Will Integrated Reporting improve sustainability? Part III – Integrated Thinking

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dreamstime_s_33567037Dr Dale Tweedie and Prof. Nonna Martinov-Bennie.

This is the third of five blogs on whether and how Integrated Reporting might contribute to sustainability.

In this blog, we consider the International Integrated Reporting’s Council’s (IIRC) objective of promoting ‘integrated thinking’.

In a sense, integrated thinking is more fundamental to Integrated Reporting than the final report itself, because the IIRC has defined Integrated Reporting as ‘a process founded on integrated thinking’.

In other word, the primary function of the Integrated Report is to communicate the changes in outlook and organisational practice that Integrated Reporting processes should have generated.

What is integrated thinking?

The IIRC defines integrated thinking as ‘the active consideration by an organisation of the relationships between its various operating units’.

As we explore in a recent article, integrated thinking has two main parts:

  1. Understanding and dialogue that stretches across an organisation’s operating units. For example, reporting and assurance on carbon emissions in mining operations might facilitate integrated thinking by requiring the accounting team to collaborate with scientific experts to measure and document carbon output.
  2. A more holistic understanding of how the organisation interacts with internal and external stakeholders. In particular, the IIRC claims that integrated thinking involves a ‘fuller consideration of stakeholders’ legitimate needs and interests’.

This suggests that integrated thinking should change both how managers see their organisation and how their organisation functions. Indeed, these two types of changes are inextricably linked: Integrated reporting should help managers better understand their organisations precisely because it stimulates more open dialogue across its constituent parts (or ‘silos’) and external stakeholders.

What are the implications for sustainability?

Early research has questioned whether integrated reporting is so far creating the type of changes the IIRC envisages. For instance, Stubbs and Higgin’s (2014) study of early adopters found incremental changes to sustainability reporting practices, rather than the more extensive and transformative organisational changes that integrated thinking seems to imply. A recent IIRC report also finds incremental changes in many organisations, but emphasizes the potential for integrated thinking to emerge over time. One of the IIRC’s participants suggests that – in practical terms – integrated thinking typically develops through producing multiple integrated reports.  

Nonetheless, it is possible to identify both positive and negative aspects of the IIRC’s approach to integrated thinking for sustainability.

POSTIVE: The IIRC’s emphasis on Integrated thinking is entirely consistent with its focus on improving how organisations communicate. Since a key part of integrated thinking is understanding other stakeholders’ views and interests, integrated thinking might improve organisations’ awareness – and the awareness of managers in particular – of sustainability issues.

NEGATIVE: Integrated thinking is a relatively weak accountability mechanism, because whether integrated thinking is occurring, and how well, cannot be directly disclosed, measured or audited (despite the IIRC’s growing focus on assurance). For example, integrated thinking may prompt management to better understand the ‘legitimate needs and interests’ of their organisations’ workers. However, it is difficult to measure or enforce this understanding, especially compared to the Global Reporting Initiatives requirement for organisations to report against International Labour Organisation benchmarks.

Moreover, and as previously discussed, the IIRC is yet to clarify what concrete processes organisations should use to engage their stakeholders. Hence, more could be done to explain what management can do to gain the broader understanding of stakeholders’ views and interests that integrated thinking entails.

In our next blog, we will consider in more detail to what extent Integrated Reporting might improve sustainability by capturing stakeholders’ ‘legitimate interests and needs’ better than alternative reporting frameworks.

As always, any comments or thoughts most welcome. If you wish to be e-mailed future blogs, please subscribe to this blog.

Economic Inequality: Where are the accountants?

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dreamstime_s_53174060Dr Dale Tweedie and Dr James Hazelton

Rising inequality in income and wealth is one of the biggest contemporary social and economic concerns, but accountants have been surprisingly quiet on this issue.

Concerns over economic inequality

The growth of economic inequality is increasingly a topic of public debate in countries like the United Kingdom, the United States and Australia.

Numerous influential – and typically conservative – economic institutions have now identified growing income inequality as a critical economic and social issue. The World Economic Forum listed deepening income inequality as number one on its top ten trends of 2015, and describes growing inequality as a threat to global economic growth, social cohesion and sustainability. The International Monetary Fund has reported that inequality in developed nations is at its highest level in decades, with ‘significant implications for growth and macroeconomic stability.’ There is also growing evidence of serious and widespread social harms from economic inequality, with economic inequality being linked to social ills ranging from poor physical and mental health to drug addiction to rates of violent crime.

Public debates over inequality have created an all too-rare cross-over between academic research and public concerns. French economist Thomas Piketty’s 685 page treatise on economic inequality was a surprise hit of 2014, reaching the top of the New York Times’ best-seller list. While Piketty’s analysis of the causes of economic inequality is hotly disputed, there is little challenge to his finding that income inequality has sharply risen in most developed nations since the 1970s. For example, in the United States, Piketty reports that the top decile’s share of national income grew from just under 35% in 1970 to almost half by 2010.

A role for accountants?

Despite growing evidence of the economic and social costs of inequality, accountants have had little involvement in either public or academic debates. However, as we observe in a recent article (50 free e-copies here), there are key contributions that accountants could make to public discussions

First, as Piketty and others have argued, both public deliberation and informed public policy about economic inequality requires greater global transparency about who owns economic wealth and receives economic income. Whatever else it may be, accounting is a vehicle – albeit imperfect – for understanding and promoting transparency. Accountants might therefore add their voice to calls to improve public access to economic information, such as in the recent debate over whether taxes paid by resource companies to governments should be disclosed.

Second, key debates about the equity of income distribution, such as ongoing critiques of the pay of executives (especially CEOs), are closely connected to corporate governance. While economists have proposed macro level policies like a progressive tax on capital (Piketty) and a minimum basic income, seriously addressing inequality will invariably need to address how resources are managed and distributed within corporations. Accountants have the expertise to evaluate existing corporate accountability mechanisms and propose workable alternatives. These proposals could complement the broader macroeconomic agenda that economists like Piketty put forward.

What do you think?

Is there is a role for accountants on economic inequality? And if so, what do accountants – or accounting – have to say?

Accounting for inequality will be the subject of a special session of the Australasian Centre for Social and Environmental Accounting Research (CSEAR) Conference, which will be held at Macquarie University, Sydney in 2015, and also a special section of the Accounting, Auditing and Accountability Journal.

Will Integrated Reporting improve sustainability? Part II – Communicating Value

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dreamstime_s_42615032Dr Dale Tweedie and Prof. Nonna Martinov-Bennie.

This is the second in a series of blogs that asks whether Integrated Reporting can contribute to sustainability, where sustainability means a replicable and just use of natural and social resources.

Our last blog highlighted one key difference between an Integrated Report and a sustainability report: That an Integrated Report describes natural and social resources from the company’s point of view.

This blog explores a second difference, which is that an Integrated Report is more about helping companies communicate than holding companies accountable. As a result, whether Integrated Reporting makes companies more sustainable depends on what and to whom companies choose to communicate.

Reporting and corporate change.

There are at least two ways that any report might change a company’s behaviour:

  1. A report may enable someone – a shareholder, an employee or a regulator – to hold a company accountable for its actions. Sustainability reporting is often viewed this way. For instance, having multi-national companies report against global labour rights may enable civil society to better enforce these standards.
  2. A report may change behaviour by changing relationships, or by starting new conversations. For example, GRI 4 requires companies to engage with stakeholders to determine their concerns. If this discussion changes how companies act, then the process of GRI reporting could change companies’ behaviour by initiating structured conversations between the company and the people it affects.

In our view, the potential of Integrated Reporting to change behaviour is more through the second mechanism than the first. That is, the potential for Integrated Reports to improve sustainability is less about making organisations more accountable, and more about creating different discussions between organisations and their stakeholders.

Communication into action

Viewed in this light, whether Integrated Reporting improves sustainability depends on what kinds of conversations an Integrated Report enables, and whether companies choose to use Integrated Reporting to initiate these conversations.

Internal conversations

Integrated Reporting might provide space and vocabulary within firms to have conversations that might not otherwise occur, especially at board and management level.

There are many people within most companies who are genuinely committed to sustainability, but whose companies may not have a culture of discussing sustainability issues. The language of six capitals might enable more serious discussions about long-term connections between companies and social and environmental issues, especially at senior levels.

External conversations

Although targeted at investors, the six capitals framework might allow organisations to more rigorously engage with stakeholders’ concerns.

For example, a common view amongst academics is that companies need social legitimacy to operate over the long term, sometimes called a social licence to operate. Integrated Reporting might allow organisations to have better conversations about preserving their social licence to operate by creating a common vocabulary in which these conversations can occur.

Implications for Integrated Reporting

Thinking about Integrated Reporting as more a vocabulary than an accountability mechanism has three implications for how companies should use an Integrated Report.

  1. There is no value in simply delegating an Integrated Report to the sustainability reporting team. Since the potential value of an Integrated Report is the conversations it could enable, the only substantive reason to produce an Integrated report is to start discussions between the sustainability team and finance, marketing, management and the board, especially about where the company, environment and society will be in five, ten or twenty years’ time.
  2. Issuing an Integrated Report is unlikely to satisfy public critics of a company’s sustainability record. On present evidence, Integrated Reports are not comparable enough to hold companies accountable on their social and environmental performance. Instead, the value of an Integrated Report is if companies are able to use the reporting framework – and the idea of six capitals it contains – to engage rather than placate concerned stakeholders.
  3. Stakeholder engagement is a key area for future development of the Integrated Reporting Framework. The current Framework requires companies to consider the ‘legitimate interests’ of stakeholders, and provides a language and format for this consideration. But – unlike GRI 4 for instance – there is little guidance on how this engagement should occur in practice.

Next time…

Based on our recent article, our next blog will consider the claim that Integrated Reporting encourages ‘integrated thinking’. What does this mean, and how – if at all – is it relevant to sustainability?

In the meantime, any thoughts or questions most welcome.

Will Integrated Reporting improve sustainability?

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– Dr Dale Tweedie and Prof. Nonna Martinov-Bennie.

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If the Integrated Reporting Framework is successful in engaging business and investors, how – if at all – will this success affect sustainability?

This is the first of a series of short blogs that address this question, based on a new article published in the Social and Environmental Accountability Journal in February, 2015.

What is sustainability?

The word ‘sustainability’ has many different meaningsWe 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.

If you are interested in being alerted to new posts, please sign up to IGAP’s blog below.

Any comments or thoughts are most welcome.

Podcasts: Ethics and the Professional Accountant

dreamstime_m_16826054In 2013 CPA Australia’s In the Black magazine hosted a series of informative and entertaining podcasts on ethical behaviour and the professional identity of accountants, with Professor Sally Gunz.

Sally is Professor of Professional Ethics and Business Law at the University of Waterloo in Canada, and the Director of the Centre for Accounting Ethics. She visited Macquarie University’s International Governance and Performance (IGAP) Research Centre in mid-2013, and discussed ethics with Dr Eva Tsahuridu, Policy Adviser at CPA Australia.

The pod-casts cover three themes:

1. common ethical challenges.

2. ethical obligations; and

2. professional trust, obligation and crises of consciousness;

This series explores ethical challenges facing professional accountants across different industries, including in public practice, not-for-profits, business and the public sector.

For Professor Gunz, the common ethical obligation for all professional accountants to consider is serving the public interest:

“It always comes back to the ultimate responsibility to serve the public. You have to remember as a professional of any stripe that even though you may act as a manager many times, you’re different from a manager.”

“You have additional responsibilities. You ultimately have the responsibility to your profession, which translates to serving the public.”

“You are there because of that responsibility. And when push comes to shove, if you don’t remember that, the question is, ‘Why are you there?’”

A good question to consider heading into 2014.

Four ideas for improving Integrated Reporting

The International Integrated Reporting Council (IIRC) recently completed the consultation period for its draft version of the International Integrated Reporting (<IR>) framework, with <IR> ‘Version 1’ to be released in December. IGAP researchers Dr Dale Tweedie and Prof. Nonna Martinov-Bennie raised four ideas for the IIRC to consider in its revisions.

????????????????????????????????????????????????????????????????????????????????????????1. Clarifying the relationship between <IR> and other reporting systems

The IIRC’s ‘value-creation’ approach to non-financial reporting is very different from the ‘impact-assessment’ approach used by the Global Reporting Initiative (GRI). Users of <IR> would benefit from greater guidance on how <IR> and GRI4 can be complementary in a practical reporting context; for example, by clarifying differences in the materiality determination processes of <IR> and GRI4 and which – if any – takes precedence.

2. Acknowledge and address stakeholder conflicts

The IIRC’s view that the interests of providers of financial capital – the primary audience of <IR> – and other stakeholders will align over the long term overlooks potential conflicts between these groups, and so how conflicts should be reported. An example in Australia is coal seam gas (CSG) exploration, which promises significant financial benefits to mining and energy organisations, but which other stakeholders have claimed is a long-term risk (e.g. to primary production and water supply). Given this perceived conflict, what should be reported by organisations engaged in CSG exploration? Further clarity on the ‘legitimate needs, interest and expectations’ of other stakeholders that an <IR> should acknowledge would help address these kinds of issues.

3. Increase comparability through a stronger ‘core’

As our earlier blog discussed, while a principles-based framework is a useful method of avoiding boiler-plate disclosures, <IR>s need sufficient commonalities to be comparable over time and between organisations. Providing a stronger ‘core’ of reporting requirements and methods, best practice guidance (e.g. on carbon reporting) and definitions of key terms could encourage comparability without sacrificing the principles-based approach.

4. Governance as accountability

The draft <IR> framework asks each organisation to explain how its ‘governance structure support[s] its ability to create value in the short, medium and long term’. While good governance is part of value creation, the key features of governance are accountability, transparency and ethics, which are fundamental to ensuring that the value that organisations create is managed and distributed in appropriate ways. Following the King Reports in South Africa, <IR> could play a greater role in emphasising and communicating the importance of these aspects of governance. 

Carbon Accounting: New Reporting and Assurance Challenges

The growing international impetus to address climate change means that it is increasingly important for organisations to understand and manage their environmental impacts. In a 2012 article, Nonna Martinov-Bennie reviewed the introduction of carbon management legislation in Australia, and explains the key reporting and assurance issues.

http://www.dreamstime.com/stock-images-co2-emissions-image17305254Carbon Legislation in Australia

The main climate change legislation in Australia is the Clean Energy Act 2011. The Clean Energy Act has four major initiatives: a carbon pricing mechanism, support for innovation in renewable energy, energy efficiency and enhancement in land management. Arguably, the policy with the most significant reporting implications – and also the most controversial – is the carbon pricing mechanism or ‘carbon tax’. The carbon pricing policy establishes an initial fixed price of $23 per tonne of CO2. This price will increase at 2.5% plus inflation until 2015, and then transition to a price determined by a carbon market. While the carbon price is new, it builds on an on-going legislative and reporting framework in Australia that began with the National Greenhouse and Energy Reporting Act in 2007.

Carbon pricing: key issues

As Martinov-Bennie explains, carbon reporting and pricing challenges business to improve their reporting and management in several key areas:

  • Reporting rigour: Because organisations’ survival has not historically depended on its control of environmental impacts, non-financial reporting has not attained the same rigour as financial reporting. By putting a cost on environmental performance, carbon pricing provides incentives for firms to bring environmental reporting standards and controls up to the same high standards.
  • Timely data: Emissions data is typically reported annually. However, the creation of a carbon price questions whether annual reporting is adequate. More frequent   reporting better reflects organisations’ costs and liabilities and can support more effective management of outputs. At least one large mining company is already moving to monthly reporting for operations of over 50-kt CO2.
  • Robust reporting systems: The current legislative framework requires secure data storage and audit trails of changes for five years. Most firms are reporting based on spreadsheets, but it is unlikely that this will be adequate over the long term.
  • Effective reporting teams: Producing effective carbon data requires organisations to create interdisciplinary teams that have the range of skills that effective carbon reporting requires.

Measuring carbon: organisational strategies

Martinov-Bennie also highlights new governance and measurement challenges involved in measuring carbon output:

  • Periodic or Continuous Carbon Reporting: Periodic reporting is the cheapest and most popular method of measuring carbon liability; however, it is also the least accurate. Organisations need to consider whether a more expensive continuous measurement system might better manage the risk of highly variable emissions.
  • Measuring the Right Activity: Accurately measuring carbon emissions requires a thorough and holistic understanding of production, especially when using contractors. For example, a landfill company that outsources emissions to a third party through gas flaring needs to report those emissions.

The future of carbon pricing in Australia?

Despite calls for certainty by the business community, the federal opposition in Australia has promised to repeal carbon pricing legislation if elected in September. However, while many commentators are predicting a change of government and policy, the long-term future of carbon pricing is uncertain. As a small, trade dependent nation, there are limits on Australia’s capacity to remain isolated if other nations move towards carbon reporting and assurance, as recent suggestions that China is considering a carbon pricing mechanism have highlighted.

Also, the long-term value for organisations in rigorous reporting and management of climate change data is not solely a consequence of the Clean Energy Act. Independent international initiatives to report environmental impacts, such as by the Global Reporting Initiative and the International Integrated Reporting Council, suggest growing pressure from stakeholders to report environmental outcomes. The growth in investment funds with sustainability criteria will also benefit firms who can report on their environmental management practices, and suggests a growing need for assurance of these reports.

Finally, as Martinov-Bennie’s article highlights, developing effective reporting of carbon outputs is one part of understanding and evaluating an organisation’s production process. From this perspective, carbon reporting and assurance is not solely an exercise in compliance, but also an opportunity to develop a more rigorous assessment of an organisation’s non-financial impacts and management strategies.