Carolyn McMaster | July 3, 2013
Integrated reporting has the potential to greatly boost the quality and utility of sustainability reporting. Companies will be far more transparent, communicate more clearly and be better equipped to track and measure their progress. That’s the message I got from reviewing a handful of recently released reports on sustainability reporting.
Unfortunately, integrated reporting* is taking hold slowly. Very slowly.
In 2012, all but one of the S&P 500 companies made some kind of sustainability disclosure, and 76 percent had some kind of sustainability report, but only seven integrated financial and sustainability reporting (American Electric Power, Clorox, Dow Chemical, Eaton, Ingersoll Rand, Pfizer and Southwest Airlines).
That’s according to an excellent and comprehensive study by the Investor Responsibility Research Center Institute (IRRCi) and Sustainable Investments Institute. The study found that companies don’t do an adequate job of reporting on the financial benefits and risks of sustainability initiatives—even when that information is available. For example, a report might highlight energy cost savings but not say what the investment or savings were. In some cases, financial aspects are anecdotal.
These findings also stand out: Different types of sustainability information tend to be siloed among sustainability reports, annual reports and Form 10-Ks (a required annual report to the SEC). For instance, 43 percent of companies included business opportunities related to climate change in their sustainability reports, but far fewer (17 percent) covered those in their annual reports, and fewer still cited them in their 10-Ks. Unsurprisingly, given the investor focus, 10-Ks are where companies are most likely to talk about financial impacts in relation to sustainability.
Less than a third (29 percent) of companies discussed financial impacts in their sustainability reports. This did not surprise me: providing bottom-line figures for sustainability issues and risks isn’t a typical function of sustainability reports, and it’s not always possible. However, numbers provide a business context for sustainability; financial disclosures make the company far more honest (or transparent, in current lingo). For better or worse, money is how we measure business success; quantifying external risks, such as weather or labor factors affecting the supply chain, is critical to knowing what to focus on.
The study concludes that sustainability reports “offered the sunniest prospects of all from companies regarding [the] environmental, social and ethical challenges buffeting them.” When less-than-sunny disclosures are discussed separately (or not at all), it violates a fundamental tenet of sustainability reporting: citing the bad along with the good. It hurts credibility and is perceived as dishonest.
Some research has shown that the quality of environmental disclosures and a company’s market value are related, according to the Value of Sustainability Reporting report by Boston University’s Center for Corporate Citizenship and Ernst & Young, which notes that linking material business impacts and sustainability risks is becoming increasingly important. The report cites research indicating that investors prefer to put their money into “transparent enterprises” and that sustainability reporting helps boost reputation, consumer trust and employee loyalty.
I want to see whether the trend toward integrated reporting (glacial though it is) does result in better sustainability reports that provide a complete picture and give companies ways to measure what matters and track their progress. Financial reporting should be a way to fully inform all stakeholders, and that’s ideally where integrated reporting leads. The IRRCi report cites this comment on integrated reporting from Microsoft: “Many of us involved in financial reporting have lamented, admittedly in very generalized terms, that financial reporting seems to be moving more towards a compliance exercise rather than a communication exercise.”
Another recent survey, Six Growing Trends in Corporate Sustainability from Ernst & Young and GreenBiz.com, agrees that integrated reporting isn’t making inroads quickly. But it does say that sustainability concerns increasingly include business risks—such as resource shortages—and companies are not well prepared to meet them. Integrated reporting, by combining financial and risk analysis with sustainability, could help with that.
I hope that CFOs and other financial executives push their companies toward integrated reporting. They shouldn’t wait for it to be a requirement.
* The International Integrated Reporting Council (IIRC) defines integrated reporting as “a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value.” I’d define it as combining sustainability reporting with associated financial risk and investment. Send me your definition if you have one.
