Friday, October 7, 2011

Heretical thoughts on Integrated Reporting

I have been hesitant to add my voice to the Integrated Reporting debate because, as one who writes Sustainability Reports for a living, I might find that the requirement for dedicated Sustainability Reports slowly disintegrates as Integrated Reporting takes over. Therefore, I have had to examine my own concerns in the light of potential bias and fear that my passion for Sustainability Reports as standalone documents may get in the way of an objective analysis. However, as a reporter, I cannot stay on the sidelines, and heck, who is objective these days anyway?

To acclimatize myself for the debate, I re-read two excellent analyses of the new discussion paper that the International Integrated Reporting Committee published recently (download here). James Farrar, an outstanding commentator, takes the considered view and lists the oportunities and the challenges, asking whether Integrated Reporting can solve the information gap. Another superb analysis came from Richard Welford of CSR Asia, who comments that the IIRC document "raises some huge questions as to whether the IIRC is being so ambitious that it risks actually damaging what it is setting out to do."  Both of these accomplished and influential writers motivated me share my thoughts, which are still work in progress.

I find great fulfillment in writing Sustainability Reports because I firmly believe they add value in a way that Annual (financial) Reports can not. I believe Sustainability Reports speak to different kinds of stakeholders - ones who are interested, not (only) in the financial stability and forward projections of the firm and how much (more) profit it will make, but in the impact of companies on their lives and on the planet, almost regardless of a company's profitability. 

I believe that most stakeholders want to know about the soul of a company, about its practices, its stories and its relationship with the planet and its dwellers. For most stakeholders of companies, the fact that a company makes more profit is almost incidental. We know it's there, we know, somewhere in our consciousness, that companies exist to make profit. We understand the free market economy. We are ok with that.

But sustainability stakeholders, and that includes everyone outside of the financial services and investment professions, want the money thing to take care of itself. They don't want to be bothered with financial balance sheets. They want to know about the company and their life. The company and their children. The company and their local park. The company and the air pollution that is affecting their asthma. The company and the Amazon Rainforest that may be so far away but rainforest destruction is just heartbreaking. The company and how it treats its employees, some of whom are relatives. The company and its gender equality policy and why a colleague was not promoted despite clearly being the best for the job. The company and our smartphones and whether someone committed suicide on the production line due to stress at work. The company and how it raises the price of cottage cheese out of all proportion to the cost of its manufacture.

Sustainability is about people, not about balance sheets. It's about aspirations, not about cumulations. Companies need to make enough money, that's clear. But if sustainability becomes subordinate to the restlessness and greed of the financial markets and sustainability reporting is taken over by the brilliant minds which created the Great Financial Crisis, the shameful economic inequalities around the globe, the bonuses of senior executives, each of which is enough to keep a village in rural India in food and clothing for a year or two and even, the Integrated Reporting Framework, then we are likely to transform sustainability into a cool and calculated numbers game, where $ count instead of impacts, and reports count instead of values.

Now, don't get me wrong. There is a linkage between financial performance and sustainability. The so-called non-financials are actually very financial, for the most part. They cost money, they save money, they build business or they present risk. In most cases, sustainability performance can be calculated and as such, it makes sense to present them in a company's annual financial accounts. Sustainability is about risk, and safeguarding risk carries cost. Sustainability is about opportunity, and investing in the future often comes with a price-tag. And as consumers and purchasers of goods and services, we are all complicit in making the economy what it is today. Many of us have chosen to enjoy the benefits of today's economic wonderland without considering the true cost.

But, wasn't sustainability reporting borne out of a desire to reflect those imbalances in a way when everyone could understand, not just Finance PhD's? Didn't sustainability reporting serve to fill a gap that financial markets ignored? The Integrated Report should reflect, so the discussion paper says, integrated thinking. But at the same time, the current focus of the Integrated Report is the needs of Investors. In other words, the Integrated Report will become just another financial tool, serving the needs of those who want to get richer, by providing them with a modern methodology to evaluate whether sustainability performance makes more money or less. And if it makes less?

Yes, I agree that financial accounting needs to reflect elements of sustainability practices. Carbon accounting for example seems to be a no-brainer. Yes, I agree that we should move to quantify and integrate some aspects of ESG risk in financial reporting. Yes, I agree that integrated thinking could well lead to new integrated business models, rather than traditional models which equal "make money + do sustainability projects". Those are good things.

But no, I am not yet sure that the Integrated Reporting model will lead to a fair and balanced representation of a company's sustainable practices as they affect ALL stakeholders,  especially when those practices deliver impacts which cannot be readily squeezed into a mathematical number-crunching exercise. I am not yet sure that the lay stakeholder will find interest in the predominance of CFO-dictated jargon-ridden legalese that will be prevalent when The Integrated Report becomes the norm. I wonder if the non-financial stakeholder will be marginalized and will eventually become irrelevant in the heydey of integrated reporting, bringing things back full circle to when sustainability reports were not even on the horizon, with only a slightly modified epicenter.

So where I am, I guess, is in a sort of hybrid model. Let's call it Venn Reporting. It's kind of like Financial Reporting with a Sustainability Boost, and Sustainability Reporting with a Financial Boost. To follow an integrated strategy, a company must do the sustainability work. To deliver a good sustainable business strategy, a company must do the financial work. But like a Venn diagram, where both circles overlap is only part of the story and not the whole story. We need to make business strategy more sustainable, which means changing the models and the thinking, and we need to make sustainability strategy more business-like with more quantified targets, impacts and yes, financials. My concern is that force-fitting them both into one model delivers only one model. The financial model. Slightly padded, maybe, but still a financial model.

By now, I get to reading the IIRC discussion paper. I like the proposed framework for the Integrated Report which follows 6 key sections.

Organizational overview and business model: What does the organization do and how does it create and sustain value in the short, medium and long term?
Operating context, including risks and opportunities: What are the circumstances under which the organization operates, including the key resources and relationships on which it depends and the key risks
and opportunities that it faces?
Strategic objectives and strategies to  achieve those objectives: Where does the organization want to go and how is it going to get there?
Governance and remuneration: What is the organization’s governance structure, and how does governance support the strategic objectives of the organization and relate to the organization’s approach to remuneration?
Performance: How has the organization performed against its strategic objectives and related strategies?
Future outlook: What opportunities, challenges and uncertainties is the organization likely to encounter in achieving its strategic objectives and what are the resulting implications for its strategies and future performance?

However, it's all in the fine print. What's value? Financial value? What's risk? Financial risk? What are material issues? Financially material issues? Will  "reduce our carbon emissions" ever be as material as "launch a new product"? Against the massive weight of financially driven development, marketing, sales, employment imperatives, how will the true interests of non-financial shareholders emerge strongly enough to create a balance? How can we ensure processes are in place to ensure sustainable business decision-making and sustainable practices which are at the base of integrated thinking?   

There are some businesses which are inherently sustainable - cleantech, water and waste management technologies, for example. The indirect impacts of these businesses far outweigh the direct impacts of how much carbon they emit in their process or how much waste they send to landfill. By advancing their core business proposition, these companies advance sustainability. Integrated Reporting is easy for these companies. They don't have to establish a sustainability program - their business is the program. But 95% of all other businesses need to integrate ESG considerations in to every business decision and weigh up the financials. For these businesses, integrated reporting is well beyond current capabilities. For these businesses, the Venn model may work best. Report on sustainability performance and reflect the truly financially material elements in the Annual Report. As linkage capability (connectivity, the IIRC calls it) improves, so we will see more complete Integrated Reports. But there will always be a need for a document which reflects the spirit and soul of the company to a broader span of stakeholders, and that will be the detailed Sustainability Report.

That's not to say sustainability reporting is perfect. It is not, in so many ways. Despite the valiant efforts of the GRI, it is still not mainstream and the quality of reports published varies so widely that true comparability is almost impossible. The leap from inadequate sustainability reporting to adequate integrated reporting (really integrated) is like reinventing the cotton gin. 

I have no doubt that Integrated Reporting will move forward and there will be uptake, of sorts. It's the sexy thing in reporting today. It has the weight of all the most dominant financial powers in leading markets behind it and many influential individuals. Of course it has. It serves their interests. I just hope that, as integration integrates, sustainability doesn't disintegrate.

elaine cohen, CSR consultant, Sustainabilty Reporter, HR Professional, Ice Cream Addict. Author of CSR for HR: A necessary partnership for advancing responsible business practices  Contact me via www.twitter.com/elainecohen  on Twitter or via my business website www.b-yond.biz/en  (BeyondBusiness, an inspired CSR consulting and Sustainability Reporting firm)

2 comments:

Brian said...

I think "scope" is a critical pillar of your post. If integrated reporting is supposed to reflect integrated thinking, then we need to define the boundaries (and limitations--what is included and excluded) and scope of the exercise. Core definitions will make or break the integrated reporting initiative.

elaine said...

hello Brian, thanks for reading and commenting. Yes, I agree, scope must be very clearly defined.
Best, elaine

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