Will Integrated Reporting improve sustainability? Part II – Communicating Value

Featured

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.

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.