On 11 July the International Integrated Reporting Council (IIRC) released a draft framework dealing with what is one of the most essential features of the modern economy: financial reporting. Underneath the mind-numbing business-speak of the draft framework is a genuine attempt to redefine how business fits into society.
The membership of the IIRC involves leaders from an impressive list of organisations including the International Accounting Standard Board (IASB), the American Financial Accounting Standards Board (FASB) and the big four accounting firms.
The CEO of the IIRC, Ian Ball, described the IIRC’s mission as "to help [companies]… make better resource allocation decisions. All of us have a stake in a sustainable society. While integrated reporting alone cannot ensure sustainability it is a powerful mechanism to help us all make better decisions about the resources we consume and the lives we lead."
The proposed new model requires the integration of financial and non-financial information to understand how an organisation is really performing. It could be better referred to as holistic reporting. But since the word holistic conjures up aromas of incense, the accountants played it safe with "integrated".
An integrated report looks beyond the traditional scope of the current financial report by addressing the wider, longer-term consequences of decisions and actions. It makes clear the link between financial and non-financial value by providing the social, environmental and governance backdrop.
This not the first attempt to account for non-financial inputs; in the past we’ve had triple bottom line reporting, sustainability reporting and other models.
But the distinction between integrated reporting and triple bottom line is important; where th three pillars of triple bottom line reporting are people, planet and profit, integrated reporting advocates an holistic approach — environmental and social impacts are inextricably woven into financial measures, there are no separate pillars.
Three major Australian organisations have elected to participate in the International Integrated Reporting Pilot Program: NAB, Stockland, and bankMECU.
NAB Chief Financial Officer Mark Joiner says his company has signed up to the pilot because "having everything [both financial and non-financial information]in the one integrated report also gives us a clearer, broader picture of the company and its performance".
Jane Diplock, former Chair of the New Zealand Securities Commission, described integrated reporting as the "third leg" of a three-legged reporting stool, alongside market regulation and prudential supervision.
It requires a radical shift in thinking — gauging value creation as more than just profit — and is more than merely the stuff of fairytales. Global momentum towards such a system grows as more investors look beyond financial gains and towards socially responsible investing. One in every eight dollars in the US is managed under a "socially responsible" framework and it’s a growing field.
At the June 2012 Rio+20 summit world leaders determined corporate sustainability reporting of sufficient importance that it became a key outcome from the summit. South Africa has already mandated integrated reporting in its stock exchange listing requirements.
Pity the accountants, unlikely torchbearers for a social change movement. It’s hard to believe but true; the central proposition of a PricewaterhouseCoopers UK Report, "A Critical System at Risk", admits "the future needs to be made looking at the entire system and the people within it".
Professor Mervyn King, Deputy Chairman of the IIRC, writes in the PwC report that "from the time of the Industrial Revolution up to the middle of the 20th Century companies adopted a take, make and waste approach to the carrying-on of business." Instead, the new integrated model must take into account the varieties of experience the company will come into contact with:
"From the corporate report, the reader should be able to tell that the company has not profited at the expense of the environment, human rights, a lack of integrity or society; that there are adequate controls in place to monitor and manage material risks and opportunities; that remuneration is linked to overall performance which includes social, environmental and financial, that there is an interactive communication with the stakeholders who are strategic to the company’s business and that the company is conducting a sustainable business."
The report even draws inspiration from Buddha’s teachings. It refers to the parable of "the blind men and an elephant" to illustrate its point about the importance of seeing the big picture.
When the partners of large accounting firms are blogging about the need for social change and quoting Buddha, perhaps they’re beginning to realise a planet with a projected population of 9 billion or more people must evolve beyond the pursuit of pure financial gain.
The recent EPA approval granted to Woodside’s plan to build a $40bn gas hub in the Kimberly is an example of the difficulties to come. After Geoffrey Cousins, businessman turned activist, expressed his view that Woodside abandon the project or move it to a less environmentally damaging position, he was told by Woodside’s Chairman elect Michael Chaney "you are acting unethically".
Can you imagine any CEO saying, "look, the board and I have decided not to build the biggest non-government industrial project in Australia’s history. We know it will reap untold economic riches but we can’t mitigate the environmental damage — so it’s just not the right thing to do."
Integrated reporting may offer hope of a refuge slightly above the river of cash. It’s a viewpoint where social and environmental matters are not completely drowned out by the sound of billion dollar roaring waterfalls of money.
There are already some companies holding up a bright lantern for others to follow. In an unprecedented move, Puma, the German sports lifestyle company, reported a supplementary environmental profit and loss last year. After taking into account an estimate of the value of greenhouse gas emissions, water usage and other costs, its official reported profit was cut by over half as a result of 145 million Euros "unrecognised" environmental costs.
Unfortunately, we all know what can happen to brave men; but it requires less valour to stand up behind a legislated reporting framework.
But this isn’t likely to happen overnight, according to a recent analysis of social and environmental reporting by the top ASX 50 companies. A report published by the Association of Chartered Certified Accountants noted that no ASX 50 companies in the 2010 financial year had linked financial and non financial performance measures and just one company noted the financial impact of Environmental, Social and Governance issues.
While the ASX has no plans to follow South Africa, Malaysia and Brazil in making integrated reporting mandatory, the CEO of the Institute of Chartered Accountants, Lee White, says in 10 years everyone will be doing it anyway.
After all, nobody wants to imagine a future where financial reporting survived but the rest of the system failed.
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