Over the past couple years, the corporate responsibility community has seen a legion of material (including our own articles and Conference sessions) focused on integrated reporting. All of this attention seems to indicate that the practice of creating one report covering both financial and sustainability performance and addressing the connections between the two has taken a firm hold. It hasn't. Only a handful of companies--including UTC, Novo Nordisk, and Philips--are publishing integrated reports. And it is far too early to predict whether integrated reporting will become a standard practice, especially in the absence of government mandates. But even if it does not, the concepts behind integrated reporting are likely to have a profound--and positive--influence on sustainability reporting, particularly when it comes to how companies communicate about their overall sustainability strategy. By the Corporate Register's account, nearly 6,000 companies published sustainability reports last year. At BSR, we see a wide range of quality in the way companies present and communicate their overarching strategy for sustainability. While a number of these reports demonstrate a company's recognition of the importance of sustainability for business, far too many fail to explain how company leaders are thinking strategically about sustainability and integrating long-term considerations of environmental and social trends into their approach for business success. If companies adopt some of the building blocks of integrated reporting--especially the future-orientation, connectivity of information, and contextualization--there is likely to be a marked improvement in the quality and value of sustainability reporting more generally. And all of this is likely to have a positive impact on corporate strategy.
Current Shortcomings in Communicating Strategy
Through the collective experience at BSR--our work with individual members on their sustainability reports, and our work with multistakeholder initiatives including the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC)--we have seen a steady improvement in the quality of reporting, and some welcome innovations. In particular, reports are focusing more on material issues, including a greater number of quantifiable performance metrics, providing the perspectives of external stakeholders, and using the web to make information more accessible to different audiences. However, there remains great room for improvement. Our mission is to work with business to build a just and sustainable world--and providing stakeholders with a transparent account of a company's performance is a key part of fulfilling that mission. But reporting also supports our mission because the reporting process forces business leaders to think through how sustainability trends are affecting their company's future. Ultimately, that thinking, and the resulting strategy, should be reflected in sustainability reports. But this is where many reports are not living up to their potential. We see these four common shortcomings related to this:
- Laundry lists of initiatives: Too often, report writers list a litany of sustainability-related initiatives rather than creating a coherent narrative articulating long-term strategy. To be sure, these bold and innovative initiatives are important--a manufacturing site geared for zero emissions, or a new product made entirely of recycled materials. But what's missing is the forest for the trees, or the overarching framework under which those initiatives sit. Instead, readers need to have a better sense of the company's long-term sustainability vision and objectives, and how they are driving business value.
- Materiality ends at issue identification: The concept of materiality--that companies should report on those issues that reflect the organization's significant economic, environmental, and social impacts or that would substantively influence the assessments--is now widely accepted and increasingly practiced among reporting companies. However, materiality should not influence only the content of the report but also the direction of the company's strategy. Many companies report the results of a materiality analysis without explaining how those material issues are integrated into business strategy. Companies need to spend more time thinking about how they manage the risks and opportunities associated with these issues, and explain how they are driving innovation and adaption around material issues, and how they are developing the necessary talent and skills to manage material issues in a way that creates long-term value.
- Insufficient context: Sustainability reports are increasingly providing performance information through indicators and metrics, and communicating year-on-year performance trends. This is a positive development. But many reports do not provide the necessary context to help readers understand and interpret the data. Companies need to better describe the circumstances under which the organization operates, including the key environmental resources and stakeholder relationships upon which the company depends. Reports should also provide the commercial context within which the company operates and significant industry trends that affect the company's ability to build value over the long term.
- Too much emphasis on the past: Ideally, sustainability reports should provide readers with an objective, measurable accounting of the company's past performance--and many reports do just that. But there is also a need for reporters to look at the future and outline relevant, strategic objectives with respect to sustainability. Communicating the future outlook and long-term goals is a necessary part of reporting on the company's strategy, and companies need to articulate how the organization is adapting to emerging trends, and dealing with future uncertainties.
Striving Toward Excellence
Although there is not yet a fully defined framework for integrated reporting, the IIRC discussion guide provides companies with five principles for developing a report that demonstrates the interconnections between financial and sustainability performance. Additionally, the current GRI G3 guidelines include recommendations for how companies should report on strategy. (These recommendations are likely to be clarified even more during the revision process that is leading to the G4 guidelines expected in 2013.) Together, these standards provide valuable signposts to help companies continuously improve in communicating strategy. BSR additionally recommends that companies consider these five questions:
- What's the framework? Ideally, a strategy is the overarching, visionary framework that guides the company. It maps out the new direction, stimulates innovation, and feeds into tactical decisions. It addresses long-term challenges, threats, and opportunities. Reporting companies need to do the hard work of developing such a framework and communicate it in a clear and engaging manner. Companies including Unilever, with its Sustainable Living Plan, and Marks & Spencer, with Plan A, have done this well.
- What are the long-term sustainability objectives? A sustainability strategy demands long-term goals, not just a set of action plans tied to a one- or two-year time period. In reporting on their strategy, companies need to state their long-term objectives concisely and clearly, and ensure that these objectives are aligned with the overarching framework that will best meet the needs of stakeholders. Each objective should be distinct, ambitious, and achievable over a time frame of five to 10 years. Ideally, these objectives should reflect the company's culture and values, and require action not only from the company but from policymakers, civil society organizations, and citizens so they lead to systemic change.
- What's the business value? A sustainability strategy should be fully aligned with and integrated into the company's business strategy. And for companies that are fully mature in their approach to addressing sustainability risks and opportunities, these should be one and the same. But for the vast majority of companies that are still evolving their sustainability strategies, a key communications challenge is articulating the business value of sustainability objectives and implementation plans. How is the company developing new products and services as a result of sustainability? How is it increasing its ability to enter new markets, develop new business models, reduce operating costs, form new partnerships, and improve its brand value and reputation?
- What will you do to ensure success? Communications about the company's sustainability strategy should also include information on how the company is creating an infrastructure to ensure successful execution. How has the company created incentives for employees to focus on achieving sustainability objectives, share knowledge, and innovate? How is the company making the critical connections among business functions so that teams collaborate? Has the company built in a review period to change tactics and adapt to new information or circumstances? By addressing these and related questions, companies can give readers the confidence that the strategy is a living framework.
- Who are the critical partners? To successfully execute a long-term sustainability strategy, companies must collaborate with other businesses, NGOs, communities, consumers, and customers. Communications on the sustainability strategy should include information on how the company is investing in these necessary relationships and partnering with outside organizations to solve problems and generate new ideas.
At BSR, we realize that any advice on improving how companies communicate their strategy also affects how companies develop their strategy. The companies that best report on their strategy are precisely those who have put in the necessary time and resources to develop their sustainability strategies. That's a key value of reporting. By following the concepts of integrated reports, companies can improve how they communicate their strategy--and the discussions that ensue are also very likely to improve the strategies themselves.