

John Elkington, the founder of SustainAbility who developed the concept of, and coined the term, “triple bottom line reporting” in 1994, recently referred to the integration of financial and corporate social responsibility reporting as the “Holy Grail” of corporate public disclosure. It is a Holy Grail that remains elusive. At the same time that Elkington announced his concept of triple bottom line reporting, he also said that the long-term goal should be “the eventual integration of economic, financial, social and environmental reporting.” Reporting this way is clearly not the case today. However, due to efforts by forward-thinking people like Elkington, Mervyn King (chairman of South Africa’s King Committee which has issued three reports on corporate governance since 1994, the latest in 2009), and Robert K. Massie (former director of Ceres and co-founder, along with Allen White, of the Tellus Institute), organizations like Ceres, the Global Reporting Initiative (GRI), The Prince of Wales Accounting for Sustainability Project (A4S), Business for Social Responsibility and social investment funds and associations all over the world, substantial progress has been made over the past 10 to 15 years in voluntary non-financial reporting (called by such names as corporate social responsibility, sustainability, or environmental, social and governance reporting). While there is no consensus definition for any of these terms and they certainly aren’t synonyms foreach other, the good news is that more and more companies are making an effort to report to shareholders and other stakeholders on their goals and performance on outcomes that are related to financial performance to varying degrees. Even better, a few leading companies around the world are starting to practice Elkington’s Holy Grail of integrated reporting. While the number is admittedly small—we know of less than 20 but our list is by no means definitive – it includes some well-known and respected companies such as Alstom in France, BASF in Germany, HSBC in the United Kingdom, Novartis in Switzerland, Novo Nordisk in Denmark, Philips and TNT in the Netherlands, and United Technologies in the United States. Some are less-well known but very interesting companies such as Aracruz and Natura in Brazil, and Novozymes in Denmark. There are even private companies like van Gansewinkel Group in the Netherlands which isn’t required to report anything at all. Most of these companies have been issuing an integrated report for a year or two. The fact that they are in such different industries in many countries means that is it highly unlikely they knew about each others’ efforts. This is an indication that integrated reporting is an idea whose time has come. We could be at a turning point in history when this practice will grow rapidly, initially by voluntary adoption and eventually through regulation. Integrated reporting is required by the King Code of
Governance for South Africa 2009, and is being voted on by the French national assembly in May. In our recently published book, One Report: Integrated Reporting for a Sustainable Strategy (John Wiley & Sons, 2010), we argue that a sustainable society requires that most companies have sustainable strategies and that integrated reporting is the best way to report this. A “sustainable strategy” is based on a business model that ensures the long-term economic viability of the firm, which today requires a real commitment to a sustainable society. This is based on a broad stakeholder view where the company takes explicit, public responsibility for its use of natural and human resources and the impact its activities are having on the environment, its employees, customers, suppliers, and the communities in which it operates. In order to do this, the company needs to understand how financial and non-financial (e.g., environmental, social and governance) performance outcomes are related to each other. In some cases, the relationship will be positive, such as higher profitability from greater energy efficiency that also reduces carbon emissions. In other cases, improved non-financial performance may require a sacrifice, at least in the short term, in financial performance. An example here would be paying a “living wage” that is above labor market rates. But it is not just companies that are responsible for ensuring that we have a sustainable society. Investors, both asset owners and asset managers, have a major responsibility as well, particularly large institutional investors that have the ability to influence corporate behavior as they provide the capital that companies need. We believe that the ultimate responsibility lies with asset owners because they select and give the mandates totheir asset managers. One of the common themes that emerged from our research is the relative indifference companies practicing integrated reporting met from their major institutional investors, particularly asset managers. Of course, SRI funds were positive about the integrated reporting development, but this is to be expected. However, the majority of institutional investors are still focused on short-term financial results. This indifference to long-term results reveals an irresponsible indifference to a sustainable society, and it puts companies in a bind. Executives have to make decisions for time frames measured in years. By comparison, many investors operate in time frames of months, days, or even hours. Investors come and go but society remains.
“The company needs to understand how financial and non-financial (e.g., environmental, social and governance) performance outcomes are related to each other.”
Serving the interests of short-term investors often means sacrificing society’s long-term interests including, ironically enough, that of future investors. The short-term versus long-term debate has been around for as long as there have been investors and involves arguments about financial market efficiency (the market really does have a long-term view but simply discounts future returns), contracting and incentive problems between asset managers and asset owners (the managers are themselves compensated on short-term results), and
competitive dynamics (companies that focus on long-term results will be at a disadvantage to those that focus more on the short term). In reality, these arguments have simply become excuses for an unwillingness to change. As our natural resources dwindle, the challenges of meeting the needs of an increasing population grow, and our collective impact on the environment reaches perilous levels, these excuses are no longer acceptable.
What is involved in accepting this responsibility? First, asset managers, with the support of asset owners, should encourage companies to adopt integrated reporting along with integrated auditing by the firm’s financial auditor. Second, asset managers, with the support of asset owners, should encourage sell-side analysts to take a longer-term view in the work they doby incorporating non-financial performance into their own models and recommendations. This is most easily done when companies are practicing integrated reporting. Third, asset managers should practice integrated reporting themselves by reporting to asset owners both financial and non-financial results and the relationship between the two. Asset owners should require that their managers engage in these three activities by making this part of how they evaluate the performance of their asset managers and even part of the criteria by which asset managers are selected. Investors, who are also corporate citizens, need to take responsibility for their role in ensuring a sustainable society and they need to do so soon.