I am perplexed by the fuss about integrated reporting. It seems obvious that a company ought to effectively measure and communicate aspects of its business that matter to key stakeholders, and to do it in a cohesive manner.
Why it wasn’t done well in the first place is a discussion for another time and place, but here we are in 2012 knowing what’s at stake if we don’t take into account the impact we have on current and future generations’ ability to thrive. Surely we are ready to move beyond isolated accounts of corporate citizenry and to undertake reporting in a way that more thoroughly demonstrates integrity (financially, socially and environmentally)? Why is the progression towards integrated reporting slow and complicated if the need is glaring and simple?
To ease my perplexity, I turned to my friend and colleague in the reporting trenches, Leah Haygood of BuzzWord, to explore the development of integrated reporting, to see just how attainable it is, and what it will take to become mainstream, like annual reporting is today.
Lorraine Smith: Leah, we know integrated reporting matters more to reporters these days. We see an uptick in activity among our clients, including several participating in the International Integrated Reporting Committee (IIRC) Pilot Programme. More broadly, integration is a growing element of the reporting strategy conversations that SustainAbility has with companies. So why do you think it’s so challenging for companies to implement?
Leah Haygood: To understand the challenge, let’s put it in context. Integrated reporting is seen as a way to address several shortcomings of financial and sustainability reporting, including:
- The failure of standard financial reporting to account for all sources of value — from reputation to employee engagement to capacity for innovation to the company’s environmental footprint — factors that are more likely to be addressed in separate sustainability reports;
- Both financial disclosures and sustainability reports have become so comprehensive that extracting key information and understanding its context is challenging;
- Perhaps most importantly, issuing separate reports makes relating sustainability/ESG and financial performance more difficult and sends a message that they are not, in fact, related.
While these problems need solutions, they also create high expectations for integrated reporting. That, combined with the relative lack of guidance, means many companies that pursue integrated reporting struggle to meet the expectations while also producing a concise and focused report.
LS: In parallel to the integrated reporting conversations, there are emerging requirements for ESG disclosures by some governments and/or stock exchanges. It would be tempting to interpret this increase as a response to the recent financial shocks creating a heightened demand for transparency. But the steady march towards broader disclosures was underway in some jurisdictions — see for example France’s Loi Grenelle — well before 2008, suggesting that there is a deepening awareness that what is “material” to a company is broader than just “financial.”
With deepening disclosures and integrated reporting slowly but (relatively) surely marching ahead, perhaps in the future we won’t use an adjective in front of the word “reporting” — financial, sustainability or otherwise. Would we lose anything if we jettisoned these qualifiers?
LH: It’s interesting that the most recent communications from the IIRC talk about integrated reporting as an additional type of reporting, not a replacement for traditional financial and sustainability reporting. In the long run, I think integrated reporting could replace glossy annual reports — and that might not be a great loss, though there are exceptions. Meanwhile, companies must continue to report mandatory financial information and I don’t think they will stop reporting on all the topics covered by sustainability reports. There are audiences for the breadth and depth of information found in leading sustainability reports and companies have found them valuable in engaging employees and scoping out competitors, suppliers and customers, among other uses. But we are already seeing the big encyclopedia morph into different kinds of communications to different audiences through different channels — and a migration to integrated reporting is only accelerating this trend.
I am concerned about one potential downside if attention shifts away from comprehensive sustainability reporting. The reporting process has provided companies like Nike, Ford and Shell a platform for engagement with a wide variety of non-traditional stakeholders, and both sides have learned a lot through the process. Mainstream investors were often missing from the dialogue and as they become a primary audience for integrated reporting — and if sustainability reports morph into more audiences (and issue-specific communications) — the unique sharing of perspectives that took place through report stakeholder committees might also go away, and the non-traditional stakeholders would likely be the ones to lose their seat at the table. That would be a loss that companies would need to make up by continuing to engage in other ways.
LS: You are on the ground with companies as they are trying to shift towards more integrated reporting. Would you describe it as an evolutionary or revolutionary step for companies?
LH: Since the Global Reporting Initiative (GRI) G3 Guidelines were issued in 2006, that’s been the main reference point and we’ve seen companies steadily evolve their reporting — using GRI for the first time, moving up the application levels and adding materiality analysis, stakeholder committees and assurance. I think we’re now entering a much more unsettled — and possibly revolutionary — period as companies test the waters with integrated reporting, trying to wrap their heads around new ways of thinking about their business model, how they use a variety of “capitals” to create value, and how to measure and articulate those things.
At the same time, reporters are trying to understand what the proposed next-generation GRI G4 Guidelines mean for their reporting. G4 was intended to crosswalk GRI with integrated reporting, but that objective was dropped. And, while G4 has a commendable focus on materiality, taken as a whole, the proposed guidelines would produce reports that are anything but concise. So we see companies thinking hard about their reporting and the needs of internal and external audiences and considering their options, including frameworks like the United Nations Global Compact’s differentiation program which has also been evolving and may be more approachable than either integrated reporting or G4. As all of these trends play out, I think we will see more experimentation and new models. By nature, reporting is open source and there’s a lot of collaboration going on through the IIRC, GRI and in other venues. Practitioners can draw inspiration from how other companies are tackling the challenges.
LS: We often hear the cliché lament about the degree to which companies pour resources into reports that few people read. Do you think integrated reporting will have any impact on that? Is it audience specific — e.g. do investors care more about this, or will consumers experience integrated reporting in a way that will bring value?
LH: When — I’m tempted to say, “if” — companies crack the nut of producing a concise, compelling communication that conveys only the most important information about their company’s performance in terms of meaningful metrics, there would be a lot of audiences for that. But with integrated reporting, I think we’re at a bit of a “build it and they will come” stage, hoping that investors will find it compelling enough that they are more motivated and able to invest with sustainability in mind. As far as consumers go, I don’t think they’re any more likely to read an integrated report than a traditional annual or sustainability report.
LS: If the desired effect of reporting is to enable change, then, it would seem the jury is still out as to whether integrated reporting will accelerate change or merely rephrase the degree to which change has (or hasn’t) taken place. At the very least it creates an increased possibility that a more effective transparency effort will reveal the right information to the right stakeholders, so that they can understand, and respond to, corporate actions.
This article originally appeared as part of SustainAbility’s Changing Tack column on GreenBiz.com.