If the Integrated Reporting Framework is successful in engaging business and investors, how – if at all – will this success affect sustainability?
What is sustainability?
The word ‘sustainability’ has many different meanings. We use the term to refer to a replicable and just use of social and natural resources. This is the ideal of sustainability made famous by the World Commission on Environment and Development’s definition of sustainability as ‘meet[ing] the needs of the present without compromising the ability of future generations to meet their own needs’.
One difficulty with assessing how the Integrated Reporting framework will affect sustainability is that the International Integrated Reporting Council (IIRC) itself uses the word ‘sustainable’ to mean two quite different things:
- Sustained value creation; which refers to a company’s ability to continually create value over time; and
- Natural and social sustainability; which refers to companies that consider how their actions are connected to, or impact, society and the environment.
These two ideas are linked, but they are not synonymous. For example, an energy company might profitably sustain itself extracting and selling fossil fuels for many years, without necessarily considering its impacts on global warming or accounting for the costs that future generations will bear.
How Integrated Reporting will not affect sustainability
Integrated Reports require companies to consider natural and social capital, but an Integrated Report is not a sustainability report.
Sustainability reports typically require businesses to explain more fully how their activities impact societies (e.g. work, health and safety reporting) and natural environments (e.g. recycling and energy use).
In a sense, Integrated Reporting does the reverse: An Integrated Report aims to better explain how society impacts business.
One partial but useful way of thinking about Integrated Reporting is as expanding companies’ balance sheets to better represent how companies depend on non-financial resources, including resources or ‘capitals’ the company does not or cannot own. For example, in an Integrated Report, social capital might reflect how companies’ supply chains and sales depend on a hidden web of trust and goodwill, as well as on its monetary wealth and physical assets.
But an Integrated Reporting ‘balance sheet’ is still organised from the companies’ point of view, rather than from external stakeholders’ view of how the company impacts them. More precisely, an Integrated Report is organised from the point of view of how social, natural and other capitals enable companies to create financial value, especially over the longer term.
So if Integrated Reporting is to improve sustainability, it can’t be in the same way as sustainability reports.
How Integrated Reporting might affect sustainability.
Integrated Reporting might affect sustainability if bringing new types of capital into mainstream business reporting and business models helps to improve how companies interact with their communities and natural environment; such as by being more responsive to harmful effects that are not priced into conventional markets.
Our recent article considers four possible ways that IR could impact natural and social sustainability in this way:
- By changing how organisations communicate
- By encouraging integrated thinking
- By better representing stakeholders’ ‘legitimate interests and needs’
- By better capturing the long-term impacts of how organisations use resources.
In our upcoming blogs, we will review each of these possibilities in more detail.
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Any comments or thoughts are most welcome.