Integrating Integrated Reporting: Part One
By Steve Rochlin, Director and Ben Grant, Manager
Recently AccountAbility participated in a workshop on Integrated Reporting at the Harvard Business School. AccountAbility’s contribution—“Integrating Integrated Reporting”—is featured in a free “Ebook” (available here) written by workshop participants. This week’s Insight presents the first half of the article.
Integrated Reporting holds the potential to function as a vital driver of organizational change towards Responsible Competitiveness. Responsible Competitiveness is the enterprise-wide approach to managing environmental, social, economic and governance issues. The Responsible Competitiveness approach builds sustainable competitive performance through measurable, transparent, and accountable commitments to employ renewable resources and to improve the well-being of workers, communities, and ecosystems.
Integrated Reporting will clearly communicate the alignment of sustainable development considerations with core enterprise-wide strategy. Investors in turn will begin to distinguish companies that possess a deep understanding of material risks and opportunities, and will steer capital toward these more accountable organizations thus creating a virtuous cycle accelerating sustainability in business.
This is at least one vision of the power of Integrated Reporting to drive change that embeds Responsible Competitiveness. Currently, however, companies face a paradox. Company leaders (be they senior executives, directors of corporate responsibility, or energized employees) cannot utilize Integrated Reporting to drive the organizational change processes to embrace a Responsibly Competitive approach, until the enterprise advances an organizational change agenda to embrace Integrated Reporting.
Integrated Reporting requires its own integrated strategy—a corporate vision and goals that reflect environmental, social and governance-related (ESG) risks and opportunities while emphasizing financial, environmental and social sustainability, and integrated systems—structures that enable the real-time flow of information and resources as needed across organizational silos. Successful Integrated Reporting will require these things, but few organizations have them.
The organizational change needed for a successful entry into Integrated Reporting requires new commitments and related systems along four areas: Vision, Leadership, Management and Knowledge. In this short paper, we examine these four areas of change and identify major inhibiting factors inherent to each. We also point to potential solutions to bypass these inhibiting factors and move a company from a lagging position to a leading one.
Integrated Reporting’s four areas of organizational change:
Vision: A well-conceived and well-articulated vision, the “future state” that sits atop a company’s strategic agenda, and drives and directs an organization’s energy. A vision is determined by aspiration, and aspiration is often limited by what we know to be possible.
The Problem: companies don’t see how Integrated Reporting is going to help them achieve their vision.
Companies have a hard time understanding the value of any type of non-financial reporting. Ask senior executives why they produce Corporate Responsibility (CR) reports, and if one gets beyond the PR spin, it typically comes down to some combination of four reasons:
- To comply. Often this means consenting to comply with the court of public opinion and/or influential stakeholder expectations, exemplified by voluntary standards such as the UN Global Compact.
- To keep up with the Joneses. A well-known driver of organizational change is the effort to keep up with what peers and competitors are doing.
- To facilitate investor confidence. This is a less common but growing reason. Socially responsible investors rarely possess sufficient stakes to move share price. But they do represent an influential channel to communicate CR commitments to key stakeholders. One does see emerging examples of larger investors asking to review CR reports (and calling for Integrated Reports).
- To advance the enterprise-wide adoption of Responsible Competitiveness. This is the least common reason. However, time and again one sees the following cycle: a company decides to produce a CR report more or less to GRI standards. It forms a cross-functional committee to support the process and data collection. The group becomes a champion for deeper, enterprise-wide commitments to CR. Senior Executives tentatively embrace this agenda. The next cycle of reporting makes a further commitment to adopt leading reporting practices. This enhances the committee’s argument for Responsible Competitiveness, and so on.
Each reason represents a useful driver of incremental change. Following these routes over time may help companies move toward Integrated Reporting. To move more quickly, executives need to both believe and communicate a more compelling vision for Integrated Reporting.
The Solution: demonstrate that Integrated Reporting is about more than just reporting.
Integrated Reporting has to be seen as more than just a reporting mechanism. The underlying value proposition can be articulated in several ways, but we submit the following as pillars of a sound argument for Integrated Reporting:
- It will change how the market recognizes CR performance. As one example, certain commodities, such as coffee, cocoa, and tea, see sustainable development concerns threatening stable supply. Embracing and reporting on integrated CR strategies will mitigate risk and create (responsible) competitive advantage. Using Integrated Reporting communicates to investors in their own language why they need to make decisions based on information incorporating ESG factors.
- It will broaden the definition of performance to include important ESG risks and opportunities, more comprehensively and longer-term than competitors.
- It will increase internal integration, bringing disparate functions and processes together to create a more efficient, streamlined organization.
As such, Integrated Reporting could become a vital tool to advance a Responsible Competitiveness Strategy. The intended purpose of Integrated Reporting is to build meaningful connections between ESG and financial performance, both internally and in outward-facing communications. Integrated Reporting could become the missing piece to an approach that would truly integrate CR into the core business.
Leadership: Leadership is the daily guidance of the CEO and other senior executives to achieve the vision. Leadership sets the tone, priorities and targets.
The Problem: leadership often starts and stops at the commitment to publish a report.
After the executive mandate is issued, things are set in motion: resources are marshaled, a project plan is put in place, and a team goes to work. However, producing GRI reports requires extensive cross-functional knowledge integration and supporting data collection (Integrated Reporting will require even more). It leads to a set of findings and public commitments that require cross-functional management follow-through—but the follow-through is too often either absent or insufficient. This constrained leadership can create internal organizational tension and strife.
The Solution: Leaders should be visibly engaged throughout the process.
The value of Integrated Reporting is as much about the journey as the destination. Leaders should understand – at a high level – the full process required to produce an Integrated Report. Their leadership therefore should extend to communicate their expectations that cross-functional teams should commit time and resources to solve knowledge integration and data challenges, and to review and respond to the findings from the reporting effort.
Next week’s Insight will discuss the two other areas of organizational change: Management and Knowledge.