// LEONTIEN PLUGGE AND KATHERINE MILES HILL

Sustainability reporting in the supply chain

Typically, sustainability reporting is considered the domain of large, multinational companies. In our increasingly interconnected world, it is now being embraced by the small and medium sized businesses that supply them, as well. What are the drivers of this interest, what challenges exist in terms of reporting for such small organizations and what does it mean for larger companies working with them?

The economic, social and environmental impacts of these small entities (SMEs)— companies with up to 200 employees— should not be underestimated. There are approximately 100 million businesses worldwide that fall within this category, according to the Organization for Economic Co-operation and Development (OECD), and they constitute a vital part of the supply chain of multinational companies (MNCs). There is a growing awareness that, in order to achieve a more responsible and inclusive business world, it iskey to involve these SMEs in the process. Even if just a small percentage of SMEs work to manage their impacts, they can make a considerable positive contribution to a more sustainable world.

However, there are challenges that come from integrating and embedding sustainability into everything a company does and disclosing performance information. Transparency comes with a price tag. Reporting does cost something in terms of financial, technical and human resources and small companies often do not have the necessary internal expertise or capacity. Many SMEs quickly realize that they are in a weaker position to address these challenges because of their size. On top of that, SMEs cannot always be as transparent as they would like to be due to reasons of confidentiality. How suppliers can manage to be both transparent and respect the confidentiality of their customers is still subject to much discourse, as is the debate on where the boundaries of responsibility lie.

Many MNCs are helping small businesses overcome these problems and are a significant driver of sustainability reporting by SMEs. This, however, is not entirely a charitable exercise. As customers exert more pressure onto large MNCs in terms of managing their economic, environmental and social impacts, the question arises, “Where does their responsibility start and end?” It is no longer enough for MNCs to view their suppliers in purely contractual terms and delegate to them the responsibility for managing these impacts, especially since the MNC has the power to decide its suppliers. MNCs are beginning to realize that their suppliers’ impacts are inextricably intertwined with their own, even if the ultimate responsibility for managing and communicating their own impacts rests with the suppliers. Through encouraging their suppliers to better understand, manage, measure, improve and eventually report their sustainability performance, MNCs can better understand their own sustainability risks and positively influence society and the environment.

One way that MNCs can help is to mentor their suppliers on these issues and share the lessons they’ve learned along the way to becoming a more responsible company. Along these lines, GRI has been working on a collaborative project with the German GTZ since January 2007 to explore how transparency within the supply chain can contribute to a better understanding of transparency and sustainability, both by the buyer as well as the SME supplier. In six countries around the world, the participating multinational companies—Daimler, Otto Group, Telefonica and Puma—have been working as mentors with suppliers in emerging economies to initiate a reporting process, improve sustainability management and performance and establish a mutual understanding of each other’s challenges.The suppliers have also received training designed by GRI and international and regional experts, as well as information from “The GRI sustainability reporting cycle: A handbook for small and not-sosmall organizations.” In early 2008, an evaluation of the project will be published, as will sustainability reports from the suppliers involved.

It’s not just the MNCs that are driving SMEs to take control of their sustainability impacts. In the globalized world, there are many SMEs who want to access regions such as Europe and North America, where a solid commitment to sustainability can make a difference in capturing the attention of these lucrative markets. SMEs understand that reporting is a way to show that their company is transparent and accountable, and they have begun that process.

This was the case for Valle del Maipo Chilean Fruit Company, which is, as the name suggests, a South American fruit exporter. In a project led by Vincular, financed by the Multi lateral Investment Fund from the Inter America Development Bank (FOMIN/BID) and The Chilean Regional Development Agency (CORFO), fruit producers and exporters from the Santiago Region, led by Valle del Maipo, produced the world’s first ever aggregated sustainability report. Through their shared reporting practices, the SMEs then created a small fruit exporting association. In the message from their directors at the Even if just a small percentage of SMEs work to manage their imp acts, they can make a considerable positive contribution to a more sustainable world. beginning of the report, they emphasize that they are targeting newly open markets for Chile, such as Europe, for the export of their quality fruits. They hope the new partnership and reporting will reduce the impact of the depreciating dollar, provide a safe work place for farmers and provide assurance to consumers that the fruits they sell have been produced responsibly.

Of course, there are also SME business leaders compelled by the sustainability agenda because of their own personal beliefs. They have a set of values that shapes the way they do business, and they report on the way these values translate into their day-to-day operations.

They understand that companies, whatever size, sector or location, are part of the solution to some of today’s global problems. In turn, their business priorities reflect the concerns of their customers and so they report accordingly. Importantly, they also detail how the company seeks to handle any of the customers’ unaddressed concerns.

Despite the challenges of embedding sustainability into everything SMEs do, GRI has noticed that these companies increasingly realize the benefits of reporting their sustainability efforts. Added to that, there are a growing number of larger companies willing to support them. In 2007, GRI welcomed over 80 new reports from SMEs and predicts a growing supply in sustainability reports from SMEs in 2008.

Copies of The GRI sustainability reporting cycle: A handbook for small and not-so-small organizations are available online at http://www.globalreporting.org/ Learning/LearningPublications/SMEhandbook/

The world’s first aggregated sustainability report is available for download at: http://www.globalreporting. org/CurrentPriorities/SmallerEnterprises/

Leontien Plugge is the GRI Programme Manager for SME and supply chain reporting

Katherine Miles Hill is a Communications Coordinator at GRI