Has Integrated Reporting thrown sustainability under the bus?
One of the more compelling ideas in sustainability management of late has been the view that listed companies ought to produce integrated reports each year, not two separate reports as most currently do: one for financial performance and another for non-financial performance.
After all, what readers of corporate reports are interested in having is information about performance in general. Why bifurcate it?
Known simply as integrated reporting, the idea of producing reports that describe both financial and sustainability performance at the same time is at least 12 years old. The first company to produce one was Novozymes (PDF) in 2002, in which its CEO, Steen Riisgaard, made the following statement:
Our decision to bring everything together in one report is a natural consequence of business and sustainability moving ever closer together, and of various stakeholders asking for a wider overview of the business.
Novozymes has been producing integrated reports ever since. And according to a recent report (PDF) put out by the Global Reporting Initiative, the idea is catching on. Between 2010 and 2013, it claims, at least 750 other companies around the world followed suit.
Some countries, too, have now made integrated reporting, or IR, of some kind mandatory. South Africa, in particular, leads the pack, having adopted the so-called King III Governance Code in 2009, which requires companies to produce integrated reports that provide a holistic view of performance. Included in King III is the following:
King III supports the notion of sustainability reporting, but makes the case that whereas in the past it was done in addition to financial reporting it now should be integrated with financial reporting. …
Sustainability reporting and disclosure should be integrated with the company’s financial reporting. …
Integrated Reporting: Means a holistic and integrated representation of the company’s performance in terms of both its finance and its sustainability.
Without a doubt, the meaning and promise of IR from the start was integrated financial and sustainability (non-financial) reporting. The explicit language to this effect in the evolution and early implementations of the concept make this clear. That said, a funny thing happened on the way to developing an international standard for IR: sustainability got thrown under the bus.
The IIRC integrated reporting framework
First, the facts. Known as the Integrated Reporting Framework, the IR standard developed by the International Integrated Reporting Council (IIRC), released in December 2013, states the following:
The primary purpose of an integrated report is to explain to providers of financial capital how an organization creates value over time. …
An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term. …
An integrated report should disclose information about matters that substantively affect the organization’s ability to create value over the short, medium and long term.
Insofar as the term value is used in all three statements above, it clearly is a reference to financial value, which of course is the primary interest of the very “providers of financial capital” the Framework was designed to serve. Other forms of value such as, say, ecosystem services or the qualities of natural, human, social and other sorts of non-financial capitals important to human well-being are largely excluded — unless, of course, those other capitals have a role to play in creating financial value. In the words of the Framework:
The ability of an organization to create value for itself is linked to the value it creates for others. … This happens through a wide range of activities, interactions and relationships in addition to those, such as sales to customers, that are directly associated with changes in financial capital. … When these interactions, activities, and relationships are material to the organization’s ability to create value for itself, they are included in the integrated report.
Translation? Only when an organization’s non-financial impacts in the world can be linked to impacts on the value of financial capital — with the interests of providers of such capital in mind — should an integrated report include, say, disclosures of a company’s social and environmental impacts. The fact that a company’s greenhouse gas emissions, for example, might be excessive and ecologically unsustainable in the extreme need not be included if it can be argued that the fact of such emissions does not yet affect shareholder value.
Indeed, not once in the Framework is it stated that the basic purpose of an integrated report is to disclose information about the financial and sustainability performance of an organization in a comprehensive and combined fashion. This is unfortunate, because one strength of the Framework is that it puts a solid stake in the ground in support of a key principle of sustainability reporting: that performance is a function of impacts on vital capitals (natural, human, social and relationship, intellectual, manufactured and, yes, financial).
But rather than require disclosure of all impacts on all capitals relative to sustainability standards of performance, the Framework then effectively turns its back on sustainability and suggests that only those impacts on non-financial capitals that could or do affect the value of financial capital need be disclosed. So much for the original vision of integrated reporting.
Enhanced financial reporting
What we have before us, then, are two forms of integrated reporting, only one of which has the strength and force of a standard behind it. The first form is the original, authentic one in which integrated reporting calls for a combined and full disclosure of financial and non-financial (sustainability) performance. In principle, this form of IR is still very much alive, albeit marginalized and marooned by the makers of the now formal Integrated Reporting Framework.
The second form of IR is the one developed and released by the IIRC almost a year ago. The one, that is, that largely has abandoned the idea of including full sustainability disclosures in integrated reports, unless it can be shown that the disclosures involved have impact on financial value. Whereas the first form of IR speaks to the needs and interests of multiple stakeholders and with all vital capitals in mind, the second one focuses only on the needs and interests of one stakeholder group (providers of financial capital) and with only one capital in mind (financial).
This curious turn of events is even more surprising and disappointing when one considers who the founders of the IIRC itself were. Included among them were the Global Reporting Initiative and the Prince’s Accounting for Sustainability Project. Both organizations have been staunch promoters of sustainability reporting over the years and arguably stand for nothing less than full-throated, non-financial disclosure. Why they would put their principles aside and lend their support to a standard launched in the name of sustainability, but which amounts to anything but, is hard to say.
Indeed, the most one can say about the IIRC’s Framework is:
1. That it calls for integrated reporting only in cases where non-financial impacts coincidentally affect financial value.
2. That what it calls for is perhaps better described as enhanced financial reporting. Enhanced, that is, in the sense that it calls for inclusion of the non-financial (social and environmental) impacts of organizations only in cases where such impacts can or do affect the value of financial capital. No other social or environmental impacts need be included, not even if they are entirely unsustainable. Why? Because from an EFR perspective, they are immaterial.
Where this leaves us, I’m afraid, is in a world that still does not have a bona fide IR standard to turn to; a world in which advocates of the original conception of IR can still be found, but whose vision and vocabulary have been misappropriated by the forces of financial and shareholder primacy.
There are two faces of IR now, and the official one has let us down. Ironically, then, for those organizations interested in doing authentic integrated reporting, the IIRC and its Framework are the last places they should look to for guidance. Private, new and experimental approaches will have to do.