SustainAbility’s recently released research See Change: How Transparency Drives Performance proposes a solution to the stalled state of sustainability reporting and transparency. See Change highlights three key elements that must be addressed in order to gain the most value from transparency and reporting efforts: materiality, valuation of externalities and integration. This is the last in a three-part series that explores those elements.
Earlier in this series we explored how materiality and the valuation of externalities enable companies to focus their transparency efforts and leverage the value of sustainability reporting. This final article discusses how companies can apply materiality and externalities valuation to integrate sustainability across the business.
True integration of sustainability means that material issues effectively are addressed within business functions and seen as critical to the company’s viability. Integration enables companies to understand internally, and — where relevant — communicate externally, how they create value and to better manage performance on critical issues.
Simply put, an integrated company is one that will be better positioned to thrive in a sustainable future. It also means that bolted-on CSR or sustainability departments, and even the word “sustainability” itself, will become a thing of the past. So how does a company become integrated?
A number of initiatives foster integration. These include integrated reporting, The Prince’s Accounting for Sustainability Project (4AS) and the Benefit Corporation movement.
Integrated reporting and integrated thinking
The integrated reporting movement, guided by the International Integrated Reporting Council (IIRC), helps companies understand and communicate the ways in which their business models create value. This is not just about reporting; ideally, a company must demonstrate what is referred to as “integrated thinking” in order to report in an integrated manner.
Practically speaking, the IIRC’s framework serves as an instigator to gather colleagues from across departments to better understand the interconnections between material issues, and to take steps toward further integrating the management of these issues across the business.
While there aren’t many examples of truly integrated companies and integrated reports that reflect this integration, a few companies stand out, including Philips and SAP. We also profile The Crown Estate and Itaú Unibanco (PDF), and their approach to integration, in our See Change research report.
A4S and CFO Leadership
With companies’ growing understanding that sustainability issues often are tied to material risks, the role of the CFO is evolving from pure financial planning and reporting to the wider lens of value creation. One initiative that aims to engage CFOs in this new role is The Prince’s Accounting for Sustainability Project (A4S) CFO Leadership Network, which brings together CFOs to “embed the management of environmental and social issues into business processes and strategy.”
The network recently has published four guides to help the finance and accounting community take practical steps to integrate sustainability into their business processes and decisions. The guides cover topics such as embedding sustainability into capital investment appraisal and natural and social capital accounting.
Members of the network include companies such as The Crown Estate, Danone, Marks & Spencer, Royal DSM, Sainsbury’s and Unilever.
Benefit Corporations foster integration
Another initiative helping companies integrate sustainability into the core business is the Benefit Corporation (B Corp) movement fueled by non-profit B Lab. This initiative also expands current measures beyond financial value to include environmental and social worth.
Today most businesses legally are obliged to maximize benefit to shareholders, as stated in their articles of incorporation. In contrast, Benefit Corporations alter their articles of incorporation to allow them to serve a more holistic purpose. Benefit Corporations can make decisions in more integrated ways that take into account the interests of society and environment along with the financial bottom line.
In the U.S., benefit corporation legislation allowing for this change has passed in 27 states and the process is underway in 14 other states. There are over 1,550 registered Benefit Corporations, including Patagonia and Method.
Challenging yet rewarding
Integrated reporting, CFO engagement and Benefit Corporations are three initiatives that drive sustainability integration. However, there are certainly challenges. A significant barrier is lack of incentives and policy architecture. As long as the purpose of a company is to maximize value to shareholders and the financial implications of key externalities are discounted, it will be difficult for senior leadership to push for increased integration.
However, the potential benefits of integration — improved resilience, more informed decision-making and better investor engagement over the long term — are promising. We propose some practical guidance in See Change, summarized here.
- Establish senior-level governance structure for cross-functional discussions on material issues.
- Leverage existing tools (IIRC’s framework, 4AS CFO Leadership Network, Benefit Corporation status), to structure further engagements with investor relations, risk management, and those responsible for corporate strategy.
- Include sustainability performance data in the company’s annual report and financial performance in relevant sustainability communications.
- Highlight interconnections across environmental, social and financial areas and how they relate to the business model and value creation.
- Publish regular narratives and data about the integrated strategy and performance and produce an integrated report.
Ultimately, true integration means that the business not only has incorporated sustainability into the core business model, but that the business model itself is sustainable. Effective transparency — including a focus on material issues and related externalities — can inform and enable integration, and in the long-term support the evolution of business to be the creators of and participants in a sustainable future.
This article originally appeared in What’s Next, SustainAbility’s column for GreenBiz.