Yes I realise it doesn’t quite sound as gripping or recognisable as sustainability or cleantech (ok my fellow geeks, I’m relying on you now!), but I attended a ‘master class’ today with Professor Robert Eccles, Harvard Business School, which addressed the key environmental issue companies are facing today, i.e. how they justify and embed sustainable practices into their core business.
Many boards are grappling with this question, but most appear frozen with terror at the potential size of the challenge and the fundamental impact it will have on their culture – as Bob suggests the massive leap required is one of “reconceptualising the role of corporations in society.”
The answer is Integrated Reporting, which Bob Eccles is championing through his book and website. He has studied this area for some time and has begun to see a change in the general mood music around the subject. As he says, “When an idea’s time has come it shows up independently in different places.” And that is certainly happening among a broad group of companies spread around the world in markets as diverse as the US, UK, Japan, Brazil and South Africa. The time is right for this concept for a number of reasons.
First and foremost it is a simple one – combining financial and non-financial data to produce a consistent picture of all relevant company information. A good example of a company attempting this significant change is Ricoh, which is treating the collection and reporting of non-financial data in a very transparent manner. Ricoh’s aim is to integrate its reporting processes, but it recognises it has a steep mountain to climb between now and 2020, because sustainable business practices lack general social consensus. Despite the fact that consumer pressure for change is now spreading to the financial community with banks such as New York Mellon Bank highlighting its commitment to environmental, social and governance (ESG) screening there is still a long way to go. Aside from the major issue around company culture and social consensus there is a big sticking point regarding the quality and control of non-financial data. As Bob’s presentation describes it ‘closing the books’ for non-financial information is not as rigorous, which leads to the other key challenge that of auditing non-financial statistics.
Clearly if Integrated Reporting is to succeed it will require integrated auditing. BASF is an example of a company addressing this issue with its ‘materiality matrix’ outlining both economic performance and environmental/social performance. Sadly not many companies have progressed this far and perhaps that is because there is a poor understanding of the relationship between financial and non-financial performance information.
While Bob confesses to being a ‘free market man’ he does believe that the markets alone are not going to be able to encourage adoption of integrated reporting on their own, it will require legislation. There are potential blockers within organisations to look out for, especially the CFO and General Counsel, whose roles make them understandably reluctant to adopt such practices. Yet hopefully we will not have to wait for a disaster such as the Great Depression for change to happen. This led to the foundation of the Securities and Exchange Commission and initial attempts to create generally adopted accounting standards.
There are some positive steps being taken by visionaries like Bob Eccles, including the recommendation to form the International Integrated Reporting Committee by the Prince of Wales’s project team ‘Accounting for Sustainability.’ They have some ambitious goals and in the coming year they will make some significant announcements. Similarly Harvard University will be running an event on Integrated Reporting in Autumn 2010, so this is definitely an area to watch.