providing a public service and for presenting large-scale impacts, electricity producing companies have accrued responsibility for reporting to their stakeholders. Therefore, disclosed information is subject to careful scrutiny and analysis. Electric utilities are a good example of having to deal with challenges emerging on a global scale. Yet, most of these companies have been carefully preparing non-financial reports for the early years, they move between vast borders, enabling them to decide what to report or not. Even from the same industry, reports still miss from homogeneity of information along time and between peers. The lack of comparability makes it difficult to identify best practices and the markup the best results. That raises the following question: • How can relevant data be structured to contribute to the effective promotion of corporate sustainability? Other questions are consequently raised: • What must constitute the core of a SR? What must be identified as critical to be measured and reported in a commonly understood language? • What are the reasons for the lack of comparability between reports? On Corporate Sustainability Reporting 14 However the carrying capacity of ecosystems and the depletion of resources only recently began to be considered in setting policy and economic directions (Arrow and all 1995; Meadows et al. 1972; Schumacher 1973). Arrow and all (1995) warned against the generally accepted assumption that economic growth is somehow beneficial to the environment. The assumption that an automatic adjustment mechanism would lead to the common good guided the definition of the main economic policies during the 70´s and 80´s. The “invisible hand”, assumed by Samuelson (1964, 2001), was touchstone of the liberal economic theory, advocating the continued growth coupled with economic liberalization. The economy-widepolicies, particularly with regard to globalization of trade have been undertaken assuming that the common good would be achieved through the normal functioning of markets. The proliferation of these policies took place giving little attention to the chorus of protests, warning to environmental quality, carrying capacity or environmental resilience (Arrow and all. 1995). Although widely used to defend the non-intervention on free market functioning, the “invisible hand” is considered by Kennedy (2009) as a concept introduced on economic theory empty with any scientific explanatory value. Kennedy (2009) adverted that modern economists have taken an “isolated metaphor, used rarely by Adam Smith” to erroneously justify the perfection of the functioning of commercial markets, by arguing that the defense of individual interests leads inevitably and unintentionally to public benefit. If economic agents do not meet the consequences of their actions when pursuing their own interests, they can harm the common good, by inducing both social and environmental damage. Adam Smith (1789) himself warned to the danger of “human behaviours in situations where markets operate less than competitively in aggregate, can and do result in sub-optimal outcomes, such as from the imposition of monopolies, protectionism, and conspiracies to restrict supplies”. To these questions can be added more contemporary others such as pollution, indifference to spillover externalities and tragedies of the commons (Kennedy 2009). The general equilibrium point in perfectly competitive conditions does not exist outside the constructs of the mathematical theory (Kennedy 2009). The efficient allocation of resources driven by the “invisible hand” requires that market prices incorporate “true social costs”, or externalities. Otherwise, the free market’s operation contributes to accentuate the disparity in wealth distribution and aggravate the depletion of resources. Marshall (1890) was the first author to refer the idea of externality (social cost) which was lately developed by Pigou (1932). Externalities are assumed as costs imposed or benefits conferred on others that are not taken into account by the person taking the action. On Corporate Sustainability Reporting 15 A manufacture polluting a river during its operational activities, imposes a cost to all the communities affected by this pollution, also affecting the ecosystems’ functions. When firms internalize these costs of operation (negative externalities) overall welfare could be raised. Although, the allocation of production external costs arguably raises the costs of products and compromises economic growth (Schaltegger and Wagner 2006). Coase (1960) proposed a new economic view on environmental problems. He defended that the governmental intervention, through taxes and subsidies as proposed by Pigou, was dispensable if the people affected by the externality and the people creating it could get together and bargain. Traditionally it is assumed on neoclassical environmental economics, that the purpose of environmental regulation is to correct a market failure, once that production costs are not entirely undertaken by their generators. The correction goes through the internalization of costs of the negative externality, which imposes additional costs on companies (Schaltegger and Wagner 2006). Reinhardt et al (2008) agreed that if firms voluntarily internalize externalities, it possibly may result in a more efficient allocation of resources. However, there is no reason to suppose that firms may necessarily achieve new efficiency levels through the reduction of externalityproducing activities (Reinhardt et al 2008). Economists, such as Kenneth Arrow, have shown that competitive firms and competitive markets do not necessarily produce the optimal amount of innovation and growth within an economy (Arrow 1962; Kamien and Schwartz 1982; UNEP 2011). Mishan (1967) warned that the benefits of economic growth could be misleading if they were not discounting the inherent negative impacts such as raised pollution, increased crime or depletion of resources. He related economic growth with social discontent once the first generates social and environmental costs that were not generally taken into consideration. Their approach was later recovered by green movements and by the degrowth promotion movements. Mishan (1967) also defended and exemplified with specific situations that economic growth does not necessarily involves improving the quality of life. Richard Douthwaite, (1999) argued that strategies used by governments to raise national income often increase poverty and unemployment, once each increase in national income may consume more resources than those created on a sustainable basis. For citizens, in this situation, the balance is negative. Serge Latouche (2003, 2004), an advocate of the degrowth movement, noted that “If you try to measure the reduction in the rate of growth by taking into account damages caused to the environment and its consequences on our natural and cultural patrimony, you will generally obtain a result of zero or even negative growth.” Even the main indicators of economic performance, such as growth in Gross Domestic Product (GDP) are not adjusted to account for pollution, resource depletion, declining ecosystem On Corporate Sustainability Reporting 16 services, and the geographical and social distributional consequences of natural capital loss (UNEP 2011). Nowadays, humankind as to deal with the reducing availability of fossil energy sources, the over-exploitation of natural resources, the declining of environmental quality, the loss of ecosystems services, as also the decreasing of flora and fauna diversity, situation which contrasts with a highly consumer life-style, on developed and developing countries (Arrow et al. 1995). Since the 30s several types of renewable resource management theories have been developed. The aim was to assure welfare as also the preservation of non-renewable resources, since then, increasingly regarded as capital (Singh et al. 2009). Natural capital has distinctive features from other forms of capital namely man-made capital, human capital and social capital (Gasparatos et al. 2008). If misused, it may depreciate, as any capital asset, often irreversibly (Dasgupta 2008) and it is non-substitutable with other forms of capital (Daly, 1989, Costanza and Daly 1992). Presently ecosystems are one type of natural capital that is especially at risk (Dasgupta 2008). However, economic sciences have been unable to assess properly the natural resources. Only recently, the economic analysis has enjoyed the contact and input from other disciplines, which explain the well being of humanity also through the natural and social environment. Schumpeter (1934) was an earliest voice to suggest a holistic approach to the study of economic phenomena. He maintained a critical perspective towards the analysis of the social matter, once he considered that the social process is in reality an indivisible whole. However, economic analysis is commonly held to be partial or biased. From the historical course, the investigator artificially selects the economic facts. These is an abstraction of reality, once one fact is never exclusively economic and other aspects, perhaps more relevant in this classification, are overlooked Schumacher (1973) later resumed the valuation of other sciences contribution’s for economic thought. He defended a holistic approach containing ethical, ecological, social and metaphysical components, which he considered were missing from the statistical models. Consequences of economic activities and growth models pursuit are under debate. The discussion on the relation between economic growth and environmental quality, and on the link between economic activity and the carrying capacity and resilience of the environment (Arrow and all. 1995) is more present than ever before. It is obviously an impossibility to pursue an infinite economic growth within a finite environment (Schumacher 1973). On Corporate Sustainability Reporting 17 The concept of economic development is presently based on the sustained increase in the standard of living in a nation's population (such as health, education) along with the increase of GDP per capita. This means, the general improving of the living conditions of a population, namely through access to health, education and sanitation services. Other aspects of economic welfare have been recently regarded as relevant faces general human development, such as leisure time, environmental quality, freedom, or social justice. Economic development is a concept halfway between economic growth and sustainable development. In fact, the increase in per capita income alone, linked to economic growth, is no guarantee of improved living conditions of populations. Schumpeter (1934) was one of the earliest economists to address economic development questions. During 1912 he published the “Theory of Economic Development” which laid the basis for the economic growth theory. Following Schumpeter (1934) growth causes are mainly nonecoconomic and they can be found on in the institutional structure of society, namely on cultural and sociological environment. In this context, economic development is constructed through alternate phases of economic growth and depressions. While growth corresponds to prosperity stages of the cycle, resulting from the introduction of new technologies and products in the economy, depressions are assumed as auto correcting phases, removing non-efficient or poorly managed firms from the market. Entrepreneurs activities were driving forces of sustainable development though the introduction of innovative products and new technology into the economy, as also through the development of new forms of organization. Schumpeter (1934) believed that the creation and destruction of existing structures and the replacement for new ones, was responsible for the continuous progress and for the improvement of the standard of living of people. He left the foremost ideas of a dynamic approach and a holistic vision of economic development. For some economists that means that per capita welfare should not be declining over time (Pezzey 1989). This idea has two main implications. First, well-being depends on the total stock of capital, including natural capital, available on the economic system, which determines the availability of opportunities for the construction of welfare. Second, “that economic development today must ensure that future generations are left no worse than the present ones” (Pearce et al. 1989) The IEDC 2011 (International Economic Development Council) defines the concept of economic development as: “a program, group of policies, or activity that seeks to improve the economic well-being and quality of life for a community, by creating and/or retaining jobs that facilitate growth and provide a stable tax base”. On Corporate Sustainability Reporting 18 Such implies that, along with the accumulation of physical capital (through GDP), is promoted the accumulation of human capital (namely through the enhancement of professional qualification of citizens). However, the accumulation both human and physical capital raises concerns about the excessive resource depletion and degradation of natural capital. Much of the interest in sustainable development is increasingly aligned with the concern of irreversible depleting of the world’s stock of natural wealth, which can deeply impact the well being of the current and future generations (UNEP 2011). The concept is associated with the ability to make options, which is materialized on deciding the paths of human welfare, choosing between the use and the accumulation of natural capital stock. In this sense, economic development strategies and policies have to take account of natural capital employed. The valuation of resulting depreciation on natural assets, namely on the goods and services that ecosystems provide, have to be considered as costs of development policies (UNEP 2011, Pearce et al. 1989; Pearce and Barbier 2000). The sacrifice of environmental quality affects both present and future generations and compromises the achievement of sustainable economic development. The concept of sustainable development naturally evolves the previous concerns. In the early days, before the pioneer deliberations of Brundtland Commission the concept of “Sustainable Development” was subject to conflicting interpretations. While for some (Redclift 2005, Pearce et al. 1989), its was rooted in mainstream ideas of increasing growth and consumption at the expense of natural capital and it was, by nature, incompatible with the concept of sustainability, for others, sustainability concerned to a scale of economic activity that allowed the maintenance of ecological life support systems. In fact, was called for some as Herman Dary as an oxymoron, once it was considered the words “sustainable” and “development” have opposite meanings (Redclift 2005). The debate still remains, once meeting the needs of the current population, demands a serious economic growth (Holliday et al. 2002). In this case, sustainable development is based on the assumption of a balanced increase of resources and it has the underlying process of economic growth. Those in favor of sustainable development argue that continued economic growth is possible if consumption of energy and resources is reduced. Both European Union (EU) and OCDE (Organisation for Economic Co-operation and Development) proposed the objective of decoupling economic growth from resource use and environmental degradation, assuming either a positive GDP growth rate associated with a zero growth rate of the environmental variable (absolute decoupling), or a growth rate of the environmental variable lower than the rate of GDP growth (relative decoupling) (OCDE 2001). In both cases, is questionable if it is possible to obtain long-term improvements alongside with the maintenance of a durable decoupling between economic growth and environmental degradation (Mauerhofer 2008). On Corporate Sustainability Reporting 19 Decoupling resource consumption from an expected increasing in life quality of the world’s population is a challenge of our days. The preservation of ecosystem services, the conservation and management natural resource and the social equity and cohesion, are objectives whose pursuit requires an holistic view, based on shared objectives and on local actions. The integration of social, economic and environmental goals, is key for the success of sustainable development process, once each goal may also support all the others. Good social conditions require strong economies, which partly rely on environmental resources and environmental conditions are inseparable from quality of life. This involves recognizing that there are potential conflicts among aims. Finding new solutions and equilibriums goes through the challenging of traditional ideas, the search for alternative solutions, the development of innovative ways, the use of creativity and the citizens involvement with the construction of the present and the design of the future. Sustainable development commonly understood as entailing ‘the integration of economic, social and environmental objectives, to produce development that is socially desirable, economically viable and ecologically sustainable’ (Hens and Devuyst 1996). From an economic perspective can be said that sustainable development is about social justice. The debate about what constitutes a fair and just distribution of wealth, rights, and opportunities is nothing new. The discussion about distributional issues within a generation has been enlarged to the questions about the distributional issues between present and future generations, with a particular focus on environmental questions. The achievement of equilibrium between economic, environmental and social folds will demand for types of partnership and a political agenda never before witnessed in human history (Holliday et al. 2002). The construction of a sustainable development is based on cycles of continuous improvement, yet firmly rooted on the wisdom and best-proven practices of the past. Sustainable development is understood in the course of this work as a long-term process with a global scope. It is based on local action, incremental changes and the cycling construction of short-term balances within the framework of a long run vision. On Corporate Sustainability Reporting 20 3.2. The Business Case for Sustainable Development1 In a world where the relevant issues in the areas of economy, environment and society tend to be globalized, the role of corporations is under scrutiny. Among the negative attributes of globalization is the erosion of confidence among society and institutions, before the awareness of inappropriate behaviors from the leaders of the major business (Rake and Grayson 2009). The concept Sustainable Development refers to a global trend and demands a holistic approach that extends over time. A challenging aspect of sustainable development is that as it cannot by achieved by a nation in isolation and it requires the involvement of different economic agents (Holliday et al. 2002). The various actors of social relations are asked to commit themselves to the continuous construction of sustainable development (Soppe 2009). Business, civil society and government are the three pillars of society. Helping create a world in which what is good for the planet is good for business is a challenge in which enterprises play an important role. In the following sections are addressed both the questions of ethics as the basis for corporative responsibility and the business contribution to sustainability. It is also presented the evolution of the concept of CSR and surveyed the problematic surrounding the reporting of sustainability. The period after the summit of the Rio was seen a turning point in the relation between corporate business and environment. Thereafter it was assumed by some major economic players that environmental issues needed to be taken into account and internalized as central concern of corporate governance (Redclift 2005). Some business leaders realized that the concept of global sustainability had a great potential for application at business level. They perceived the existence of parallel between the issues involved in sustaining a planet with those involved in sustaining a corporation (Holliday et al. 2002). Both require balancing acts between managing for the long term and managing for the short term. If managers fail in their management strategies, firms can fail and they may become extinct (Holliday et al. 2002). Both depend on the grid of relationships that ensure resource availability and performance of daily activities necessary for survival. As in the natural word the ability to survive depends from the ability to grasp the changes underway and to react appropriately. Still within the sustainable development thinking, many corporate leaders found new strategies to growth and thus meet the expectations of stakeholders. 1 “Business must both find its roles in and for a sustainable future, and also advocate these roles to the public, governments, consumers, investors and NGOs. To be trusted, business must walk its talk.” WBCSD Annual Review 2008 On Corporate Sustainability Reporting 21 As sustainable development is about changes in resource exploitation, investments, technological development, and institutions, business cannot remain indifferent to these issues given that concern them directly. Changing times require attention and intervention so that new balances between the factors described above remain business-friendly. A vision of sustainable development as an opportunity rather than a charge, can lead to exploitation of competitive advantages. Sharp CEOs are concerned in guiding their companies toward sustainability, but also try to orient society toward sustainability (Holliday et al. 2002). Companies have a high potential of contribution for sustainability, because while economic agents they play various roles, acting as customers, suppliers, distributors, investors, educators, among others. As economic players, they are an important part of the sustainability construction process. As a matter of fact, companies can operate as a motor for more sustainable practices among stakeholders (Vives 2008; Heal 2004; Engen and DiPiazza 2005). Business has an opportunity and a responsibility to show that it can help lead society along a sustainable path of progress, either by its own example or as key provider of solutions for global issues. The regulation gap between the institutional reaction and social needs can be completed expeditiously through the intervention of the companies. Business by acting decisively and quickly is able to precede the slow decision-making in sovereign states with respect to environment and society crucial issues (Falck and Heblich, 2007). This way, business goals are inseparable from the values of societies and environments within they are operating. Today’s actions must be considered as a determinant for the future, bearing in mind the fast growing of the global dimension of environmental and social issues, will accompany the general evolution of markets and of economic issues. Samuel A. DiPiazza2 make aware of the urgent need of thinking sustainability, suggesting that the exploitation of the planet's resources without a coherent plan to replenish it can lead to a global crises. He compares the actual financial crises elapsing from people borrowing beyond their means with a natural crises emerging from borrowing the planet beyond its supply capacity. As in financial markets, if nothing is done, that can lead to a collapse of natural capital. 2 (Global CEO, PricewaterhouseCoopers) in WBCSD Annual Review 2008 On Corporate Sustainability Reporting 22 3.2.1. Business Ethics as base for CSR The moral conscience is an essential characteristic of human specie and it is assuming prominence since recent financial scandals and not so recent environmental disasters. Decision-making in the business sphere as in the personal sphere is constrained by a set of principles, which in turn are conditioned by specific cultural, religious and social contexts. Thus the exercise of corporate responsibilities is closely dependent on the ethical principles assumed by an organization and its managers. The distinction between ethics and moral is the fact that morality relates to the actual practices of the men as members of a given society. Morality is based on the principles behind a given community, embodied in rules, guidelines or standards of conduct and action, defined within various and specific constraints, while ethics concerns the critical reflection about day-today practices. For business ethics can be understood the branch of ethics that examines the dilemmas, decisions and judgments in the context of business. As examples of frequent quandary, may be listed the practice of corporate social responsibility, the limits of decent competition or the conflict of interests among stakeholders. As business ethics, can also be understood “the study and evaluation of decision making by businesses according to moral concepts and judgments” (Columbia Encyclopedia)”. Now, more than ever, ethical dilemmas are affecting the way of doing business. The depletion of natural resources, pollution of water, soil and air, the increasing attention of citizens and consumers to the environmental and social issues require a serious consideration about ethics on business. The ethical principles of the company and managers will, ultimately, determine how the company interacts with stakeholders and how it assumes its responsibilities. However, ethical conflicts frequently arise from the concurrence of interest between stakeholders. The balance is not always easy to achieve (Roe 2005). Reinhardt et al (2008) remember that the academic debate over the legality of sacrificing profits in the public interest appears to have begun in 1932 with opposing articles from Dodd (1932) and Berle (1931, 1932)3and that issue anticipated the economic debate in decades. The debate is still present and the original ideas of their authors are still subject to reinterpretation. Bratton and Wachter, (2008) offered a new reading of these fundamental and actual texts of corporate law, which have recently reached the 75th anniversary. 3Berle's 1931 article, “Corporate Powers as Powers in Trust” and Dodd's 1932 response, “For Whom Are Corporate Managers Trustees?” On Corporate Sustainability Reporting 23 The economic controversy began more recently, in 1970, with Milton Friedman’s article, “The Social Responsibility of Business Is to Increase Its Profits,” published in the New York Times Magazine. According to the shareholder primacy theory, shareholders have priority over all other stakeholders. That means that in a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom (Friedman, 1970). Friedman argued that the company's objective is to generate profit. In such case the ethics of companies would be strongly conditioned by the interests of shareholders. In this line, even when CSR activities are authorized, it is underlined to its acceptance that they come upon the interests of shareholders, or at least do not conflict. The debate coated greater emphasis on Anglo-Saxon countries were until recently was almost unquestionable the non-legality of sacrificing profits in benefit of environmental and social issues, definition originally offered by Elhauge (2005). Primarily former British possessions (ex: USA and Australia) share many legal features. Corporations in these countries have similar board structures, face similar legal requirements, and even share some legal precedents. In such countries, CSR as been discouraged, but permitted. (Reinhardt 2008). Corporate managers can be legally charged for penalize the interests of shareholders, if engaged in socially beneficial activities, even in the best interests of the corporation, but ignoring the collective interests of shareholders (Corfield 1998), (Borok 2003), (Roe 2005); (Lynch-Fannon 2007), (Reinhardt 2008). However European countries and Japan, easily undertake the CSR concept once the responsibilities before stakeholders, particularly towards employees, since long have been accepted and valued as part of organizational culture. Particularly after the end of the First World War, some entrepreneurs and thinkers such as Rathenau, have been proposing that each company should consider alongside with the interests of shareholders, the convergence of employees', consumer and the collective interest in developing the national economy. These interests required a set of verifications and balances to achieve an ethically acceptable equilibrium between them. Within cultural traditions of social democracy or firm loyalty to employees, most European countries have legal systems that place a greater emphasis on stakeholder participation and differ largely from the system in the United States (Roe 2000; Williams and Aguilera 2006). Curiously, the concept has generated more enthusiasm and controversy among AngloSaxon countries that adopted liberal models of which left a regulatory gap that was filled with the concept of CSR. On Corporate Sustainability Reporting 30 Different views have different implications. The present work adopts the CSR definition of European Commission (COM 2001), as “a concept whereby companies decide voluntary to contribute to a better society and a cleaner environment”, through the integrating of “social and environmental concerns in their business operations and their interaction with stakeholders”. In this perspective, the company is assumed as a legal “person” responsible for the impacts of its own activities on the society and on the environment, which are taken into consideration on operational activities and on strategic decisions of the organization (Figure 3-2). Ethical principles frame the definition of the basic strategically lines, guiding corporate actions through several interrelated time horizons. Figure 3-2 Strategic corporate framework This definition reinforces the relevance of business for a better society and leaves open space for companies to contribute, through their actions and voluntarily will, for this aim. A company has responsibility before stakeholders rather than shareholders. Stakeholders refer to anyone who is influenced, either directly or indirectly, by the actions of the firm. According to the stakeholder theory, the business entity should be used as a vehicle for coordinating stakeholder interests, instead of maximizing shareholder (owner) profit. The integration of stakeholder concerns requires a holistic view of the business. Until recently companies were viewed as mere units of processing resources, according to a particular organization and by using a set of technologies. Presently, companies are conceptualized as members of a network of multilateral relations, which affect and are affected by each other, interactively. On Corporate Sustainability Reporting 31 For example, the manufacture of a product may be affected by customers' requirements, consumer expectations, working conditions, health and safety of employees, the social and environmental conditions in the area of implementation of the plant, as well as the applicable laws and regulations. All these conditions affect the company in a greater or lesser degree throughout the supply chain, both for upstream and downstream directions. That way, from focusing on the internal dynamics, greater interest and attention is being put in the external dynamics, of those complex organisms that are companies. On this perspective Corporate Responsibility (CR) is more than the sum – at least the integration – of its social and environmental components; it is about integrating social and environmental concerns into business strategy and operations and the promotion of a vision of business accountability to a wide range of stakeholders, besides shareholders and investors (Porter and Kramer 2006; Godfrey and Hatch 2007). The concept reinforces the link between the firm and the context in which it interacts (Doane 2005). The old paradigm based on individualism, competition and isolation, is definitively outdated (Marshak and Grant 2008; Porter and Kramer 2011; Kytle and Ruggie 2005). Consequently, the commitment with stakeholders requires transparent and accountable provision of information to the interested parties that are sustaining the organization. Customers, suppliers, employees, consumers or investors are pivotal for the operation of any company. The practice of CSR in the business scenario has been connoted with the performance of multiple functions in particular: correction of externalities, acceleration of processes of change, more efficient use and better distribution of resources (Heal 2004; Vives 2008, Falck and Heblich 2010). CSR has been seen as a broad-spectrum prescription for solving the environmental and social problems that affect business, from labor standards to CO2 emissions (Doane 2005). For some, the CSR is viewed and defended through the lens of the market, once that incentives for investment and rewards for ethical business behavior are supposedly evaluated trough the increase of business opportunities and the rise of competitiveness. For other, CSR evolved to respond to the market failures and it is taken to reduce externalized costs or to avoid distributional conflicts (Heal 2004). Although society valuates fairness as well as efficiency, the presumption that markets are efficient does not imply that they are simultaneously fair. They cannot necessarily assure matching the best social or environmental solution (Heal 2004; Vives 2008). External costs or externalities arise from the production or distribution of goods or services and are determined as the difference between private and social costs. Private costs are those assumed by firms or individuals while social costs are those assumed by society as a whole, and include the sum of private costs with externalities. On Corporate Sustainability Reporting 32 In some sectors of the economy, such as tech sector, private and social costs are aligned and debates are unusual, once externalities are almost inexistent. In these cases, corporate social responsibility has little role to play. However, in situations where “distributional disagreements” and differentials between private and social costs appear, CSR may act as the invisible hand to produce a social advantage, in addition to increasing the company's profits and protecting against loss of reputation (Heal 2004; Vives 2008). External costs express market failures and economic inefficiencies at the local, state, national, and even international level. Global market failures in the absence of global integrated legal framework, mainly those relating to external costs, are hardly internalized (Falck and Heblich 2010, Heal 2004, Hediger 2010). Falck and Heblich (2010) assume that the basic social order is constituted both by a legal framework and social conventions, which reflect the ruling principles and dominant views. The history has sown that new ideas have to slowly integrate this order before be widely accepted. CSR can contribute to faster this process through the proposal of new ways of action and behavior that exceed their own implicit and explicit obligations. CSR can be distinguished from market social responsibility, with the first conditioned by legal and regulatory framework of the second (Vives 2008; Reinhardt et al. 2008). A socially responsible strategy can help to minimize problems of income distribution or allocation of resources especially in contexts where there are more conflicts. While acknowledging that companies should take responsibility for impacts resulting from its activities (Vives 2008) does not claim that they are to be responsible for solving society's problems, which are the responsibility of different authorities. However, since Bowen (1953) published his seminal “Social Responsibilities of the Businessman” until recently, business managers have preferred the Chicago School’s short economic guidance, focused on profit generation, than a wider subscription of social responsibilities (Meehan et al. 2006). In the current strongly interactive business environment, fostered by the Internet, key stakeholders have easy access to critical information about the companies. The reputation and social environmental influences their attitudes towards the company and serves not only as an instrument of public relations but as a powerful tool that can create mutual advantages for both business and community (Alniacik 2010; Doane 2005). A reflection on the loss of credibility and trust in business has substantiated two decades ago the belief that CSR was important. Presently the same reflections between what should be done and the effective business practices raise the question of sustainable enterprises (Rake and Grayson 2009). On Corporate Sustainability Reporting 33 Hediger (2010) recognizes an attempt to relate CRS and CS (corporate sustainability) with the global challenge of sustainable development, in some cases giving the same meaning to both concepts. Using capital theoretical and welfare economic approaches he proved that, from the standpoint of sustainable development, CSR and CS are distinct but interrelated concepts. Following this author, CS refers mainly to the maintaining of capital and corporate value; insofar CSR refers to the management of firm resources and the contribution to stakeholder’s welfare. Garriga and Melé (2004) expound that Corporate Social Responsibility (CSR) field presents not only a landscape of theories but also a proliferation of approaches, which are controversial, complex and unclear. These authors defend that each CSR theory is focused in four main dimensions, which are related to: the fulfillment of objectives to achieve long term profits; the use of business power in a responsible way; the integration of social demands and ethical values; the contribution to a good society by doing what is ethically correct. The development of a new theory to better understand the relationship between business and society is needed. It should integrate the mentioned four dimensions and contribute to overcome each dimension’s limitations. This would require both an accurate knowledge of reality and a sound ethical foundation (Garriga and Melé, 2004). Thus, can be assumed that, sustainable businesses are those that work their ability to survive in the long run. Recent history has proven that are not the most profitable companies who succeed, but those that are responsive and better suited to the requirements, both for the market and for the entire context of its activity. A sustainable business is based on a set of strategies and socially responsible actions in a specific spatial and temporal context. However, due to the constant evolution of the issues surrounding the business activities and strategies, CSR has to evolve permanently to meet changing social and environmental requirements. The corporate sustainability is achieved through the interactive exercise and evolution of corporate social responsibility (Figure 3-3). Figure 3-3 Relation between Corporate Sustainability and CSR Sustainable business CSR period 1 CSR period 2 CSR period 3 CSR period 4 (...) CSR period n On Corporate Sustainability Reporting 34 Sustainability itself is assumed as an holistic concept that is based on the idea that the whole is greater than the sum of the parts (Soppe 2009) and that it concerns more to movement between states rather than the achievement of a single position (Gray 2010). So, the aim of social responsibility is to contribute to sustainable development (ISO/DIS 26000) and the concept of CSR precedes the concept of sustainability (Rake and Grayson 2009). Corporate responsibility refers to actions and effects in the short term, while the second also refers to a strategic vision in the long term. The construction a sustainable business relies in the assumption of corporate responsibility. Considering the present state of the world, the compromise with corporate responsibility is not possible without the compromise with corporate sustainability (Rake and Grayson 2009). Yet the effect is bilateral, once the practices of today should be framed both by the present constrains and by the vision of the future. On Corporate Sustainability Reporting 35 3.2.3. Reporting on Sustainability The reporting of non-financial issues assumes a variety of denomination namely Sustainability Report (SR), Corporate Social Responsibility report (CSRR), Social and Environmental report (SE), Environmental, Social and Governance Report (ESG). Whilst the differences that may exist on contents and format, on this work, was adopted the denomination SR. In the following developments the concept of SR generically refers to a broad range of nonfinancial corporate issues. However, corporate responsibility behavior needs to go along with a proper reporting system. Reporting practices based on accountability and transparency can contribute to reinforce public trust, respond to consumer’s expectations, follow employee’s hopes, retain best talents and manage reputational risks, among others. (Alniacik et al. 2010) Social responsibility in business arose initially associated with movements of philanthropic character. Later this effort has gone towards improving the competitive context of organizations, through the involvement in social causes in order to motivate employees and improve the image of companies to the outside. Corporate social responsibility offers two levels of action. One turned into the organization, referring the commitment of employees with certain behaviors, which is materialized in codes of conduct and ethical codes. Other, with a broader influence, referring the social interactions with employees, clients, suppliers and communities, which is expressed in social reporting. Codes of conduct, ethical codes, or guidelines for behavior serve as example of the first level and it concerned to the organization commitment with an ethical behavior, which extends to employees (O’Dwyer and Madden 2006) The early several definitions of conduct codes present them as “stand alone documents” separated from the operational documents. However initially focusing in US companies, they spread along the world and they constitute the early efforts on inspiring the ethical consciousness on business (O’Dwyer and Madden 2006). The second level of action was initially materialized in social, health and environment reporting, but it took off when corporate environmental responsibility has increasingly become a topic of concern. On Corporate Sustainability Reporting 36 The first, so-called, reports of sustainability emerged in the last decade of twentieth century and resulted, in general, from adapted environmental or safety and health reports, which began to appear as independent reports during the 80´s. However, only from 1999, SR began to exhibit a wide viewer and include environmental, social, economic and even financial issues (Kolk 2004). In the early days there were no accepted standards for corporate non-financial reports, which meant that there were wide variations in both the content and the format of the reports produced. This prevented the realization of temporal analysis or the mere comparison of results between companies and limited the use of SR as an effective tool to support management. Presently, although clear differences between countries and sectors, there is a clear trend for the disclosure of non-financial information in all sectors of activity (Kolk 2004). Bebbington et al. (2007) use the term “corporate social responsibility (CSR) reporting”, to reinforce the link between the reporting activities and organizational and operational functions relating to social corporate responsibility. A representative report implies a dynamic change of information with several levels of an organization with implications “on strategic planning, governance, stakeholder engagement, risk management, decision making, data collection and management systems, performance measurement, performance management, public relations and communications”. (Adams 2008). The CSR reporting makes sense only when interpreted in light of the company's CSR and its own dynamics of operation. Recently, the increasing awareness of stakeholders led to the development of frameworks in order to meet their expectations, improve the quality of reporting and increase transparency. On Corporate Sustainability Reporting 37 3.2.3.1. Expectations on corporate reporting Non-financial reports are an important management tool, allowing a better systematization of information usually disperses and the accomplishment of internal diagnosis. The reporting may also be used to improve the management of internal information and to assess the systems of performance monitoring. It is part of a mechanism for monitoring, analysis and accountability of the performance of an organization. The sustainability or CSR reports emerge as a way to operationalize sustainability in business, once it involves the creation of a practical tool to measure the quality changes in the performance of companies in terms of sustainability in a credible, transparent and consistent way. In this context, those reports appear as an integrator element of each organization activities, framed by their own values and principles and reflecting its real contribution for sustainability. Many studies defend that companies concerned with sustainable issues, in average, achieve better shareholder returns than other companies laboring on the same sector. Some researchers have shown that a social corporate responsible behavior can improve business health (Engen and Di Piazza, 2005). When the interests of stakeholders are taken into account on management decisions, positive effects can be expressed, for example, on long-term reputation, work relationships, access to credit, product perception, as also on customer loyalty and supplier preference. A proper position before stakeholder expectations helps to create appropriate conditions to ensure survival. Corporate value increases, once that raising value is directly associated to higher capacity of survival on the long run. Sustainable companies represent higher value for stakeholders and they tend to cooperate to preserve those organizations. The process is interactive and can generate a virtuous spiral of sustainable development. Positive and negative information on corporate social responsibility influences purchase, employment and investment intentions of various stakeholders (Alniacik et al. 2010; Rake and Grayson 2009). By other hand, reporting allows some parts of the financial community to gear up their use of non-financial, extra-financial and sustainability disclosures to better understand performance of companies. However, most investors do not use the mainstream SR because they were not trained to decode it. Unlike financial reports, SR does not present numbers, trends or metrics that allow comparison between companies or temporal analyses. The information provided is usually scattered by extensive reports and rarely refers the problems and difficulties that organizations have to deal with. On Corporate Sustainability Reporting 38 The credibility of the report is rooted on an honest assessment of business behavior. As an example, most of the companies involved on recent accounting and ethical scandals published their corporate responsibility report (BP, Enron, WorldCom, Ahold and Parmalat) (Kolk 2008; Kolk and Pinkse, 2009). Many of these scandals are connected with internal stakeholders ethical issues such as managers and employees irregular behavior and it usually fall within the corporate governance debate (Kolk and Pinkse, 2009). Yet, the disparity between related behavior and effective actions involving greenwash, bribery and corruption, may lead the public opinion and the stakeholders to discredit SR and this reports may lose ground as a serious means of communication between companies and stakeholders, unless accountability, transparency and responsibility growth on. As recent financial scandals affected negatively the reputation of listed companies, SR reporting may well contribute to a wider assessment of corporate performance and help to minimize conflicts with stakeholders (Becchetti et. al 2009). Social responsibility is key for corporate strategy, working towards greater transparency and disclosure on global company performance. However, following Porter and Kramer (2011), corporate responsibility has a dark side once the most companies embrace disclosure practices more they are accused for insufficient accuracy and for creating problems in society. A narrow and outdated approach concerning value creation is mainly responsible for the focus on financial performance, which is reflected in shortterm success. Companies concerned with short-term financial flows, may forget broader perspectives of value creation. They can depreciate the interactions both with society, environment and economy; witch may heavily constrain their ability to survive in the long run. Porter and Kramer (2011) define value as benefits relating to costs. Although this view of value is usually lagged from environmental and social issues, they propose a new approach of value creation based on corporate practices, which increase competitiveness in business while simultaneously enhance economic and social improvements. This broader perspective of value, expectedly will contribute to long-term success and for increasing corporate sustainability. The short-term perspective widespread in financial markets defines the way investors and corporate managers operate and the way they are rewarded. In the wake of scandals as those surrounding the downfall of companies such as Enron and WorldCom, expectedly other measures could assume leadership and to be recognized as key measures in assessing the financial performance of companies, those who favor long-term safety and yield of assets (Zadek and Merme 2003). On Corporate Sustainability Reporting 39 So, signals and lessons collected from current Sustainability Reports point to the need of a better understanding of the links between the evolving sustainability agenda and wider market opportunities. Nevertheless, recent years have witnessed an increase in the number of companies reporting publicly on various aspects of their environmental and social performance, most companies are still missing an important opportunity to communicate with their stakeholders and other institutions. Civil society insists that sustainability practices to be credible should be developed, implemented and evaluated with the involvement of relevant stakeholders (COM 2006 136). Investors stress that, besides sustainability reports it is still needed to improve disclosure and transparency of company practices, and consumers still demand more complete and transparent information to guide their purchase choices (COM 2006 136). To comprehend the extent of the unsustainability of current business is a necessity for individuals, organizations and societies. Various fields and extensions require models, metrics and tools appropriate, so can be defined the strategies and measures that boosts sustainability As business activities have multiple impacts, the report presented to the stakeholders will need to present a multifaceted and inclusive structure. SR´s built based on information of enhanced quality and subject to transparency and completeness principles assume a higher credibility and significance before corporate stakeholders and other parties. If this information reflects all the corporation activities interconnected, it can provide a genuine and holistic image about its performance. On Corporate Sustainability Reporting 46 The development of new categories of intangible assets is expected and new methods will arise to report the essence of culture and the values of companies. Polo and Vazquez (2008) proposed the integration of the social report with the intellectual capital report, because they consider some matters, contents and goals are common to both documents. Given the observed similarities and the greater flexibility and scope of the intellectual capital report, they believe that the integration of the two types of report can simplify the presentation of non-financial information and make it accessible to a greater number of stakeholders. Producing a single report allows executives to understand how not all corporate responsibility practices have the same value and to dedicate more energy and resources to that which will increase the firm’s sustainability. The integrated development of corporate citizenship and intellectual capital monitoring could enhance the benefits of corporate responsibility practices and create a competitive edge. (Pedrini 2007) Since it is impossible to manage that which cannot be measured, the need for a map of the various forms of capital used in the company, as well as of their corporate responsibility practices, has thus been identified as a first step toward good management. On Corporate Sustainability Reporting 47 3.2.4. CSR through financial market lens The idea that the economic performance of a company was linked to environmental and social performance, with few exceptions, only recently has received generalized acceptance by the academic community (Sharfman and Fernando 2008). Those first approaches to positive relationship between environmental and economic performance, were mostly based on a resource-based view. In this perspective, it is assumed that a greater economic effectiveness results from a greater efficiency in resource management, including environmental resources. For example, the implementation of measures to reduce waste can pass through both the reuse of materials, or the introduction of more effective procedures / technologies. Such attitude involves the use of fewer resources and consequently implies less operational costs for the company, impacting the broad improvement of the organization effectiveness (Sharfman and Fernando 2008). The broader relationship between corporate financial performance (CFP) and sustainability performance has been the subject of scientific studies, which can be framed by two lines of research in opposite directions. Those who analyze the reaction of financial markets to the company's internal strategies, mainly through the measurement of market returns, while others address the impact of financial markets on the performance of sustainability (Ziegler and Schroder 2010; Sharfman and Fernando 2008, Lydenberg 2009; Arnold 2008). In the following sections are initially displayed the approaches that justifies the global performance of a company as a result of its financial performance and its ability to finance. Then are presented the approaches that justify the opposite, i.e. the good financial health is the result of good environmental, social and economic performance. A third group refers to the methods used to justify the existence of mutual effect between performance of sustainability and financial performance. 3.2.4.1. CSRP versus Financial performance The financial effects of the corporate social and environmental performance (CSRP) follow various strands of research, which include portfolio analyses, event studies and long-term micro econometric studies (Ziegler and Schroder 2010). Such analyses are mostly intended to ascertain whether it is worth investing in socially and environmentally responsible behavior, i.e., to determine whether financial markets reward those behaviors. On Corporate Sustainability Reporting 48 This line of research fits the instrumental stakeholder theory, which suggests a positive relationship between Corporate Social and Environmental Performance (CSRP) and Corporate Financial Performance (CFP) (Orlitzky et al. 2003). According to this theory, the satisfaction of various stakeholder groups concurs for better organizational financial performance. Silveira (2006) studied the impact of corporate standards ethics, corporate governance, social responsibility, sustainability and transparency in the volatility of Latin American banks. The methodology involved multiple linear regressions sectional (cross-section) using as dependent variable the volatility of stock returns and as explanatory variables the corporate standards (ethics, corporate governance, social responsibility, sustainability and transparency). Control variables, were included in the regressions to ensure the robustness of results. The study revealed that the set of corporate standards has a negative relationship with the volatility of return on bank shares in Latin America. Ioanniou and Serafeim (2010) explored the link between CSR strategy and corporate financial performance, exploring the mechanisms via which crucial CSR information gets evaluated and reached public equity markets. They quantified the impact of CSR strategies on sell-side analysts recommendations. Ziegler et al. (2011) studied the relationship between information disclosure by energy companies and the performance of their shares and found that it is more positive for this sector due to greater exposure and scrutiny. A great deal of other academic research has been conducted to identify the possible relationship between corporate social performance and financial performance (Alniacik e al. 2010). Obtained results were inconclusive. Margolis and Walsh (2007) analyzed 80 studies relating CSR activities with financial performance. They found that 53% of these studies documented a positive relationship, 24% found no significant effect, 5% showed a negative effect, and 19% produced mixed results. Although theoretical and empirical research often points to a positive relation between CSR and business competitiveness, the current literature is often missing the way to measure the CSR impact on business performance (Weber 2008). Other empirical approaches apply event studies. An event study is a tool widely used in finance to investigate the reaction of the stock market to a specific type of news or events (Capelle-Blancard and Couderc, 2008). It consists in an econometric research methodology, which aggregates mathematical economics, statistics and theory and it is commonly applied to investigate financial markets statistically relevant response to certain past or announced events, namely Information on environmental or social corporate activities. Gupta and Goldar (2005) conduct an event study to examine the impact of environmental performance of large Indian companies on their stock prices. On Corporate Sustainability Reporting 49 They applied the Ordinary Least Squares (OLS) as estimation method for the market model. This model assumes a linear relationship between the return of any security and the return of the market. They defined a standardized one-shot event by firm, so that the selected event could be associated with a statistically significant variation in the market value. Dasgupta et al. (2001) performed a similar analysis for Latin America countries, but consider multiple bad (and good) events for various firms. The traditional method for event study starts from the definition of the categories of events, fact that conditions the subsequent improvements in results. Capelle-Blancard and Couderc (2008) reversed the methodology, looking for causes from the effects already detected (ex: knowing an abnormal return, it is intended to identify the cause). They considered timevarying beta estimates they used a GARCH process to model the volatility. The authors held several investigations to assess the relative importance of different types of news in driving significant price changes in the defense industry. They concluded that most of the key drivers are the same as in other industries but he identified some special features, mainly related with geopolitical events that had relevance on the market value of defense industry firms. Assuming that chemical disasters are a major risk that influences firm’s revenues but also generates external impacts affecting the health and the environment, Capelle-Blancard and Laguna (2010) examined the stock market reaction to industrial disasters. For the period 1990– 2005 they did a collection of 64 explosions in petrochemical industry. Using the dataset, they performed two-phased econometric analyses. First, using an event-study methodology they assessed the average market value losses supported by shareholders. Secondly, they tried to identify the factors behind the fall in the value of the shares of each firm. They found that stock market reacts immediately to chemical disasters, with serious falls on stock prices within two days following the accident. A multivariate analysis suggested that losses in the first days were seriously related to the severity of the accident. Although short-horizon methods for event studies are quite reliable, long-horizon methods, despite continuous improvements, still struggle with some limitations (Kothari and Warner 2006). Some authors still consider that the event study has a short-term character, preferring the use of long-term econometric approaches at the firm level (Ziegler and Schroder 2010). Lo and Sheu (2010) applied the Blinder-Oaxaca decomposition to explain why the market value of sustainable leaders is higher, on average, than on other firms. Using a sample of U.S. S&P 500 companies from 1999 – 2002, they explained the determinants of sustainable and non-sustainable differences on firms’ valuation. The results obtained suggested that less than 40% of the difference between sustainable and non-sustainable value was explained by firm’s specific characteristics, such as operation, financial performance, industry and growth. Each one of these categories was represent by three or four variables. More than 40% of the On Corporate Sustainability Reporting 50 difference was not explained by commonly used financial valuation criteria, which leaves room for other factors to influence investors. Lo and Sheu (2010) concluded that sustainability matters for investment decision-making. Sustainability information is perceived and valued by investors and it counts as an intangible asset. However, their results suggested both the need for development of other evaluation techniques and the use of different variables. An holistic monitoring system of corporate performance demands the understanding of the drivers valued by investors, which go beyond the publicly-recognized criteria and evaluating variables commonlyused in both academics and real financial markets (Lo and Sheu 2010) Gupta and Goldar (2005) found a positive correlation between abnormal returns of firm stock prices and the level of is own environmental performance, that lead to the conclusion that financial markets could play an important role on present and future environmental management. They conducted an event study to examine the impact of environmental rating of large pulp and paper, auto, and chlorine alkali firms on their stock prices. They found that the announcement of weak environmental performance lead to negative abnormal returns while a good performance lead to positive abnormal returns. The disclosure of new information on the environmental and social performance, when affecting investor’s expectations about company’s profit, may constrain the purchase options, impacting on the share price (Gupta and Goldar 2005). Orlitzky et al. (2003) performed meta-analyses over published studies to assess the relationship between CSP and CFP. They concluded the existence of a positive and mutual link between CSP and CFP, affecting each other through a virtuous cycle: top-performing companies with better financial behavior can more easily support and afford CSP activities. In turn, CSP also helps them become a bit more successful. Corporate social responsibility is rewarding in many ways and this analysis helps to reject some notions developed by neo-classical economists whereby CSP is necessarily inconsistent with shareholder wealth maximization. However, in light of results, the authors warn to the need of a field join endeavor to improve the reliability of CSP and CFP measures (Orlitzky et al. 2003). In reverse direction some studies are mainly focused on the corporate sustainability effects on the financial performance and are generally consistent with the slack resource theory, which suggests that better financial performance leads to the availability of slack resources that provide the opportunity for firms to invest in environmental and social activities (Waddock and Graves 1997; Ullmann 1985). That means that companies with a good financial performance “have less difficulties to pay attention to stakeholder groups and to obey moral standards or can invest in new capital, which inevitably (even when not intended) leads to a better sustainability performance (e.g., Telle, 2006). Indeed, the study of Waddock and Graves (1997) shows that corporate sustainability performance is positively affected by different indicators of corporate On Corporate Sustainability Reporting 51 financial performance such as return on sales, return on equity, and return on assets.” Therefore, companies with better financial health have greater ease in investing resources on issues related to corporate sustainability. In this line, Sharfman and Fernando (2008) studied the impact of the cost of capital, as external effect influencing the environmental performance of companies. They assumed that the overall cost of capital of a firm is given by the weighted average of the cost of debt and equity capital. This approach applies only to large companies publicly traded in capital markets. They used a Capital Asset Pricing Model (CAPM), usually applied to determine a theoretically appropriate required rate of return of an asset, to estimate de cost of equity capital. Huang (2010) examined the effects of economic volatility on global sustainability using a dynamic panel data model. Panel data refers to multi-dimensional data and it may contain observations on multiple phenomena along several time periods for firms or individuals. Huang (2010) concluded that output volatility and financial market volatility exert strong negative impacts on sustainable development. Those impacts are aggravated in higher energy intensity countries and lower trade share countries. Ziegler and Schroder (2010) examined empirically the determinants of the inclusion of worldwide and European firms in sustainability indices respectively Dow Jones Sustainability World Index and Dow Jones Stoxx Sustainability Index, which claim to integrate the corporate leaders in terms of sustainability. The inclusion of firms in sustainability stocks indexes can be seen as a good indicator for corporate sustainability performance, once it is expected that selected firms present a sustainable behavior exceeding those of their competitors. However, Ziegler and Schroder (2010) argue that once sustainability performance is not standardized, the selection of measures may err for a certain amount of subjectivity. For such reason, they question the reliability of the use as an indicator of corporate sustainability integration of a particular company in a sustainability index. For their research, they used flexible panel probit data models which present the advantage of reducing the occurrence of spurious relationships and because they allow the inclusion of unobserved heterogeneity (Ziegler and Schroder 2010). Spurious correlations may occur thanks to unobserved firm characteristics. For example good management can affect both corporate sustainability and economic performance. Unobserved heterogeneity results from time invariant firm-specific random effects (ex: firm strategy constant over time) and to an autoregressive structure in the stochastic components (ex: single decision about wages) (Ziegler and Schroder 2010). The panel data model applied for Ziegler and Schroder (2010) includes unobserved heterogeneity and lagged explanatory variables, to avoid endogeneity problems that can lead to biased or inconsistent estimates. The probit models have the advantage of greater simplicity in estimation than other models with an autoregressive structure, which are more complex On Corporate Sustainability Reporting 52 3.2.4.2. Bilateral effects and Conclusions Orlitzky et al. (2003) defended that is a limited vision to consider a unilateral causal link between Corporate Social and Environmental Performance (CSRP) and Corporate Financial Performance (CFP). The authors believed that both instrumental stakeholder theory and slack resources descriptions are accurate, further the two constructs have a relationship of mutual causality. To prove that they proposed three sets of temporal associations: (a) prior Corporate Social Performance affects Corporate Financial Performance; (b) prior Corporate Financial Performance affecting subsequent Corporate Social Performance; and (c) contemporaneous (cross-sectional) associations. To conduct their investigation these authors made use of a meta-analytic review of primary quantitative studies of the CSP–CFP relationship. Psychometric meta-analysis is a sophisticated research-integration technique that quantifies the effects of theoretical and methodological deficiencies in a given line of inquiry (Orlitzky et al. 2003). The method of metaanalysis is based on a theory of data, which includes the comprehension of both several kind of errors (on sample, on measurement and on data). Meta-analysis is a technique usefully applied in many substantive areas where multiple individual studies give rise to inconclusive or conflicting results (Orlitzky et al. 2003), such as in the studies conducted to investigate the relationship between CSP and CFP. The results of Orlitzky et al. work show that there is a positive association between CSP and CFP (positive, simultaneous and bidirectional) across industries and across study contexts. Falck e Heblich (2010) studied how to interrelate the shareholder and stakeholder approach with strategic CSR. For such, they focus on the identification and classification of social trends and on the corresponding strategic CSR actions. Using a multi-stage process to identify the best CSR response to stakeholders and society expectations. In short, for some, corporate sustainability performance is an investable concept, since it may bring mutual benefits both for companies and investors. It is natural that companies with no environmental or social concerns incurred in direct or indirect losses with wealth, credibility and image, which usually lead to loss of value in financial markets, on the long run. From a financial point of view, sustainability is part of a strategic corporate context and has to do with the decisions of management and the creation of long-term value (Soppe 2009, Doane 2005). On Corporate Sustainability Reporting 53 For other, as Lydenberg9 (2009), corporate responsibility is linked to social responsible investing. He argues that financial markets were taken by short-term thinking, mainly concerned on achieving short-term profits, having disturbing consequences, such as poor asset allocation and increased volatility in financial markets. He suggests that the concept of sustainability and the practice of responsible investing may help focusing financial markets on the long run. It is expected that the short-term investors do not nurture great interest in the corporate sustainability reporting of companies. Their transactions in capital markets are designed to aim an immediate return and they generally have a speculative character. Long-term investors, with a horizon of 5 to 10 years (e.g. pension funds), tend to enhance corporate sustainability and safe value creation over time. The current practices on finance have been following, since the 70´s, the Modern Portfolio Theory (MPT), which is for some (Lydenberg 2009; Mason 2009) the paradigm that underlies the current crisis. Lydenberg (2009) criticizes the assumption that the MPT portfolio management techniques do not affect the level of market risk and returns. With this in mind the responsibilities of investors fall beyond the level of the portfolio, since their decisions affect the market and society. They defend the development of a new theory of investment, once that the MPT does not meet the economic reward of social and environmental risk. The SR could link up with this work, particularly as related to methods of accounting for assets (Lydenberg 2009). The definition of the criteria for success of investment, to guide investors beyond the profitability of their own portfolios, is urgent. Under the umbrella of responsible investment, the merit of an investment is measured both by the benefits brought to society and to the markets. Responsible investing must attend to environmental and social damages, which occur in the path of achieving profit and that should be paid through the deviation of productive resources (Lydenberg 2009). Amaeshi (2009) noticed that a current complain from investment professionals was the lack of quantified and standardized information, which complicates the analysis and commits comparisons with other companies. Most of the corporate material, typically communicated in prose style, was of limited use for investment professionals. The information, he continues, should be quantified and properly explained. Financial markets, seems to appear, extremely important agents in promoting corporate responsibility, which is materialized in a mutual relationship, as previously described. Therefore, it is important to know whether the market recognizes the sustainability efforts of companies, once it affects the resource allocation. 9 Article from S. Lydenberg included in the book: Bettignies, Henri-Claude; Lépineux, François, 2009. “Finance for a Better World - The Shift Toward Sustainability”, Palgrave Macmillan On Corporate Sustainability Reporting 54 The financial area has undoubtedly a very significant impact in promoting corporate sustainability (through the granting of credit and interest rates, as well as the appreciation of the shares) and is affected by this in a virtuous circle. Markets operate on the basis of collective intelligence using data from disperse sources. For the present research is relevant to capture the issues that affect the market, but also those that concern sustainability but are hidden behind local regulations or are kept way from public eyes. The fact that financial markets are sensitive to news about companies paves the way for a greater focus on the information provided and therefore greater control on environmental and social issues. On Corporate Sustainability Reporting 55 3.3. Monitoring and measuring sustainability The overall assessment of sustainability traditionally felt under two basic lines, the use of physical indicators or the use of economic approaches. In both cases, the attempts to understand the complex issues of sustainability have proved to be incomplete in the approach and in the results (Böhringer and Jochem, 2006; Gasparatos et al. 2008). Although a lot a research has been developed in the area of sustainable development, namely on tools and concepts, the definition and implementation of metrics is crucial for the monitoring and measuring of progress toward sustainability (Krajnc and Glavic, 2005; Singh et al. 2009). Various efforts have been performed either by academia or by international organizations to measure sustainability (Krajnc and Glavic, 2005). Most of them focus mainly on one dimension of sustainability. Very few take into account simultaneously the environmental, economic and social aspects (Singh et al 2009; Gasparatos et al. 2008; Böhringer and Jochem, 2006). Sustainability indicators aim to provide information of the environment and socioeconomic activities and about the interplay between them (Böhringer and Jochem, 2006). Indicators translate sustainability issues into quantifiable measures with the ultimate aim of helping address the key sustainability concerns (Azapagic, 2004). Gasparatos et al. (2008) reinforces that indicators have been widely used to measure, to understand and to take actions in the most diverse fields. He goes further suggesting that it is not surprisingly that indicators are subject of great interest in the research on sustainability assessment. Several frameworks suggest the use of numerous sustainability indicators, which are generally measured in very different units. However a large number of performance measures, although useful for measuring the different dimensions of sustainability, it hampers to make business decisions, to compare companies or to establish benchmarks. (Krajnc and Glavic 2005). Singh (2009), Böhringer and Jochem (2006) also defended that indicators of sustainable development should be negotiated with appropriate communities of interest, so that indicators could be selected within a coherent framework. This way, the involvement of stakeholders could ensure the integration of specific parameters on the evaluation process, either initially or over time as an interactive process. On Corporate Sustainability Reporting 62 In general, standards for sustainability reporting are still missing. The submission of information relating to sustainability and corporate performance suffers from the lack of standardization and comparability (Krajnc and Glavic 2005; Kolk 2004; Gasparatos and al 2008). Key questions regarding frameworks, measurement and empirical methods have not yet been settled. Dozens of frameworks for assessing corporate sustainability performance have been proposed, using a large amount of indicators. However, the heterogeneity of measures hinders the analyses over time and the comparisons between companies (Krajnc and Glavic 2005). By other hand, it is important to realize to what extent the indicators will be used, since their collection requires effort and resource use. It is a fact that the assessment of such a complex concept as sustainability demands the use of several indicators (Krajnc and Glavic 2005; Kolk 2004; Gasparatos and al 2008), chosen and analyzed under certain criteria to better describe such intricate systems. Accordingly, the choice of tools and indicators must be carried out in accordance with the context and settings to show (Gasparatos and al 2008). Yet, current methods to define the relevance of disclosured matters are often based on subjective judgments for each category of analyses. Paraphrasing Lyndenberg, (2010) “the process is an art more than a science”. The development of new communication approaches in conjunction with attempts to incorporate sustainability measures into strategic performance measurement systems, such as the balanced scorecard (BSC), are being performed by companies. Although, attempts to add multiple nonfinancial measures into company’s strategic measures have long been under way, the inclusion of sustainability measures is recent. Few empirical studies have investigated whether the last are incorporated and used corporate strategic decision-making and in which way sustainability measures help business managers. (Weber 2008) Several initiatives were engineered to report on sustainability issues but their application reveals difficulties concerning the determination of crucial data to report. The relevance for the core operation of the business and for the key stakeholders in the corporation should guide this selection (Lydenberg et all 2010). As the basis of reporting is crucial the clearance of main issues affecting present and future generations that companies have to disclosure. In this sphere, the core of the sustainability reporting is constituted for relevant sectorspecific key performance indicators. Business indicators should be focused on sector key sustainable issues and integrated with financial and economic indicators (Lydenberg et all 2010) On Corporate Sustainability Reporting 63 Leadership is a driver for CSR and also for dynamic organizational change (Rake and Grayson, 2009). Although authors recognize that companies learned to collect, measure and monitor the evidence and develop the business case, they failed to hardwire consistently on mind and culture of all the staff, partners and supply chain. The involvement of stakeholders on the sustainability assessment, should integrate a transparent and trustworthy process (Gasparatos et al 2008). From the literature review, can be noticed that companies and stakeholders still deal with several difficulties at the level of sustainability reporting. Reports usually results on: Companies • mainly on a voluntary basis • on different periods of time Report • issues and indicators to report • their own metrics • to assure the report by an external part or not Choose • their own criteria of materiality • their own key stakeholders • the level of reporting • the concepts used • the methodologies to collect and treat the data to include on the report Define Reports • metrics presented in absolute values • some indicators with a qualitative nature Use • Large volume of information with a high level of detail • Large volume of qualitative information • Information regarding specific time period • Different benchmarks to measure performance Provide Figure 3-7 State of sustainability reporting - companies Figure 3-8 State of sustainability reporting - reports On Corporate Sustainability Reporting 64 From the previous, stakeholders have to deal with: The main limitations on a representative and meaningful report are aggregated in three main groups (Figure 3-10). Figure 3-10 Limitations on sustainability reporting The speech above reflects the diversity of conditions and frameworks applicable to companies that result into a defragmented set of instruments for corporate information, which often do not reflect its overall performance. Heterogeneity in reporting Different values, ethics and cultural background Reporting different core activities and impacts Different measurements and metrics Stakeholders • Different ways of structuring the information • Information that looks similar but refers to different concepts • Information processed in different ways Use of • analyzing and interpreting the data presented in the report • making comparisons of results between companies • assessing performance over time • monitoring the accomplishment of objectives • assessing companies contribution for sustainability performance Difficulty in Figure 3-9 State of sustainability reporting - stakeholders On Corporate Sustainability Reporting 65 From the previous, can be also concluded that corporate disclosure of non-financial information of European companies is poor and unregulated. Even non-financial information, whose disclosure is mandatory in European countries, is not homogeneous, depending on the legal framework of each country. In European countries corporations have already the obligation to report on environmental and social issues that materiality affects the firm performance, such as green gas emissions or social report. Nevertheless, non-financial disclosure is mainly regulated at a voluntary level and it does not reveal the consistency needed for making comparisons both between companies and over time. Since lacking a framework as those used for disclosure financial information topics and aspects covered by non-financial reports are weak when used to compare different companies. Its use for stakeholder’s decision-making is quite limited. The increasing interest in non-financial information demands relevance, timeliness, comparability and consistency of the data. Figure 3-11 State of sustainability reporting - needs The development of key performance indicators (KPI´s) for corporate social responsibility emerges as a need for allowing benchmarking between companies and the analyses of the performance evolution during the time for each of them. The core interest areas are assumed as all the activities arising from the objectives and the “raison d'être” of the company, as also the impacts that arise from those activities. The relation between activities and impacts is characterized by a mutual influence. As activities affect impacts, the last ones can also influence the development of activities by imposing constraints and new targets. • Assure the availability of high quality data • Assure a comprehensive and uniform set of sustainability indicators Industry has to: On Corporate Sustainability Reporting 66 As expressed in Figure 3-12, KPI used for monitor activities and impacts, contributes to identify relevant issues that should be considered core issues, within the domain of corporate sustainability performance. Figure 3-12 Network of interrelationships for KPI´s Considering as example a power plant, for electricity generation, with gaseous emissions. The characteristics and the volume of those emissions, can affect the activities. A legal setting or community intervention can frame the imposition of changes on production processes or installation of equipment for environmental protection. Thus both, activities and impacts, should be considered on KPI´s setting. By other hand the monitoring output can induce the need to improve the activities and impacts, as result of the redefinition of goals or benchmarking activities. Specific performance indicators are justified, once different industries have to deal with different activities, processes and impacts. On the other hand, several groups of stakeholders have different expectations and uses for non-financial disclosure. The above considerations raise the following questions: • What must constitute the core of a SR? What must be identified as critical to be measured and reported in a commonly understood language? • How can this report be structured to contribute to the effective promotion of corporate sustainability, increasing these firms ability to survive in the long term? • How to identify performance indicators that allow to measure, beyond the past performance, the adequacy to the critical trends that constrain the path of corporate actions? Which are the indicators reflecting the long-term sustainability issues for and from business? Core Activities Impacts KPI´s Core Activities Impacts KPI´s On Corporate Sustainability Reporting 67 The objective of the present research is to contribute to increased conciseness, transparency and representativeness of the RS. For that purpose the main contribution of this work is the identification of a relevant set of Sustainability Key Performance Indicators (SKPI´s) for the energy sector, usable for several stakeholder groups. It is also expected to provide better understanding on the relation between corporate sustainability and financial markets. From the previous, we assume that corporate contribution for sustainability has to meet the economic, environmental and economic dimensions, but also a financial dimension. In this study, the economic dimension is connoted with the company’s use of resources, in order to meet its needs and carrying out its activities. Economic dimension is concerned with operational and management aspects, while the financial dimension is labeled with the issues of access to financial markets and the valuation of the company for shareholders and investors. The literature has shown a clear multilateral relationship between all the mentioned dimensions, while highlighting the role that balanced interactions may play in building and enhancing long term companies survival. The vision of corporate sustainability applied in the present work meets four basic lines: the financial recognition in the short and long term, the economic efficiency, the social improvement and the environmental neutrality. Neutrality is understood as the internalization of the environmental and social externalities and the compensation for the negative impacts. Building a sustainable business respects the assumption of corporate responsibility in the short term, while meeting the definition of strategic guidelines for the future. The same way is here argued that sustainability indicators should be constructed from the short term KPI CSR indicators (Figure 3-13). An integrated view over time coupled with a holistic attitude in the short term, will allow the identification of sustainability indicators relevant for a particular sector or industry. Sustainable Business CSR period 1 CSR period 2 CSR period 3 CSR period 4 CSR period nCSR period 5 (....) KPI CSR indicators Period 1 KPI CSR indicators Period 2 KPI CSR indicators Period 3 KPI CSR indicators Period 4 KPI CSR indicators Period 5 KPI CSR indicators Period n SKPI (sustainability key performance indicators) Figure 3-13 Conceptual source of SKPI On Corporate Sustainability Reporting 68 On Corporate Sustainability Reporting 69 4. Methodology 4.1. Introduction The purpose of this research is to identify a limited and representative set of key sustainability performance indicators (SKPI) from the vast series used in company’s reports (sustainability reports (SR) and other forms of non-financial reports). It is expected that it may contribute for greater rigor, relevance and comparability of these reports and to understand the actual and potential contributions for the promotion of sustainable development at corporate level. This issue leads to the question of measuring and communicating corporate contribution for sustainability (corporate sustainability) in a transparent, meaningful and comparable way. In this perspective, the current SR inefficiency seems to result mainly from failures on the disclosure of relevant information, but also from the market small capacity to recognize the corporate sustainable behavior. Stakeholders apprehension of corporate sustainability is based on disperse analysis and methodologies developed by several agents, which may provide conflicting or biased results. Moreover, the information provided by corporations fails from uniformity of criteria in regard both to the collection of data and to the submission of results. A real understanding of the performance for sustainability requires standardize, comparable, transparent, verifiable and quantifiable information. The indicators used to illustrate the performance of companies, often lack consistency, relevance and representativeness. So, the perceived importance of corporate contribution for sustainability is leading the current work. The authors (Revilla et all. 2003) found that the improvement quality of data provided by companies should be based on common supports for information gathering, adapted to the firm’s practices of data collecting and processing. A good relationship with industry, taking into account their information requirements and the aims of the report, also contributes to the delivery of high quality data. They also discovered that companies were interested in accessing specific statistical data, that contribute to track its own position relating to their competitors in the market. In this field, several frameworks have been proposing a wide range of pertinent indicators. Yet, a very large collection of indicators hampers the analysis of information, difficult the performance understanding and hinders the comparison between companies. On Corporate Sustainability Reporting 70 The use of a not very extensive set of representative indicators of sustainability performance is relevant to understand and to relativize the performance of each company regarding the industry. Given that each sector has specific characteristics that influence the definition of relevant indicators, this research focuses on the production and commercialization of electric energy (Ziegler et al. 2011). To handle this problem it was decided to use a Factor Analysis technique (FA), since it allows the identification of the most representative indicators from a vast available set and it provides the summarization of the information in smaller groups of components. As far the survey of literature allowed to conclude, the use of factor analysis is quite innovative in addressing the corporate sustainability issues, especially in the case of nondichotomous variables use. In the present study the technique will be applied to non-dichotomous variables, collected from European companies in the energy sector. The analysis was performed upon a database constructed by the author using: publicly available data from company reports and websites, industry reports and other open access sources. The author assumes that the indicators presented in GRI (2006) framework are conceptually well suited to the reality of the studied sector. Yet, they still present some disadvantages such as: qualitative nature, difficulty in collection, high number, lack of uniformity both in collection, processing and presentation, as well as uniformity in the definition of metrics. The definition of SKPI will contribute to the clear the set and reports easier reading. Most available studies suggest a set of indicators, from selection methodologies designed by the authors. Nevertheless, it is arguable that these methods may present problems of subjectivity, both in defining the selection criteria and in the allocation of scores, which may reflect research personal positions towards the case under consideration and therefore limiting the results. This work aims to circumvent this subjectivity embedded in research through the investigator intervention. In this line, the indicators incorporated into AF analysis were those presenting the minimum observations required for inclusion. The present chapter refers, besides the current introduction, a brief survey of the literature on analytical practices, the methodological proposal for data collection, sample determination and indicators selection, as also the presentation and justification of selected multivariate methods. On Corporate Sustainability Reporting 71 4.2. Literature review over applicable methods Several authors have been addressing the questions of the adequacy and representation of KPI. Literature has shown that the analysis of corporate performance is being skewed and it favors a certain angle of vision, which is detriment for the rest. Economic and financial performance takes major role in academic research. The analyses of corporate sustainability can be performed on a basis of “best in class approach” using the most sustainable corporation of each sector, or “industry based approach” using information from the entire sector of activity or from a representative sample. Krajnc and Glavic (2005) proposed a model to reduce the number of corporate sustainability indicators, aggregating them into a composite sustainable development index. The procedure of calculating the index is divided into the following parts: selecting, grouping, weighting, judging, normalizing indicators, calculating sub-indices and combining them into the index. They illustrated the proposed model with a case study, designed to compare the sustainability performance of two companies from the same sector. Zhou et al. (2006) performed a comparative study between three of the most common techniques of aggregation (linear, geometric and weighted). The results showed that the geometric aggregation technique provided the lowest loss of information. Rahman e Post (2011) applied a hierarchical factor analysis to dichotomous variables to identify those measures of environmental and social corporate responsibility “exclusively valid, reliable, and transparent”. The hierarchical factor analysis consisted, in a two steps procedure, beginning with a factor analyses of the dichotomous variables to create sub-factors, followed in a second stage, with factor analyses of the scores of the sub-factors. The result was a CSR measure, which included 22 indicators grouped into 3 categories “Governance Data (5 items), Credibility Data (11 items), and Environmental Performance Indicators (6 items)”. Within each obtained category, the items were to test for internal consistency and reliability using a Cronbach alpha test. A hierarchical factor analysis it is best suited to dichotomous variables than a single factor analysis. As in this study, most of the items were dichotomous variables; simple factor analysis of dichotomous variables tends to yield many and often misleading factors. Confirmatory factor analysis was later used to assess the validity of the three scales (Rahman and Post 2011). GRI framework was used as reference for the structuring of indicators (Rahman and Post 2011; Clarkson et al. 2008). On Corporate Sustainability Reporting 78 Raw data is collected using GRI (2006) framework and aggregated in absolute indicators. Using the GRI (2006) framework as reference and using publicly available information, are collected as much indicators as possible. In the present work they are aggregated in four main categories: environment, social, economic and financial. Those who meet the minimum number of observations are used to estimate relative indicators. Expected characteristics of relative indicators: • Realistic and relevant (theoretical justification) for relevant issues • Transparent (theoretical justification) on the collection and treatment of data • Relative (as far as possible, indicators selected are made relative, for example according to the productive capacity, the turnover or the number of employees, in order to allow for comparisons between companies. Only occasionally, in very concrete and duly justified situations, indicators are used in absolute value. • Independent (using statistical tools to determine the correlation between indicators) • Relevant on the short and long term • Easy to get (data) and calculated • Representing the interests of various stakeholders (using the directions of the GRI and industry) • Smallest number (a giant list of indicators is not applicable) The use of many indicators in great detail does not allow a global view of business performance because it induces the dispersion of the analysis and hinders the interpretation. On Corporate Sustainability Reporting 79 4.6. Factor analyses Currently there has been a growing availability of data referring the most diverse subjects. However, increasing information demands powerful tools for ordering, processing and interpreting, in order to create useful knowledge for decision making. Multivariate statistical techniques go beyond simple statistics, allowing the simultaneous analysis of multiple measurements on individuals or objects of the research. Its main character lies in the multiple statistical variables under study, which are assumed to be random and interrelated in such way that their individual effects can only be interpreted jointly (Hair et al 2009 (b)). Multivariate techniques are applied either from two to thousands variables. Factor analysis (FA) technique fits into the larger context of multivariate statistical techniques, which have been increasingly used for the study of complex, multidimensional relationships among variables (Hair 2009). It allows the management and organization of hundreds or thousands of variables. It plays a leading role among multivariate techniques, providing summarization and data reduction, paving the way for the application of other techniques. FA technique is particularly suited for the purpose of this thesis once the last involves the use of a large number of variables relating to environmental, economic, social and financial issues. A very vast set of variables, although providing large information usually ends up presenting a difficult and complex interpretation by users. However, some variables are naturally associated presenting similar behaviors. For example, it is expected that increases in production’s capacity are accompanied by a revenue variation in the same direction. The overlapping of some variables is much likely to occur among a large set of variables, than between few variables, which may remain distinctive and different. This way, a large number of variables that expresses a particular reality, can be replaced by a smaller group, which maximizes the explanation of the entire data set. Having this objective in mind, FA is applied in this study. From the vast set of information provided by the sample companies, it aims to identify the variables most representative of corporate contribution for sustainability. From a wide range of reported indicators, FA technique allow to extract those most representative, as also to rank the factors most relevant to the sustainability analysis (each factor integrates multiple indicators). The analysis also allows eliminating indicators that measure the same things and those who have less relevance, with a minimum loss of information for the user. On Corporate Sustainability Reporting 80 4.6.1. FA presentation Factor analysis techniques allow to understand the structure and interrelationships of a wide number of variables addressed in multivariate techniques, in order to determine underlying patterns, that may support the condensation of large amount of information into a smaller set of factors or components (Hair 2009). It has been widely used in business related research. The technique identifies the correlation between variables and it comprises the most highly correlated in groups, called factors. A factor, in the present sense, is a linear combination of the original variables, highly intercorrelated, constructed in line with underlying relationships (structure) between them. Each factor is assumed to represent a specific dimension within the data. It may also express a concept that is not adequately represented by a single measure. Each dimension has a meaning as a collective whole, if in presence of a conceptual basis for understanding the relationship between variables. However, FA results (factors) are dependent on the quality and consistency of input data. The use of an indiscriminate set of variables without any conceptual coherence is likely to generate poor results. A primary requirement for the selection of variables is that correlation value can be calculated between all of them. Such is not difficult when dealing with metric variables. However, if some no metric variable has to be included in the analysis, it should be converted into a dummy variable (coded 0 or 1). Literature suggests a minimum of 50 observations, subjected to the rule of at least 10 observations for each variable (Hair 2009). The issues related to the design of AF, such as sample size, selection of the variables to consider and conceptual grounds are very important to understand the structure of the data. The structure revealed in the analysis depends on the researcher's early decisions on these matters. FA primary concerns focus more on the character and composition of the variables included in the analysis than on their statistical qualities. It is assumed that an underlying structure does exist among variables. This technique does not apply any concepts of explained variables or explanatory variables, as it happens in dependence techniques. All variables without distinction are used to maximize the understanding of the global variable set and not to estimate a dependent variable. On Corporate Sustainability Reporting 81 The application of FA provides two major outcomes, which are data summarization and data reduction. Data summarization deals with structure of data and the underlying dimensions that allow reducing the data to a set of factors expressing concepts. Factors are estimated as also the contribution of each variable for the factor (loading). Data reduction goes further and it derives a factor score for each dimension, allowing the creation of a composite measure or the selection of a small set of variables to replace the larger original one (Hair 2009). 4.6.2. Designing FA Whether used to summarize or to reduce, the technique requires a thoughtful selection of the variables to use, accordingly to the results expected. An FA always produces factors that reflect the conceptual foundations that underlie the selection of variables to be used. Using an wholesale set of variables, with lean conceptual coherence, will probably produce poor outcomes, once the technique can not determine whether the data is suitable, but just to determine the correlation among variables. The previous judgment of variables is also important to achieve the completeness of the factor. For example, a variable that refers to air emissions from a company with processes that consume large amounts of fossil fuels may be relevant to the definition of a factor that expresses the local environmental impact of this unit. The literature suggests the definition of key variables that may reflect closely the hypothesis proposed for the underlying factors (Hair 2009). The design issues are very important to understand the structure of data. The structure revealed in the analysis strongly depends on the decisions of the researcher namely those relating to variables selection and sample size. The nature and composition of the variables included is as important as their statistical qualities and the investigator has the responsibility to ensure that the observable patterns are conceptually valid and suitable to the study. In addition to the conceptual requirements for FA, generic design requirements are as follow (Hair 2009): • Use of metric variables (although it can be used a small group of dummy variables) • At least 4 variables per factor expected • At least five observations per variable (hopefully 10) • Some degree of multicollinearity among variables is desirable, once representative factors demand variables intercorrelated. On Corporate Sustainability Reporting 82 4.6.3. Principal component analysis (PCA) versus Common factors analysis (CFA) Factor analysis may be implemented via two different methods, which are Principal Component Analysis (PCA) and Common Factors Analysis (CFA) (Hair 2009). Both PCA and CFA intend to reduce the dimensionality of a set of data (extracting factors), but the two techniques take different approaches to achieve this result (Hair 2009, Jolliffe 2002). The literature and some software packages propose several e sometimes confusing designations for both methods. The present study used the definitions proposed by Hair (2009) including: • In PCA it is assumed that all variability in an item should be used in the analysis. Factors are based on the total variance13 (common, unique and error variance). The method is primarily used to summarize most of the original information (correlated variables) into a minimum number of factors (principal components), which account for the maximum portion of total variance of the original set of variables. The first principal component accounts for as much of the variability in the data as possible, and each succeeding component accounts for as much of the remaining variability as possible. • In CFA it is used only the common variability of an item with the other items. Factors are based on the common variance, which excludes specific variance and error variance. The method is mostly applied to identify underlying dimensions reflecting the communalities among variables. As a variable is more correlated with other variables, their common variance increases. In FA variables are grouped in factors based in their shared variance. The selection of one method or another is based on knowledge of the characteristics of relationships between variables and the objectives to achieve with FA. In most cases, these two methods usually yield very similar results, mainly if the number of variables exceeds 30 or the communalities exceed 0,6 for most variables (Hair 2009, Gorsuch 1983). However, principal components analysis is often preferred as a method for data reduction, while principal factors analysis is often preferred when the goal of the analysis is to detect structure. CFA, having more restrictive assumptions and excluding part of variance, presents itself as less suitable for this research. 13 Variance is a value (i.e. the square of the standard deviation) that represents the total amount of dispersion of values for a single variable about is mean (Hair 2009). On Corporate Sustainability Reporting 83 5. Method Implementation 5.1. Overview In the following sections the criteria for sample selection is explained and the selection of companies displayed. A set of generic relevant issues for the industry is presented. These issues are decomposed in themes applying the recognized framework Global Reporting Initiative (GRI). For each theme several indicators are proposed. Hereafter the criteria for selection of indicators is defined and applied, which lead to the first list of indicators to be used in this work. Finally, the data needed for indicators is collected and treated so that they can be implemented the established multivariate techniques. The methodology is applied accordingly to section 4 Methodology and to Figure 5-1 Methodology. The present chapter begins with a brief description from the European energy context, and proceeds with the sample selection. From the universe of energy companies, the sample is selected according to the criteria established in section 5.2. The exclusion factor is the inexistence of non-financial public data, voluntary disclosed by the company. A short characterization of the main findings within the sample is then performed, to provide a better understanding of European electric utilities. Thereafter, based on reports and frameworks, is performed an analyses of the most critical issues for the sector. This analysis, conducted at European level, allowed the identification of a vast set of indicators that could reflect the environmental, social, economic and environmental behavior of electric companies. This large number of indicators, defined to reflect the critical issues for the sector, was later reduced to a selected set, influenced by the data availability for most of the sample. Although, there is some systematized information available for national and local level, at corporate level is noted a great lack of data. The sources consulted for the collection of data were mainly, the financial and non-financial reports disclosured by companies. The quality control of information disclosed is, in most cases, assured by national authorities to which these data must be reported. Based on available indicators, which are mostly expressed in absolute values, a set of relevant relative indicators is then proposed. On Corporate Sustainability Reporting 84 Some descriptive statistics are performed over this selection, in order to assess, from an operational standpoint, the interest of the relative indicators for the objectives of the research. Multivariate statistical techniques, Factor Analysis (FA), were then applied to the information collected, to identify the most relevant indicators, as also the similarity between the sample individuals. The information obtained was then presented and discussed. On Corporate Sustainability Reporting 85 Data collection Introduction to - KPI for Energy industry Selection of the sample Relevant issues for the industry Relevant indicators 1st Selection of indicators Construction of relative indicators Framework: GRI Concepts: ISO 14000 and ISO 26000 Generic criteria 2 nd Selection of indicators Specific criteria Factor Analysis (FA) FA - 1st selection FA - 2 nd selection Construction of an index Economic Social environmental Financial Publicly available sources Presentation of results. Interpretation and discussion Example: Financial Environmental Social Economic Defined criteria Higher contributions in Europe and headquarter country Generic criteria; Reports and frameworks Relevant issue Independent Regulated Quantitative Availability for the sample Theoretical ground Refinement Figure 5-1 Methodology On Corporate Sustainability Reporting 86 5.2. Sample This section refers to a brief characterization of the European energy sector, the process description of sample selection and a characterization of the same. 5.2.1. European Energy Scenario During the twentieth century, electricity companies grew in national markets. Authentic giants, electric companies strongly dominated their home markets and usually integrated the entirely electricity and gas value chain (Soares and Sarmento 2010). Aware of the risks inherent to the situation, the European Union institutions proposed a sector restructuring which relied on three main concepts: liberalization, integration and unbundling. As result of European directives and national legislation, the profile of most European utilities has fully changed. Liberalization process was assumed as main contribute to the rejuvenation of energy sector, once market participants would get better prepared to adapt to rapid economic and environmental changes in the energy sector and, mainly, to meet the specific climate change challenges (COM (2009) 115 final). As a result, on 2007, almost EU Member States had their electricity and gas market 100% open to competition, with exception made to Bulgaria, Cyprus and Estonia (SEC (2009) 287). However, the weight of the largest generator in its home country is highly variable. The ten largest producers in twenty tree Member States still control more than 70% of national production capacity. In countries like France, Estonia, Cyprus and Malta, a single agent is responsible for more than 75% of the total electricity generation in the market. A prerequisite for integrate European electricity and gas markets is that national markets were properly connected and that those interconnections were efficiently used. The resulting increase in border trade, helped to moderate the market power and, as markets become more competitive, to benefit consumers with competitive prices and services (COM (2009) 115 final). Presently, European energy markets are increasingly integrated and energy networks diversified but integrated. On the world stage, the EU represents approximately 15% of primary energy consumption, being exceeded only by the USA and China. This way, EU represents one of the most important players on the energy markets worldwide (DG TREN 2010). On Corporate Sustainability Reporting 87 The analyses of Gross Inland Consumption (2007)14 (Table 5.1), shows a strong demand for oil and gas, however still presenting a strong value on solid fuels (hard coal and lignite). EU27 still setting presents a strong presence of fossil fuels, which dominate energy mix representing 78% from gross inland consumption. Low-carbon energy sources (nuclear and renewable) represent 22% from gross inland consumption, relating to 2007 data. Table 5.1 Gross Inland Consumption Fuel Shares in % (2007) In Mtoe All Products Solids Oil Gas Nuclear Hydro Biomass Other EU-27 ** 100,0 18,3 36,4 23,9 13,4 1,5 5,4 1,1 Source: OECD; ** Source: Eurostat, May 2009 The power generation represents 71,3% from the use of solid fuels and 31,9% from gas natural use, both on EU-27. From all the fuels used in EU, about 53% are imported (Eurostat 2009). The current EU energy scenario is characterized by a strong external dependency, with an energy system heavily dependent on primary sources (Eurostat 2009). Consequently, the prices of gas and electricity on EU markets are highly sensitive to oil prices developments in international markets, for two main reasons. First, the oil price is used as a reference for long term price agreements on gas supply. Second, a large proportion of power production technologies still rely on natural gas and petroleum as raw material. This means a strong dependence on resources not endogenous, non-renewable, with strong impact in terms of emission of greenhouse gases. Before the situation described, the use of an entire range of mixed power generation technologies is crucial to ensure security of supply and to reach equilibrium among renewable energy sources (RES), which may present an intermittent character and flexible back-up capacity (Eurelectric 2010). Although the electricity industry is investing significantly in RES (renewable energy sources), the installed production capacity for wind, geothermal and hydro, reached 25% of total installed capacity, in 2007. Most investments in RES are supported by electricity industry, which is taking the challenger to diversify and encourage renewable based electricity production (Eurelectric 2010). 14 Gross inland consumption is the quantity of energy consumed within the borders of a country. It is calculated using the following formula: primary production + recovered products + imports + stock changes - exports - bunkers (i.e. quantities supplied to sea-going ships) (DG TREN 2010) On Corporate Sustainability Reporting 94 5.2.3. Sample selection The population subject to the study is composed by the European utilities engaged mainly in electricity production, but also in other activities such as gas and electricity transport; gas, electricity and heat distribution; oil and gas exploration and production; sales and wholesales of gas and electricity. The first selection aggregated the companies with higher representation at national level. An attempt was made to get a heterogeneous sample in terms of size, structure of shareholders, business areas and territorial coverage, which was representative of the diversity of European energy business community. Companies without the non-financial information published were excluded. Other exclusions were due to factors such as poor quantified data on non-financial published reports or the recent company integration within a group. In this last case, information on the company is usually reported in the group-consolidated report. However, some companies recently integrated within an economic group still present independent non-financial reports referring to their own activities. In these specific cases, companies were included in the sample. The companies founded in this position are: * Electrabel is a subsidiary of GDF Suez since 2009. Electrabel operates at the Benelux countries. It publishes an integrated report, applied only to Belgium, providing great availability of figures referring to electricity and natural gas activities. * EnBW Energie Baden-Wurttemberg AG (EnBW) is a subsidiary of EDF group in 45%. EnBW integrates several companies benefiting from a vertical integration for gas and electricity. EnBW is a ENTSO E member once it provides electricity transmission at regional level. Some EnBW data appears in the report of the group EDF. In 2011 EnBW released an integrated report. There are indications of a possible share sale of EnBW by EDF. * Endesa is participated by ENEL group in more than 90%. Endesa published a separate sustainability report for the year 2010. The sustainability issues are also mentioned in the 2010 Annual Report concerning the activities of electricity and gas. * International Power PLC, which integrates the activities of electricity and gas, was acquired in 70% by GDF Suez Group. * Nuon was participated in 50% from the group Vattenfall, in 2009. Vattenfall´s participation should increase to 100% over the next five years. Nuon published an independent CSR report from 2002 to 2009, referring the activities of electricity, gas, and heat. The CSR Report for 2006 and 2007 are not available in English. Due to the constraints associated with unbundling, Nuon separated the transportation segment in 2009, handed over to the company Alliander. On Corporate Sustainability Reporting 95 Transmission System Operators (TSOs) were also excluded. They are main intervenient in electricity trading, once are responsible for the wholesale transmission of electricity at high voltage networks. Although they usually hold a regional or national monopoly, they behave independently from generation and supply interests. According to non-discriminatory and clear rules, they allow electricity market players such as power companies, traders, suppliers, distributors and customers, to access the high voltage electricity grid (www.entsoe.eu/). The European Network of Transmission System Operators for Electricity (ENTSOE) includes 41 members. Most companies are operating natural monopolies, under tight regulation, with a national or regional scope. A preliminary analysis on their non-financial reporting has shown that presented information was manly bending over network operation data. Other non-financial information was hardly accessible. For these reasons and because the impacts of electricity transmission have a narrower extent when compared with power generation, these companies were excluded from the sample. Table 5.3 Generation utilities Name Headquarter Installed generation capacity (MW) Share of renewables in electricity generation Revenue (106 Euros) Employees Share of Public Ownership Acciona Spain 7 587 97,26% 6 263 31 687 0,00% BKW FMB Energy Ltd. Switzerland 2 532 37,24% 2 586 2 914 52.54% Centrica UK 4 672 1,50% 25 114 34 969 0,00% CEZ GROUP Czech Republic 15 018 3,68% 7 954 32 627 69,78% Dansk Olie og Naturgas A/S Denmark 6 654 19,80% 7 331 5 874 75,00% Drax UK 4 000 0,00% 1 887 1 150 0,00% Edison Italia 12 586 0,00% 9 685 3 939 0,00% Eesti Estonia n.a. 0,00% 796 2 608 100,00% Electrabel Belgium 11 233 3,13% n.a. 7 213 0,00% EDP Energias de Portugal SA Portugal 21 990 64,43% 14 171 12 096 25,00% Electricite de France SA France 140 100 1,65% 65 200 158 842 84,48% Electricity Supply Board Ireland 5 600 0,00% 2 740 6 980 95,00% EnBW Energie Baden-Wür AG Germany 15 489 10,50% 17 509 20 952 46,55% Endesa SA Spain 40 141 35,48% 31 177 24 732 0,00% Eneco Netherlands 2 200 44,00% 4 922 6 545 100,00% Enel Societa per Azioni Italy 97 281 31,74% 73 377 78 313 31,20% EON AG Germany 68 475 10,00% 92 863 85 105 (*) ESSENT Netherlands 4 048 12,10% 6 120 5 872 0,00% EVN Austria 1 787 39,02% 2 752 8 536 51,00% Fortum Corporation Finland 14 113 41,28% 6 296 10 585 50,76% Gas Natural Fenosa SA Spain 17 305 17,79% 19 919 18 778 0,00% Hafslund Norway NA 100,00% 2 018 1 123 53,73% Iberdrola SA Spain 44 991 30,12% 32 926 29 641 0,00% International Power PLC UK 70 196 0,00% 3 745 3 520 0,15% NUON Netherlands 3 645 8,44% 5 458 2 750 51,00% Rwe AG Germany 52 214 3,95% 47 741 70 856 (**) 5,1% Scottish Southern Energy PLC UK 11 330 15,71% 25 097 20 177 0,00% Statkraft Norway 16 010 88,50% 3 680 3 301 100,00% Vattenfall AB Sweden 39 923 22,72% 23 725 40 363 100,00% Verbund AG Austria 8 638 81,88% 3 308 3 096 51,00% (Data referring to 31 December 2010) Legend: NA - data not available (*) Information disclosured did not revealed the direct involvement of public entities ; (**) Treasury shares On Corporate Sustainability Reporting 96 In the current European setting it is difficult to identify energy sector companies engaged in a single key activity, once they generally present a vertical integration of business, which in many cases include those from extraction of resources to product delivery to the customer, through processing, distribution and provision of support services. Alongside with vertical integration has been registered a strong trend towards a horizontal integration in the sector via the creation of partnerships and / or acquisition within the same market / sector, both seeking an increase in size (market share) and taking advantage of possible savings of scale. Only 27% of the sample is devoted exclusively to activities related to production, trading or distribution of electricity, eventually associated with the production and distribution of heat (Figure 5-2). The remaining 73% comprise in general businesses of marketing, transportation and distribution of natural gas, and on a smaller scale the extraction of fossil fuels, the environmental services, the construction and engineering activities, as also, water supply, wastewater treatment and waste management services. Occasionally sample companies may integrated telecommunications services (e.g., EVN, Hafslund and Scottish and Southern Energy). About 40% (see Figure 5-3) of the sampled companies develop their activities in other continents beyond Europe, with a notorious participation in Latin American countries, especially by companies based in Italy, Spain and Portugal, which play a key role in the expansion of intercontinental energy businesses. Companies based in the countries of northern and central Europe show a greater tendency for internationalization within Europe, expanding its business into neighboring countries. There is still a non-negligible investment in electricity production in the U.S., particularly in the renewable sector, which also receives some contribution from the UK companies besides the southern Europe companies. 27% 73% Only electricity related business Yes No 40% 60% Multicontinental activities Yes No Figure 5-2 Business diversification Figure 5-3 Geographical dispersion On Corporate Sustainability Reporting 97 The selected sample comprises companies with diverse legal forms and ownership. The share of public shareholding is still relevant in the broader sample (Figure 5-4). By public ownership is perceived the participation in company’s capital of the state or other public entities such as central, regional or local public authorities. Relating to 2010, about 20% of companies show a public participation of more than 80% and 47% of the sample presents a public contribution higher than 50%. These holdings are concentrated in Northern and Central Europe, on the ground that the energy business is considered a strategic investment and a structuring asset for the country, and it should be safeguarded from foreign interests. The countries from Southern Europe and the United Kingdom, have been withdrawing public participation in the capital of their energy firms, leaving the energy business increasingly handed over to the private initiative under the supervision of regulatory authorities. Energy companies play a very important role in society since, besides the products and services they provide, they are also responsible for creating a large number of jobs. In 2010, 50% of the sampled companies responded individually for more than 10,000 jobs each. A single company is responsible for over 100,000 jobs. About 27% of the sample is responsible for ensuring between 10,000 and 50,000 jobs. These numbers reveal a particular responsibility from the industry towards society (Figure 5-5). As previously mentioned, the production of electricity has an important impact on the level of emission of greenhouse gases and on the consumption of natural resources. The use of renewable energy sources has been promoted as a bid to help minimize these effects and to reduce the negative contribution of electricity production in environmental terms. 20% 27% 10% 43% Share of Public Ownership (SPO) 80%<SCO 50%<SCO=<80% 20%<SCO=<50% SCO=<20% Figure 5-4 Share of public ownership (2010) 3% 10% 27% 10% 50% Number of employees (NE) 100.000<NE 50.000<NE=<100.000 20.000<NE=<50.000 10.000<NE=<20.001 NE=<10.000 Figure 5-5 Number of Employees (2010) On Corporate Sustainability Reporting 98 However, beyond all the efforts made at EU level to promote the renewable energies, in 2010, 33% of the sampled companies still produce less than 5% of its electricity using renewable energy sources (Figure 5-6). The sample comprises the largest and most representative producers of electricity in Europe and 60% of them still use less than 20% of renewable sources in electricity production. Only 10% of the sampled companies produce over 80% of its electricity from renewable sources. In late 2010, about 70% of the sampled companies presented an installed capacity under 20.000 MW, from which more than half with less than 10,000 MW. The analysis of Table 5.3 allows to detect that companies having above 30% shares of renewables in their energy mix are 55% of companies with installed capacity less than 20,000 MW and from these 66% with an installed capacity less than 10,000 MW. The production with the use of renewable sources is more valued in smaller companies. However, the same table reveals that all larger companies with shares of renewable higher than 30%, are concentrated in southern Europe. Portugal, Spain and Italy lead the investment in renewable sources in terms of large-scale production, which might indicate a closer alignment of corporate strategies with the global environmental concerns. 10% 3% 27% 27% 33% Share of renewables in electricty generation (SREG) 80%<SREG 50%<SREG=<80% 5%<SREG=<20% 20%<SREG=<50% SREG=<5% Figure 5-6 Share of renewables in electricity generation (2010) 4% 14% 14% 29% 39% Installed generation capacity (IGC) (in MW) 100.000<IGC 50.000<IGC=<100.000 20.000<IGC=<50.000 10.000<IGC=<20.000 IGC=<10.000 Figure 5-7 Installed generation capacity (2010) On Corporate Sustainability Reporting 99 The integration of a company into a CSR or sustainability index necessarily entails an external evaluation. Non-financial reports usually refers the registration of the company on sustainability or corporate responsibility indexes (usually DJSI (Dow Jones Sustainability Index) or FTSE4Good Sustainability). This variable can also work as a proxy for the integration of sustainability funds. In fact, companies presented into a index are usually called to compose CSR or sustainability funds. Regarding the recognition of performance in terms of sustainability (Figure 5-8), 47% of companies are listed on indexes of sustainability or CSR (mainly from FTSE4Good or Dow Jones). Firms in Northern Europe frequently comprised in the index Infogrok, which as a very generalist character (not specifically relaying to sustainability issues) and includes approximately 40,000 companies. Infrogrok was not considered in the analysis. The reporting of non-financial information is being increasingly integrated into firm’s annual reports. In 2010, 53% of sampled companies achieve some sort of financial and non-financial report integration (Figure 5-9). Interestingly, in addition to the disclosure of integrated information, many companies continue to publish separate books with non-financial information, which indicates a visible concern to adjust the reporting profile to different stakeholders needs and expectations. The GRI (2006) is the framework mostly used to normalize the information for non-financial report. 77% of the sample uses the GRI to structure and collect information to be reported. Although not all companies choose to register their reports on the GRI organization. 47% 53% Sustainability index Yes No Figure 5-8 Sustainability index 53% 47% Integrated report in 2010 Yes No Figure 5-9 Report integration 77% 23% GRI framework Yes No Figure 5-10 GRI use On Corporate Sustainability Reporting 100 5.3. Relevant indicators Currently a wide range of frameworks provides guidelines for the presentation of non - financial information of companies, which can manifest itself in various forms (financial reports, annual sustainability of corporate responsibility, citizenship, governance, among others). Simultaneously, national law and European regulation require the annual submission of specific information of enterprises, namely those relating to tax, employment, occupational safety and some environmental issues. All this information provides the calculation of a wide range of indicators, within a scenario seemingly defragmented and raises the following questions: • To what extent these indicators reflect the company's real contribution for sustainability? • To what extent a broad set of indicators scatters attention, evading the issues most relevant? • To what extent the indicators overlap, presenting similar information? • To what extent the legislative and cultural framework conditions companies disclosured information leading to the privilege of some indicators at the expense of other? In this context, it is important to define a restricted set of representative indicators, universal, readily available, transparent and relevant for stakeholders understanding of the contribution of a company for sustainability. Yet, none of the metrics and tools previously presented seems to be capable of assessing the progress towards sustainability in a holistic manner. However, the concepts of corporate responsibility (CR) and sustainability still suffer from lack of coherence, consistency and widespread acceptance (Hediger 2010). In relation to those concepts adopted in this thesis, should be clarified that the interpretations adopted are as follows: • CSR is associated with the assumption of responsibilities arising taken in the sphere of action of a company before its various stakeholders (customers, suppliers, shareholders, employees, consumers, public authorities and others). • The concept of sustainability when applied to business is viewed from two perspectives interconnected and interdependent. On Corporate Sustainability Reporting 101 • An internal perspective, referring to the company's ability to survive in the long term. • An external perspective, referring to company's contribution to the sustainability of the planet. • If on one hand, the internal sustainability depends on understanding the present, on the apprehension of the trends that are emerging for the future and on defining the appropriate strategies, by other hand, internal sustainability conditions and is largely conditioned by the external context. Both perspectives are necessarily intertwined In this context, the growing concern for CSR and sustainability in business is due to: • Acceptance of a systemic and interactive view, whereby companies integrate a web of relationships that they, as economic agents, influence but they are inversely conditioned by the context in which they move. • Perception of the dual role of the companies, on one hand as consumers of resources and generators of pollution, but on the other, as key elements for the construction of collective welfare and therefore essential agents for the sustainability of the planet. • Perception of a crisis not only financial, but also social and environmental, resulting in climate change, population growth and resource scarcity (energy, natural resources, water, land access). Given the above, the present work assumes that (see Figure 5-11): • Each company interactions and activities fall necessarily within one of the following dimensions: environmental, social, economic and financial. • Corporate sustainability is not only taken in consideration as the survivability of a company in the long run, but particularly from the perspective of business contribution for the sustainability of the planet. On Corporate Sustainability Reporting 102 Figure 5-11 Dimensions of corporate contribution for sustainability The selection of indicators, for the present work, took place in several stages: 1. Survey on the available frameworks and first indicators collection (described in subsection 5.3.1) 2. Raw data collection (described in subsections 5.3.2 and 5.3.3) 3. Review of industry relevant issues (described in subsection 5.3.4) 4. Selection of absolute indicators (described in subsection 5.3.5) 5. Relativized indicators proposal (described in subsection 5.3.7) Financial, economic, social, environmental Indicators Frameworks (UN; industry; UE; other) Sustainability Indexes and funds Reporting Sustain ability CSR EGR Nacional Reports Nacional Legislation Rankings How to monitor? Financial Economic Environ mental Social Do they really reflect the company´s contribution for sustainability? Dimensions for the Corporate contribution for Sustainability Financial recognition (in short and long run) Environmental "neutrality" Social improvement Economic efficiency Through an relevant set of indicators Relevant for: Stakeholders Shareholders Industry Financial On Corporate Sustainability Reporting 103 5.3.1. Initial indicator collection First was carried out a compilation of energy industry related indicators referred in several sources (GRI, EFFAS and industry specific frameworks). From the previous collection non-quantitative indicators were eliminated as well as similar indicators or those relating to the same subjects. A review over the published non-financial reports from our sample of energy companies was performed to identify matters effectively reported. A survey over available databases evidenced that, in most cases, besides expensive, they showed a limited number of indicators, with less diversity and scope than what would be desirable for the research. The majority had poor transparency regarding sources and methods for data collection. In some situations limited disclosured information is intended to avoid conflicts of interest in relation to the services provided by the database provider (Rahman and Post 2011). Thus, for the databases available on the market do not prove to be adequate to the objectives of the research it was decided to build a database for exclusive use in this work. The definition of the supporting structure for the data attended to: • the type of data to collect • the functionality on handling and review • the easiness on integration with tools for implementing the methodology defined. Regarding the data type Gujarati (1988) presents three types of data that can be employed in quantitative analysis: • Time series data, where it is studied the behavior of a variable over time, • Cross-sectional data, when analyzing the behavior of data collected on sample units at a given point in time • Panel data, when checking jointly the behavior of data individual units (crosssectional data) over time (time series data). Data is observed over two dimensions (typically, time and cross-sections). Panel data may also refer to multi-dimensional data if containing observations on multiple phenomena observed over multiple time periods. It is termed as multi-dimensional when the phenomenon is observed over three or more dimensions (ex: individuals, variables, time). On Corporate Sustainability Reporting 110 carry out certain species spawns). The thermal generation impacts on biodiversity, through the rejection of cooling water, which can change the parameters of the aquatic surrounding areas and compromise the survival of local ecosystems. Residuals - The largest share of waste generated on energy production mainly consists on various kinds of ash, slag and gypsum. These materials are generated on the desulphurization process. Under European legislation they can be treated as by-products and incorporated into other industrial processes. Nuclear waste - Although generated in much lower amounts, by their dangerousness and temporal extent of their activities, it represent a critical issue in the panorama of electric generation Dimension 2 - Social Energy companies play a key role in social terms both for the volume of direct and indirect employment generated and by the geographical dispersion of the activity, confronting different communities and cultures. The services rendered and the goods traded are central for the development of society and for the welfare of millions of citizens. the impact on communities, the importance of service and relevance of traded goods. The major issues integrated in the social aspect are as follows: Employment conditions and professional development Health and safety Community support Corruption and bribery Dimension 3 - Operational / Economic The importance that energy plays in economic development, arises some questions related to: the need to optimize the use of scarce resources (primary energy sources such as fossil fuels or biomass), the appropriation of resources by energy companies and competition for the soil use with other activities (e.g. dams). Stakeholders of energy companies have different interests. It is important to understand the operating conditions in terms of efficiency and how the value added by energy related activities is distributed by stakeholders. The major issues integrated in the economic /operational aspect are as follows: Installed capacity Distributed vale added Generation and end-use efficiency On Corporate Sustainability Reporting 111 Dimension 4 - Financial This last category has not been openly seen in more conventional forms of presentation of corporate responsibility, which generally refer only to economic, environmental and social matters. It was introduced because it was considered relevant for the long-term survival of the sample. Financial issues play a key role in the concerns of business and are crucial to the pursuit of social and environmental objectives. Long-term profitability Ability to meet the long run commitments Sustained increase in the company value On Corporate Sustainability Reporting 112 5.3.5. Selected indicators Indicators reported for a small number of companies (less than 33%) were eliminated, given their low representativeness in terms of the sample. Indicators with less than 50 observations were eliminated given their low representativeness in terms of the issue. The definitions of Basic Economic and Financial indicators (Table 5.5) are based on International Financial Reporting Standards (IFRS), once the sample firms have an international dimension and as a consequence they use the IFRS as accounting standard. Table 5.5 Basic Economic and Financial indicators Economic and Financial Symbol Name Unit Description EBITDA EBITDA (106 euros) Earnings before interest, taxes, depreciation and amortization (or gross operational profit) EBIT EBIT (106 euros) Earnings before interest and taxes (or operational profit) N_PFT Net profit (106 euros) Gross profit minus operating expenses and interest (or net profit) CAPEX Capital expenditure (106 euros) Investments for capital maintaining or expansion T_ASS Total assets (106 euros) Economic resources tangible or intangible controlled by the corporation and expressed in monetary value N_ASS Net Assets (106 euros) Residual value left for company owners after deduction all liabilities from all assets. means the same as Shareholders' equity. It usually means the same as Shareholders' equity N_DBT Net debt (106 euros) Liabilities and debts minus cash and other similar liquid assets T_EQT Total Equity (106 euros) Ownership in company assets after all debts associated with those assets are paid off T_LBL Total Liabilities (106 euros) Obligation of an entity arising from past transactions or events DEV_D Direct economic value distributed (106 euros) Used GRI (2006) definition 16 T_RVN Total revenues (106 euros) Total income that a company receive during a fiscal year from its normal activity (or turnover) ST_IDX Sustainability index Dummy 1Yes; 0 - No T_DBTR Total debt ratio % (Long Term Debt + Short Term Debt) / Capital Employed 16 GRI definition for Direct Economic Value Distributed Direct economic value generated a) Revenues Net sales plus revenues from financial investments and sales of assets Economic value distributed b) Operating costs Payments to suppliers, non-strategic investments, royalties, and facilitation payments c) Employee wages and benefits Total monetary outflows for employees (current payments, not future commitments) d) Payments to providers of capital All financial payments made to the providers of the organization’s capital. e) Payments to government Gross taxes f ) Community investments Voluntary contributions and investment of funds in the broader community (includes donations) Economic value retained Economic value generated less Economic value distributed Investments, equity release, other On Corporate Sustainability Reporting 113 The EBITDA gives indication on the operational profitability of a company. By removing the payment of interest, taxes, depreciation and amortization, on profit calculation, the effect of different factors on the company's profitability is nullified, allowing comparisons to be made. Among others, the effects that influence earnings may include, for example, the different structures of assets, debt, or taxation, which in the case of EBITDA are not considered (Haltman 1986). The difference between EBITDA and EBIT regards depreciation of capital. Amortizations and depreciations reflects the investment that a company makes in economic terms in tangible and intangible assets (possibly in environmental and social assets). The calculation of amortizations and depreciations as depending on subjective decisions relating to assets useful life, depreciation methods or residual values, can also induce distortions on the net income. For these reasons, EBITDA removes subjective judgments that can obscure how the company is really performing. It is widely used to compare financial performance among companies, namely those with different capital structures, fiscal framework or depreciation policies. Net profit is the is the most refined form of profit since it considers all expenses necessary to the corporate business, or else, it is the obtained profit after interest, taxes, depreciation and amortization are deducted. Net profit provides a implicit picture of the management decisions and it reflects a clear vision about the expenses that the company has to bear to keep running (Nabais 1997). Although EBITDA individually taken, provides a incomplete picture, once it does not address several relevant expense items. If on one hand the EBITDA reflects the ability to generate earnings, the net profit represents the ultimate results, after the payment of the liabilities from the company's operation. The capital expenditures (CAPEX) refers the expenses incurred to maintain, replace or expand the company asset base, representing business improvements. The CAPEX reflects the effort in the maintenance and expansion of business capacity. It complements the information provided for EBIT, once it is subject to the accounting for depreciation and amortization over the asset expected life (Nabais 1997). Thus, the indicators previously presented are assumed to complement each other and they are jointly used to understand business financial performance. There were also collected the indicators considered in IFRS as main elements of a company financial position which are: “Asset: An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise. Liability: A liability is a present obligation of the enterprise arising from the past events, the settlement of which is expected to result in an outflow from the enterprise' resources, i.e., assets. On Corporate Sustainability Reporting 114 Equity: Equity is the residual interest in the assets of the enterprise after deducting all the liabilities under the Historical Cost Accounting model. Equity is also known as owner's equity. Under the units of constant purchasing power model equity is the constant real value of shareholders´ equity.” (IAS 1 article 10) Following the same source it was collected “total revenues” as the elements of an income statement that measure the financial performance, which is understood as: Revenues: increases in economic benefit during an accounting period in the form of inflows or enhancements of assets, or decrease of liabilities that result in increases in equity. However, it does not include the contributions made by the equity participants, i.e., proprietor, partners and shareholders (IAS 1 article 10). Some companies report the distribution of the value generated in the exercise, by stakeholders (employees, shareholders, lenders, community, state and in some cases suppliers), registering however considerable differences in the methodology applied in the calculation of the amounts attributable to each of stakeholders. in this case we used the terminology and calculation method set forth in the GRI (2006) framework (see footnote 16). In addition to the indicators referred into the consulted frameworks, a new indicator have been proposed by the author to incorporate the previous selection. As far as is known it is an unprecedented fact in the assessment of corporate sustainability. Additional indicator is annualized volatility. Volatility refers to the variability of returns of an asset over a given period, and is commonly used to quantify the risk of holding that asset during that period. In this particular situation volatility of corporate shares is used to evaluate the market recognition of corporate sustainable behavior, once it is quite stable in crisis situations and provides greater stability over time. By itself, volatility is a fundamental element for the risk management in financial markets. It is expected that companies having more concerns about sustainability would present lower volatility on their stock prices. The analysis of the volatility of share prices of a sample of companies within the energy sector (electricity producers) was chosen as an indicator of market recognition for the conduct of business. This information is important for investors who could be able to design their investment strategies taking in account the use of these companies as a way to balance their investment portfolios. Volatility was calculated using the following formula: Yt=ln (Pt / Pt-1) Yt = Instant return on time t Pt = Share closing price on time t On Corporate Sustainability Reporting 115 Annualized values were obtained based on the calculation of the standard deviation on daily returns. The analysis of companies’ volatility focuses on the period from 1 January 2004 to 31 December 2010. The data set consists on daily closing price from energy companies shares, listed on the stock market in which the company's headquarters is registered. The stock prices were extracted from several sources: sample company’s websites, stock exchange websites and financial websites linked to Stock Exchange websites. About 1800 observations were obtained for each company. This data presents a nonexperimental nature, once occurs entirely out of the control of the researcher. The indicators with minimum number of observations collected for the environmental, social and operational matters are presented below (Table 5.6, Table 5.7 and Table 5.8). Unlike the economic and financial indicators, the meaning of the following indicators is easily apprehendable and not undertaken any detailed explanation. Table 5.6 Basic operational indicators Operational Symbol Name Unit Description EL_CAP Electricity capacity MW Installed capacity for electricity generation (maximum power) PEC_CN Primary energy consumption Tj Fossil fuels used on electricity generation EL_GENT Total annual production GWh Gross electricity generation EL_SELF Electricity for selfconsumption GWh Electricity used in production and administrative services NEL_GENT Net electricity produced GWh Total annual production less electricity for self-consumption NEL_GENRE Net electricity generation from renewable sources GWh Includes hydro, wind, biomass (not for combustion), geothermal and tidal sources NEL_GENNU Net electricity production from nuclear GWh Includes only nuclear sources for electricity generation NEL_GENTH Net electricity production from thermal GWh Includes conventional, co-generation, combined cycle and other combustion processes (including biomass and waste) EL_LOSS Electricity losses % Transmission and distribution losses G_EXT Gas extension Km Network extension (for gas distribution) EL_EXT Electricity extension Km Network extension (for electricity distribution) ELD_SAL Electricity sales distribution GWh Electricity for large consumers ELS_SAL Electricity sales supply GWh Electricity sales for residential clients and small consumers ELT_SAL Total electricity sales GWh Electricity sales for all clients EL_COS Electricity costumers n.º Number of costumers for electricity sales supply G_TRN Gas transport GWh Amount of gas transported G_SALD Gas sales distribution GWh Amount of gas distributed G_SALS Gas sales supply GWh Amount of gas supplied G_SALT Gas sales total GWh Total amount of gas Sales (distribution and supply) G_COS Gas Costumers n.º Number of gas costumers H_GEN Heat generation GWh Economically values heat on district heat and process heat BYPRO By products (gypsum and ashes) t Generated products available for introduction in other productive processes. BYPRO_REC Recovered by products ashes and slag t Byproducts effectively incorporated into other economic processes On Corporate Sustainability Reporting 116 Table 5.7 Basic environmental indicators Environmental Symbol Name Unit Description WA_COO Water for cooling (103 m3) Total of water used for cooling WA_WITH Water withdrawal (103 m3) Total of water captured from various sources (rivers, sea, underground) used for company processes WA_DSCH Water discharged (103 m3) Total water discharged CO_T CO2 total Kt Total CO2 emissions (for the group) CO_TH CO2 thermal Kt CO2 emissions from company thermal facilities SO_T SO2 total Kt Total of SO2 emissions from company facilities NOX_T NOx total Kt Total of NOx emissions from company facilities PART_T Particles Kt Total of particle emissions from company facilities WST_T Total waste (t) t Total waste generated from company facilities (hazardous plus nonhazardous waste) WST_NZ Non-hazardous waste t Total non-hazardous waste generated from company facilities WST_NZRE C Recovered nonhazardous waste t Total non-hazardous waste generated from company facilities not disposed in landfill WST_Z Hazardous waste (t) t Total hazardous waste generated from company facilities WST_ZREC Recovered Hazardous waste t Total hazardous waste generated from company facilities not disposed in landfill WST_NU Nuclear waste from low and intermediate level waste Dummy Total nuclear waste generated from company facilities (1Yes; 0 – No) ENV_EXP Environmental expenditure (106 euros) Environmental current costs plus environmental investment ENV_CST Environmental current cost (106 euros) Environmental costs incurred by the company for the year From all possible social indicators those generally more affordable are disclosured in social balance reports, which in some countries have a mandatory character. Table 5.8 Basic social indicators Social Symbol Name Unit Description EVD_EMP Economic value distributed to the employees (106 euros) Economic value distributed to the employees including wages, salaries and other benefits paid to employees EVD_TAX Economic value distributed to taxes (106 euros) Economic value distributed to the state and local authorities. Includes income taxes, license fees, property taxes and others EVD_COM Economic value distributed to the communities (106 euros) Economic value distributed to the communities, supporting sport, cultural, social, philanthropic activities. Contributions to community EVD_OWN Economic value distributed to owners (106 euros) Economic value distributed to the owners, including dividends, group contributions and minority interests EVD_LEN Economic value distributed to lenders (106 euros) Economic value distributed to the lenders EVD_SUP Economic value distributed to suppliers (106 euros) Economic value distributed to the suppliers and other operating costs EMP_T Employees total n.º Total number of employees at the end of the year EMP_FTE FTE n.º Full-Time Equivalent converted to full-time positions EMP_FAT Nº of work-related fatalities n.º Number of fatalities occurred in labor context EMP_TRG Nº hours of training n.º Total hours of training EMP_ACC On duty accidents n.º On duty accidents, excluding contractors EMP_LDA N.º of days lost due to accidents n.º N.º of work days lost due to accidents On Corporate Sustainability Reporting 117 The selected indicators are expressed in different units and scales. The performance of comparisons among them, requires their standardization or the relativization. In the present case, the relativization of the indicators revealed itself as a adequate way to address the complexity arising from the lack of a common scale of measurement. Moreover relativization allow to create new measures, more adequate to concepts and dimensions to explore. Relative indicators are developed in the following chapters (see item 5.3.7). On Corporate Sustainability Reporting 118 5.3.6. Material concepts for the defined dimensions Confronted with the vagueness of the concept of corporate contribution for sustainability, it is considered in this work is that this contribution is manifested in four key dimensions. Each dimension is expressed in several material concepts (see Figure 5-12) The contribution of each company or corporation for sustainability is assessed in terms of: Figure 5-12 Material concepts for the corporate contribution for sustainability Corporate contribution for sustainability Financial recognition Economic efficiency Environmental neutrality Social improvement Stability Dependency Productivity Authonomy Equity Efficiency Effectiveness Coverage Reliability Profitability Compensation Strategy Production Impact Safety Commitment Fairness Equality On Corporate Sustainability Reporting 119 Several authors have been trying to characterize the sustainability dimensions. The present research proposes that corporate contribution for sustainability demands for economic efficiency, financial recognition, environmental neutrality and social improvement. Samuelson (1964), defines economics “as the study of how a person or society meets its unlimited needs and wants through the effective allocation of resources”. For Lionel Robbins (2007) "economics is a science that deals with the study of human behavior as a relationship between ends and scarce means which have alternative uses”. Based on the above definitions, focusing on issue of the use of scarce resources to achieve a particular goal, we assume that the main concept characterizing the economic dimension is efficiency. Efficiency refers to the relationship between the results and the resources used and it has implicit an underlying arbitrio in choosing resources, means and objectives. Effectiveness, productivity, equity, autonomy and dependency are assume as material concepts of the economic dimension. Effectiveness measures the relationship between the results and the desired goals and it assumes greater importance when articulated with efficiency. Productivity measures the quantity produced (production) against the resources used (inputs), allowing to quantify efficiency. Equity is also a powerful concept for the economic dimension. As companies are important consumers of resources to provide products and services and employment providers, they have a large responsibility in building social well being. The way companies distribute the value generated in their business by various stakeholders and the way they remunerate the use of different capital sources (e.g. intellectual, environmental, social), is critical for understanding the corporate contribution to the economic, social and environmental sustainability. Autonomy and dependency are mainly associated with external factors out of the company control, such as suppliers and costumers. Accordingly to the literature, the financial credibility is important to provide the resources that allow a good environmental and social behavior. On the other hand, a company that controls and minimizes its environmental and social impacts, presents fewer risks and have greater ease in financing. Presently, the valuation of a company in financial markets increasingly reflects not only shareholders expectations, but also other stakeholder’s valuation. Thus the dimension most relevant financial folder is associated with the concept of recognition, which in turn is linked to the sub dimensions of coverage, reliability, profitability and stability. Financial recognition is firstly characterized by coverage and reliability, both referring to the capacity to assume the financial commitments with equity. Profitability is relevant as an expression of the ability to capitalize companies’ assets. Stability refers to ability to manage changes, deal with shocks and control the risks. The proposed variables were designed to address these dimensions and concepts. On Corporate Sustainability Reporting 126 Although the social influence of business it is larger than the sphere of employee issues, the usable in this research is mainly confined to labor relations (IEMP). In fact only 15% of proposed indicators refer to other issues of social improvement. It was assume that this dimension would be driven by safety in workspace, by the commitment with employees, by equality in treatment, regardless of gender, race or color and by fairness in income distribution for the governmental institutions and for communities. Table 5.12 Relative social indicators Symbol Unit Name Dimension SOCIAL Responsibility IEMP_ACC %O iemp_acc=1000*emp_acc/emp_t Average accidents per one hundred employees Safety IEMP_FAT %O iemp_fat=1000*emp_fat/emp_t Average fatalities per one hundred employees Safety IEMP_FTC % iemp_ftc=emp_ftc/emp_t Share of employees with full-time contract commitment, company IEMP_PC % iemp_pc=emp_pc/emp_t Share of employees with permanent contract commitment, company IEMP_TRG hours iemp_trg=emp_trg/emp_t Hours of training per employee commitment, company IEMP_ABS* % iemp_abs=number of absent days /the number of available workdays Absenteeism rate commitment, employees IEMP_SEN* years iemp_sen=sum of years of employees permanence in the company/emp_t Average seniority (permanence in the company) commitment, company, employees IEMP_TURN* % iemp_turn=number of employee leaves/ average number of employees Share of employees replaced within the company, excluding retirements (staff turnover) commitment, company IEMP_WOMT % iemp_womt=emp_womt/emp_t Share of women in total workforce equality IEMP_WONM % iemp_wonm=emp_wonm/emp_t Share of women in management equality IEMP_WOMB % iemp_womb=emp_womb/emp_t Share of women in the board equality ITAX % itax=evd_tax/t_rvn Weight of tax on revenues fairness IWAGE % iwage=evd_emp/evd_own Weight of wages, salaries and benefits on payments to the owners fairness (*) Reported relative indicator The variables IEMP_FTC (Share of employees with full-time contract), IEMP_PC (share of employees with permanent contract) and IEMP_TRG (hours of training per employee), express the company's commitment to employees is reflected on the flexibility of work schedules, stability of employment contracts and training. The investment, both in human resources and in the creating appropriate labor conditions for employees and candidates, results is better health and safety and talent retention. It is represented by the variables: average number of accidents involving company staff (IEMP_ACC); average work related fatalities in company staff (IEMP_FAT), absenteeism rate (IEMP_ABS), period of median stay in the company (IEMP_SEN). On Corporate Sustainability Reporting 127 Staff turnover (IEMP_TURN) refers to the percentage of employees yearly leaving the company. High staff turnover and low seniority may mean that investments in human capital are not properly monetized, as well as that social commitment is reducing in terms of job maintenance. Yet small and consistent turnover can benefit some businesses, high turnover rates may signify that management style needs adjustments, once new hires presents associated challenges and costs for the company. The variables (IEMP_WOM) relate to the weight of women at different hierarchical levels (T - total, M - management and B - management board). Although the sector analysis shows traditionally a strong preponderance of men, since 2004 it has been a growing weight of women namely at the level of management positions. This indicator presents a high visibility in the sample companies possibly due to European legislation concerning gender equality. The weight of tax on revenues (ITAX) and the weight of wages, salaries and benefits on payments to the owners (IWAGE) are intended to represent the fairness concept on social improvement. The variables indicate the companies contribution for society through taxes, as also the distribution of incomes between financial and human capital. On Corporate Sustainability Reporting 128 5.4. Descriptive statistics In FA it is assumed that the character and composition of the selected variables is more relevant than their statistical qualities. Therefore, it was considered relevant to a correct perception of the character of the variables the performance of a brief analysis of the descriptive statistics for the variables selected for the year 2010. This statistical analysis aims to assess the consistency of the variables in relation to the theoretical framework. An overview will allow to detect whether the proposed set of indicators is interesting in a operational standpoint. This reflection tests the alignment of the results with the objectives of the research and it provides ground for further work. A brief interpretation of the mean, median, standard deviation, skewness and kurtosis, will contextualize the sample and ascertain the adequacy of the obtained variables to the context of the industry. The normal distribution is often referred, once it is widely used as a model for the statistical study of complex phenomena both in natural as in social sciences. A variable with a normal distribution presents a symmetrical distribution around the mean and under certain conditions the average of a large number of random variables with different probability distributions tends to a normal distribution. Although normally distributed variables provide stronger solutions, is not relevant when a descriptive result is intended. The standard deviation is broadly used to describe how concentrated the distribution is around its mean for a random variable. High standard deviation indicates that values are disperse over a large set of values, whereas low standard deviation means that the values obtained for the sample are closely located near the media. In this perspective, standard deviation may serve as a measure of uncertainty. Since we deal with data expressed in different units and different scales, and because the averages of several variables are different, we use a measure of relative dispersion to compare the variability of different data sets. In this case, we used the coefficient of variation (CV) being a measure of general use. The smaller the CV, greater data accuracy. € Equation 1 Coefficient of variation ! CV =S X S=Standard deviation X=Media On Corporate Sustainability Reporting 129 Skewness measures the asymmetry of a probability distribution. If zero, the distribution is equitable in relation to media. If less than zero (negative asymmetry), shows a left tail and if greater than zero (positive asymmetry), presents a tail to the right. Kurtosis is a measure of dispersion which characterizes the flatness of the curve of a distribution function. If zero, the flattening is equal to the normal distribution (mesokurtic). If less than zero, flattening is greater than the normal distribution (platikurtic) and if greater than zero, the flattening is smaller than the normal distribution (leptokurtic). Jarque-Bera is a test of goodness of fit used in statistics, i.e., if the data exhibit a skew and kurtosis compatible with the normal distribution. Table 5.13 gives descriptive statistics for financial variables. Attending to the theoretical framework it is intended that these variables reflect the coverage, reliability, profitability and stability for each company. The statistics may present the main trends in sample. Table 5.13 Descriptive statistics for financial variables Variable Observations Media Median Maximum Minimum Standard deviation CV Skewness Kurtosis DV_YLD 17 0,16 0,054 1,97 0,01 0,4668 2,92 4,1128 16,9404 E_PS 25 1,77 1,270 6,20 0,00 1,7670 1,00 1,5597 1,6260 IEBIT 29 0,06 0,062 0,14 0,01 0,0307 0,49 0,5599 0,2254 IEBITDA 29 0,11 0,096 0,25 0,06 0,0416 0,39 1,8642 4,4094 IDBT 14 0,28 0,289 0,76 0,00 0,1806 0,64 1,1645 3,2978 IT_LBL_EQT 29 1,98 1,582 5,52 0,53 1,3070 0,66 1,2917 1,0588 ROA 20 0,04 0,037 0,10 -0,01 0,0283 0,71 0,3884 -0,1213 ROE 23 0,13 0,129 0,26 -0,04 0,0742 0,57 -0,2551 -0,1634 ROI 21 0,20 0,062 2,64 0,02 0,5614 2,87 4,5482 20,7782 ROR 19 0,10 0,102 0,35 0,01 0,0851 0,81 1,7225 3,3708 VOL 21 0,01 0,014 0,02 0,01 0,0022 0,15 0,6331 -0,1040 The distance between the media and the median gives information about the asymmetry of the sample, i.e. the difference between the sample average value and the value which divides the number of the sample observations into two equal parts. Given the median, half the population will have values lower or equal to the median and half the population will have values greater or equal to the median. The greater the distance, the greater the asymmetry of the distribution. For this set of variables, in most cases, the media nearly coincides with the median, indicating a fairly even distribution of observations around the media. In some cases, media far exceeds the average, as for variables DV_YLD, ROI, which might indicate a higher dispersion of values on the right side of the median, that triggers the media value. On Corporate Sustainability Reporting 130 In these cases, can be expected a higher concentration of variable’s lower values and a higher dispersion of variable’s higher values. The analysis of the standard deviation and skewness reinforces this interpretation. All of the variables are positively skewed, excepted for Return on Equity (ROE). A graphical representation of the distribution function, would present a curve with a longer tail on the right side than in the left side. That means that the mass of the distribution is concentrated in the left side of the curve but some very high values are located at the right side. The sample thus presents the tendency to concentrate the data about the media, with a slight distortion on the curves to the left, with long tails on the right resulting from few very high values. The negative skewness is rare in the social sciences. Most variables are found to be leptokurtic (i.e., fat tails), except ROE, ROA (return on assets) and volatility (VOL), which are slightly platykurtic. The skewness and kurtosis coefficients indicate that the variables dividend yield (DV_YLD) and return on investment (ROI) are leptokurtic and positively skewed regarding the normal distribution. In both cases the values for skewness are high (4.1128 and 4.5482 respectively), indicating the probability of occurrence of extreme high values. The right side of curve presesents a long tail, which is not compatible with a normal distribution curve. The values for Kurtosis are much above zero, which indicates that the probability distribution curve for these variables present a flatening lower than the normal distribution. It is relatively easy to obtain some scarce values for these variables that deviate from the average for a distance of several multiples of the standard deviation. In fact, return on investment (ROI) and Dividend Yeld (DV_YLD) present the largest standard deviation among all financial variables, which is consistent with the general impression that observations are largely spread around the media. The JarqueBera test also rejects the hypothesis that dividend yield (DV_YLD) and return on investment (ROI) are normally distributed in both cases. The remaining financial variables most often display a distribution consistent with the normal distribution. On Corporate Sustainability Reporting 131 The environmental variables included in Table 5.14 reflect both the company's actual impacts on the environment and the production strategies that influence these impacts. Table 5.14 Descriptive statistics for environmental variables Variable Observations Media Median Maximum Minimum Standard deviation CV Skewness Kurtosis IGENTH_T 28 0,40 0,453 0,92 0,00 0,3090 0,77 -0,0258 -1,3692 IGENNU_T 28 0,17 0,037 0,66 0,00 0,2133 1,26 0,9658 -0,4037 IGENRE_T 28 0,30 0,188 1,00 0,00 0,3134 1,05 1,1566 0,2627 IGENRENU_T 28 0,47 0,469 1,00 0,00 0,3150 0,67 0,2077 -1,0079 IEXPENV_RVN 29 0,01 0,000 0,08 0,00 0,0196 1,95 2,3661 5,5347 ICO_TEQ 24 0,34 0,307 0,73 0,04 0,1758 0,52 0,3444 -0,4367 ICO_TH 25 0,41 0,417 0,76 0,11 0,2038 0,50 -0,1938 -0,9600 ISO_T 21 0,64 0,270 7,00 0,02 1,5057 2,36 4,1620 18,0595 INOX_T 21 0,48 0,361 1,52 0,05 0,3545 0,73 1,5221 2,6467 IPART_T 12 0,06 0,018 0,52 0,00 0,1458 2,41 3,3784 11,5580 IWST_ZREC 19 0,25 0,000 0,97 0,00 0,3660 1,47 1,0864 -0,4157 IWST_Z 22 0,14 0,061 0,90 0,00 0,2259 1,63 2,5420 6,5493 IWST_REC_NZ 20 0,45 0,596 0,98 0,00 0,4086 0,91 -0,0831 -1,9306 From table Table 5.14 is noted a concentration of values around the mean for observations involving the production of electricity simultaneously from renewable sources and nuclear (IGENRENU_T). This suggests the consistency of corporate strategies, that rely on the simultaneous use of these technologies as a way to circumvent the dependence on fossil fuels. However, the CV above 1 both for the the weight of production of renewable in the total production of electricity (IGENRE_T) and the weight of the nuclear on total production of electricity (IGENNU_T), indicates a greater dispersion of observations. It is also noticed a slight positive skewness for both variables, which means that some companies present extreme values on their shares of nuclear production or renewable production . The skewness for the generation variables (IGENRE_T, IGENNU_T) is reinforced by the observation that the mean values are much higher than the median. As the media is highly influenced by extreme values, in this case it far exceeds the value that divides the observations for these variables into two equal parts (median). That means that more than 50% of the sample had values below the media and some few companies in the sample have values much higher than the media. For the variable representing the carbon free electricity (IGENRENU_T), the media equals the median, which means that although individual companies resort to different energy mixes, they tend to converge when dealing with the sum of nuclear and renewables. On Corporate Sustainability Reporting 132 The cases for production process from burning fossil fuels (IGENTH_T) and generation from non-fossil fonts (IGENRENU_T) have similar statistics. The distribution of observations is substantially symmetrical and the same are concentrated around the average, which means that the variability of data is low and there are no outliers positively or negatively distorting the curve. Both variables present negative values for the kurtosis, which indicate a curve flatter than a normal distribution and with a wider peak. The probability for extreme values is lower than probability for a normal distribution and the values are wider spread around the mean. Gaseous emissions when compared with electricity production, show a lower dispersion in terms of CO2 (represented by ICO_TH and ICO_TEQ). The distribution is consistent with a normal distribution, with no significant skewness or flattening. Albeit variables present large differences between maximum and minimum values, which may be due to the use of different production technologies, the values are distributed evenly around the mean and the median. This means that companies with higher emissions are offset in reverse way by companies with lower emissions. The existence of mechanisms for monitoring and controlling the CO2 reduction, presenting a mandatory character in most European countries, may contribute to this behavior of the observations. Regarding the remaining variables representing the emissions per kWh produced (ISO_T, INOX_T, IPART_T), they show a large data dispersion around the average. The various companies in the sample present emission levels of greenhouse gases very different depending both on the technology used and the legal framework. A strong positive skew, with long tails to the right is easly identified, which means that while most of the observations are below the media, some few companies exhibit extremely high values. The values for Kurtosis indicate a distribution sharper than the normal, with values concentrated around the mean and thicker tails. This means high probability for the occurrence of extreme values. The residues, both referring generation (IWST_Z) and treatment (IWST_REC_NZ and IWST_ZREC), exhibit large standard deviations. The weight of hazardous waste in total waste generated (IWST_Z), presents a high dispersion (CV = 1.63) with positive bias, which means that over 50% of the sample companies generate a quantity of hazardous waste below the mean, but there is a strong probability of occurrence of outliers with very high values. That means that he majority of companies in the sample produces relatively few hazardous waste in relation to total waste, but some individuals may produce exceptionally high quantities. This may result either from differences in the technology used, as well as from different classifications of the dangerousness of the materials generated. On Corporate Sustainability Reporting 133 For the recycling of hazardous waste (IWST_REC_NZ and IWST_ZREC), the previously described behavior remains, but with lower skewness and lower probability of occurrence of extreme values. This may mean that, although companies have large differences in the generation of hazardous waste, such differences tend to fade regarding the handling and routing of these residues. The trend for an harmonized legislation at the European level has contributed to an increasing homogenization of good practices for waste management. Regarding the recycled non-hazardous waste (IWST_REC_NZ) the dispersion is lower than the one presented for the hazardous waste. Observations tend to concentrate on the right side of media, meaning that more than 50% of the sample companies recycle a percentage of its waste higher than media. A tendency for the occurrence of extreme low values is also noted, i.e., very few companies carrying waste recycling far below the mean. The environmental expenditures (investment + costs) on revenues, given by IEXPENV_RVN, register a huge disparity in the observation’s behavior, for the selected sample. The variable in general assumes extremely low values, which indicate a low weight of these expenses in total revenues. Over 50% of companies have values below the media, but may be noted a tendency for extreme values, with few firms embarking on relatively high environmental expenditures. The economic variables presented in the Table 5.15, are related primarily to effectiveness and eficiency on resources use and the equitable distribution of the economic value created. The issues of autonomy on other electricity suppliers, or dependence on customers, are also covered. Table 5.15 Descriptive statistics for economic variables Variable Observations Media Median Maximum Minimum Standart deviation CV Skewness Kurtosis IT_RVN 29 0,49 0,437 1,24 0,19 0,2449 0,50 1,7167 3,4487 IPDTV 30 5,76 3,667 24,65 0,39 6,1042 1,06 2,2317 4,5788 IRVN_EMP 29 0,93 0,937 2,46 0,11 0,5034 0,54 0,8575 1,9095 ICAPEX 25 0,04 0,056 0,12 -0,12 0,0579 1,31 -1,3754 1,7628 IPEC_CN 13 5,14 5,500 9,04 0,26 2,6808 0,52 -0,5174 -0,3680 IH_GENTH 10 1,09 0,324 7,68 0,17 2,3234 2,14 3,1251 9,8235 IWA 18 0,17 0,002 1,356 0,000 0,328 1,39 1,7413 2,5344 IBYPRO 9 0,79 0,660 2,72 0,25 0,7639 0,97 2,4334 6,4579 ISELF_T 16 0,03 0,019 0,11 0,00 0,0351 1,13 1,1258 0,2850 IGENT_SAL 25 0,78 0,698 2,76 0,16 0,5292 0,67 2,2393 7,4346 ISAL_ELCOS 14 0,03 0,018 0,12 0,00 0,0329 1,08 2,0902 4,4002 IEVD_TAX 26 0,15 0,154 0,35 0,03 0,0894 0,59 0,4036 -0,6252 IEVD_EMP 27 0,40 0,342 1,00 0,02 0,3024 0,76 0,6132 -0,8447 IEVD_LEN 16 0,13 0,109 0,34 0,02 0,0920 0,69 1,1540 0,6497 IEVD_OWN 21 0,26 0,235 1,00 0,03 0,2316 0,89 1,8012 4,1453 On Corporate Sustainability Reporting 134 The weight of revenues on assets (IT_RVN) presents a balanced distribution around media, with low CV values but with the tendency to assume values extremely highs. This means that the return on assets suffers from scarce variability in the sample, although some few companies are able to generate more revenue per unit of assets. The electricity produced per employee (IPDTV) is lower than the media, which amounts to 5,76 GWh per year and per employee. In fact, 50% of the sample stands below 3,7 GWh. This reflects not only different capitalization of human resources, but different structures of functioning relating to administrative and operational support services. The internationalization strategies, expanding for Latin America or Africa also implies both hiring relatively more employees and the starting-up adjustments of the new production units. However, the revenue generated per employee (IRVN_EMP) presents a distribution concentrated, balanced and symmetric with respect to the media, as also a lower propensity for extreme values than variable IPDTV. This means that although employees are not directly engaged in the production of electricity, they contribute in other ways to generate revenue. The sector is characterized by a wide disparity of activity in addition to the production of electricity, such as transport and supply of electricity and gas, environmental services, extraction of fossil fuels, among others. The weight of capital expenditures on total assets (ICAPEX) presents a high dispersion over the sample, with some extreme low values, meaning that the capital expenditure by unit of assets is highly variable over the sample. Some companies are performing expansion investments, over new geographical sites or on new technologies, while other don’t. The primary energy consumed for unit of produced electricity (IPEC_CN) presents a low CV, meaning that most companies have similar ratios. Higher energy consumption is associated to a greater share of thermal power generation. The use of water per unit of electricity produced (IWA) refers to cooling activities on thermal power plants. The european regulation includes rigid guidelines regarding the use of water and the preservation of the strategic reserves (groundwater). The water use dependes both on the tecnological needs but also on the availability of usable water and on national legislation. The sample presents a high variation on the water use for cooling. Although more than 50% of the sample is below the media, some extreme high values contribute for a positive bias. These values vary inversely to the share of renewables in electricity generation. The waste of thermal energy generated through the co-generation process constitutes an inefficient use of resources. The variable “weight of heat for sale on total electricity generated” (IH_GENTH) refers only to companies with co-generation processes and it seems to present a great variability among the sample, with the caveat that many companies do not report this information. On Corporate Sustainability Reporting 135 The commercialization of thermal energy implies the existence of suitable distribution networks, generally unavailable in the countries of southern Europe and partially available in central Europe. This variable indicates the efficiency on the use the energy potential for fuels employed in co-generation. It may partialy indicate the sucess of the coordination of energy efficiency strategies, for thermal energy use. Ashes and gypsum are byproducts generated by co-generation processes that are capable of commercial value and usable by other economic activities. The variable IBYPRO, refers to the share of ashes and gypsum valued in other economic activities. Although its production depends on the share of thermal, it presents an high variability on the sample, meaning different attitudes towards by-products valuation and different technological options for electricity production. The conditions of independence opposed to suppliers and customers are reflected in the variables electricity sales per costumer (ISAL_ELCOS) and weight of electricity generation on overall electricity sales (IGENT_SAL). The relationship between production and sales reflects the company's market strategy, the conditions for market access and the utilization of its own production capacity. In extreme cases, may be find a situation in which the company sells less than its production to the final customer, as part of its output is forwarded to other producers under supply contracts and the opposite situation, in which the company sells more than its production, because it acquires electricity from other producers. Observations for both variables are found fairly evenly around the media and extreme high values may occur. For IGENT_SAL thses values refer to companies producing a larger share of the electricity sold to consumers and thus more autonomous with respect to electricity suppliers. Extreme high values for ISAL_ELCOS may also refer to those companies with larger customer portfolios, which form a solid base for marketing the products. The Economic Value Distributed (IEVD) by employees, owners, lenders and public authorities present similar behaviour. In short, firms do cluster around a single ‘average’ level of Economic Value Distribution although there is some possibility of extreme high values.