A Bottom Line With a Human Touch

So you know that the company you're thinking about investing in has been growing at a 12% annual rate over the past five years and that it sports a forward P/E ratio of 14. You've calculated the PEG ratio, read the latest filings with the Securities and Exchange Commission, and listened to the company's conference calls. You've done your homework, as any diligent investor should, and feel comfortable that you understand the company's bottom line. But have you read the company's sustainability report assessing its "triple bottom-line" performance?

Instead of reaching for your calculator, you'll need your reading glasses. An increasing number of companies have been submitting such reports lately. According to a recent study by SIRAN, the Social Investment Analysts Research Network, about 40% of the S&P 100 Index companies now do so. Of those, 62% base theirs on standards developed by the Global Reporting Initiative, or GRI. These voluntary reports document the company's progress on a number of fronts, such as community donations, environmental and labor practices, human rights, and product responsibility.

History
GRI was established in 1997 by CERES, a "national network of investment funds, environmental organizations, and other public interest groups working to advance environmental stewardship on the part of businesses," in conjunction with the United Nations Environment Programme (UNEP). The group devised globally applicable guidelines that were first released in draft form two years later for corporate, governmental, and non-governmental organizations reporting on the "triple bottom line" of economic, environmental, and social performance.

Later, in 2002, the GRI became a permanent independent organization based in Amsterdam and an official collaborating center of UNEP, whose core mission remains the maintenance and enhancement of the guidelines through consultation and stakeholder engagement. More than 700 organizations reported using the GRI framework in 2004. Updated guidelines are expected to be published in October 2006.

Save the world; win an award: Hewlett-Packard
To acknowledge and publicize sustainability reporting, CERES, together with the Association of Chartered Certified Accountants, presents awards to North American companies for the "best" sustainability reports. These awards are "not intended to endorse or reward company performance in any of the three areas, but rather to acknowledge exemplary disclosure that places performance in the broader context of sustainability challenges, risks and opportunities. The judging criteria address completeness, credibility, and quality of communication." In 2004, winners included Hewlett-Packard (NYSE: HPQ  ) for best sustainability report; Gap (NYSE: GPS  ) received the commendation for social reporting for its 2003 social responsibility report.

One can find Hewlett-Packard's 2004 global citizenship report deep within its website in the company information section. HP boasts that it proclaimed that "Good citizenship is good business" as far back as when it adopted its corporate objectives in 1957, identifying "global citizenship" as one priority alongside others such as profit and growth. The 2004 report states that "As a global corporation, HP has the responsibility to use our economic power and reach to have a net positive impact on the world." A letter from Debra Dunn, senior vice president of corporate affairs and global citizenship, goes even further by saying that "In the 21st century, global citizenship is not just a corporate responsibility, but also a prime business opportunity to grow our company in new ways." Specifically, the document details the company's progress toward addressing three main issues -- remedying electronic waste, raising standards in the company's supply chain, and increasing access to information technology, and how HP plans to meet related goals over the next three to five years.

Tell us about your sweatshop use and win: Gap
If you're wondering whether a company could report alarming facts about its activities and nevertheless win acclaim for its honesty, take a look at Gap's story. Unlike HP, Gap seemingly had to be coerced into becoming a "citizenship" advocate. Gap neither had corporate responsibility as a clearly delineated founding principle nor arose one morning feverishly impassioned with the idea of altruistic reporting. Instead, as a result of a 1999 lawsuit naming Gap as one of 18 manufacturers charged with human rights abuses in the U.S. commonwealth of Saipan, the company eventually reached a settlement three years later that created a $20 million fund to compensate workers and establish independent factory monitoring. According to the 2003 report, the lawsuit increased Gap's "awareness about foreign contract workers and the unique vulnerabilities they face at the hands of recruitment agents and factory management."

Meanwhile, in 1996, Gap published its code of vendor conduct prohibiting child labor, forced labor, and discrimination. Shareholder activists then filed a resolution in 2001 urging the company to publicly report on compliance with this code. After the company agreed to a dialog on the matter, the resolution was withdrawn, and investors formed the ad hoc public reporting working group in late 2002. This group, comprising Domini Social Investments, the Calvert Group, the As You Sow Foundation, the Center for Reflection, Education and Action, and the Interfaith Center of Corporate Responsibility, worked with the company toward developing its 2003 Social Responsibility Report.

When Gap released its report in May 2004, it was hailed as a trailblazing moment -- the first report examining compliance with a vendor code of conduct. The report details the extent of global factory compliance with the company's vendor code, as studied through visits by its compliance team. The results were not glowing. For example, up to 25% of Mexican factories paid less than the minimum wage while more than 50% of African factories operated machinery lacking adequate safety devices, and a majority of Chinese factories stored hazardous materials improperly. The document specifies goals, primarily targeting labor standards and factory conditions, and states that "This report is a first step toward our goal to provide greater transparency into our compliance program." An entire section of the company's website is now devoted to social responsibility, with the reports available, and touts the company's commitment to such concerns.

The triple bottom line
The significance of sustainability reporting is not (one hopes) about whether awards are won. The documents themselves, slick products of a burgeoning public relations specialty, vary in their degree of scope and detail despite the GRI guidelines. The fact remains that they are increasingly becoming part of the corporate landscape, whether because of internal culture or public pressure.

Even if you believe that a company's only pursuit should be to maximize shareholder returns without regard to any other effects its activities may have, it makes sense for you to acquaint yourself with these reports. They shed light on pressures facing a company and its industry while providing another view as to how corporate dollars are spent and how business strategies evolve. Whether a majority of investors will ever base their investing decisions on "socially responsible" concerns is unclear, yet corporations are clearly becoming more focused on presenting themselves as responsible global citizens. Keep your eye on that triple bottom line!

What's your bottom line on triple bottom-line reporting? Weigh in on the Fool's Socially Responsible Investing discussion board.

Gap is aMotley Fool Stock Advisorpick.

Fool contributor S.J. Caplan welcomes comments. She does not own shares in any of the companies mentioned in this article. The Motley Fool has a disclosure policy.


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