BOB MASSIE, COFOUNDER, GLOBAL REPORTING INITIATIVE
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Integrated reporting—which merges traditional financial reporting with sustainability reporting—has shot up the global agenda quickly, emerging from relative obscurity two years ago. As cofounder of the Global Reporting Initiative (GRI), a multistakeholder organization that established sustainability reporting standards through an exhaustive consultation process in the late 1990s and early 2000s, I see parallels in the development of integrated reporting, and its promise to help shift our economy toward sustainability, justice and prosperity.
At this point, integrated reporting is more of a concept than a practical reality—a kind of vision that flows from intuition, rather than a specific set of steps. The basic premise of integrated reporting is that current financial accounting standards and practices fail to capture all of the information necessary to manage firms effectively in the 21st Century. This information, which largely revolves around societal expectations on how companies govern themselves and their impacts on communities and the environment, currently resides predominantly in sustainability reports (also known as corporate social responsibility or citizenship reports).
So, integrated reporting advances the proposition that sustainability reporting and financial reporting are inherently linked, and thus would benefit from merging. Not only would this streamline efforts; it would also spur a fundamental rethinking of how we define our economic life—starting with the definition of capital. Is capital just financial, or does it also encompass the natural, social, intellectual and other realms? If so, how do we calculate returns on these other forms of capital?
Stepping back, the very structure of integrated reporting raises the more basic question of the purpose of the firm: Is it to maximize prosperity for shareholders or for stakeholders? And, digging deeper, integrated reporting raises the question: What is the flow of causality between sustainability and finance? Does sustainability enhance financial performance? Or might the system of financial performance ultimately lead to improvements in sustainability? The enactment of integrated reporting will help answer these complex questions.
Integrated reporting also proceeds from another underlying assumption: that it will lead companies to integrate sustainability into business strategy. On this count, I see an extraordinary diversity of practice. Many companies, particularly in developing countries such as Brazil and India, already recognize that their long-term prosperity depends on understanding fundamental social trends, such as water scarcity, climate change and respect for human rights. The vast majority of firms, however, seem completely content to rely on 19th- and 20th-Century financial standards that essentially ignore these broader societal issues.
The rationale for such limited reporting rests on the notion of disclosing only so-called material information. Here again, integrated reporting begs the question, material to whom? Just managers and shareholders? Or other stakeholders as well, such as governments and civil society? The danger here is that, instead of simplifying things, as integrated reporting promises, it will make things more complicated by multiplying the number of factors—and audiences—of reports. Another danger lurks on the other edge of this knife, though: In the interest of prioritizing materiality, integrated reporting could narrow the field of inquiry to the point of losing key sustainability information.
Shifting to the question of how best to promote the uptake of integrated reporting, discussion typically reverts to the voluntary-versus-mandatory dichotomy. But I’ve always felt it’s not a fixed bipolar situation—it’s more of a continuum. With voluntary reporting, we gain innovation, such as the invention of new key performance indicators (KPIs). While I believe this is a good thing, it also introduces a proliferation of different metrics, making it difficult for third parties such as investors, NGOs, governments or even other companies to compare and benchmark corporate performance.
Another problem with voluntary reporting is the free-rider dilemma, where companies wait in the wings while others take risks and innovate, and then step up after the forerunners have done the trouble-shooting. Mandatory reporting solves this problem, and also introduces standardization, which facilitates comparability. I think we’re seeing an evolution from voluntary to mandatory, with the Johannesburg Stock Exchange in South Africa the first in the world to mandate integrated reporting.
Broader uptake of integrated reporting will likely take longer, along the 2020 timeline that GRI outlined at its 2010 Conference. From my own work on the Working Group of the International Integrated Reporting Committee (IIRC), launched in August 2010 by GRI and the Prince of Wales Accounting for Sustainability (A4S) initiative, there is talk of trying to get things done at a faster rate in order to present a plan to government leaders at the G20 meeting this fall.
I sometimes think the effort toward integrated reporting is being rushed a little bit—which may not lead to greater success, but to greater fragility of the product. If the creation of an integrated reporting framework is not done correctly, then a substantial number of people who form a constituency of NGOs, investors, governments and others that support a broader sustainability approach will simply bail out of the process.
The IIRC includes virtually all of the major accounting societies and accounting firms in the world. And in that sense, it’s a very promising effort because so many key players and security regulators are at the table. The main question is whether these players view integrated reporting as a nice-to-have add-on to standard financial reporting, or a critical innovation that supplants traditional financial reporting. The IIRC is, I think, proceeding correctly in trying to find the major points of agreement among many different parties by asking very basic questions, such as: Who’s the target audience? What’s the role of integrated reporting? What should the short-term objectives be? And what should the long-term objectives be?
I hope that GE, in its position of exceptional leadership in the United States and the world, will play a powerful role in helping other companies recognize that sustainability isn’t some crazy add-on element, but rather a key component 21st-Century business. Now that GE CEO Jeff Immelt has been appointed head of President Obama’s Council on Jobs & Competitiveness, he has a special opportunity—and I would also say an obligation—to provide the kind of competitive leadership that the president was calling for in the State of the Union by introducing these sustainability questions that are on the top of the list of many economic discussions around the world, but are almost nowhere in the policy and political discussions in the U.S. So, there’s a particularly opportune moment now that I hope GE will seize.
Bob Massie is a cofounder of the Global Reporting Initiative and a 2012 Democratic Candidate for U.S. Senate, Massachusetts: http://bobmassie.org/.