March 2014: Radicalising through standardizing
Different ways of reporting sustainability impacts have been championed by a significant number of academics, practitioners and companies. A range of these approaches have made it onto MBAs and standard business school curricula. This thinking has been critical for highlighting the theoretical deficiencies with business as usual but has just not been enough to really alter the zeitgeist of mainstream business. One of the key issues has been a lack of standardization on how sustainability reporting should be done. I would also argue that until now an equal problem has been who has been (or not been) advocating for it.
However, it seems that when it comes to sustainability reporting, we may actually be on the cusp of something profound. Although innocuously disguised as Integrated Reporting or <IR>, you don’t have to delve deep to see how significant <IR> is. Its self-stated goals, when the Prince of Wales and the GRI brought various stakeholders together 2010 under the banner of the ‘International Integrated Reporting Council’, was to “to create a globally accepted framework for accounting for sustainability”.
Any good initiative draws on common wisdom, and so <IR> is in many respects ‘nothing new’. It takes the principles of Elkington’s triple bottom line (people, planet, profit), the KPI development of the GRI and other bodies, the Forum for the Future’s Five Capitals module (human, social, natural, financial and manufactured, with the addition of Intellectual capital), marketing’s focus on value creation and the Carbon Disclosure Project’s focus on investors as the key draw for organizations to voluntarily take part. What is new, is that <IR> with a large injection of systems thinking and long–term vision, has taken these workable, yet discrete, models and whipped them up into something far more powerful then any of them could be on their own – a single future replacement for financial reporting.
<IR> makes clear the fact that businesses are there to create value, and those financial and other stakeholders who support a company do so on the basis of this value. It also makes clear the fact that businesses utilise a range of pre-existing value (in the form of different ‘capitals’), some of which are tangible in the price they pay for them e.g. manufactured capital, and some of which are not at the moment e.g. the health of a workforce or environmental services utilised. A business worth investing in is one that, when all the draw-down and enhancement of different capitals is taken into consideration, actually adds real value to people. A sustainable business is one that can create real value into the future.
However up until now the only comparable way that investors and society are able to judge the value creating reality, or potential, of a company is through a retrospective financial statement and some idealized statements of intent. Current financial reporting not only partially measures the value a company creates, but it only looks at what has happened in the past. With <IR> a company must state its strategic intention to create wide-ranging value in the short, medium term and long term. And of course, <IR> guides how this value should be understood in sustainable terms – something that it critical for creating clarity, comparability and efficiency.
One question many people ask is why would a company want to disclose its strategic intentions to the world? This is where the role of financial investors is significant. Investments are made on the basis of the future value creating potential of a company and so by being able to judge this potential, investors are able to make less risky decisions. Therefore if an investor is looking at a range of companies, you don’t want to be the one that isn’t sharing the wonderful ways in which you are going to create real value. The fact that customers, potential employees and NGOs will also be looking at this information is, of course an added incentive.
It is this desire for better information, combined with the accepted need to get real about whether companies actually create more good than harm, which means <IR> could take off quickly. However what makes me really excited about <IR> is who is behind it. A prestigious and wide ranging group, from Sir Mark Moody-Stuart, the heads of the ‘Big Four’ accountants, to Jochen Zeitz of Puma fame, David Nussbaum of WWF, and a whole range of other significant people in between.
We have all seen many sustainability initiatives come and go, but for me I would go as far as to say that <IR> is potentially bigger than anything that has come since Bruntland - an irresistible combination of what it is trying to achieve and who is driving it. Those at the heart of the process are not shy about forecasting that <IR> will at some point replace standard financial reporting – I agree, and it will not be a moment too soon.
Dr Victoria Hurth lectures at Plymouth University, is a UK lead expert for ISO Sustainable Development in Communities and a board member of Tradable Energy Quotas.
Please note: this was originally published in Croner's Environmental Magazine