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Executive Perspective: Is Integrated Reporting the Sustainability Tipping Point?

September 26, 2013

 

By John Paluszek, Global Alliance Past Chair and Senior Counsel Ketchum/Executive Producer, Business In Society

 

If you have long labored in the sustainability vineyard, the idea of a “sustainability tipping point” may seem facile and presumptuous.

 

But hold on. Let’s inspect some of the accumulating evidence.

 

First, context in this seminal counsel from John C. Bogle, champion of intrinsic-value investing: “The principal focus of our financial system must shift from the counter-productive short-term speculation of the recent era toward the type of long-term investment that produces an optimal return on capital and creates wealth for investors.”

 

So let’s examine “sustainability” mainly in terms of long-term valuations (Day-traders: You may leave the room).

 

The epicenter of corporate sustainability cum long-term valuation is The International Integrated Reporting Council. It defines integrated reporting as “a process that results in communication … [on] how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value of short, medium and long term … principally aimed at providers of financial capital.” [Emphasis added.]

 

Of course, this means numbers – and materiality. How do you integrate valuation of progressive business strategies in environment, social and governance (ESG) into the framework of traditional financial reporting?  And, perhaps, how do you invent new communications vehicles that serve this purpose?

 

No easy task. But IIRC is now hard at it. It has developed a Consultation Draft with some 359 reviewers, at last count, from every continent – providers of capital, analysts, assurance providers, NGOs, consultants, accountants, academics, regulators and labour representatives among them. Moreover, IIRC has now attracted 100 businesses and 35 global investor organizations in its Pilot Programme developing various approaches to the task. And in August, Deutsche Borse Group (with its 756 listed companies having a combined market capitalization of 1,185 trillion Euros) became the first stock exchange to join the Pilot Programme.

 

Pilot Programme participants come from many industry sectors, so their design and implementation of integrated reporting may vary considerably. As an example, the rationale of one participant, The Clorox Company, includes these key elements:
 

  • Shows the linkage of CSR strategies to business strategies, reinforcing role in value creation.
     
  • Drives integrated thinking, accountability and resource allocations across the company.
     
  • Addresses increasing interest from the investment community in the contribution of sustainability efforts to value creation.

 

More immediate evidence of an approaching sustainability “tipping point” occurred this week in New York City at the invitation-only, tri-annual United Nations Global Compact Leaders Summit, “Architects of a Better World.” Here are some of my Summit highlights  and the accompanying UNGC survey, “Global Corporate Sustainability Report 2013”:

 

  1. Rapidly evolving investor movements [now] seek to generate and secure long-range financial returns while also contributing to sustainability solutions. Example: The UNEP Finance Initiative, with over 200 institutions, including banks, insurers and fund managers, and UN-supported Principles for Responsible Investment, representing asset managers and asset owners with well over US $30 trillion in capital.
     
  2. A new era of “sustainable foreign direct investment” by corporate entities with commitments to principles like those of the Global Compact may well be underway. Such corporate FDI flows, more than $1 trillion annually, far outstrip Official Development Assistance.
     
  3. Although there is increasing attention to sustainability at the CEO and Board levels, admittedly, all is not “rosy”. While 65% of Compact signatories are committing to sustainability at the CEO level, only 35% are training managers to integrate sustainability into strategy and actions; too, supplier sustainability ranks as the top barrier to large companies’ sustainability progress.
     
  4. Nevertheless, U.N. Secretary General Ban Ki-Moon summed up sustainability trajectory/velocity this way: “With growing incentives from investors, consumers, and Governments, and pressure from enlightened business and industry leaders, we can move from incremental progress to transformative impact.”
     
  5. About 8,000 companies around the world have signed on to the Global Compact ESG principles; some 4500 NGOs, governments, academic institutions and civil society organizations are also affiliated.

 

Additional “tipping point” evidence, much of it perhaps warranting additional EXECUTIVE PERSPECTIVE attention, must, in this condensed telling, be presented in a “sustainability potpourri”:
 

  • Innovation meets sustainability. Consider Enel’s new 2012 Sustainability Report, which emphasizes materiality and includes “future generations” among its stakeholders; “Veja Sneakers with a Conscience” (A SME engaging its entire supply chain, from cotton growers to consumers, in co-devising a sustainability value proposition); and Puma’s bold Environmental Profit and Loss methodology for “natural capital accounting” related to “externalities.” 
     
  • Banks and insurance companies are increasingly making development investment and risk management decisions in accord with The Equator Principles and The UN Insurance Working Group, respectively (Note: UN report, “Insuring for Sustainability”). And risk management is now a central consideration for sustainability commitments generally.
     
  • The International Organization for Standardization’s ISO 26000, offering guidelines for social responsibility, is getting traction.
     
  • Linkage of soft assets on balance sheets – up to 80% of assets in some cases -- and reputation/corporate brand-management is being refined and applied.
     
  • Non-Governmental-Organizations (NGOs) are increasingly partnering with companies in common-cause attention to ESG challenges and opportunities -- thereby reducing demands for regulatory, as opposed to voluntary, sustainability programs.
     

 

That’s some of the evidence for the “sustainability tipping point.”  Now, in symmetry with contextual advice above, a summation with this enduring counsel from John Bogle:

 

“Of course the successful enterprises that endure must generate profits for their owners. They will do that best when they take into account not only the interests of their stockholders but the interests of their customers, their employees and their  communities, and the interests of our society.”

 

Source: Thomson Reuters Sustainability