These days, integrated reporting is a corporate dog everyone loves to kick.
People will tell you it’s a bore, a chore, a snore. It’s another corporate cost center, a straightjacket on corporate communication, a full-employment program dreamed up by do-gooders to give jobs to bean counters.
To its harshest critics, integrated reporting is not even a dog. It’s a tail that wants to wag the dog.
A dozen years ago, people said all these things about the Global Reporting Initiative, known as GRI. The first time I wrote a corporate sustainability report, one of the client’s first instructions was that I was not to mention GRI because to do so would “legitimize” it.
Today GRI is on a global roll, with thousands of companies using its sustainability reporting framework. Corporations that once shunned GRI now proudly proclaim their participation — and the high grades they are getting compared to other companies. It’s now possible to pick up a GRI sustainability report and zero in on the disclosures you care about, spot the ones that are still missing, and make comparisons across companies and industries.
And all this is just Act I. As sure as night follows day, Act II is going to usher in integrated reporting, which merges financial performance and sustainability performance into one regulated reporting document for shareholders.
Here are the three biggest reasons why.
GRI has helped companies save money and make money. Companies that count their carbon emissions soon see how much energy they are wasting. Once they find out, they get serious about operating more efficiently, which saves money.
The next thing that happens is that these companies compete better. They can do more for their customers with less. They have learned so much about their operations that they can price product and service options more precisely. And they can offer a smaller carbon footprint than the competition for customers who care about that. All these things make money.
Now multiply these effects by 2 or 3 and you’ve got integrated reporting. (If society adopts cap and trade systems or carbon taxes, multiply by 5 or 10.) When companies reckon the real costs and benefits of everything they do, they are going to implement improvements they never paid attention to before. They will have to, because their customers and investors will demand it.
For decades, corporations have issued bland disclosures about their risk factors in their annual reports. There is almost no connection between these disclosures and what the companies say in their business descriptions and results of operations. I once pointed this out to a lawyer at a white-shoe corporate law firm, and he said, “Of course. You think we want to rile people up?”
After the financial crisis and the Gulf oil spill, the new normal is that people are riled up and looking for ways to monetize it. Lawyers and accountants are waking up to the fact that any intentional fudging between stated risk and real known risk is a lawsuit waiting to happen. Such gaps have always been technically illegal. They’re now becoming dynamite.
Just look at the whole Deepwater Horizon debacle. Every party to the myriad lawsuits is asking the same question: what risks did you know about, and how are they different from the ones you told us about?
Insurance companies are starting to hunt for these gaps, too, so that they can reprice for the real risks, not just the stated ones. And right now, many companies are issuing two different sets of risk factors in their annual reports and sustainability reports.
The solution is to integrate the risk factors required for annual reports with the risk factors required for various forms of sustainability reporting, including the Carbon Disclosure Project and GRI, among others. Companies that have a seamless, clean story will have lower insurance costs and happier investors. Companies with disconnects and gaps will resolve them, because that will be cheaper than rising insurance premiums or falling stock prices.
Companies love to win. When they spot a new game they think they can win, they play it. That’s the main tailwind behind GRI: well-managed, more-sustainable businesses want you to know that about them. Sure, they value the environment and people and communities and all that. They also want to make that into a competitive win for their brand.
Integrated reporting is going to be a big new playing field for corporate leadership. Just as well-run companies embraced GRI because it was an objective way to stand out from the crowd, they will embrace integrated reporting when they realize they can tell an even more powerful investment story than they did with just profit and loss.
Even companies in the middle of the pack who adopt integrated reporting will benefit right away by increasing something essential to their brands, something that is perhaps harder to come by than any other quality: respect.
I mean this in both directions.
Companies that take the step toward greater transparency and accountability will win respect for it, and not just because they will stand out as better corporate citizens. They will also exhibit increased respect for their investors, employees, customers and other stakeholders. At its core, integrated reporting is a recognition that the people who own a company, work for it, and patronize it deserve to know its real net effect on the world we all share.
Emotive Brand is a brand strategy firm.
Image: Mike Collinge