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Fuelling the Future - 'Change is a State of Mind'

By Joss Tantram on April 12, 2010 at 3:43pm.

Company and Context

Neste Oil is a Finnish Oil company that emerged from state ownership in the 1990s, is listed on the NASDAQ OMX exchange in Helsinki, employs around 5,000 people and has activities across the globe. As a formerly state-owned entity, the company’s largest shareholder remains the Finnish Government’s Prime Minister’s Office.

Whilst you may not have heard of Neste Oil, the company has a major consumer presence in Finland as the country’s largest consumer fuel retailer with over 800 fuel stations, and ambitions to further develop their consumer focussed activities in Northwest Russia and the southern part of the Baltic Rim. More significant perhaps is the company’s activities in developing and supplying fuels to the wholesale market and its strategy to “...be the world’s leading supplier of lower-emissions traffic fuels” and its investment in “green” and renewable bio-fuel based diesel production.

The Annual Report 2009 represents the company’s latest step in the provision of sustainability information as an integrated part of financial reporting. In previous years, information on the company’s approach to responsibility has been included in Annual Reports and in 2008 the company also produced a stand-alone “environmental brochure”.

Extractives companies, especially those involved in oil and gas exploration and production lie at the sharp end of environmental and social concerns, having such a significant opportunity to either contribute to or mitigate environmental and social issues. In the oil and gas sector, in recent years, many companies have sought to report upon their activities in the fields of mitigating the impacts of conventional fuel production and supply and also demonstrating their commitment to reduce impacts and use renewable energy sources.

Neste Oil’s approach to the challenges of sustainability is to seek to provide fuels which utilise the same infrastructure and technology as conventional fuels but which utilise either significantly larger proportions of bio-fuels or are entirely based on renewable biological sources. A key part of this strategy is their investment in production facilities for NExBTL renewable diesel, which can be produced from a flexible mix of vegetable oils and waste animal fat sourced from the food industry and which is reported to reduce greenhouse gas emissions by 40-80%  compared to conventional fossil diesel.

Neste Oil’s Annual Report 09 seeks to present the company’s approach to the development of a leadership position in renewable fuels and the opportunities and challenges inherent in such a commitment.

Content

Overall, the report presents a combination of conventional financial and governance information with information on the company’s approach and performance on sustainability issues. Integrated reporting remains a developing art. Issues include congruency of financial and non-financial information, and the extent to which the “conventional” business information normally found in an Annual Report references and supports the sustainability information. This report displays a high degree of integration between overall business vision, strategy, governance, sustainability commitments and performance. This can be ascribed to the company’s ambition to define its overall offer as leading in terms of the environmental performance of its fuels.

The report contains conventional Annual Report contents in the form of business performance and key financial metrics, CEO Review, Business Strategy and Business Unit overviews and also specific information under the heading of “Responsibility” focussing upon financial responsibility, environmental responsibility and social responsibility. This section also contains a GRI Content Index and an Independent Assurance Statement.

Credibility

Overall, the company faces significant challenges if it is to achieve its target of becoming the world’s leading supplier of lower emissions traffic fuels, specifically because of the challenges of sustainable sourcing bio-fuel feedstocks. The key feedstock that the company is committed to using is Palm Oil, which has become a hugely controversial product because of its associations with forest clearance in Indonesia and the resulting pressure upon iconic species such as the Orangutan.

In the context of responsibility, this report contains the following statement: “By acting responsibly, Neste Oil aims to reduce or eliminate the negative impact of its operations”. This is a laudable goal, yet it is difficult from the report to identify just what the company’s current net impacts are, or how they will get from the current position to the implied destination. Such aspirational statements do not stop here: The company’s approach to responsibility also states: “We are socially responsible, environmentally sound and economically viable”. Such a statement is problematic from an environmental perspective, and does indicate a challenge to the company to match its rhetoric with a realistic perspective on just what the overall impact of the company is. The term “environmentally sound” has no inherent meaning and requires contextualisation, it encourages a reader to ask just what it means; relatively better than other oil & gas firms, zero emissions or simply legally compliant?

The report contains an overview page of “Results” including its targets for responsibility performance, and actual performance, in 2009. Many of the targets contained are qualitative, and it is difficult to assess whether they have been achieved adequately. For instance, one target is to “Develop leadership training programmes further and ensure quality implementation” and the actions and achievements noted against it are that a “Total of 361 managers took part”. Is this good and how would we know? Both targets and achievements should be normalised, for instance to indicate what percentage of target managers 361 represents. Another challenge to the company’s presentation of “results” is the limited scope of time covered -  best practice is to disclose at least 3 years of targets and performance, and preferably 5 years.

The fundamental challenge for Neste Oil  lies in the implications of its commitment to become a global player in the development and supply of bio-based diesel fuel and the requirement to source palm oil responsibly. The company’s approach to this appears strong. It is an active member of the Roundtable on Sustainable Palm Oil (RSPO) and has committed to using only certified palm oil (through the RSPO certification process) when available in sufficient volumes (which the company estimates will be by the end of 2015). This is a laudable and impressive aim, and would send a significant message on the mainstreaming of independently certified bio-fuel sourcing to the wider world. The challenge is that from reading the report the achievement of this goal seems likely although stretching. From a quick look at publically available external comments on the RSPO and Neste’s plans, it is clear that there are significant stakeholder concerns about the achievability and unintended consequences of such a significant expansion in palm oil use for bio-fuels. NGOs, including Greenpeace, have criticised the plans and process of the RSPO and a quick web search reveals the text of a speech to the Neste Oil AGM in April 09 which notes that if Neste Oil meets its goals for “green” diesel production it would become the world’s single biggest palm oil consumer , and this raises concerns that there is simply not enough palm oil production capacity to meet such intended demand.

It would not be true to say that the report ignores the challenges inherent in palm oil production, and Neste Oil is clearly committed to seek and promote certified sourcing. However, given the scale and scope of stakeholder concerns about the RSPO and palm oil in general, a requirement emerges for Neste Oil to more fully explore and answer such concerns within the context of its reporting, which does not yet adequately take place. 

Given the concerns of stakeholders,  for the company should significantly develop its disclosure of stakeholder engagement and communication. The report does include a “Stakeholder Overview” table, which lists a variety of groups together with the type of interactions undertaken and evaluation and feedback from those interactions. In practice, however, interactions are predominantly communications based and do not really present a picture of either what issues are of concern to different stakeholders or indeed the depth of concerns and implications for Neste’s plans.

The report contains a GRI Content Index and an independent assurance statement from Tofuture Oy. The assurance statement covers specific content in the report related to responsibility and reflects a limited engagement. Despite this, the statement was conducted in accordance with AA1000AS and the use of GRI guidelines and represents a very useful set of key issues for the company to consider in the development of its approach to reporting. The statement has a set of observations and recommendations covering:

· the company’s approach to the identification and disclosure of material issues,
· greater involvement of stakeholders in identifying material issues,
· a more systematic approach to data gathering and management and
· focus upon delivering against commitments for sustainable supply chain management with special reference to raw materials sourcing.

Communication

The report is visually well designed and presented. The most striking aspect of the report is the use of a number of quotes seeking to reinforce the themes of vision, change, evolution and general creative thinking. These all serve to create a feeling that the company wants to think and do things differently, and indeed much of the report’s contents support this, at least in intent, if not yet in execution. Writing is generally clear and the report uses clear graphs and diagrams to support and reinforce messages and approaches.


Conclusions

There is a lot in this report that is very impressive, though there are a number of places where the report either overclaims, oversimplifies or fails to provide the required detail on processes and approaches. Neste Oil clearly wishes to take a responsible approach to its business and its ambition could have a significantly positive effect in both the availability of lower impact fuels and in (if it is possible) mainstreaming the production of certified sustainable raw materials. However, it would better serve the company’s ambitions to make a clear further step to discuss, disclose and demonstrate the real challenges, areas of disagreement, barriers and progress towards its overall goals that are going to be a key part of its journey to achieve its vision.

Recommendations

- Ensure that the observations and recommendations of the Assurance providers are taken up and progress on these are reported in the next report, including:
-  Develop and disclose materiality identification process.
- Include stakeholders in materiality identification.
- Specifically note issues for consideration highlighted by stakeholders, highlight the full range of their concerns and disclose the company’s perspective.
- Include at least 3 years of performance data.
- Ensure that targets and indicators are truly quantifiable and provide context to allow readers to judge qualitative performance data.
- Present annual progress towards achieving 100% sourcing of certified raw materials.
- Present an overall metric of progress towards achieving the company’s vision.
- Ensure that the use of phrases such as “environmentally sound” are avoided.

Joss Tantram, Partner – Corporate Sustainability, Terra Consult.
Joss is a specialist in strategic sustainability management consulting. He was a member of the judges on the Association of Chartered and Certified Accountants (ACCA) UK Sustainability Reporting Awards and is a member of the British Standards Institution (BSI) Technical Committee SDS/1 representing the UK in the development of the forthcoming international Social Responsibility Standard ISO 26000. Joss designed and is a Director of WWF International’s One Planet Leaders global executive development programme.
For more info see: www.terra-consult.co.uk