The Sustainability Buzz

Will Integrated Reporting Drive Sustainability Forward?

One ReportLet’s face it.  Reporting is not sexy.  Neither are standards.  If you need to convince yourself of this fact, hold a talk on standards and reporting (and even offer to feed people) and observe just how many people show up.  Yet reporting is often the way that we determine how we’re doing quarter over quarter and year over year.  Financial reports drive decision-making and form the basis of business strategy.  But even as we become more aware (and the data supports) that allowing sustainability to drive business strategy is not only prudent but profitable, sustainability reporting remains jettisoned to the “nice-to-have” reporting periphery for many companies.

Along comes integrated reporting.   Also known as “One Report,” it sits at the confluence of financial, non-financial and sustainability reporting to provide a more accurate picture of value creation.  It ties environmental, social and governance (ESG) performance to financial performance and serves as a tool for not just articulating actions more holistically and accurately, but also for promoting positive ones.  United Technologies, Philips, BASF and Southwest Airlines are all currently reporting this way, and it may be that everyone will soon be required to report this way, too.  The European Union is expected to mandate ESG reporting by June 2013, and it’s likely that the U.S. will begin to move in this direction, too.

So if integrated reporting is so great, why aren’t more companies doing it?  Why should they bother?  Well, it turns out that an integrated report requires an integrated strategy.  As last month’s Buzz article reported, the companies who have integrated sustainability into their overall business strategy are pulling ahead of the competition in reaping financial benefit from their sustainability efforts.  Reporting may not be sexy, but greater profitability sure is.

We’re learning that judging a company purely on their economic performance is short-sighted, and it doesn’t accurately account for all of the risks to their continued profitability and performance.  Better management of resources (energy, water, materials, air quality, talent) is going to be a driver of competitive advantage for companies.  Integrated reporting provides an opportunity for senior management to gain insight on performance in these areas.  There needs to be a solid information platform supporting sustainability-focused business transformation initiatives to facilitate companies’ abilities to meet their goals.  Again, it’s back to the “you can’t manage what you can’t measure” thing we talk about so frequently at iSpring.

Currently, there’s a mishmash of information out there for shareholders and stakeholders that lacks consistency or integration.  Some companies have gotten on board with the Global Reporting Initiative’s G3 Guidelines framework to create meaningful sustainability reports, but they still exist as an “add-on” to their financial reports and only address ESG performance.  Integrated reporting standards need to be more comprehensive—as if the G3 Guidelines and the U.S. Generally Accepted Accounting Principles had a love child.

The Integrated International Reporting Committee (IIRC) is currently developing an overall framework for integrated reporting, and they released their discussion paper, Towards Integrated Reporting – Communicating Value in the 21st Century on integrated reporting in September 2011.  Their vision for the future of reporting and key report components doesn’t feature the words sustainability or corporate responsibility anywhere in there.  Their assumption is that sustainability is part and parcel to truly integrated model of disclosure.  In the U.S., the Sustainability Accounting Standards Board (SASB) has recently been formed to develop sector-specific key performance indicators (KPIs) for environmental, social and governance issues that affect financial performance.

Unfortunately, a key barrier to integrated reporting—or even sustainability reporting—for many companies in the U.S. is that they are still having difficulty getting the data they need for internal management reporting and performance evaluation.  That data simply isn’t ready for primetime yet.  For these companies, integrated reporting surely looks like more work and financial investment than they can handle right now.

However, as more companies test the integrated reporting waters, pressure will be on the others to follow suit.  The IIRC is undertaking a pilot program to work with 100 companies worldwide to produce integrated reports based on their new framework.  Don’t you think once Microsoft and Pepsi put out integrated reports, competitors like Oracle and Coca-Cola won’t follow suit, especially if the integrated reports receive praise?  And in the end, it may just be good business.

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