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September 08, 2010
New Initiative Seeks to Mandate Integrated Reporting by Companies
    by Robert Kropp

Janet Ranganathan of the World Resources Institute speaks with about the International Integrated Reporting Committee's efforts to include sustainability issues in financial reports.

Sustainable investors have long been calling for effective corporate reporting on environmental, social, and governance (ESGs), and thanks in large part to their efforts the number of such reports has increased to a substantial degree. A recent academic report found that the number of standalone CSR reports issued by companies between the early 1990s and 2007 increased from fewer than 100 to over 1,000.

Furthermore, according to the same report, "The association between corporate social performance and financial performance…is positive."

But is a standalone corporate sustainability report, as opposed to the integration of ESG issues into financial reporting, enough? One need only look at the example of BP, which until the Gulf oil spill disaster had been considered by many to be a paragon of sustainability because of its corporate social responsibility (CSR) reporting, to conclude that a more effective way of measuring the financial risks and opportunities is an idea whose time has come.

According to a 2008
report by KPMG, only three percent of corporate annual financial reports had CSR information fully integrated into them.

Last month, a major initiative aimed at addressing the integration of ESG issues in financial reporting was launched, when the
Prince's Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) announced the formation of the International Integrated Reporting Committee (IIRC).

According to the IIRC, its "intention is to help with the development of more comprehensive and comprehensible information about an organization’s total performance, prospective as well as retrospective, to meet the needs of the emerging, more sustainable, global economic model," by creating "a globally accepted framework for accounting for sustainability: a framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format."

Along with AS4 and GRI, IIRC members include the International Accounting Standards Board, the US Financial Accounting Standards Board, and the International Organization of Securities Commissions, as well as Price Waterhouse Coopers, Deloitte, Ernst & Young and KPMG. The Committee's membership also includes the
World Resources Institute (WRI), a nongovernmental organization whose "mission is to move human society to live in ways that protect Earth’s environment and its capacity to provide for the needs and aspirations of current and future generations."

Recently, Janet Ranganathan, the Vice President for Science and Research at WRI, wrote a piece entitled
Minding the Sustainability GAAP, in which she stated, "The failure to integrate sustainability as a strategic business issue in annual financial reports means that businesses and investors continue to make investments that are bad for the environment, society and ultimately their own bottom line."

"As a result," she continued, "Environmental trends continue on a downward trajectory, creating even greater risks for companies, especially those that have not embraced sustainable business strategies." spoke with Ranganathan about the growing interest in mandating integrated reporting for public companies.

"I've been wanting this to happen for ten years," said Ranganathan, who in addition to her current role at WRI has directed its US Climate Policy Initiative as well as founding and directing the
Greenhouse Gas Protocol Initiative.

"I started focusing on how companies account for environmental costs that were on their books," she said, "And found that there were a lot of environmental impacts and costs that were not on the companies' books, and wondered how they would address those."

Referring to the example of BP, Ranganathan said, "A really great report doesn't necessarily correlate with really great performance."

Considering the increase in recent years of corporate sustainability reporting, it has become clear that, according to Ranganathan, "Sustainability issues are increasingly mainstream, and address the core of companies' operations." Yet, despite the attention now given to sustainability issues by companies and investors alike, the absence of such issues in financial reporting diminishes their importance to corporate managers.

"Once an issue is in the annual financial report, it gets a lot more attention internally," Ranganathan said. "It also gets the attention of investors. If investors know about sustainability risks, they would vote with their investment money."

In advance of the launch of the IIRC last month, some countries have taken steps to address ESG factors in financial reporting. In June, for instance, the
Johannesburg Stock Exchange (JSE) began requiring its more than 450 companies to produce integrated reports, and announced its collaboration with four other South African organizations in forming the Integrated Reporting Committee (IRC) to issue guidelines on good practice in integrated reporting.

"The IIRC is building on standards that are beginning to emerge in certain countries, as well as the interests of G-20 countries to have a more integrated financial report because of the economic crisis," Ranganathan said. "The IIRC to its credit has done a good job of getting the key players involved in the process, and has a political strategy for getting this issue onto the agenda at the G-20 meeting in France," scheduled for 2011.

According to the IIRC, the objectives for integrated reporting include making clear the link between sustainability and economic value, as well as providing a framework for such factors to be taken into account systematically in reporting and decision-making. Metrics would no longer emphasize short-term financial performance, and the information needs of long-term investors would be supported.

Addressing the issue of what should be included in integrated reports, Ranganathan said, "I don't think that everything in the GRI will now be in financial reporting, because that would be overwhelming. We're confident that the major ESG issues can be covered in integrated reporting, but there are still going to be issues."

"In financial reports there is a section on management discussions and commentary," she continued. "If it becomes a requirement for companies to start discussing these things, it's important to get high-level support for discussions about sustainability issues."

"We don't have all the answers on how to translate environmental and social performance into financial terms, but if we ask the questions we will create the demand for them," she added.

As for the urgency of the issue, Ranganathan concluded, "If you think of a world with nine billion people, the risks are only going to go in one direction. They are going to increase."


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