From the Many, One: The Path To Integrated Reporting
These days, most annual reports are little more than a letter from the CEO and a page or two of highlights wrapped around the 10-K. No context to help explain good or bad performance, no details or proof points about long-term vision, and certainly no effort to help an average shareholder understand the management discussion and analysis (MD&A) section.
Institutional investors have the luxury of listening to a CEO firsthand and asking questions in analyst meetings and in one-on-one calls. But it’s almost impossible for individual investors to get the whole picture, especially if they’re concerned about the company’s impact on the larger world and its financial implications.
Whether for reasons of conscience or the growing realization that bad citizenship hurts the bottom line, solid evidence exists that investors are taking increased note of corporate behavior. A 2009 white paper on the subject shows the trend clearly. Coauthored by the Dutch investment firm Robeco and the corporate consultant Booz & Company, this study found that “responsible investments” have been growing at an accelerated rate, climbing an average of 22 percent a year between 2003 and 2007. (This compared to flat growth in traditional investments in the same period.)
The report, however, also identified key stumbling blocks to responsible investing, chief among them the lack of any real consensus on what a responsible investment actually is. With no universally accepted standards and definitions, investors have precious little to go on. It’s up to them to create their own standards for separating the wheat from the chaff — for distinguishing sustainable, cutting-edge companies from those that merely claim to be responsible players.
For traditional measures, investors can certainly rely on the mandatory 10-K report to the Securities and Exchange Commission (SEC) to get a clear snapshot of a company’s financial performance year to year. There is, however, no counterpart for gauging nonfinancial performance. To address this lack, many companies now produce corporate responsibility (CR) reports. But most of these documents are, in the end, not very helpful investment tools. There is no requirement that their results be audited or their content be measured against consistent benchmarks. And there is no standard way to gauge the effect of nonfinancial factors on the bottom line.
How, then, can we truly measure the long-term impact of a company’s behavior or judge the risks and/or ethical implications of a given investment? While the task remains difficult, the answer might be the “integrated report” — an annual document that combines both financial and nonfinancial data, creating clear connections between social and environmental choices, their impacts, and performance.
In 2009, integrated reporting took a big step forward with the collaboration of two major advocacy groups, the Global Reporting Initiative (GRI) and the United Kingdom’s Prince of Wales’s Accounting for Sustainability Project. A meeting of investors, diplomats, standards experts, accounting firms, and major companies established a group, the International Integrated Reporting Committee, that would create universal standards and models, as well as a global governance structure to enforce consistency worldwide. Other developments also began to accelerate the trend, including a South African mandate that all companies in the country produce integrated annual reports by 2011.
In the United States, meanwhile, the SEC released guidelines requiring companies to assess and disclose the business effect of climate-change laws and regulations. This includes taking into consideration financially measurable consequences, such as the lower demand for products that are potentially damaging to the environment and the cost of adhering to environmentally progressive international accords. The directives had been called for by some large investors, including the California State Teachers’ Retirement System, the nation’s second-largest public pension fund. They represent a significant step in the drive to tie environmental impacts to a company’s bottom line.
As with most trends, some countries are well ahead of the curve, including Denmark, the first to make integrated annual reports a national requirement. A prime example of the result is Novo Nordisk’s “triple bottom line” report — a document that, in the company’s words, “ensures that decision making balances financial growth with corporate responsibility, short-term gains with long-term profitability, and shareholder return with other stakeholder interests.”
Getting on Board
It’s likely that companies everywhere will find themselves under increasing pressure to explain the impact of their decisions on the environment, society, and the bottom line. This means that integrated reporting will increasingly become the norm, so the time to begin preparing to issue this new kind of corporate report is now. Before starting, however, realize that an integrated annual report is a big undertaking. Above everything, it requires a deep commitment to the underlying goal of integrated reporting: becoming, in deed and not just word, part of a sustainable global economic model.
Where, then, to begin? Here are some basic first steps:
Bring people together. Call a joint meeting of annual report, CR (or CSR), and investor relations teams. Integrated annuals demand a great deal of cooperation and coordination. This initial meeting will establish relationships and put the subject on everyone’s radar.
See what works. Contact companies that are already doing integrated reports. Study their efforts and get as much information as you can from their team leaders. At the same time, stay abreast of developing standards and techniques — particularly by following the progress of the International Integrated Reporting Committee (IIRC).
Get buy-in from above. As with any major corporate undertaking, commitment must start from the top. Make an effort to engage and educate upper-level management. Their approval, after all, is critical to getting the resources you’ll need.
Do what you can now. While it’s unlikely you’ll accomplish an integrated annual report in the first year, there’s plenty of preliminary work to do, so get started. Create a team to get up to speed with GRI guidelines, and begin to align your current CR reporting with GRI standards. Start to explore ways to connect the current annual and CR reports. This means asking a broad range of questions, such as: How can we connect corporate strategy to emerging global trends and dynamics? How can we correlate sustainability issues to their financial implications? And how can we connect remuneration incentives to risk and organizational behaviors? As you ask these questions, start building a prototype, outlining possible structure and content. Also, draw up a rough timeline, so that your team has something to work against. Finally, while you plan, begin to rewrite the basics of your company’s story with impacts in mind. Instead of simply saying, “Sales are up by X percent,” create a holistic picture that incorporates impacts and solutions, ethical issues, and your record on diversity and employee engagement.
Promote internally. Employees take pride in companies that are committed to responsible, sustainable behavior. Integrated reporting is proof positive of where your company stands. It’s a solid, concrete platform that can elevate the corporate brand.
Corporate reporting is ultimately about metrics — about numerical data that help investors gauge potential rewards and possible risks. What has changed is that investors seek (and will increasingly demand) new metrics, particularly as the costs of irresponsible corporate behavior come to light. Investors, in short, want more. Corporate citizenship has become more than a buzzword. And proof of good citizenship has become fundamental to investment decisions that are both ethical and sound. It’s likely the best way to provide that proof is the integrated annual report. As a standardized, quantifiable document of true performance in the marketplace, it is good for shareholders, good for the brand, and good for the world we will leave to our children.
As seen in Corporate Responsibility Magazine
Steve Mignogna is a Principal at Sequel Studio, a branding and marketing, and communications consultancy based in New York.