We are witnessing a leadership battle for ownership of sustainability transparency and it’s not a good thing. Instead of playing to each organization’s strengths, we are risking moving the needle back to only one strength: financial returns. The battle is being played out on the respective turfs of the IIRC, SASB and the GRI, where IIRC and SASB are focused on what investors want to know in order to make more money and GRI is focused on what companies are doing to the world that makes it more or less sustainable. If I were a publicly listed corporation, I would probably find myself rather confused, amused or bemused.
Creating a harmonized corporate transparency pathway which enables consistent and non-overlapping disclosure frameworks does not need to be a lost cause, although it looks that way at present. Even the definition of a core concept such as materiality is not consistent across these three leading organizations, as explained eloquently by Dunstan Alliston-Hope and Guy Morgan of BSR in a great article to which I have referred in the past.As I was considering this fascinating state of affairs, I noticed that a few other accomplished experts have also discussed what Dwayne Baraka calls the disconnect in ESG reporting.
In an article which outlines the strengths and weaknesses of the IIRC, SASB and GRI frameworks, Baraka concludes that, “each of the approaches will add something to various types of investors, and dialogue might increase, but companies and investors need to be involved if CEOs and responsible investors are to have a meeting of minds on the state of ESG reporting.”
Another article, by Cornis van der Lugt, an independent consultant and researcher with a sharp mind, was published back in May 2013, just after GRI’s G4 guidelines were revealed, entitled “Time to align forces.” This was his first message of caution: “Used in combination, IR1 [Integrated Reporting Framework version 1] and G4 can have significant impact on measurement and disclosure by companies world-wide. Yet used non-aligned, and perceived to be competing, years of work on non-financial reporting and corporate sustainability may be lost.” van der Lugt goes on to present a fabulous evaluation of the IIRC and G4 frameworks and even offers his updated comparative analysis of both freely to all those who are interested.
However, even before the pronouncements on the state of affairs post-G4, the chronology of this leadership battle for corporate sustainability transparency was already apparent. These are my observations from afar and some, possibly irreverent and highly subjective assumptions about what’s been going on.
Integrated Reporting is in the air. The May 2010 GRI conference ended up with CEO Ernst Ligteringen making a bold if not rather surprising declaration to 1,200 participants from over 70 countries. Two goals for the GRI.
(1) By 2015, all large and medium-size companies in OECD countries and large emerging economies should be required to report on their Environmental, Social and Governance (ESG) performance and, if they do not do so, to explain why.
(2) By 2020, there should be a generally accepted and applied international standard which will effectively integrate financial and ESG reporting by all organizations.
This second element, the surprising one, was clearly an expectation that GRI would become an integral part of the fabric of anything the IIRC would eventually come up with. It was also a clear expectation that it was going to take quite some time – ten years – to develop an international standard for integrated reporting.
This was the twilight period. Everyone was optimistic that we could have it all. Eventually.
Round Two : August 2010 : Formation of IIRC
There was a big buzz of excitement and anticipation when the IIRC was formed in 2010, called at the time the International Integrated Reporting Committee, with a lot of support from Prince Charles, who was moving full steam ahead with the Accounting for Sustainability Project at the time. IIRC (renamed in 2012 to Council rather than Committee) was chaired by Professor Mervyn E. King, the then Chair of GRI. Was this a conflict of interest? Apparently not at the time, when, to all onlookers, GRI and IIRC were euphorically optimistic that the solution to all the world’s ills had been found in integrated reporting of the kind that would be jointly owned and nurtured by GRI with the IIRC filling in the gaps and making the connection to investors.
Soon the landscape would look rather different. However, three GRI leaders were on the original steering committee and working group of IIRC, and the shared objective to create a globally accepted standard for accounting for sustainability was the glue that stuck everyone together. (Apart from money of course. Let’s not forget that the original IIRC governance bodies were composed of 53 members of whom 31 (58 percent) represented financial services institutions or associations or the financial function of corporations in one way or another. Contrast this with the governance bodies of the Global Reporting Initiative which has always been a collection of elected representatives from corporations, NGOs, labor institutions, academic institutions, consulting firms and individual experts, representing all corners of the sustainability spectrum including human rights, environmental protection, labor standards, economic development and more. IIRC and SASB are squarely focusing on an investor audience and therefore target publicly traded companies, while GRI is focusing on any and all audiences, and therefore targets all organizations, including government agencies, SMEs, non-profits and trade associations who are not required to deliver Annual Reports, integrated or otherwise).
The creation of IIRC was not entirely out of the blue. It followed the publication of the campaign book, One Report, by Eccles and Krusz, a heroic, if not a little rose-colored, effort to extol the benefits of integrated reporting, and the announcement of the South African Stock Exchange in June 2010, that listed companies would be required to deliver an integrated report if they wanted to stay listed, a coup-de-grace for non-reporting companies, masterminded by Mervyn King, the leading light in creating a pre-global South African Integrated Reporting Committee. The fact that King would ultimately find his home at the helm of the IIRC was probably not yet entirely predictable as, at this point, all seemed hunky-dory on the reporting horizon.
In the GRI 2010-2011 Year in Review, the optimistic intertwining of IIRC and GRI is evident:
“GRI’s Reporting Guidelines offer comprehensive and trusted guidance for sustainability reporting, and are an excellent tool for progressing towards integrated reports. GRI also aims for its Guidelines to be a provider of robust content for the forthcoming integrated reporting framework. GRI is present in the IIRC’s Secretariat and Committee, and in its content Working Groups and task forces.”
“Professor Mervyn King has been an outstanding Chairman for the Global Reporting Initiative, pushing the sustainability reporting agenda forwards in pursuit of a sustainable global economy. GRI congratulates Professor King on his new appointment and as an active member of the International Integrated Reporting Committee the GRI is looking forward to continue to work closely with Professor King in the important endeavor of promoting the development of Integrated Reporting.”
Nonetheless, this divorce, amicable though it may be, sends a message to the aspiring Integrated Reporters of the world: Investors are King. (No pun intended). The Chief Exec of GRI, Ernst Ligteringen, however, remains in the loop as a Board Member of IIRC with its reorganization in late 2011.During the period up to the publication of the Integrated Reporting Framework in December 2013, IIRC is generating quick wins and momentum for integrated reporting. It gets the concept on the agenda at Rio, and a declaration (the famous Paragraph 47) which talks of “integrating” sustainability information in to the reporting cycle,” publishes a draft integrated reporting framework for public comment and a consultation draft and establishes alliances and memorandums and a pilot program and more. Driving forward relentlessly, IIRC pretty well overlooks, it seems, a similar major reporting event which is taking place at the same time. The new-improved GRI Reporting Framework.
Round Four: Mid 2012 Enter SASB
In October 2012, the newly-formed full-of-promise Sustainability Accounting Standards Board put out a press release claiming that “SASB will be the U.S. voice for material non-financial issues and how to recognize and account for them as part of corporate reporting.” With bold plans to create a Materiality Map and a series of sector-based standards that identify material non-financial issues that should be included in mandatory reporting by publicly traded companies, SASB starts to shake up the mix. Notably at this point, SASB maintains a distance both from GRI and from IIRC, carving a place for itself on the reporting landscape which will rather disturb the status quo and leave corporations even more challenged and possibly, amused, bemused or confused.
Round Five: February 2013 IIRC and GRI agree to agree
Just as both GRI and IIRC are developing their respective frameworks, an MOU is signed between the two organizations, declaring that both parties will proactively engage with each other by sharing information and striving for “complementarity” in their respective frameworks. Shame they didn’t agree to agree on a definition of materiality. That would have been an MOU with teeth. Instead, GRI made some more tangible resource commitments to IIRC. IIRC made rather fewer to GRI.
Round Six : May 2013 GRI good news
May 2013 was alive with the sound of eager applause at the GRI conference in Amsterdam, hailing the new G4 as the superhero way forward for sustainability reporting, with a materiality focus, and a shorter, sharper, cleaner, quicker way to relevant corporate transparency. Although ditching comparability, the process-oriented G4 framework was seen by (almost) all as a massive improvement on previous GRI reporting framework iterations and would substantively change sustainability reporting for the better.
Oops. Just one thing missing. Despite the stated objective of creating a sort of plug-and-play sustainability element which would fit snugly into integrated reports, by “offering guidance on how to link the sustainability reporting process to the preparation of an Integrated Report aligned with the guidance to be developed by the International Integrated Reporting Council (IIRC),” the G4 framework excluded all serious mention and reference to integrated reporting and all guidance relating to the process linkage. Why? Well, the IIRC was powering up full steam ahead with its own framework, and apparently didn’t have the time to stop to think about how G4 could work to its advantage. Or it thought that G4 wouldn’t work to its advantage. The official line was that the timelines for these two developments were different.
Round Six Part Two : G4 Research on Integrated Reporting
In 2013, GRI also demonstrated an interest in the progress of integrated reporting and led a piece of research which examined the sustainability perspectives of existing integrated reporters and other experts. One of the key conclusions placed G4 squarely into the round integrated reporting peg, describing GRI as “a compass of sustainability,” saying that, “Some of the [reporters] want to see GRI hone key performance indicators specifically from the perspective of integrated reporters. Others appreciate how GRI ‘opens their eyes’ to the breadth of potential sustainability concerns for their business, and find the GRI reporting process a good reference point as they construct an integrated report. As one pioneer put it: ‘GRI guidelines helped us right from the start to answer the question: what does it take to be a sustainable company?’”
Round Seven: December 2013 IIRC Framework Publication
Hot on the heels of the publication of the G4 Framework came the IIRC Framework, in December 2013, announcing that the framework marks “an important milestone in the market-led evolution of corporate reporting.” The definition of the Integrated Report, in the framework 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.”
And we are left in no doubt about who the Integrated Report is designed to communicate this to. “The primary purpose of an integrated report is to explain to providers of financial capital how an organization creates value over time. It therefore contains relevant information, both financial and other.” Conspicuous by its omission in the < IR > Framework is any mention whatsoever of GRI. The word “sustainability” appears only twice. There can be no mistake that Integrated Reporting is not about sustainability impacts. It’s about helping investors make financial decisions. If it happens that a sustainability impact is so unquestioningly obviously financially material, then it will merit inclusion in the integrated thinking and writing of the Integrated Report. Regrettably, or otherwise, that may exclude most of what is included in sustainability reporting.The < IR > framework ignores GRI, MOU or otherwise. GRI believes that sustainability reporting is a prerequisite for integrated reporting but in fact, it’s not. Because nowhere in GRI – or in G4 – is the link explicitly made between sustainability issues and business profitability or shareholder return. And nowhere in < IR > is the link explicitly made between sustainability impacts and financial outcomes.
Perhaps it’s time we stopped thinking of Integrated Reporting as an evolution of both Annual and Sustainability Reporting and accept that reality is different. Integrated Reporting plays an important role in filling in the gap between top line and bottom line and ensuring that the value-creation radar screen is not too narrow. Sustainability Reporting plays an important role in ensuring companies account for their impacts on all stakeholders. These are two purposes, two roles and despite the existence of a compelling connection between the two, no organization has successfully delivered a framework which encompasses both in a substantive way.
Round Eight: January 2014 IIRC and SASB sign an MOU
And still, the MOU game continues. This month saw the signing of an MOU between the IIRC and SASB ”to more closely collaborate to advance the evolution of corporate disclosure and communicate value to investors…… Among other measures, SASB and the IIRC agree to strive for complementarity and compatibility in the ongoing development of their respective frameworks, guidelines and standards, and take proactive measures to share the work of the other organization.” There’s that complementarity thing again. If only we could save the world by signing MOUs and preaching complementarity, we would all be able to sit back and take a long rest by now.
Round Nine: Here we are. All Lose
So far, in eight rounds, no single framework has emerged a clear winner. Sustainability Reporting is firmly entrenched and G4 is looking promising with uptake starting to emerge. The token number, growing though it may be, of integrated reports, some of which are evidence of integrated thinking and some of which are evidence of little thinking, is unlikely to increase substantially unless we see that investors are not only demanding, but using, these wonderful new documents. SASB is a great concept and has made fabulous progress in practice, but we have yet to see the detailed SASB standards being widely applied in any sector. In short, the fragmentation and apparently competitive battle for sustainability transparency leadership has not yet favored any of the protagonists in an outright way, which might suggest that time and energies might be more productively used in working together rather than working apart.Perhaps it is time that the leadership of the IIRC, GRI, SASB and even the UNGC – there’s room in the corner – meet together at a Complementarity Retreat (no MOU necessary) and emerge with a set of agreed action items:
- Recognize that G4, < IR > Framework and SASB Standards CAN each deliver unique and equally valuable elements of corporate transparency and accountability.
- Harmonize the definition of sustainable business materiality and other key definitions across all frameworks.
- Agree that < IR > is the standard for Integrated Reporting and that, as such, it must include a reporting against a set of common core sustainability material issues relevant to all businesses with linkage to business outcomes and financials, with harmonized performance indicators and methodologies to measure these.
- Agree that G4 is the standard for sustainability reporting and that the material issues identified through the sustainability process must reference business outcomes, irrespective of where they occur in the value chain. Companies producing only one (integrated) report would be advised to include core material issues as identified in (3) above, and a set of sustainability material issues as required by G4.
- Agree that SASB have got the sector materiality process nailed, and encourage the adoption, with perhaps some adaptation for non-U.S. non-publicly traded entities, of SASB standards in integrated and sustainability reporting without duplicating all that’s being done in separate processes.
- Agree to do things once and not three times, where reasonably possible.
- Agree to be inclusive and not competitive, while retaining focus, where reasonably possible.
- Have a celebratory ice cream, and get to work.
A version of this piece was originally published on the CSR Reporting Blog.