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Why the Traditional Corporate Sustainability Report Is Dying

Why the Traditional Corporate Sustainability Report Is Dying

It’s official: the old CSR is becoming obsolete.

CSRs go by many names: corporate sustainability reports, corporate responsibility reports, or simply, sustainability reports. Anyone who’s glanced at one most likely read about how a company reduced its carbon emissions, started a recycling program, or how much money it donated to charity. You might remember images of pristine lakes, smiling farmers, or ethnically diverse employees deep in collaboration.

If this is the only content in your company’s corporate social responsibility and sustainability report, beware: this style of CSR is on its deathbed.

Investors want more. Employees, consumers, and policy makers want more. They want a deeper, more focused understanding of the companies that impact them. Nonfinancial information on environmental, social, and corporate governance (ESG) has become increasingly significant in the last 20 years. But the current form of sustainability reports—mere appendages to annual reports— aren’t enough to drive change.

Harvard Business School Professor Robert Eccles, co-author of One Report: Integrated Reporting for a Sustainable Strategy, characterized current sustainability reports as “more window dressing than substance.” And for that reason, he told the MIT Sloan Management Review that those reports “aren’t very effective at influencing the company’s resource allocation decisions.”

Also, companies tend to overemphasize public relations and the sponsorship of good deeds rather than the central issues of the organizations, according to Derek Abell, Founding President of the European School of Management and Technology in Berlin, Germany.

 

HISTORY OF THE CSR

The CSR evolved from its earlier version of environmental reporting back in the 1980s. There were sporadic efforts to document corporate environmental impacts for multiple reasons: some companies were more environmentally progressive; others wanted to be seen as earth-friendly; and many others—namely those responsible for industrial waste sites or environmental disasters—issued the reports due to litigation.

In the 1990s, corporate responsibility and sustainability reports expanded to include other forms of societal impacts such as corporate philanthropy. It was then that they became known as CSRs. Mike Barry, head of sustainable business at Marks & Spencer described the old notion to Marketing Week like this: “Philanthropy was just scratching your head at the end of a profitable year and wondering who to write a check to, in order to keep the chairman’s wife’s favorite charities happy.”

Since the early 1990s, CSRs have evolved and increased exponentially. Consider this: in 1992, 26 sustainability reports were issued globally. In 2010, the number had grown to 5,638. Today, at least 95 percent of the 250 largest global companies issue reports on corporate responsibility.

In the modern age of corporate reporting, sustainability can no longer stay on the sidelines. The new currency is transparency, accountability, resilience, and engagement. The benefits of corporate sustainability reporting are not to be negated; these reasons are why corporate sustainability is important.

THE FUTURE OF CORPORATE REPORTING: INTEGRATION

The new model is the integrated report, which highlights the strategy of a company and how its financial and nonfinancial information impact each another now and in the future. The leading authority on this new type of reporting, the International Integrated Reporting Council (IIRC), is a global coalition of regulators, investors, companies, standard setters, the accounting profession and nongovernmental organizations. The IIRC defines the integrated report as “a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.”

In an effort to guide corporations toward integrated reporting, the coalition released the first version of an international framework on April 16, 2013. This white paper will explain the ins and outs of integrated reporting and how it can benefit your company. In addition, it includes a reference list of the newly released principles, specifics on how they differ from the traditional annual report, and an exploration of traditional corporate sustainability report issues.

REDEFINING SUSTAINABILITY

By its barest definition, sustainability is the capacity to endure. One corporate sustainability report definition, as defined by the Dow Jones Sustainability Index, is “a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.”

The mentality behind integrative reporting is that sustainability shouldn’t be considered one more area of compliance or one more category to earn brownie points in. That line of thinking would position sustainability as a burden. Instead, integrated reporting positions sustainability as central to the way in which organizations operate every day and how well they create value over time.

As CEO of Hermes Equity Ownership Services Colin Melvin put it in a 2012 IIRC report, “In the long run, companies that behave well, do well.”

In order to get to the core of integrated reporting, we start with the premise that the wealth of a company is not solely defined by its bottom line. Every organization relies on different forms of capital to operate. The IIRC’s framework defines those multiple capitals as the following:

  • financial capital: money
  • manufactured capital: assets such as buildings and equipment
  • intellectual capital: the brains behind the operation, including intellectual property
  • human capital: people who make up the organization, their skills, experience, loyalty and motivation
  • social and relationship capital: connections among stakeholders and with other communities, and the health of those relationships
  • natural capital: environmental resources including air, water, land, forests, etc.

The intention behind integrated reporting is not to grade how companies are doing in each of the following areas. A report card mentality of high marks and low marks separated for each category would be overly simplistic and create a seemingly impossible goal for straight A’s. In the new model of reporting, integration comes through illustrating the significant interdependencies and tradeoffs that impact the company’s value over time.

Therefore, the purpose of the integrated report is to give all stakeholders—including investors, employees, customers, suppliers, business partners, local communities, legislators, regulators and policy makers—the information to evaluate how well the company will create value over time.

“Value is created over different time horizons and for different stakeholders through different capitals, and is unlikely to be created through the maximization of one capital while disregarding the others,” according to the framework.

So, for example, let’s say a big retailer decides to invest in solar panels to install in 300 locations throughout the southern U.S. The purchase negatively impacts their financial capital in the short term, but the tradeoff is greater energy efficiency (a plus for natural capital), new assets (manufactured capital), and most likely, an enhanced reputation in the retail industry (social and relationship capital). In the medium and long term, the solar panels will decrease electricity bills in those 300 locations and eventually benefit the company’s financial capital.

NEW PRINCIPLES

The IIRC framework offers six guiding principles in the making of the integrated report.

  • Strategic focus and future orientation

Define strategy and how it creates value in the future. Traditional annual reports do the opposite by documenting what happened in the past year and focusing mainly on financial capital.

  • Connectivity of information

Break down the old ways of isolated thinking and illustrate how material factors influence one another.

  • Stakeholder responsiveness

Describe quality of relationships with key stakeholders by reporting how the company addresses the needs and interests of each group.

  • Materiality and conciseness

Traditional annual reports can run several hundred pages. There is no page limit for integrated reports, but many companies have been able to get them down to 30-50 pages. Abridged financials are sufficient. Some companies like Nedbank feature their detailed reports online and leave the specifics out of the integrated report in order to make the latter more concise and readable.

  • Reliability and completeness

Include both positive and negative data that is considered material to the business. Accuracy, trust and transparency are key.

  • Consistency and comparability

Make it easy to compare data from one period to another. Try using benchmark data, ratios or other quantitative indicators.

MORE THAN A TREND

So far, corporate reporting on environmental, social and corporate governance issues remain largely voluntarily. However, that may change in the future. In 2010, South Africa became the first country to require integrated reporting.

The shift to integrated reporting continues to gain momentum. The IIRC launched a pilot program in October 2011 to guide businesses publishing integrated reports for the first time. One year later, the number of companies in the pilot program doubled from 50 to more than 100 organizations.16 Coca Cola, NovoNordisk, Volvo, Puma, HSBC, and Microsoft are among the giants that have transitioned into the new model of reporting.

The emergence of integrated reporting does not equate to the end of detailed sustainability reporting. In fact, the new model places an even higher priority on sustainability. The major shift is in integrative thinking.

“If you’re running the company correctly in the first place, this is what you should be doing already,” said Bertie Loots, head of Deloitte’s integrated reporting team, on Summit TV. “This is an opportunity for you to tell the story of your company, to tell what actually happens around the boardroom table and to try get a competitive advantage that way. In our increasingly connected world, that’s the way the world is moving.”

This whitepaper from Lapidary Copy will reveal the nuts and bolts of integrated reporting, from financial capital to human capital and from manufactured capital to natural capital. You will gain a better understanding of the core benefits of integrated reporting and why the new currencies of transparency, accountability, resilience, and engagement are more important now than ever.


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