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12/15/2010

2010—The Year of the Integrated Report


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Corporations are clearly increasing the quantity and quality of their environmental, social, and governance reporting in response to investor pressure and a growing awareness of the consequences of a failure to manage the associated risks. But few have taken the next step—to formally integrate their financial and ESG reporting. However, 2010 may be remembered as the year the integrated reporting movement truly began to gather steam.

In March, Harvard Business School professor Robert G. Eccles and coauthor Michael P. Krzus published their book, One Report: Integrated Reporting for a Sustainable Strategy, which describes the benefits that were accruing to companies that were making efforts to report their financial and sustainability results in such a way that made their interrelationship more transparent to all stakeholders. In August the Prince of Wales’ Accounting for Sustainability Project and the Global Reporting Initiative, one of the driving forces behind sustainability reporting, announced the formation of the International Integrated Reporting Committee with the goal to work with companies, regulators, investors, and other stakeholders to promote the widespread adoption of integrated corporate reporting. In October, Harvard Business School held its first Workshop on Integrated Reporting, following it up with the e-book The Landscape of Integrated Reporting.

The Landscape of Integrated Reporting is a compilation of analysis and observations by the Harvard Workshop participants (among them this writer). It includes insights from the pioneers of integrated reporting, including Rabobank, Van Gansewinkel Groep, Philips, and American Electric Power. The collection also includes commentaries on integrated reporting from sustainability thought leaders, standards setters, and consultants, as well as the investment and auditing communities, and technology providers.

The book contains 64 contributions, totaling some 110,000 words, and was published a month after the conference. “The uniformly high quality of the articles people wrote and the fact that very busy people did this within a three-week deadline shows the level of passion and commitment to integrated reporting on the part of the workshop participants,” says Eccles, who organized the Harvard conference and is responsible for the e-book. In reflecting on the final product he also observed, “This book is a snapshot of progress and issues for integrated reporting today. It can be used as a road map for what needs to be done. A year or two or five years down the road, we can compare the current state of integrated reporting with what was captured in this book to evaluate the progress that has been made.”

The perspectives expressed illuminate the challenges that companies face as they attempt to integrate reports that have most often been produced in separate silos and which contain information expressed in very different ways.

Clearly a report that merely sets sustainability data beside financial data will not have achieved the goal of integrated reporting. Indeed, Terence L. Jeyaretnam and Kate Niblock-Siddle of the Australian sustainability consultancy Net Balance caution that integrated reporting cannot be viewed as a mere reporting exercise. They maintain that the measure of an integrated report’s success is the extent to which it enables companies to link their sustainability and business strategies. “It is that linking,” they write in their chapter of The Landscape of Integrated Reporting, “that is the critical process for an organization in identifying its financial and nonfinancial priorities. If sustainability is integrated into the broader corporate strategy it can enable stakeholders to understand the connection between sustainability and financial performance. It can also enable the company to make more strategic decisions in prioritizing sustainability issues.”

Adam Kanzer, Managing Director and General Counsel of Domini Social Investments, points out that while the mainstream responsible investment movement has focused on sustainability factors in generating alpha, what should be recognized is that “the ultimate alpha generator is our planet’s life support system,” and that “financial performance is meaningless if society is impoverished by its generation.”

Kanzer takes the view that integrated reporting has the potential to catalyze a transformational financial market shift “from ‘efficient’ capital formation to ‘sustainable’ capital formation.” He also believes it will put sustainable reporting front and center before an analyst community that often ignores corporate sustainability reports. Furthermore, he notes, “An integrated report should make this aspect of the company’s performance more relevant to senior management as the relationship between the company’s sustainability performance and the long-term value of the company is more clearly expressed and measured.”

During the Harvard workshop, there was considerable concern expressed that the integrated reporting movement would lead to a lesser role for sustainability factors, as the goal might be to produce a more streamlined unified report. Addressing that concern in his chapter, Kanzer noted that “it is critically important…that integrated reporting not subordinate sustainability factors to financial metrics. Financial reporting must incorporate sustainability factors to be accurate and honest [but] the goal should be something far more ambitious, incorporating a more enlightened view of value and materiality in a world that is desperate for a full and honest accounting of the consequences of our decisions.”

Indeed, the outcomes for companies that have embarked in earnest on integrated reporting initiatives appear to be overwhelmingly positive. In describing Rabobank’s experience with integrated reporting, CSR manager Olaf Brugman affirms that the exercise has enabled the private bank to “imbed sustainability into its core business activities and created a more trusting and transparent relations with stakeholders.”

–Susan Arterian Chang writes on sustainable finance and is director of content development for Capital Institute.

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