The Petroleum Industry: Excellence & Responsibility in Serving Society

Forum 3 "Establishing Enhanced Credibility and Reputation in the Petroleum Industry Through Social Audits and Independent Verification"

Verification of Sustainable Development Reports

Mark Wade Shell International. Abstract
Shell recognises the importance of accountability to stakeholders not just for financial performance but also for environmental and social impacts of the Group. There is a need and desire to be open through engagement and more transparent communication. An important part of building confidence is the publication of reliable, verified information that gives a fair picture of our overall performance. Verification also helps improve the rigour of internal management systems and performance. The presentation outlines Shells approach to the verification of sustainable development reporting in the light of societys changing expectations. It explores the reasons for verification, for whom and how. The verification challenge of extending the financial approach to environmental and social/ethical aspects of performance is discussed. The development of a system of symbols to add clarity and value to the verification process is outlined. The case is made for moving from confirming the accuracy of data to adding further meaning for stakeholders, and the need to complement traditional approaches of verification with new methods of assurance. The latter include testimonials and expert panels, benchmarking and stakeholder perceptions of performance. Verification is seen as an import part of a broad programme of stakeholder dialogue and communications. Through this combination of actions we aim to earn the trust and respect of all parties who have a legitimate interest in our activities.

Verification of Sustainable Development Reports

Third-party verification of environment and social aspects of reporting is a relatively new practice and is done to add credibility to the publications. Shell has been a leading proponent of verification and has gained valuable insight and experience since it started working with KPMG and PricewaterhouseCoopers in 1996. Our verification goal is to ensure that people trust what we say to be correct. This paper outlines: Why we verify the Shell Report Who we are doing it for What the best methods are Our plans for the future.

Why we verify
We recognise the importance of accountability to stakeholders and are learning to be more open, through greater engagement with our stakeholders. We characterise this need in what we see as the move from the Trust-Me to the Show-Me World, as shown on this diagram.

V e rify in g S D R e p o rts T h e m o v e to th e S h o w M e w o rld

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S h e ll In te rn a tio n a l S u s ta in a b le D e ve lo p m e n t G ro u p

The implication here is that people are less willing than they were in the past to take the assurances of authorities such as government, scientists and companies on trust. There is an increasing call for corporations to show what it is they are doing. And in the absence of trust - something that characterises the modern world there is a demand for independent verification of what is being shown. An integral part of restoring confidence is the publication of data and information that is verified by respected independent organisations. Beyond assuring accuracy and reliability, verification increases stakeholder confidence that what is being reported is a fair picture of performance. It also improves an organisations ability to monitor and manage its activities. This is why we go to considerable lengths to verify the Shell Report - a publication we want to embody completeness and balance, display accountability and be an active document that invites debate. Verification, in our view, enhances these attributes.

Who are we verifying for?

We verify for a range of audiences. These include: Our people. As managers and staff, we need to have confidence in the effectiveness of our internal systems. It also helps us establish progress against targets and commitments - we know how much

has been achieved and what still needs to be done. We need confidence too that our work will be seen to make a difference by those inside and outside of our organisation. It empowers us to be ambassadors for our organisations. Specialists. These include what we call "special publics", those people who are particularly interested in what we do. Included is this group are shareholders, analysts - particularly those specialising in socially responsible investment, rating agencies, our business partners (who need to know that they are dealing with a trustworthy company), government officials, journalists and non-governmental organisations (NGOs), such as labour organisations, UN agencies, church, human rights and conservation groups. Industry colleagues. To build mutually-beneficial knowledge in your sector on impacts, you need to be able to benchmark performance. Verification provides greater confidence in the information that is being compared in this way and helps in developing industry norms and standards. Communities. We are very much part of the communities in which we operate and we need to establish credibility with our neighbours. They need to feel confident that what we say is correct. The general public is not a key audience. Few read corporate reports. They tend instead to take their lead from opinion formers among the special publics, such as NGOs and journalists.

Best methods
The best method of verification depends very much on the nature of the information. The concept of verification is built on the experience gained over the past decades in verifying financial data. This model can be applied to much of our health, safety and environmental (HSE) information - certainly the bulk of it that can be expressed in numbers. But as can be seen from the slide below
Ve rifyin g S D R ep orts Th e v erific atio n c ha llen ge
Fi na nc ia l E nv iron me nta l S oc ia l/ E thic a l/E c on om ic

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1 U nit 1 D efin itio n Stand ard F orm ulae Stand ard Exch ang e R ate Pro cess T radit ion al Verification

20-40 U nit s 20-40 Stand ard D ef inition s Stand ard F orm ulae Stand ard In stru men t C alibration s T radit ion al Verification

100s Un its F ew Stan dard D efin itio ns N o F orm ulae N o C alibration T radit ion al & Stakeho lder verificatio n/assuran ce

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complexity increases dramatically as you shift from financial to environment information, and then by a further order of magnitude greater as you move to social information, very little of which can be expressed in simple numbers. Despite recent controversies in financial auditing, the system - which focuses on a single unit, the dollar is still evolving but reasonably mature and has taken a profession over a century to develop to its current state of sophistication. The financial model of verification has been successfully applied to the HSE field where the parameters can be mostly expressed in figures. Despite the increased complexity - tens of different units (such as CO2, SOx and NOx, spills and safety measures) and numerous definitions - verifiers have made considerable progress over a decade and are delivering useful environmental verification within the inherent limitations in the accuracy of data.

In 1996 we started verifying our environmental data in the upstream business and extended this to the rest of the Group in 1997 and 1998, when we commissioned the most extensive verification ever undertaken by a multinational. This involved the verification of 25 parameters and visits to 40 operating units around the world. The rigour of the verification gave the verifiers, and us, a better understanding of the quality of our underlying systems and processes. With this information in hand, we worked with our verifiers to focus our attention on the 12 HSE parameters that we - supported by our verifiers - believe reflect the significant HSE impacts at Group level. Those Shell operating units that were subject to on-site verification in 1999, and that can demonstrate to the verifiers that their HSE data management systems are still effective, are subject to review centrally. Other Shell companies continue to receive on-site verification of their data. Providing assurance on social information - such as the effectiveness of anti-bribery and anti-corruption practices - is a far less mature process. There are hundreds of potential areas that could be verified (conforming to human rights, integrity, inclusiveness) but few standard definitions exist and there are neither calibrations nor formulae that can be used. Social information can be fuzzy and difficult to define. Because of the sheer volume and complexity, applying standard verification procedures to social information would be a very expensive failure. That is why we have looked instead at alternatives that can help achieve our ultimate goal: the trust of stakeholders. And if it is this trust that we are after, why not ask the stakeholders for their views? This is exactly what we have done. We have been looking at how we can make use of stakeholder panels to offer advice on our performance (this is working well in Canada and the Philippines), testimonials from independent experts who know what we do, and surveys to tap into people's views. If they make a judgement of our performance then their perception is our reality. Of course there is still a role for classic verification processes because one can check to see if management systems are working and that data from such systems are reliable. So far, for example, we have verified the central consolidation of social data (has it been added up correctly, how many returns?). We have also made progress in developing with a broad group of stakeholders a set of key performance indicators (KPIs) that will form a basis for a reporting and verification in the future. We also published an independent view of the effectiveness of our Business Principles letters of assurance process undertaken by the US-based Ethics Resource Center. Because of the different levels of verification that apply across the environmental and social aspects of the Shell Report, we have, working with our verifiers, developed three types of verification. Verified parts of the Report are labelled with symbols to reflect the type of verification. These are:

Global verification - applies to the most important HSE data

Here the verifiers obtain an understanding of the systems used to generate, aggregate and report these data. They assess the completeness and accuracy of the data reported by visiting the operating units (site level) to test data and systems. They perform a review of all data reported and assess the appropriateness of the data trend in discussion with management. They test the calculations made at Group level. For financial parameters they also check that they are properly derived from the audited Financial Statements. Systems and process verification - applies to case studies and benchmarking data

The verifiers assess systems and processes and underlying evidence supporting the data and statements marked with this symbol. Their assessment includes interviewing Shell people and external experts, reviewing documentation and confirming the accurate use of data derived form external sources. Aggregate verification - applies mostly to social and ethical data
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At the central level only the verifiers test the integrity and accuracy of the aggregation of data pertaining to the Shell Business Principles. This includes testing samples from a complete set of site (Operating Units) returns. No site visits are made by the verifiers and no verification is made of the reliability of the data at site level. We have adopted this multi-level approach to acknowledge the differences in the nature of the information and to demonstrate to our stakeholders that we are being open and honest. We did not want to publish bland statements normally associated with verification and we use the symbols to help communicate better.

The future
We expect that reliance on self-assessment and the demonstration of sound internal controls will become the norm for providing assurance on the reliability of HSE data. Independent verifiers will continue to visit operations regularly to check the continuing validity of HSE data management systems and reliability of information. But providing data reliability is only part of improved transparency. We are now exploring ways of moving from confirming the accuracy of data to adding further meaning for stakeholders: for example, is our performance good, bad or indifferent? To achieve this we will use other methods of assurance, such as testimonials from experts, making comparisons with other companies (benchmarking) and recording stakeholder perceptions of our performance. This is part of our effort to understand how well we are performing, communicate this to others, and to learn from those that do better. Fundamental to this approach is to focus on what is important for stakeholders. Our experience shows that while they want less information, it has to address their concerns. One way of creating focus - and

the approach we have chosen - is to develop a limited but significant set of key performance indicators (KPIs) in collaboration with stakeholders. We see KPIs as the logical basis for targets and milestones and for developing standards of reporting and verification. We identified an initial set of 16 KPIs with our stakeholders, five of which we already report (Return on average capital employed [ROACE], Total Shareholder Return, critical environmental, and health & safety parameters, and greenhouse gas emissions). Here common definitions and systems are in place and data are verified and reported regularly. Efforts since 1999 to test the practicality of the other 11 have led us to conclude that these fall into two basic groups. The first includes those whose measurement can be largely and meaningfully achieved by survey and the results from local or other levels can be aggregated (reputation, brand performance, acceptability of environmental performance, integrity, staff feelings on how they are treated with respect, and diversity and inclusiveness in the workplace. Good ways have been found in implementing these indicators prior to use. The second set contains those that can best be developed by a "learning-by-doing" approach for corporate reporting, focused on a particular "hot spot" or case study. Examples include: stakeholder perception of the quality of engagement, social performance and acceptability of environmental performance at local level. Pilot studies are continuing to develop tools and approaches in a range of operational and cultural contexts. Each study involves external experts and extensive consultation with local communities and other stakeholders to seek their view of Shell's performance, identify areas for improvement and agree local performance indicators. These studies are helping to enhance the social performance of business units and inform our approach. In addition, a review by KPMG of the internal management systems of the Shell Nigeria Community Development programme was complemented by a study of the performance outcomes by an independent stakeholder panel, which included individuals from UNICEF, Pro-Natura, the World Bank and Nigerian government agencies. These experiences, including the testing of a human rights assessment tool in South Africa, give us growing confidence in this new model of assurance where classical verification is complemented by independent expert appraisal and stakeholder perception of social performance. Data from this approach at different locations cannot be aggregated meaningfully. We advocate reporting performance at the corporate level on a hot spot or case study basis, aligned to international stakeholder interest and local reporting elsewhere. Further progress has been made in developing and applying a tool for self-assessing the degree of alignment of business process with sustainable development. The tool has been used systematically in two of our Businesses - Chemicals and Exploration and Production - to heighten awareness and identify actions for improvement. We still have a long way to go, but we feel confident that we are making progress towards our goal of improving stakeholder trust in our actions. The new model of assurance - as described - is beginning to complement the traditional approach. We certainly need to work harder to integrate the two approaches but we feel assured that, as this variation on the diagram shows: as trust increases the need for formal assurance mechanisms diminish.

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We believe that our inclusive approach - through greater transparency and a broader interaction with a wide range of stakeholders - is simply good business practice in a more demanding and uncertain world. If you understand and respond to the expectations of society - and make this part of your every-day business - there is less need to attach a formal verification process at the end. This is because trust is established along the way.