Monday, May 11, 2015

The Future of Integrated Sustainability Reporting

Integrated reporting helps to cut through the complicated morass of sustainability metrics. This effort helps tor provide greater consensus regarding the understanding of issues like materiality, transparency and comparability. In 2014 and into 2015 we have seen the proliferation of sustainability reporting that incorporates both environmental, financial and other elements.

While the benefits of sustainability reporting have been widely document there is a need for more comprehensive and integrated sustainability reporting. This is revealed in a number of surveys which show that there is a lack of shared understanding. As reported in Responsible Investor Magazine, a 2013 survey indicated that CEO's see many barriers to implementing ESG issues.

CEO's said that the driving force is revenue growth and cost reduction (44%), their own motivation (42%) customer demand (39%), employee engagement (31%) regulation (24%) and investors pressure (12%). What is most interesting about these results is that investor pressure did not change between 2010 and 2013. However this is at odds with research that shows that 78% of investors think that disclosure on ESG issues is adequate. Only 7% think that it was sufficient for them to assess materiality.

Companies have a number of different options each of which come with respective strengths and weaknesses. The three major bodies that have advanced corporate reporting are GRI, SASB and IIRC. Here is an assessment of the strengths and weaknesses of each.

IIRC

Strengths
  • Focussed on value creation within companies, from financial capital provider’s perspective
  • Responsive to negative and positive externalities
  • Flexibility to accommodate other frameworks (including GRI and SASB)
  • Potential for integration of ESG issues into business-as-usual reporting

Weaknesses
  • No guidance on metrics or KPIs
  • Little standardisation
  • Freedom may lead to poor ESG disclosure
  • Lacks alignment with traditional materiality

SASB

Strengths
  • Uses traditional definition of materiality
  • Certainty in relation to disclosure
  • High levels of comparability is targeted
  • Integrated into current reporting mechanisms
  • Easy integration with other frameworks (including IIRC and GRI)

Weaknesses
  • Very small number of issues identified per sector
  • Little guidance on processes, standards or KPIs
  • Might not identify all material issues for all companies (especially niche players)
  • KPIs not mandated, decreasing comparability

GRI

Strengths
  • Reliance on relevance of issues should mean better reporting on less issues
  • Focus on future targets and expected performance
  • Good flexibility to incorporate SASB and IIRC approaches
  • Widely used among large listed companies and good reputation
  • Requires process and compulsory metrics reporting

Weaknesses
  • More stringent tests for compliance than IIRC
  • G4 reporting might result in less transparency and comparability overall
  • Doesn’t identify relevant issues for some companies
  • Extensive supply chain disclosure is likely to increase related costs

One example that highlights the future of integrated reporting comes from AkzoNobel a paints and coating company. They have taken integrated reporting to the next level with what is being called the 4D method. This approach measures the whole value chain and includes four dimensions of capital: Financial, natural, social and human.

Pavan Sukhdev, CEO of sustainability consultancy GIST Advisory says the pilot “showcases the future of impact valuation and integrated reporting.” Adrian de Groot Ruiz, True Price executive director at True Price, a sustainability research organization that confirmed the 4D approach to be the first of its kind to be published, calls it “the future of integrated thinking and reporting.”

Two studies released in September 2014 demonstrate the merits of integrated reporting. The benefits cited in these report include engagement with external stakeholders and strategic applications.

In a study from the International Integrated Reporting Council research 91 percent of all respondents have seen a positive impact on external engagement with stakeholders, including investors. A total of 87 percent of businesses believe investors better understand their strategy. This includes better decision-making (79%), better collaborative thinking by the board about goals and targets (78%), better understanding of risks and opportunities (68%).

A PwC study showed that nearly two-thirds of investment professionals (63%) who responded believe that integrated reporting improves the quality of a company’s reporting. This includes information about strategy, risks and other drivers of value that could have a direct impact on its cost of capital.

“By attaching an economic value to the positive and negative aspects of each dimension, we can gain valuable insights into how we can drive longer term value not only for our shareholders, but also for the environment, people and society at large,” said AkzoNobel CEO Ton B├╝chner. “In addition, the results will inform our strategic decision-making … for our ongoing efforts to do more with less.”

Related
Comprehensive Summary of Sustainability Reporting Guidance
Sustainability Reporting to Minimize Negative Impacts and Increase Positive Benefits
Sustainability Reporting: Video of Company efforts to Engage New GRI G4 Guidelines
Webinar - Sustainability Reporting to GRI G4: Time to Make The Switch
Meaningfull Change to Make CR Reporting Pay: Inverviews
Video - Corporate Sustainability Report 2013: The Way to Long
The Future of Integrated Sustainability Reporting (2012)

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