By William Baue, SocialFunds.Com

Sustainability reports, whose credibility is enhanced by such stakeholder engagement and assurance statements, are gaining in significance, as KLD indexes add Nike due in part to its report.
way to respond to critics is to stonewall them; another is to embrace them, using their feedback as a catalyst for growth and innovation. In the world of corporate sustainability reporting, stakeholder engagement with both allies and critics can be as important as assurance statements in creating credibility. Pioneering sustainability reporters are fusing engagement with assurance statements by convening small groups of diverse stakeholders to evaluate the information and presentation of sustainability reports.

Yesterday, Gap Inc. (ticker: GPS) released its 2004 Social Responsibility Report with the imprimatur of a Public Reporting Working Group (PRWG) consisting of shareholder advocates, socially responsible investment (SRI) firms and corporate social responsibility (CSR) activists.

"We believe that Gap has made substantial progress in focusing on the connections between its core business, systemic global concerns, and workers’ lives," reads the PRWG statement contained in the report. The Gap convened the group in 2002 to critique its first Social Responsibility Report (released last year to cover fiscal year 2003), which broke new ground by publishing a comprehensive list of supplier factory shortcomings in compliance with the Gap’s Vendor Code of Conduct.

While some bemoan that sustainability reports are not reaching a broader audience, the documents are gaining increasing significance. Last week, KLD Research & Analytics announced the addition of Nike (NKE) to its Broad Market Social Index (BMSI) and Large Cap Social Index (LCSI).

"Since the Indexes were launched in January 2001, Nike failed to qualify on social and environmental criteria . . . due primarily to concerns about its contractors’ labor practices, such as the use of forced overtime, low wages, unsafe working conditions, suppression of protests using local military, and general physical abuse," states KLD in its July 2005 newsletter. "The decision to add Nike to the KLD BMSI and LCSI is associated with the publication of Nike’s 2004 Corporate Responsibility Report."

Nike followed a similar strategy as Gap, convening a Report Review Committee that included Liz Umlas, the KLD analyst covering Nike as well as labor and human rights issues, among other academics and union and nongovernmental organization (NGO) representatives.

"We generally do not add companies to an index on the basis of a report alone–other factors include Nike’s being the first in its industry to disclose its entire factory base and its willingness to engage at least some of its critics," Ms. Umlas told SocialFunds.com. "In the past, the labor issue has been the main sticking point in our excluding Nike; the company continues to face substantial challenges in that area, but we feel it is demonstrating significant efforts to address these."

David Schilling, contract supplier system and human rights program director at the Interfaith Center on Corporate Responsibility (ICCR), participated in the Gap’s PRWG and also met with Nike to discuss its report.

"Both the 2004 Gap report and the 2004 Nike report have similar positive aspects–both address the chronic nature of compliance violations in their factory base, with each providing data of code violations by region, and their monitoring and remediation process to address the violations," Rev. Schilling told SocialFunds.com. "Both also recognize that the root causes of social compliance violations need systemic responses and those responses must engage all stakeholders in the process."

While Ms. Umlas and Rev. Schilling generally praised the reports, both also had criticisms, which is to be expected since their informed skepticism is the primary reason the companies asked them to participate in the feedback groups.

"The wages paid workers in supplier factories is not fully presented or discussed in either report," said Rev. Schilling. "There is data on percentages of factories in various regions not paying the legal minimum wage and/or appropriate premium overtime rates–monitoring has helped identify the issues, but more needs to be done to ensure that workers are paid what they deserve."

"In addition, there is no discussion of the sustainable living wage, which goes beyond the legal minimum wage set by governments, to discuss what workers and their families need to meet their basic needs and improve their standard of living over time," he added. "The Nike report has a section on wages and economic development of workers which advocates increasing productivity over the long term as a means to increase workers’ wages, but there are numerous examples where worker productivity has improved and the gains didn’t end up increasing the paychecks of the workers."

Ms. Umlas similarly focuses her critique of the Nike report on the labor issue.

"In the labor section, which is the heart of the report, while some of the anecdotes are strong, the data in the chapter are not always properly disaggregated or presented in a systematic or comprehensive manner," said Ms. Umlas. "Just as important, the company is still asking readers to take it at its word regarding its implementation of labor standards."

"It’s not yet clear what kind of report assurance would eliminate this difficulty and also be feasible for companies to undertake, but it’s also clear that critical readers are increasingly demanding more independent corroboration of what’s in these reports–Nike has a ways to go on this," she added.