All you need in order to understand why integrated reporting is so important to the future of sustainable business is to read a truly integrated report. After reading one (Philips’ report for example) and, for comparison, a regular sustainability report you won’t need any further explanation. Believe me. Another option is to read one of the many publications of Prof. Robert Eccles of Harvard Business School, who is one of the experts in this field, which he describes as a “bizarre little domain of standard-setting for nonfinancial information.”
Earlier this month Prof. Eccles was interviewed on MIT Sloan Management Review about the latest developments in integrated reporting. This interview provides a clear view of both the opportunities and the challenges of integrated reporting. It’s interesting to see how what Eccles describes as what is considered by most people as “the most boring thing you can possibly talk about” can be such an important driver in the sustainable business space. Here are five reasons why, including the challenges that each one presents:
1. Integrated reporting can spur actions, not just display them
According to Eccles, right now “many, if not most, sustainability reports are more window dressing than substance and so aren’t very effective at influencing the company’s resource allocation decisions.” He believes there’s a much greater potential in reporting, both externally and internally, and integrated reporting is the way to take a full advantage of it.
It means that integrated reporting doesn’t only demonstrate the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates, as the IIRC defines it, but is also an integrator of sustainability into a company’s core business.
Challenge: Enhancing the role of an integrated report from a greenwash gatekeeper into a sustainability driver isn’t easy at all. It’s clear that an integrated report can help spot dishonesty or incoherence, but can it really be an eye opener and a driver for change for a company?
2. Integrated reporting will help developing the metrics everyone is waiting for
One of the main problems in the sustainable business space today is the lack of clear metrics, translating social and environmental issues into business language, i.e. figures. The GRI standards, the most common framework used by companies for reporting hasn’t been able to fill this void yet. Integrated reporting is supposed to change it by including ESG metrics, like the ones that companies like Puma are experimenting with these days. It’s going to be an important step for investors and other stakeholders as well as a way to encourage competition between companies over who is more sustainable.
Challenge: First, creating valuable yet simple metrics. No one really did it to date. Second, how you compare apples to apples? As Eccles mentions in the interview, there’s still a debate between setting a generic set of standards applicable across all industries, or sector-specific. “That would be a fundamental, strategic decision. On the one hand, it’s good to have a set of metrics that are applicable to any circumstances, so that you can compare apples to apples. On the other hand, when you get into the sustainability, nonfinancial measures, ESG metrics, whatever you want to call them, what’s important tends to vary by sector,” he said.
3. Integrated report to sustainability report is like shared value (CSV) to CSR
In other words, integrated reporting reframes the whole idea of value creation, providing an alternative to an existing model that provides very little value. Michael Porter (Eccle’s colleague at Harvard Business School) explained that while CSR is separate from profit maximization, discretionary or is in response to external pressure and is based on an agenda that is determined by external reporting personal preferences, CSV is integral to competing and to profit maximization with an agenda that is internally generated.
Integrated reporting is also offering a better alternative to what we have now, which Eccles describes as ineffective and invaluable system. It’s no wonder there’s a clear similarity between the way Porter describes shared value and the way Eccles describes the opportunity in integrated reporting: “Good companies will see integrated reporting as an opportunity to communicate on and implement a sustainable strategy, which I define as one that creates value for shareholders over the long term while contributing to a sustainable society.”
Challenge: Both integrated reporting and CSV sounds great in theory and have some solid examples from companies that already implement them, yet the substance behind their promise is not clear yet, and it’s also not that obvious that the majority of companies will truly benefit from implementing them.
4. Creating a global regulated sustainability reporting system
So far all the frameworks we have, from GRI reports to CDP surveys are voluntary. Thousands of companies use these frameworks, but a greater number of companies don’t. As Eccles mentions, to achieve the goals behind integrated reporting at a global scale means “that integrated reporting needs to be a mandatory, not voluntary, exercise.” There’s just no other way to do it.
Challenge: Who will be the regulating body? Will it be done through stock exchanges, such as the SEC, making it a listing requirement? Should it pass through legislation or maybe developed by a global body like the U.N. that will set up the standards?
5. Integrating a third-party audit requirement to ensure quality
Right now the majority of reports are not audited, which is one of the reasons why the data presented is many times questionable, not to mention the latest criticism on many mistakes found in unaudited reports. Clearly, the addition of third-party verification will make ESG data much more trustworthy and therefore more valuable.
Challenge: Creating an auditing system that will be accepted on all the involved parties. Since we’re talking about accountants here, it won’t be simple. Let’s just hope it won’t take too long.
Raz Godelnik is the co-founder of Eco-Libris, a green company working to green up the book industry in the digital age. He is an adjunct faculty at the University of Delaware’s Department of Business Administration, CUNY and the New School, teaching courses in green business and new product development.