 
The Landscape of Integrated Reporting: Reflections and Next Steps

Edited by _Robert G. Eccles, Beiting Cheng and Daniela Saltzman_

Copyright 2010 The President and Fellows of Harvard College

Cambridge, Massachusetts, 02138

Smashwords Edition, License Notes

This ebook may be reproduced, copied and distributed for non-commercial purposes, provided the ebook remains in its complete original form. The articles in this ebook may be quoted, reproduced, copied and distributed for non-commercial purposes, provided the articles are properly cited.

# Table of Contents

Foreword  
_Nitin Nohria_

Introduction: The State of Integrated Reporting Today  
_Robert G. Eccles_

Part I: The Role of the Corporation in Society

Accounting and Accountability:Integrated Reporting and the Purpose of the Firm  
_Robert Kinloch Massie_

A CEO's Letter to Her Board of Directors  
_John Fullerton and Susan Arterian Chang_

Drivers of Corporate Sustainability and Implications for Capital Markets: An International Perspective  
_Ioannis Ioannou and George Serafeim_

Growth, Stuff and a Guinea Pig: Inspired Thoughts from Two Days at Harvard Business School  
_Terence L. Jeyaretnam_

Integrated Reporting in a Disconnected World? The Macro Measurement Challenge!  
_Alan Willis_

What Should Be Done with Integrated Reporting?  
_David Wood_

Part II: The Concept of Integrated Reporting

The Five Capitals of Integrated Reporting: Toward a Holistic Architecture for Corporate Disclosure  
_Allen L. White_

Integrated Reporting: A Perspective from Net Balance  
_Terence L. Jeyaretnam and Kate Niblock-Siddle_

Think Different  
_Alan Knight_

ISO Standards for Business and Their Linkage to Integrated Reporting  
_Kevin McKinley_

Toward a Model for Sustainable Capital Allocation  
_Adam Kanzer_

Learning from BP's "Sustainable" Self-Portraits: From "Integrated Spin" to Integrated Reporting  
_Sanford Lewis_

Will Integrated Reporting Make Sustainability Reporting Obsolete?  
_Ernst Ligteringen and Nelmara Arbex_

Part III: Benefits to Companies

Integrating Integrated Reporting  
_Steve Rochlin and Ben Grant_

Integrated Reporting: The Future of Corporate Reporting?  
_Paul Druckman and Jessica Fries_

Integrated Reporting Contributes to Embedding Sustainability in Core Business Activities  
_Olaf Brugman_

Six Reasons Why CFOs Should Be Interested in Sustainability  
_Simon Braaksma_

Sasol's Reporting Journey  
_Stiaan Wandrag and Jonathon Hanks_

One Report; One Message to All Our Stakeholders  
_Frank Janssen_

Southwest Airlines One Report(TM) Review  
_Aram Hong_

Integrated Reporting: Managing Corporate Reputation to Thrive in the New Economy  
_Hampton Bridwell_

A Team like No Other – Who Will Own Your Integrated Report?  
_Christoph Lueneburger_

Will the USA Take a Leap? Barriers to Integrated Reporting  
_Mike Wallace_

Integrated Reporting in a Competitive World of Cities  
_Jen Petersen_

Part IV: The Investor's Perspective

Some Thoughts on Integrated Reporting and Its Possibilities  
_Farha-Joyce Haboucha_

Integrated Reporting: What's Faith Got to Do with It?  
_Laura Berry_

An SRI Perspective on Integrated Reporting  
_Peter DeSimone_

Towards a 21st Century Balance Sheet: The First Three Steps  
_Toby A.A. Heaps_

Part V: The Importance of Auditing

Does an Integrated Report Require an Integrated Audit?  
_Bruce McCuaig_

One Audit—Moving towards 21st Century Integrated Assurance  
_Nick Ridehalgh_

Auditors at the Crossroads  
_Keith L. Johnson_

Sustainability Reporting – Can It Evolve Without Assurance? The Audit Profession Can Help to Build an Assurance Model  
_Cindy Fornelli_

Part VI: Leveraging Technology

The Role of XBRL and IFRS in Integrated Reporting  
_Maciej Piechocki and Olivier Servais_

Bringing Order to the Chaos: Integrating Sustainability Reporting Frameworks and Financial Reporting into One Report with XBRL  
_Liv A. Watson and Brad J. Monterio_

Sustainable Investing and Integrated Reporting: Driving Systematic Behavioral Change in Public Companies through Global Sustainability Rankings, Indexes, Portfolio Screening and Social Media  
_Michael Muyot_

Integrated Reporting Enablement  
_Richard L. Gristak_

Leveraging the Internet for Integrated Reporting  
_Kyle Armbrester_

Part VII: Better Engagement

The Business Imperative of Stakeholder Engagement  
_Sandy Nessing_

Integrated Reporting as a View into Integrated Sustainable Strategies  
_Scott Bolick_

Integrated Reporting and the Collaborative Community: Creating Trust through the Collective Conversation  
_Kathleen Miller Perkins_

Online Co-Creation Communities: A New Framework for Engagement  
_Denis Riney_

Employee Engagement and the Holy Grail  
_Kathy Miller Perkins_

Engagement as True Conversation  
_Kate Parrot_

Part VIII: Perspectives on an Action Strategy

Tomorrow's Corporate Reporting  
_Patricia Cleverly, David Phillips, and Charles Tilley_

Push, Nudge, or Take Control –An Integrated Approach to Integrated Reporting  
_Shelley Xin Li_

Integrated Reporting: Long-Term Thinking to Drive Long-Term Performance  
_Mindy Lubber and Andrea Moffat_

Integrated Reporting: Now What?  
_Michael P. Krzus_

Transformative Innovation towards Integrated Reporting Passes through a Hands-on/Transition Phase and Leads to Real Innovation in Management  
_Livia Piermattei_

Two Worlds Collide – One World to Emerge!  
_Ralph Thurm_

Success Factors for Integrated Reporting: A Technical Perspective  
_Ralf Frank_

Part IX: Action Strategy Tactics

Integrated Reporting: Impact of Small Issuer Challenges on Framework Development and Implementation Strategies  
_Lisa French_

Beware of Greeks Bearing Gifts  
_Partha Bose_

The Role of Lawyers in Integrated Reporting  
_Galit A. Sarfaty_

The Role of Stock Exchanges in Expediting Global Adoption of Integrated Reporting  
_Christina Zimmermann_

Integrated Reporting and Key Performance Indicators  
_Steve Lydenberg and Jean Rogers_

Developing Key Performance Indicators to Support Integrated Reporting  
_Yoshiko Shibasaka_

Part X: Lessons from Experience

Some Thoughts on Advancing the Vision and Reality of International Integrated Reporting  
_Robert H. Herz_

The French Grenelle II Act: Enacting Integrated Reporting and Further Developments  
_Patrick d'Humières and Nicolas Jandot_

Sustainability Reporting: Where Does Australia Stand?  
_Terence L. Jeyaretnam and Kate Niblock-Siddle_

Integrated Annual Report Survey - New Zealand's Top 200 Companies: Exploring Responses from Chief Financial Officers on Emerging Reporting Issues  
_Wendy McGuinness and Nicola Bradshaw_

The Climate Disclosure Standards Board –Setting a Standard for Realism and Resilience  
_Lois Guthrie_

CDP's Lessons from Ten Years of Climate Disclosure  
_Nigel Topping_

Part XI: Final Reflections

Integrated Reporting and the MBA Education  
_Daniela Saltzman_

A Proposed Research Agenda on Integrated Reporting  
_Beiting Cheng_

# Foreword (1)

Nitin Nohria, Dean

Harvard Business School

The following are selected excerpts from Dean Nitin Nohria's opening remarks to participants in Harvard Business School's inaugural Workshop on Integrated Reporting.

I am truly excited to have this opportunity to begin a conversation with all of you on the important topic of integrated reporting. As the dean of Harvard Business School, I find it a matter of great concern that society has lost so much trust in business. We live in a time in which business leaders are often trusted even less than politicians. It is something that I think each and every one of us should pay serious attention to.

I believe business contributes to the prosperity of humanity, and is more important to the continued prosperity of humanity than any other institution. Therefore, we must question what got us collectively to a place where society has lost that level of lost trust in business.

Whether it be the environment, healthcare, or making sure that people have access to information, I can't think of any major problem that society confronts today that can be effectively solved unless business plays an important part. And yet we find ourselves in a moment where this trust has been badly damaged. We've reached a place that feels like a vicious cycle, where nothing progressive is going to happen. Somehow, we have to turn this cycle in the other direction, and restore business to a place where it is experienced as an honorable calling, and a thing that can make great progress in society.

How can we get started down this path? One way is to introduce progressive ideas and practices that demonstrate to the world we care about more than profits. It's not that profits aren't important; no business survives without making profits. But that goal isn't incompatible with other societal priorities.

I think of integrated reporting as one of these progressive ideas and efforts that can begin to restore society's trust. If we start in various ways reporting back to society that we care, these reports can demonstrate we're as serious about holding ourselves accountable to and measuring our progress on a wide variety of things that matter most to people.

My understanding of the present state of integrated reporting is that many companies are producing reports, yet each is done in its own way without any clear sense of a top-down standard. This is a matter of concern to some, but I would argue that rather than be anxious about it, we should celebrate it and allow a lot of these ideas to bubble up. With some oversight form a coordinating body—of which I know there are a few that have been created now—we can begin to see a pattern and some best practices emerge, possibly inspiring others to take up the charge. Hopefully out of that bottoms-up process some standards will emerge more spontaneously than they would from the top-down.

What excites me so much about this idea is that it has yet to fully take hold. It's always important to be in the midst of emerging ideas and to provide support and momentum for ideas that are a little ahead of their time. By being at the leading edge of the movement, we can have real influence, bringing not just management thinking and theory but management practice and perspective.

This process might take some time, so I urge you to be patient with yourselves. This is not just for the sake of business that you're here, but also for the sake of society. I believe deeply that business is an engine for prosperity in society. Most of the challenges that society faces, business must address. By taking on this integrated reporting initiative, business can show its commitment in that direction and in the process restore society's confidence and trust. Perhaps that will return us to a productive cycle in which business and society have a positive relationship.

Nitin Nohria became the tenth dean of Harvard Business School in July of 2010. He previously served as co-chair of the Leadership Initiative, Senior Associate Dean of Faculty Development, and Head of the Organizational Behavior unit. His intellectual interests center on human motivation, leadership, corporate transformation and accountability, and sustainable economic and human performance.

Endnote: (1) This foreword is an edited and abbreviated version of Nitin Nohria's opening remarks at A Workshop on Integrated Reporting on October 14, 2010.

# Introduction:

The State of Integrated Reporting Today

Robert G. Eccles

On October 14-15, 2010, "A Workshop on Integrated Reporting: Frameworks and Action Plan" was held at the Harvard Business School. The workshop was sponsored by the Business & Environment Initiative led by Professors Rebecca Henderson and Forest Reinhardt. Professor Robert G. Eccles was the workshop chairman. Dean Nitin Nohria made the opening remarks, a summary of which form the Foreword of this book.

For two days, over 100 of the world's leading authorities on corporate disclosure discussed the concept of integrated reporting (sometimes referred to as One Report), what its contribution could be to creating a more sustainable society, and what must be done to ensure its rapid and broad adoption in a high quality way (1). The workshop participants included people from a wide range of countries and representing virtually every group that has a stake in integrated reporting and can help to make it happen: companies, analysts and investors, NGOs, regulators and standard setters, accounting firms, technology and data vendors, academics, students, and civil society. A free  Executive Summary of the workshop is available.

In order to more fully capture the insights and wisdom of the workshop participants, the Harvard Business School decided to publish a free "EBook." Everyone who attended the workshop was invited to write a contribution for the book. The response was overwhelming in terms of both quantity (64 pieces totaling some 110,000 words) and, more importantly, quality. The editors believe that this book nicely captures the current state of integrated reporting in the world, highlights the critical issues that must be addressed to ensure its rapid and broad adoption, and contains many good suggestions for an effective action strategy to make this happen. We see this book as establishing a baseline from which we can evaluate the progress of the integrated reporting social movement over time.

The book is organized into 11 parts. Part I, "The Role of the Corporation in Society," addresses the fundamental question of "For what purpose does a corporation exist?" Is it to maximize value for shareholders, regardless of its impact on other stakeholders and the environment? Or is its purpose to represent all of society's stakeholders in as balanced a manner as possible? If the latter, does meeting the needs of other stakeholders contribute to value creation for shareholders, and over what time frame, or are tradeoffs inevitable? In a very real sense, the question of the role of corporations in society and the content and practice of integrated reporting are inseparable. A company's reporting practices are a representation of how it sees itself and, in turn, they shape what it will become. Rethinking the role of the modern corporation and developing integrated reporting frameworks and practices will reinforce each other.

In the first chapter of Part I, "Accounting and Accountability: Integrated Reporting and the Purpose of the Firm," Massie argues that true integrated reporting will require an integrated theory that reconciles the shareholder and stakeholder models of the firm. Fullerton and Arterian Chang's hypothetical "A CEO's Letter to Her Board of Directors" illustrates the challenges a company faces in attempting to adopt such an integrated theory for implementing integrated reporting. Ioannou and Serafeim, writing "Drivers of Corporate Sustainability and Implications for Capital Markets: An International Perspective," summarize their recent research on the role institutional forces play in causing companies to adopt sustainable business practices and how the market reacts to those who do. Jeyaretnam, in "Growth, Stuff and a Guinea Pig: Inspired Thoughts from Two Days at Harvard Business School," raises the provocative question of whether greater value for society is best obtained by shifting to a slow or no growth perspective. Along this same theme is Willis's "Integrated Reporting in a Disconnected World? The Macro Measurement Challenge!," drawing a parallel between financial reporting by companies and measures of Gross Domestic Product by countries that do not take account of externalities created by growth in GDP to argue for the importance of the IIRC. In the final chapter, "What Should Be Done With Integrated Reporting," Wood argues that in order for integrated reporting to have its desired impact in changing decisions by companies and investors, all stakeholder groups need to act on the information they are getting—thereby helping to bring about the more integrated theory of the firm called for by Massie.

Integrated reporting is an embryonic management practice whose meaning is not yet well defined. As yet, no institutionally recognized framework exists, although the International Integrated Reporting Committee (IIRC) is working on developing the first draft of one. Similarly, there is no global set of standards for measuring and reporting on nonfinancial (e.g., environmental, social and governance) performance although important work has been done here by the Global Reporting Initiative through its "G3 Guidelines" and the work of the Carbon Disclosure Project and the Climate Disclosure Standards Board in creating a "Climate Change Reporting Framework." Thus the concept and practice of integrated reporting is very much a work in progress.

Part II, "The Concept of Integrated Reporting," contains seven thoughtful chapters which contribute to our understanding of just what integrated reporting means. In "The Five Capitals of Integrated Reporting: Toward a Holistic Architecture for Corporate Disclosure," White offers the idea of "capital stewardship" as the foundation for fusing the distinctly different characteristics of financial and nonfinancial reporting. Jeyaretnam and Niblock-Siddle emphasize in "Integrated Reporting: A Perspective from Net Balance" that integrated reporting requires the integration of sustainability into the company's business strategy; they also point out that "One Report" can and should be supplemented with targeted communications to different stakeholders using the company's website. In "Think Different," Knight cautions against the risk of the IIRC losing its "nerve and ambition" and explores five issues that need to be addressed in order to ensure the promise of integrated reporting. One of the great challenges in implementing integrated reporting is developing standards for nonfinancial information; McKinley's "ISO Standards for Business and Their Linkage to Integrated Reporting" provides insights into how this can be done based on the experience of the International Standards Organization and explains the contribution of ISO 26000 " _Guidance on social responsibility"_ to integrated reporting. As with standards, another key issue for integrated reporting is the definition of materiality and Kanzer, "Toward a Model for Sustainable Capital Allocation," frames the issue by asking the question of "Material to whom?" Using the example of BP's Deepwater Horizon oil spill disaster, in "Learning from BP's 'Sustainable' Self-Portrait: From 'Integrated Spin' to Integrated Reporting," Lewis explains how integrated reporting must overcome weaknesses in both financial and sustainability reporting in order for an integrated report to provide reliable and credible information rather than being "a mere marketing tool." Ligteringen and Arbex discuss how the GRI's next generation of G4 Guidelines will contribute to integrated reporting by making "ESG reporting more mainstream."

With the exception of South Africa and, in a certain way France, implementing integrated reporting is a completely voluntary exercise by companies. To the extent that companies see real advantages in doing so, they will adopt this practice on their own volition, as a few companies have already done and more are doing. Thus making the case for integrated reporting from the company perspective is very important in order to bring the power of market forces to bear on spreading its adoption. Part III, "Benefits to Companies," contains 10 chapters that provide strong evidence based on companies' actual experience and some persuasive logical arguments for the benefits companies will receive from integrated reporting:

-"Integrating Integrated Reporting" (Rochlin and Grant) argues that integrated reporting can be a vital driver of organizational change towards "Responsible Competitiveness" which "is the enterprise-wide approach to managing environmental, social, economic, and governance issues."  
-"Integrated Reporting: The Future of Corporate Reporting?" (Druckman and Fries) provides insights based on research conducted by The Prince's Accounting for Sustainability Project; it also discusses the mission and some key milestones of the IIRC.  
-"Integrated Reporting Contributes to Embedding Sustainability in Core Business Processes" (Brugman) describes the benefits to Rabobank, including "an internal redefinition of what is material to us" and the "internal embedding of sustainability in core business processes" which "will allow for a fairer and more balanced evaluation of our business activities."  
-"Six Reasons Why CFOs Should Be Interested in Sustainability" (Braaksma) describes the benefits Philips has already received from integrated reporting and identifies three areas targeted for improvement: improved engagement by feedback loops, improved workflow management, and providing reasonable assurance.  
-"Sasol's Reporting Journey" (Wandrag and Hanks) is a longitudinal analysis of Sasol's evolving corporate reporting practices since 2002 and the benefits it has achieved, such as "improving our internal management and reporting systems."  
-"One Report; One Message to All Our Stakeholders" (Janssen) explains that this private company has benefited from "new feedback" from its stakeholders due to integrated reporting.  
-"Southwest Airlines One Report™ Review" (Hong) presents an analysis of Southwest Airlines' first integrated report, along with a set of recommendations for improving it.  
-"Integrated Reporting: Managing Corporate Reputation to Thrive in the New Economy" (Bridwell) argues that integrated reporting is an important tool for helping companies to manage their corporate reputation.  
-"A Team like No Other" (Lueneburger) describes three phases for implementing integrated reporting and the key competencies within each one needed by the team that has this responsibility.  
-"Will the USA Take a Leap? " (Wallace) makes the case that sustainability reporting, followed by integrated reporting, in the U.S. will catch up with these practices in Europe with one reason being that "organizations need ways to demonstrate their credibility and lift them above their competitors."  
-"Integrated Reporting in a Competitive World of Cities" (Petersen) argues that the concept of integrated reporting is as relevant for cities as it is for companies and illustrates the benefits that could be obtained by New York City in doing so.

The purpose of external financial reporting is to help investors make investment decisions. Similarly, the original purpose of nonfinancial reporting (also called corporate social responsibility or sustainability reporting) was to provide information of interest to other stakeholders. Investors, especially socially responsible investors (SRIs) and some of the large pension funds that have a long-term view, are becoming increasingly interested in nonfinancial information. A company's performance on environmental, social and governance (ESG) issues affects how well it is managing risk in the short term and contributes to its performance over the long term. However, just how much attention investors pay to nonfinancial information when making their decisions is a topic of much debate today and the answer varies according to geographical location (e.g., more in Europe than in the U.S. and Asia) and investment strategy (e.g., more by SRIs and pension funds than by hedge funds and mutual funds).

Part IV, "The Investor's Perspective," contains four chapters which provide insights from investors themselves. Haboucha makes the case that investors need to do a better job of incorporating ESG analysis into their financial analysis and links integrated reporting to good corporate citizenship arguing the "moral case" that "society will stop tolerating corporate behavior which counters its values." Berry reinforces the moral argument for good ESG practices by companies in her chapter "Integrated Reporting: What's Faith Got to Do with It?" since "investors who view their portfolios through the 'lens of faith' need 'a framework that integrates financial and sustainability reporting.'" DeSimone ("An SRI Perspective on Integrated Reporting") notes that while "integrating ESG information into investing can be daunting" it is important do so since "time is not on our side"; he also notes the responsibility of asset owners to provide proper incentives for asset managers to take a long-term view which incorporates ESG issues into their investment decisions. Heaps explains why investors are beginning to take a greater account of ESG factors and summarizes research by Corporate Knights Research Group which identified 10 "universal key performance indicators (KPIs)" that are of interest to investors and calls for a "21st Century Balance Sheet" that explicitly takes into account ESG factors.

Once a global framework for integrated reporting and measurement and reporting standards for nonfinancial information have been established, the question then becomes whether the integrated report should be audited and by whom. Some companies who publish nonfinancial reports have a third party provide a limited assurance statement (not a real audit), although those who do so are in the minority. These assurance statements can be provided by the company's financial auditor, another auditing firm, or some other type of firm such as a CSR or environmental consulting firm. A number of challenges will have to be overcome in order to provide a true audit of an integrated report. These include developing audit methodologies, expanding the skill sets of financial accounting firms who choose to do integrated audits, dealing with the inevitable questions of legal liabilities for companies and their audit firms, and having investors make it clear that they are willing to have companies spend the amount of money necessary for an audit that gives a "true and fair" view of a company's integrated report.

The four chapters in Part V, "The Importance of Auditing," discuss integrated audits of integrated reports. In "Does an Integrated Report Require an Integrated Audit?" McCuaig notes the difference in form and content of financial audit and nonfinancial assurance opinions and addresses a number of issues that need to be resolved in order to have true integrated _audits_. Ridehalgh, in "One Audit—Moving Towards 21st Century Integrated Assurance," identifies some of the challenges audit firms will have to address in order to provide One Audit and emphasizes that such an audit will require "a more detailed report on the effectiveness of the organization's governance, risk and management and internal controls frameworks." In "Auditors at the Crossroads," Johnson suggests that a more holistic and diagnostic "physician paradigm" is a more useful way to conceptualize an integrated audit than the current approach based on "regulatory compliance inspection" and discusses the relevance of the new professional credential of Chartered Enterprise Risk Analyst recently introduced by the Society of Actuaries. The final chapter in this Part, "Sustainability Reporting—Can It Evolve Without Assurance? The Audit Profession Can Help to Build an Assurance Model" (Fornelli) discusses how the accounting profession "can leverage its expertise in assessing internal control over financial reporting to develop an assurance framework for sustainability reporting initiatives."

Integrated reporting involves adding new content to a company's annual report. In some cases, the base document is the company's CSR or sustainability report to which financial information is added. However, new technologies are as important as new frameworks, new measurement and reporting standards, and new auditing methodologies. These include specifically Extensible Business Reporting Language (XBRL) and more generally the Internet and its associated Web 2.0 technologies (2). Auditing firms are already facing the challenge of auditing financial statements in the XBRL format and so new technologies and new audit methodologies are closely related to each other. But the power of new technologies goes far beyond auditing. Integrated reporting is as much about a company's website as it is about a single paper document or _one_ report. Using Web 2.0 technologies, companies can provide more detailed information of interest to every stakeholder group; furnish users with analytical tools for analyzing data provided by the company as well as data added by the users themselves; give users access to analytical tools; allow users to customize their own integrated and other reports; provide information in a variety of media formats, such as videos and podcasts; gather feedback from users on the company's website and reporting practices; document the amount and sequence of use of data by different types of users; and improve dialogue and engagement with all stakeholders.

Part VI, "Leveraging Technology," contains five chapters about the contribution technology can make to integrated reporting. "The Role of XBRL and IFRS in Integrated Reporting," by Piechocki and Servais, provides a primer on XBRL and how it is currently being used in financial reporting. Watson and Monterio explain in "Bringing Order to the Chaos—Integrating Sustainability Reporting Frameworks and Financial Reporting into One Report with XBRL" how XBRL for financial reporting can be extended to cover sustainability reporting and eventually integrated reporting if two obstacles can be overcome—the need for a neutral organization to coordinate ESG XBRL taxonomies and a collaboration of stakeholders to ensure global adoption of these taxonomies. In "Sustainable Investing and Integrated Reporting: Driving Systematic Behavioral Change in Public Companies through Global Sustainability Rankings, Indexes, Portfolio Screening and Social Media," Muyot makes the case that a combination of rankings and social media can improve disclosure by companies and gives evidence of this in the cases of Microsoft, Cisco, and Oracle. Gristak, "Integrated Reporting Enablement," echoes the importance of XBRL and Web tools and to these he adds the even newer technology of cloud computing. The final chapter by Armbrester, "Leveraging the Internet for Integrated Reporting," emphasizes that integrated reporting is about much more than a single paper document and identifies three major contributions technology can make: (1) providing more detailed information to specific stakeholders, (2) improving dialogue, engagement and interactivity, and (3) increasing a company's reporting capabilities "through exposure of data and flexibility in self-report creation."

Engagement is not done through technology alone. It involves a wide variety of two-way conversations between individuals and between groups using a range of media from face-to-face conversations to online polls and wikis. Just as One Report doesn't mean _only_ One Report, integrated reporting is about much more than providing more integration between financial and nonfinancial performance metrics in a company's external reporting. Equally important is the much higher level of engagement between a company and its stakeholders. Integrated reporting is as much about _listening_ as it is _talking_. Through engagement a company (1) understands the expectations of all its stakeholders, including performance targets, and communicates its own view of its role in society, (2) determines the information needs of all stakeholders and gets feedback on how well these needs are being met, (3) manages financial, operating and reputational risk, and (4) ensures that it has a sustainable strategy for contributing to a sustainable society.

The six chapters in Part VII, "Better Engagement," address various means and benefits of engagement. "The Business Imperative of Stakeholder Engagement," by Nessing, describes the benefits to integrated reporting company American Electric Power from its program for stakeholder engagement that began in 2007; Nessing notes that "Companies that don't listen to their stakeholders risk losing market share, access to capital, competitiveness, their reputation and the public trust. Why would any company deliberately risk that?" Bolick's "Integrated Reporting as a View into Integrated Sustainable Strategies" reports on SAP's experience in using engagement to determine the correct KPIs for providing material information on the company's sustainability performance and emphasizes that "integrated reporting will only be meaningful if it reflects the results of an integrated strategy." In "Integrated Reporting and the Collaborative Community: Creating Trust through the Collective Conversation," Miller Perkins argues that because organizations are now embedded in an integrated "web of relationships and associations," the effectiveness of these networks depends upon the trust between the parties; integrated reporting is an important way to build this trust but doing so requires companies to overcome the barriers contained within their own organizations. Riney, "Online Co-Creation Communities: A New Framework for Engagement," focuses on engagement between a company and its customers by using social networking tools in a process of co-creation that takes account of ESG issues in developing a company's products and services and using integrated reporting to communicate the results of these strategies. Another chapter by Miller Perkins, "Employee Engagement and the Holy Grail," focuses on a different stakeholder—employees—and she makes the case for how integrated reporting will result in a better understanding of the company's strategy and thus higher productivity by its employees. In the final chapter, "Engagement as True Conversation," Parrot points out that true engagement requires a conversation based on listening and mutual learning where the company and its stakeholders focus more on articulating their _interests_ rather than their _positions_.

The challenges of making sure that there is a well-defined and common conception of integrated reporting; establishing frameworks, measurement and reporting standards; developing the necessary audit methodologies; and learning how to leverage technology and effectively engage with all stakeholders are immense. An even greater challenge is creating and implementing a collaborative action strategy for the rapid and broad adoption of integrated reporting around the world in order to ensure a sustainable society. Part VIII, "Perspectives on an Action Strategy," presents seven general views on the elements of such a strategy and how it should be implemented. Part IX, "Action Strategy Tactics," addresses six specific tactics that can be used for developing and implementing integrated reporting. Part X, "Lessons from Experience," draws on the experience of others who have tried to change corporate reporting in ways relevant to integrated reporting.

The first chapter in Part VIII, "Tomorrow's Corporate Reporting," by Cleverly, Phillips and Tilley, presents preliminary results of a study by the Chartered Institute of Management Accountants, PricewaterhouseCoopers UK, and Tomorrow's Company regarding the challenges of changing the corporate reporting system including the lack of trust, insufficient resources and unwillingness of stakeholders to engage, vested and conflicts of interest, and a lack of aligned incentives. In "Push, Nudge, or Take Control: An Integrated Approach to Integrated Reporting," Li calls for regulators to take a principles-based approach that will "allow creations and innovations" but she also points out that regulation alone is not enough—regulators can push but "civil society can nudge the process" and "companies need to take control of the process as a means to develop their business strategies." Lubber and Moffat echo the need for a multi-pronged approach that involves companies, investors, the advocacy community, regulators, and the accounting industry since "All of us have responsibilities if we're to ensure that robust and credible integrated reporting is driven by, and in turn drives, our economy's shift to a long-term sustainability orientation." Similarly, Krzus, writing "Integrated Reporting: Now What?," details what each of five groups (analysts and investors, companies, regulators and standard setters, technology and data vendors, and stakeholders) needs to do in order to make the "vision for the year 2020...a reality." Piermattei's "Transformative Innovation towards Integrated Reporting Passes through a Hands-on/Transition Phase and Leads to Innovation in Management" uses Procter & Gamble's Connect and Develop model for innovation as an analogy for the "transformative and not simply evolutionary innovation process" that will be required to take integrated reporting through the stages of Explore, Exploit and Export. In "Two Worlds Collide—One World to Emerge!" Thurm emphasizes that if integrated reporting is going to become common practice by 2020, efforts in the "microcosm," such as the work of the IIRC and industry federations, need to be connected to the "macrocosm" of "global, regional, or local targets" since "Some say we have 20 years left not to lose control over this planet." Frank, in "Success Factors for Integrated Reporting: A Technical Perspective," concludes Part VIII by identifying three success factors "the integrated reporting community and its proponents will have to deal with in order to successfully take corporate reporting to a better future": (1) developing an accounting framework for nonfinancial information, (2) reducing complexity in corporate reporting through a reassessment of what information is relevant, and (3) getting greater clarity about the meaning of "integrated."

The six tactical action strategy issues in Part IX are:

-Ensuring that frameworks for integrated reporting will work for smaller companies ("Integrated Reporting: Impact of Small Issuer Challenges on Framework Development and Implementation Strategies" by French)  
-Mobilizing consumers, employees and stakeholders to support integrated reporting ("Beware of Greeks Bearing Gifts" by Bose)  
-How lawyers can and should support the development of reporting standards ("The Role of Lawyers in Integrated Reporting" by Sarfaty)  
-The role stock exchanges can play in spreading the adoption of integrated reporting ("The Role of Stock Exchanges in Expediting the Global Adoption of Integrated Reporting" by Zimmerman)  
-A process for defining material KPIs to be included in an integrated report ("Integrated Reporting and Key Performance Indicators" by Lydenberg and Rogers)  
-The importance of not having too many KPIs and putting them in the context of narrative information ("Developing Key Performance Indicators to Support Integrated Reporting" by Shibasaka)

Part X is comprised of six chapters in which the authors reflect on their own experiences with corporate reporting in order to offer suggestions for developing and implementing integrated reporting. In "Some Thoughts on Advancing the Vision and Reality of International Integrated Reporting," Herz, the former Chairman of the Financial Accounting Standards Board, states that both "general marketplace acceptance on a voluntary basis" and "governmental and regulatory support and action" will be required. Analyzing French initiatives to improve corporate reporting up to and including The Grenelle II Act which "makes integrated reporting mandatory for about 2,500 businesses and for a few hundred state-owned companies," d'Humières and Jandot emphasize that a "strong political push" must be supplemented by efforts from accounting authorities and financial market authorities, as well as analysts, investors and academics. Jeyaretnam and Niblock-Siddle review Australia's experience with sustainability reporting in "Sustainability Reporting: Where Does Australia Stand?"; they also discuss materiality, review the superannuation fund VicSuper's transition to integrated reporting, and highlight how the diversified property company Stockland is using its website to communicate with its stakeholders. In neighboring New Zealand, McGuiness and Bradshaw report on a just-completed survey of the practices and plans for integrated reporting of the largest 200 companies in that country: "Integrated Annual Report Survey: New Zealand's Top 200 Companies." The last two chapters are based on the experience of the Carbon Disclosure Project and the work of the Climate Disclosure Standards Board. In "The Climate Disclosure Standards Board: Setting a Standard for Realism and Resilience," Guthrie discusses what was done to address a "confused disclosure landscape" about climate risks and greenhouse gas emissions in order to create the Climate Change Reporting Framework, published in September 2010, "whereby investors would reward stock prices of companies that integrate sustainability to their business and companies would respond by further improving their sustainability performance." Topping, authoring "CDP's Lessons from Ten Years of Climate Disclosure," then draws eight lessons from their experience, identifies six traps to avoid, and lays out a roadmap for achieving a disclosure program "that is mandated by regulation and that requires companies to disclose according to a rigorous accounting standard and to have disclosures assured by a third party."

Three clear points emerge out of these 19 chapters on developing and implementing an action strategy. The first is a clear sense of urgency—we have 10 years at most to make integrated reporting the universal practice. The second is that both market and regulatory forces must be brought to bear. The third is that collaboration on a massive scale with virtually every stakeholder group will be required.

Part XI, "Final Reflections," concludes the book. Saltzman points out in "Integrated Reporting and the MBA Education" that business schools have the potential to make an enormous contribution to integrated reporting by including this topic in their MBA programs as they train future generations of leaders since "Business schools can play a critical role in shaping our world and can have a profound impact on creating a more sustainable future." Good research is at the foundation of good teaching and in "A Proposed Research Agenda on Integrated Reporting," Cheng lists a number of potential research projects, including studies of the relationship between financial and nonfinancial performance and deriving lessons from the first wave of required integrated reports in South Africa this year; she concludes that making research a high priority is important since integrated reporting "is a field that has attracted limited attention so far but is witnessing increasingly faster growth and greater impact these days."

I have a final reflection of my own. The most important thing about integrated reporting today is that it is an emerging social movement. The meaning of integrated reporting will only be developed and its implementation will only happen if this movement is an effective one. This will require a high level of commitment that comes from energy, enthusiasm, trust, courage, persistence and collaboration amongst every person and organization who believes that integrated reporting can play an important role in ensuring that we have a sustainable society. The co-editors and authors of this book have this commitment and we hope that every reader will as well. Please join the integrated reporting social movement for your own sake and for the sake of generations to come.

_Robert G. Eccles is a Professor of Management Practice at the Harvard Business School. He is the author of three books on corporate reporting, the most recent one being_ One Report: Integrated Reporting for a Sustainable Strategy _(with Michael P. Krzus). He has a personal commitment to doing whatever he can through his research, teaching, and collaborations with others to facilitate the rapid and broad adoption of integrated reporting in order to create a more sustainable society._

Endnote: (1) Integrated reporting is the combination of a company's financial report and its corporate social responsibility or sustainability report into a single document. It also involves leveraging the Internet to provide more detailed information of interest to shareholders and other stakeholders, as well as for improving dialogue and engagement with all stakeholders. See Eccles, Robert G. and Krzus, Michael P. _One Report: Integrated Reporting for a Sustainable Strategy_. Hoboken: John Wiley & Sons, Inc.  
(2) Extensible Business Reporting Language (XBRL) involves assigning electronic "tags" from a "taxonomy" or business dictionary to both quantitative and qualitative data so that it can be distributed and consumed over the Internet in a rapid and efficient way.

# PART I

The Role of the Corporation in Society

#### Accounting and Accountability: Integrated Reporting and the Purpose of the Firm

Robert Kinloch Massie

Visiting Scholar, Harvard Law School; Co-founder, Global Reporting Initiative

The successful pursuit of integrated reporting will require the disentanglement, analysis, and eventual reconciliation of divergent views on the purpose of the corporation. The debate over integration is, in part, a debate over the materiality of key information. Materiality, in turn, is often a question not just of content but also of goal and of audience: we must be able to answer not only what are we measuring, but why, and for whom? Are we seeking to answer the questions of managers and shareholders? Or are we also providing key data to a wider community of stakeholders on whom corporate success is mutually dependent? In other words, is integrated reporting an extended version of traditional _financial accounting_ , or is its focus _firm accountability_ in which the corporation is seen as a holistic mechanism for creating human prosperity? If we are asking whether some form of reporting is material, we must be able to specify: _material to whom?_

The concepts of accounting and accountability are obviously related: they refer to transparency, accuracy, and responsibility for the consequences of decisions. At the same time, differing assumptions about shareholder and stakeholder theory are likely to affect how integrating reporting will be designed and carried out.

I. Integration and Purpose

Financial reporting has undergone substantial changes over the last hundred years and is currently being challenged on whether it provides an accurate portrait of the present and future performance of firms. Sustainability reporting, which has come into being over the last two decades, looks at a different set of corporate impacts. Until recently these approaches developed along parallel tracks, leading many corporations to attempt to explain their strategies for value creation in two different languages, formats, and reports. The formation of the International Integrated Reporting Committee—with representatives from the worlds of both financial and sustainability reporting—are exploring whether the two can, in some manner, be merged.

The choice of how to approach such a merger, however, depends on one's views of the core purpose of the firm. If one believes that the purpose of the firm is exclusively to promote the interests of shareholders, then the path toward integrated reporting might be simply to select a handful of measurements from the sustainability field that can be shown to be directly useful to enhancing shareholder value. On the other hand, if corporate value and prosperity are broader concepts in which shareholders play an important role—but not an exclusive one—the purpose of integrated reporting would be to demonstrate the necessary interdependence of stakeholders.

To analogize it to auto manufacturing, is integrated reporting attempting to add a stronger engine and fancier electronics to an existing vehicle? Or should it acknowledge that the automobile is a means to an end: the provision of safe, convenient, low-cost mobility? To put it another way, financial reporting tends to assume that strategic goals are relatively fixed and that the challenge faced by managers is one of mobilizing and disbursing capital to achieve them. Sustainability reporting often leads to the assessment of deeper strategic questions such as "What business are we really in? What large scale impact are we having? Whose needs are we trying to meet? And how is our industry changing?"

Integrated reporting is a worthy goal. By pointing out the implications of the definition of the firm for its development, I am not suggesting that such questions invalidate the effort. At the same, divergent intellectual premises must not be papered over. By facing these complexities early on, we are far more likely to develop a system of integrated reporting that will meet multiple objectives for multiple parties.

To explore the assumptions in greater detail, let's begin with the statement of purpose—or "terms of reference"—for the Working Group of the International Integrated Reporting Committee (IIRC) (1). The objective of the recently formed committee, they write, is to develop an "integrated reporting framework" that will:

1. support _the information needs of long-term investors,_ by showing the broader and longer-term consequences of decision-making; [ _emphasis mine_ ]  
2. reflect the _interconnections between environmental, social, governance, and financial factors_ in decisions that affect long-term performance and condition, making clear _the link between sustainability and economic value_  
3. provide the necessary framework for _environmental and social factors to be taken into account systematically in reporting and decision-making_  
4. rebalance performance metrics _away from an undue emphasis on short-term financial performance; and_  
_5._ _bring reporting closer to the information used by management_ to run the business on a day to day basis.

Though the statement explicitly says that the purpose of reporting is to support "the needs of long-term investors," it also admits an underlying consensus about the problems with traditional financial reporting. The statement implies, for example, that current financial accounting has a tendency to focus on the wrong things over the wrong time frame. The language additionally implies that short-term market pressures make it difficult for managers to assess the long-term consequences of their decisions. Because management often omits structural data that can have significant bearing on the performance and value of the firm, "environment, social, and governance" (ESG) information needs to be incorporated in new ways. Finally, the statement suggests, any resulting system of measurement must be "closer to the information used by management to run the business on a day to day basis." This last point is, at best, unclear. Is it suggesting that future tools should be comparable to those that managers are using to manage their firms, or to one which they should use if better one were at their disposal? One also has to wonder how this objective—to provide day to day tools for feedback and decision-making—fits snugly with the aspiration that goals should be measured over the long term.

II. Shareholder Primacy

The statement is helpful in clarifying the shared goals of the project, but it refers only tacitly to corporate purpose. Perhaps to most of the participating organizations the answers seem self-evident. For those with a traditional 20th century perspective on corporate structure, the purpose of the firm is to maximize financial value for the shareholder. Under such a doctrine of "shareholder primacy," the legal status of the shareholder as the central authority in corporate governance dictates that all effort within the firm ultimately be directed towards their benefit. This theory of ownership in turns flows from a particular historical understanding of property rights. Shareholders lay claim to predominance and to corporate governance because of the supposedly unique risk they bear as both the providers of initial capital and as the residual claimants, after other debt holders and contractual parties have been paid, to the remaining value of the firm.

Under a theory of shareholder primacy, the purpose of introducing integrated reporting is to surface previously invisible ESG elements that would affect the financial value of the firm. This approach, even when framed narrowly, remains complex. The debate has raged for many years about a) whether the inclusion of ESG factors does indeed influence the financial performance of the firm; b) whether this effect can be discerned in the short term or only over the long; and c) whether the effect is primarily due to the identification of positive elements that lead to greater profitability or to the avoidance of risks, volatility, and costs. Whatever the description of the effect, the notion of obligation to shareholders is unaffected.

In the last generation, increasing numbers of economists, investors, accountants, executives, and public officials have accepted that idea that ESG factors do—in some manner—have an effect on the firm. The question for many is how to extract the relevant information from the plethora of ESG issues in a way that can be used by analysts and managers to extract additional relative value, or "alpha," for shareholders (2). Under this assumption, the task of designing an integrated reporting framework will be to sift through the utility of measurements and indicators, keeping or tossing those on the basis of their perceived value to financial returns and to shareholders.

III. Stakeholder Model

An alternative view of the corporation would lead to a different approach. Under stakeholder theory, shareholders are viewed as a critical constituency of a firm, but not its sole justification. The corporation is instead conceived of as a complex entity, comparable to a biological organism, that relies on multiple inputs of resources, including human, natural, and financial capital. The purpose of the firm is to create a net gain for _all_ the participating parties. The role of management is to orchestrate the proper sequence and balance of actions to achieve this goal.

The core argument for stakeholder theory rests on two premises. First, many issues that will eventually have significant impacts on the value of the firm are often not recognized initially as "financial questions." Stakeholder theory, and its counterpart of ESG reporting, provides a distant early warning system that introduces questions of strategy to managers before it is one can say with precision how they should be factored in and monetized. Second, the inclusion of ESG factors allows for the correction of pricing distortions and market inefficiencies that result when the full factor costs of a firm decision are not included.

Though some corporate critics have argued that the maximization of profit and shareholder value is always at war with the achievement of all other interests, traditional economics and financial accounting have taken a more instrumentalist and nuanced approach. Traditional financial theory argues that having a single objective function (shareholder value) actually permits the balancing role that they concede is part of the social function of the firm. The premise is that since markets efficiently price the contributions of both natural and human capital, managers who are tempted to undervalue these factors in order to favor narrowly financial outcomes will eventually be penalized and forced to recalibrate.

This optimistic view is seriously flawed. To begin, even the most ardent theorists recognize that market failures crop up with alarming frequency. Moreover, innovations in economic theory have identified important anomalies in which non-rational behaviors and sticky transitions prevent the smooth rebalancing of factor inputs (3). And finally, we know that large scale collective action problems, incentive misalignments, and principles of game theory press managers to pursue narrow or short-term objectives even when such actions may damage the firm over the long-run.

The problems increase by orders of magnitude when the relevant domain for the creation of value is an entire industry, a region, or a nation-state. Through these complexities we enter the realm of public policy, in which rules and incentives are invented in an attempt to offset the distorting influences of collective action problems. We create "rules of the game" in which competition among firms can still be reconciled with public goals and benefits. For proponents of sustainability within firms, an advantage of integrated reporting is that it will introduce greater awareness of these collective impacts into institutional decision-making. For opponents of such an expanded mandate for firms, this is precisely the problem; firms should only be considering their own institutional well-being and avoid anything that distracts attention or draws resources from its financial objectives. In this view, collective decisions should be made through politics. If that's so, their counterparts respond, corporations should not be spending shareholder assets to influence political decision-making, which should be a debate about the public good.

IV. Towards Integrated Reporting and Balanced Purpose

Sustainability reporting, when it arose, challenged many of the core assumptions of financial accounting. Globalization, technological advancement, expanding markets, and resource depletion have been altering the basic conditions of commerce, so much so that new theories and tools are desperately needed. While early airplanes could get by with simple instruments—airspeed indicators, compasses, and eventually altimeters—most pilots relied for navigation on what they could see out the cockpit window. As the power, range, and size of aircraft have increased, so has the need for instantaneous and accurate information. Current electronics allow pilots to identify hundreds of pieces of information about the functioning of the planes for which they are responsible, allowing the aircraft to avoid collisions and to be flown safely under far more difficult conditions.

Sustainability advocates argue that measurement must be improved because the nature of information and value has changed across the board. In finance, the definition of an "asset" has shifted dramatically from _tangible_ components like machines and land to _intangibles_ like intellectual property and brand value (4). In the environmental dimension, long-ignored elements like greenhouse emissions, water scarcity, toxins, and resource depletion have major implications for stability of production, taxation, and consumption. In the social realm, the education, loyalty, and expectations of employees, customers, and local communities can have a direct impact on the success of the firm in arranging to receive the necessary capital. As evidence of these correlations grow, more and more parties are trying to understand and control, as the IIRC terms of reference state, the "interconnections between environmental, social, governance, and financial factors ... [as well as] the link between sustainability and economic value."

Though not everyone accepts the idea that a single objective function—shareholder value—will automatically reconcile all other questions, supporters of integrated reporting generally believe that the apparent tensions between different goals can be reconciled if the time horizon is pushed out long enough. Prosperity is prosperity, they argue. To pursue financial objectives without considering the larger contextual impacts is both societally wrong and financially dangerous since the firm will eventually make mistakes and be penalized for its errant behavior. Similarly, the pursuit of ESG factors for their own sake cannot be sustained if the firm becomes unprofitable, a direction that will eventually cut off the critical resources of revenue and capital to even the most well meaning firm.

The underlying assumption of this perspective is that firms are currently functioning below their optimal level of both social and financial performance. There is thus great room for joint gains, as companies discover that they can advance up and out towards higher Pareto optimality on a sustainability/prosperity curve. There is considerable anecdotal evidence to support this view. For example, a decision to review an ESG factor such as greenhouse gas emissions can lead to a re-examination of transportation, energy use, production logistics, and even packaging that ends up both saving the firm money and reducing pollution.

Of course, there remain just as many counter-examples, where financial returns are increased when firms externalize their costs on to other parties. The cultural image of the rapacious corporation, mindlessly pursuing profit and shareholder value without regard to the consequences to parties "outside" the firm, flows from these very real and often painful patterns. The political, moral, and economic debate about the role of the firm in society turns on whether the externalization of such costs is an inevitable and uncontrollable feature of modern capitalism which happens at such a scale that it calls into question the benefits of corporate value-creation. In the view of corporate skeptics, the only response to such damaging behavior must be regulation, enforcement, and penalties that force a firm to recalculate the costs and benefits of cost—shifting on to innocent parties.

A model of that assumes that corporations are structurally prone to exploitation leads to a pattern of deep social distrust on all sides. If corporations rely exclusively on the rhetoric and practice of shareholder primacy, consumers, communities, and workers often conclude that managers are seeking profit at any cost. Corporate managers, in turn, often feel stereotyped and misunderstood, when they discover that their motivations, talents, and decisions are routinely rejected as compromised.

The massive disruptions in capital and corporate markets—and the stupendous destruction of value—throughout the first decade of the twenty-first century has called into question the viability of the shareholder primacy model. The introduction of the stakeholder theory of the firm was designed to provide both a practical definition and a new normative code for describing and guiding the complicated decisions that managers must make. While it has yet to achieve universal acceptance—partly because of a perplexing lag in legal theory—more and more parties have found this model helpful in creating a more nuanced understanding of the benefits and costs of the corporate form.

Financial reporting reflected and encouraged a narrow view of shareholder primacy. Sustainability reporting arose as a corrective. The concept that the two can be reconciled reflects the deeper aspiration that one can reground the definition of the role of the corporation in less polarizing and more productive concepts. There remains considerable uncertainty among the parties as to whether the goal can be achieved. Supporters of traditional financial reporting worry that introducing sustainability will lead to the introduction of irrelevant information or to the distortion of the role of the firm. Advocates for sustainability reporting worry that after years of being ignored by financial theorists, integrated reporting could end up as a mechanism through which traditional methodologies capture, subordinate, and dismiss the substantial gains of more than a decade of sustainability research.

It thus become not a question of whether a few isolated ideas from sustainability reporting can be imported back into the older model of financial accounting in order to improve the performance for shareholders, or whether financial accounting can simply be recast in ESG terms in order to achieve objectives that include broad public policy goals. The real challenge—which can be met only if it is honestly faced—is whether the creation of a system of integrated reporting will affirm and support a more accurate view of the role of the corporation in creating long-term value for individuals, for firms, for stakeholders, and for communities.

For an individual who is suffering from the symptoms of undiagnosed illness, the first steps towards health is an unblinkingly candid diagnosis, followed by a course of action that openly acknowledges the interdependence of treatment with the natural systems of the body. If the goal of modern economic life is sustainable prosperity, and one of the main vehicles for its achievement is the complex and powerful modern firm, then we need to acknowledge the full range of underlying assumptions, and thus create not just integrated practice through reporting but integrated theory as well. This is the true challenge of merging accounting with accountability, one whose successful resolution would bring rich rewards for the century ahead.

Endnote: (1) <http://www.integratedreporting.org/> Full disclosure: The author was recently appointed to the Working Group of the International Integrated Reporting Committee, though as of November 2010 had not yet attended a meeting.  
(2) The "alpha" coefficient, a component of the capital asset pricing model, is defined as the measurement of an investment's performance over and above the performance of investments of the same industry or risk.  
(3) See the field of behavioral economics. <http://www.econlib.org/library/Enc/BehavioralEconomics.html> and the recent Nobel prize in Economics which was awarded for labor market "search frictions" -  http://nobelprize.org/nobel_prizes/economics/laureates/2010/press.html  
(4) <http://www.investopedia.com/terms/i/intangibleasset.asp>

#### A CEO's Letter to Her Board of Directors

John Fullerton, Founder and President, and Susan Arterian Chang, Director

Capital Institute

_Capital Institute is pleased to participate in this creative and important project. The challenge of measuring what matters is not new. But what matters now, in a world where we consume the earth's resources at a rate 1.5 times faster than they can be regenerated, is profoundly new. The laws of thermodynamics do matter, more so every year, as our ecological footprint continues to grow. Our economics, and capitalism itself, depend upon business playing a leadership role in finding a path to truly sustainable capitalism. We are especially heartened by Dean Nitin Nohria's expressed belief that by committing itself to that path and assuming that critical leadership role, business can reclaim society's faith and trust._ _  
_ _\-- John Fullerton_

_This hypothetical letter from a fictional CEO to her board of directors represents our best efforts to distill the collective wisdom of the Integrated Reporting workshop participants through the "lens" of the Capital Institute_ _._ _  
_ _\--Susan Arterian Chang_

I am writing this letter to the board having just returned from a Harvard Business School conference on "Developing an Action Plan for Integrated Reporting." The experience has altered my worldview and how I perceive my role as CEO of this corporation. If I can pinpoint the transformational moment I would say it was when GRI's Ernst Ligteringen shared a chart based on data sourced from the Global Footprint Network, illustrating that our economy has been running a deficit relationship with the earth's ecosystem since the 1980s and that we are now consuming resources on an annual basis equivalent to 1.5 planet Earths.

Shockingly, when I returned home from the workshop, my thirteen-year-old daughter informed me that she had calculated that our family has an ecological footprint of seven. She asked me if I knew what my company's ecological footprint was, and looked into my eyes in a new way, not like a child, but like a mature fellow traveler who _knew_.

It is now impossible for me to escape the conclusion that unless we find a way to negate the laws of physics, our destructive, business-as-usual course will end in certain planetary disaster and human tragedy of a scope scarcely imaginable. At the same time, this realization gives me a sense of the tremendous opportunity before us—to be among the leaders in the great transition to a more just and sustainable economy.

How should public companies like ours mobilize to meet this challenge and opportunity? Our most urgent priority must be to begin to identify the indicators that will allow us to measure, assess, and manage our contribution to this ecological emergency and report the results to our stakeholders in a transparent way. We will attempt to integrate these indicators and performance measurement systems into our financial reporting process where that is possible. But when it is not, we will nonetheless include all material sustainability analysis alongside our financial results in a single report. Failure to commit to this holistic management and reporting system will henceforth be deemed tantamount, as Ligteringen says, to "flying blind."

Dean Nitin Nohria's opening remarks also resonated with me deeply. He described how society had lost faith in the corporate community due to its failure to take responsibility for its contribution to environmental and societal ills in its relentless pursuit of short-term profits. "When I was growing up a business person's word meant something that could be honored," Dean Nohria said. "Now if you ask the common person what their view of business leaders is they will say 'they care about nothing but themselves. They don't even want to maximize shareholder value, just their own.'"

In last year's annual report, my letter to "shareholders" focused on our corporation's strategies to preserve our bottom line against the backdrop of a severe economic downturn. This year's letter will be addressed to "stakeholders" and will focus on our strategies to reverse a sustainability crisis that has far more profound implications for our survival than the current recession. We will begin immediately in all communications with stakeholders, to describe, not just with numbers, but also with narrative, what goals we have set and what steps we are taking to address our role in that crisis. In short, we will set out on the road to restore society's trust in us.

We will be proceeding without the benefit of mandatory guidelines and even without a clear consensus about what this new way of reporting should look like. We simply don't have the luxury of time. As the saying goes, what gets measured gets managed and we will begin with measuring and reporting, guided by early standard setters like the Global Reporting Initiative. We will then leverage our core competencies in the service of our sustainability strategies.

I would also like to point out that I am aware that the value of many of our most precious natural and social assets cannot be expressed in monetary terms or "by the numbers." For those we will invent a new vocabulary to describe and report their value. We will be treading new ground as we seek to convince the markets that our nonfinancial returns may sometimes be more critical to predicting our future performance than our financial ones.

We will ask our financial auditors to provide the same level of assurance on our holistic value reports as they do on our financial reports. We will expect them to get up to speed with us quickly and to push us to demonstrate that we have identified all material issues, indicators and data and have engaged all the stakeholders required to conduct effective sustainability performance analysis and reporting.

To address the concerns expressed by some members of the responsible investing community let me assure you that we will not short-circuit sustainability metrics by focusing too narrowly on producing a streamlined holistic report. We will call on you for guidance, and your early, pioneering work will be recognized and validated.

Indeed, I would offer these cautionary words to the CEO of Southwest Airlines whose enthusiasm for integrated reporting appears to be as much about promoting efficiency in the reporting function as it is to drive sustainability. I take the view that we may need to sacrifice efficiency as we begin to adopt the structure of a more complex, adaptable system when we undertake holistic reporting. We know that the process may mean that for the first time functions within the organization that never communicated with one another will need to collaborate in ways that mimic complex natural systems. That transition may slow some of our processes and our decision-making but I believe the resilience and transdisciplinary knowledge sharing it nurtures within our organization will serve us well in a world of increasingly scarce natural capital.

As we decide what sustainability indicators are material to report on we will engage all our stakeholders and NGOs, including our most vocal critics. This frank and sometimes painful engagement process may lead us to conclude that we have no other option but to wind down those portions of our business that, despite our best reengineering efforts, continue to contribute egregiously to global ecosystem overshoot. At the same time we will begin to transition into businesses that will support the creation of a just society that honors the finite nature of the ecosystem and its resources.

Some of the information we will disclose as part of our holistic reporting may put us at a competitive disadvantage in the short-term, either because we are communicating intelligence about our exposure to environmental and social risks that our competitors have chosen not to disclose, or, on the other hand, because we will be revealing information about our best practices that we believe it is our duty to share with society at large. We will debate with our attorneys when they counsel us that this degree of transparency is imprudent.

We are well aware that sustainability reporting may not be a priority for many of our investors—and that even signatories to the UN PRI are often paying mere lip service to its tenets. But it will be our job to persuade them that they must partner with us in this grand experiment.

I also intend to line up three sovereign wealth funds committed to long-term value and five pension funds that have already declared their desire to focus on long-term stakeholder value. I will ask them to support us should any of our major shareholders decide to disinvest on the day we announce our vision.

I plan to invite my industry colleagues and our key stakeholders to establish a set of key sustainability performance indicators for our sector. This will allow investors and all stakeholders to benchmark our performance and to push us to compete against something beyond short-term financial indicators.

I will also form an industry group and invite our institutional investors to join us in lobbying the SEC to issue a ruling requiring mandatory holistic reporting. Our regulators need to hear from issuers like us and from the mainstream investment community, not just from "responsible" investors, that mandatory holistic reporting will serve to create a more transparent and level playing field for all market participants.

Let me conclude by saying that while we admire Southwest Airlines for putting their employees and customers ahead of profits henceforth we intend to do them one better. It will be our mission to include among our primary stakeholders global society and the earth's ecosystem, with the view that prosperity for all stakeholders will follow.

Ladies and gentlemen, we have a new purpose. I ask for your support and your trust as we tread new ground together, knowing that any short-term challenges we encounter will be dwarfed by the long-term value you have entrusted our management team to create.

_John Fullerton is the_ _f_ _ounder and President of_ _Capital Institute. John leads all activities of the Capital Institute and is also the principal of Level 3 Capital Advisors, LLC, an investment firm focused on high-impact sustainable private investments. During an 18-year career at JP Morgan, John managed multiple global capital markets and derivatives businesses, and the venture investment activity of LabMorgan. He was JPMorgan's representative on the Long Term Capital Oversight Committee in 1997-98._

_Susan Arterian Chang is the Director, Content Development at Capital Institute._ _Susan has covered major trends in the global capital markets for a variety of international business publications, and was the publisher, for eight years, of a community newspaper in White Plains, New York. Before joining Capital Institute she was publisher of The Impact Investor website._

#### Drivers of Corporate Sustainability and Implications for Capital Markets: An International Perspective

Ioannis Ioannou and George Serafeim

In recent years, a growing interest in corporate sustainability has emerged, both in academia as well as the business world. Indicatively, in the latest UN Global Compact/Accenture CEO study (2010) (1), ninety-three percent (93%) of the 766 CEO participants worldwide, declared sustainability as an "important" or "very important" factor for their organizations' future success. In fact, eighty-one percent (81%) stated that sustainability issues are now fully embedded into the strategy and operations of their organizations.

The term "sustainability" encompasses the four primary drivers of firm behavior: economic responsibility to investors and consumers, legal responsibility to the government or the law, ethical responsibilities to society, and discretionary responsibility to the community (2). To date, perhaps the most studied aspect of sustainability has been its link to corporate financial performance (CFP)—what has been coined as "the business case for Corporate Social Responsibility (CSR)". The critical question asked is whether socially responsible firm behavior results in real value-creation. However, empirical evidence has been inconclusive or even contradictory. A number of studies found a positive link, others a negative while some others claimed no link at all.

In our work, through a series of papers, we shed light on two major issues within the CSR domain: firstly, we investigate the implications of sustainability for capital markets, by providing empirical evidence of the impact of sustainability strategies on sell-side analysts' perceptions of value creation. Secondly, we explore the persistent heterogeneity in social performance observed worldwide, by investigating to what extent firm-, industry- and country-level factors drive socially responsible behavior by firms. Our special focus is on the overarching institutional structures (i.e., legal, political, labor and capital market institutions). Additionally, we combine insights from the first two studies to show whether sustainability affects sell-side analysts' perceptions of value creation homogeneously across different countries. Overall, we suggest a novel way of looking at the "business case for CSR," we emphasize the need for effective communication channels regarding sustainability, between individual firms and the broader investment community and we identify the main drivers behind the firms' choice to engage in socially responsible behavior.

In the first study we focus on a crucial channel, namely sell-side analysts, through which information is channeled from firms to capital markets. We explore whether sustainability is perceived by investment analysts to be value-creating or value-destroying for the period 1993 to 2008. We also investigate how firm heterogeneity as well as analysts' characteristics interact with sustainability rankings to impact investment recommendations. The findings we provide are based on a large longitudinal sample utilizing models which condition on changes within-firm over time, thus ensuring that it is not just between-firm differences that drive our results but rather shifts in analysts' recommendations within each firm over time.

We find evidence that in earlier periods (1993-1997), sustainability was perceived by analysts as value-destroying and thus, had a negative impact on investment recommendations. In later periods (1997 onwards), sustainability was perceived as value-creating. Furthermore, we find that larger firms or those that are followed by a larger number of analysts are more likely to receive favorable recommendations when they rank high on sustainability indexes, suggesting that sustainability is more likely to be perceived as value-creating when adopted by higher visibility firms.

We also consider how the analyst's ability and skill moderates the relationship between sustainability and recommendations: we find that analysts with more years of experience following the focal firm, or broader _sustainability_ awareness or greater availability of research resources, are more likely to perceive sustainability as value-creating. In other words, higher ability analysts are better positioned to evaluate sustainability initiatives and subsequently reflect this information through their more favorable recommendations. This finding is particularly important since capital market participants respond more to recommendations of more experienced analysts employed by large brokerage houses relative to other analysts (3).

Moreover, prior studies have suggested that analysts' perceptions are a relatively good representation of investor expectations of a firm's long-run earnings potential (4). Essentially then, in this paper, we theorize about and estimate how CSR strategies are being perceived and evaluated by one of the firm's most important stakeholders—the investment community. Our work has implications for understanding how market value is being created in capital markets as heterogeneous firms implement socially responsible strategies in their respective industries.

Top executives and managers interested in implementing CSR strategies therefore, should be aware that negative analysts' reactions, and subsequent value destruction in capital markets is a real possibility when they initially attempt to implement such strategies. Managers should particularly focus on communicating the value of CSR strategies to the investment community: reporting short term costs but also highlighting long-term benefits could mitigate difficulties that investors may face in understanding the value generated through such activities and might even expedite the adjustment of their valuation models to these new sustainability-augmented business models. Moreover, managers should be aware that not only what is communicated matters but also to whom it is communicated.

Although a lot still remains to be investigated around the interface between firms that engage in CSR activities and capital markets, environmental, social and corporate governance (ESG) ratings and rankings across the world, suggest that _persistent_ sustainability _heterogeneity_ across firms exists. For example, firms like IBM, Intel, HSBC, Marks and Spencer, Unilever, Xerox, General Electric and Cisco Systems are regarded as highly socially responsible organizations whereas, companies like Ryanair, Chevron, Philip Morris, and Monsanto are considered bad corporate citizens (5). Why do some organizations choose to act in a socially responsible manner whereas others act irresponsibly? In other words, _what are the drivers behind a firm's choice to engage or not engage in socially responsible behavior_?

The overarching hypothesis of our second study is that in addition to idiosyncratic firm- and industry-level factors, _country-level institutional variation significantly impacts firms' engagement in socially responsible behavior_. In order to identify the impact of institutions, for each country in our sample we classify them into four different categories: a. Legal institutions, b. Political institutions, c. Labor market institutions, and d. Capital market institutions. Within each category, we employ well-established institutional metrics to characterize the causal mechanisms through which institutions may influence and drive firm-level responsible behavior.

The results show that for social and environmental performance, our models explain up to 41% and 46% of the overall variation respectively, whereas we explain 63% of the variation in corporate governance performance. Using a variance of components analysis we find that country effects explain 17.4%, 14.3%, and 54.8% of the explainable variation in social, environmental and governance performance respectively for the full sample of firms, while the same effects explain 31.3%, 35.6%, and 57.3% of the explainable variation for a sample of the ten largest firms from each of the 42 countries in our sample. In other words, institutions seem to exert a profound impact on whether and to what extent firms decide to engage in socially responsible practices.

We find that countries that adopt regulatory frameworks promoting _stronger competition_ between firms should also be willing to tolerate firms with lower scores on both the social and environmental dimensions. Our work then, underlines potential tradeoffs between efficiencies due to competition (6) on the one hand, and social performance on the other. Moreover, our results indicate that in countries with low _levels of corruption_ , firms are more likely to be socially and environmentally responsible, as well as more likely to have higher quality governance structures. When it comes to political institutions, and rather interestingly, we find that in countries where the largest party in congress adopts a _left/center political ideology_ , then firms are less likely to behave in socially and environmentally responsible ways.

When considering labor market institutions, we find that in countries with high levels of _labor union density_ , firms are more likely to be both socially and environmentally responsible at the expense of significantly poorer corporate governance performance. Also, in countries with _limited availability of skilled labor_ , we find that firms score higher on both the social and environmental dimensions due to increased incentives to compete along those dimensions to hire and retain the limited number of skilled employees (since highly skilled employees are more likely to seek employment by firms with high CSP, as shown in prior literature).

Furthermore, the evidence suggests that capital market institutions matter _relatively less_ compared to other institutions. We find that in countries where capital is raised by firms in the form of _equity issuance_ (rather than debt issuance), both social and environmental performance suffer indicating, we argue, a short-term focus on securing the best possible financing terms. This short-term focus proves detrimental for the adoption of socially and environmentally responsible behaviors which are more likely to generate long-term benefits to the firms (e.g., brand reputation), as opposed to shorter-term immediate returns.

At the firm level, we find that _scale of operations_ , _firm visibility_ , _product_ and _capital_ _structure_ characteristics explain a significant portion of the variation in both social as well as environmental performance. When we investigate the corporate governance score, we find that only _firm visibility_ and _capital structure_ characteristics are significant at the firm level, whereas most of the variation is driven by institutional level variables. Legal institutions, such as laws that limit the _degree of self-dealing_ among corporate directors, are the most important determinants of corporate governance performance.

Given the growing attention that top executives around the globe pay to the adoption and implementation of socially responsible behaviors, it is crucial that they understand the key drivers of their organizations' overall social performance, especially those drivers outside the boundaries of their own firms and thus, those beyond their direct control. In this second study we go a long way towards _identifying and quantifying those drivers_ , both at the firm and industry level but more importantly, at the level of national institutions.

At the same time, our work has important _policy implications_ and is particularly relevant for emerging and less developed countries in which labor and capital markets as well as legal and political institutions, are currently being built and their roles being redefined. Policy makers should design institutions while being fully aware of the power that such institutions have in determining the social, environmental, and governance performance of corporations. In other words, policy makers should be acutely cognizant of the shifting role of the business organization within the broader social context and its potential ability to tackle greater social issues.

Institutional variation across countries might not only affect the level of corporate sustainability but it may also influence the perceptions of the investment community about the value of sustainability. In a study that combines insights from the previous two research papers, we document that equity analysts perceive sustainability to create more value in more _corrupt environments_. In these environments sustainability can serve as the signaling mechanism that differentiates companies with strategic plans to change the way business is done and promote ethical and sustainable practices, which in turn can create long-term economic growth and have a positive social impact. Moreover, corporate sustainability is perceived as less valuable in countries with _stronger unions_ , consistent with sustainability initiatives being more strategic and potentially more valuable when they are formed without the threat of strikes, and other disruptive actions. Finally, in countries with more _competitive product markets_ sustainability is perceived as less valuable. Fierce competition can shift firm focus in short term survival and distract from creating long-term sustainable practices.

With our work in these three studies, we make significant inroads into understanding why and when firms are more likely to engage in sustainable practices, how are these strategies likely to be perceived by stakeholders and how such perceptions may influence the firms' value in public equity markets. Given the underlying debate around the current and future role of the business organization in tackling important global issues like climate change, environmental deterioration and extreme poverty, our work underlines the need to pay particular attention to building the right institutions that promote high social performance by corporations, and the need for effective communication among important stakeholders, about the long-term value and long-term positive social impact of sustainability initiatives.

Ioannis Ioannou (iioannou@london.edu) is an Assistant Professor of Strategic and International Management at London Business School and George Serafeim (gserafeim@hbs.edu) is an Assistant Professor of Business Administration at Harvard Business School. Their previous publications include:

Ioannou, I., & Serafeim, G. 2010a. The impact of corporate social responsibility on investment recommendations. Harvard Business School Working Paper, No. 11-017.  
Ioannou, I., & Serafeim, G. 2010b. What drives corporate social performance? International evidence from social, environmental, and governance scores. Harvard Business School Working Paper, No. 11-016.  
Ioannou, I., & Serafeim, G. 2010c. The Impact of national institutions and corporate sustainability on investment recommendations. Harvard Business School Working Paper.

Endnote: (1) "A New Era of Sustainability. UN Global Compact-Accenture CEO Study 2010" last accessed October 20th, 2010 at: (<https://microsite.accenture.com/sustainability/research_and_insights/Pages/A-New-Era-of-Sustainability.aspx>)  
(2) Carroll, A. B. 1979. A three-dimensional conceptual model of corporate performance. _The Academy of Management Review_ , 4(4): 497-505.  
(3) Stickel, S. E. 1995. The anatomy of the performance of buy and sell recommendations. _Financial Analysts Journal_ , 51(5): 25-39; Clement, M. B. 1999. Analyst forecast accuracy: Do ability, resources and portfolio complexity matter? _Journal of Accounting and Economics_ , 27: 285-303.  
(4) Fried, D. & Givoly, D. 1982. Financial analysts' forecasts of earnings: a better surrogate for market expectations. _Journal of Accounting and Economics_ , 4(2): 85-107; O'Brien, P. 1988. Analysts' forecasts as earnings expectations. _Journal of Accounting and Economics_ , 10(1): 53-83.  
(5) "Ethical Reputation Ranking (Covalence EthicalQuote Ranking)" compiled and published by Covalence, an ethical reputation organization, in the first quarter of 2010. Last accessed and found on July 28th, 2010 at: (<http://www.ethicalquote.com/index.php/2010/04/15/covalence-ethicalquote-ranking-q1-2010/>)  
(6) Nickell, S. 1996. Competition and corporate performance. _Journal of Political Economy_ , 104(4): 724-746.

#### Growth, Stuff and a Guinea Pig:Inspired Thoughts from Two Days at Harvard Business School

Terence L. Jeyaretnam

Net Balance

I was privileged to be invited to an exclusive gathering of thought leaders by Professor Bob Eccles and his colleagues at Harvard Business School (HBS) to contribute to critical thinking on a new, but growing dialogue on integrated reporting. While the two days of discussions and presentations covered an array of issues associated with integrated reporting, they also delved deeper into conversations about the state of the world and sustainability of the planet and its tenants. This inspired me to think about the human addiction to growth, the ferocious appetite for "stuff" and how this may be overcome by the optimistic vision of a special cohabitant, "Guinea Pig B."

The paradox of growth

The session on integrated reporting opened up the dialogue to integrated management and indeed integrated living. The issues associated with the unlikely bedfellows of sustainability and economic growth were part of many a foray into the integration of sustainability into everyday practices. But can these forces necessarily coexist in today's society?

There is not one speech that I have heard that does not reinforce the need for continuous economic growth. Have you ever heard a politician talk about the growth levels being sufficient? Even passionate environmentalists talk about "sustainable" development, as if development in itself is an accepted norm—a concept without which our global economies will die. Will standing still (no growth) mean eventual dissipation? Is growth the only way to improve livelihoods? What if we are wrong about the need for growth?

I always believed that Mahatma Gandhi, amongst being a patron of many other revolutionary concepts, was an environmentalist at heart. He lived three passions—simplicity, slowness and smallness. Gandhi believed simplicity led to happiness, that slowness led to appreciating this and smallness provided that capacity to find oneself. Is this the paradox of growth? Well, it just may be growth's mirror image, if we take the time to look in the mirror.

When was the last time you were taught how to simplify? Have you ever purchased a daily-use item that is simpler than its predecessor, like is it becoming simpler to choose your daily loaf of bread or pint of milk? Simplicity certainly is a term of the past—left forgotten in the race for growth.

Let's take slowness. Ironically, as we inundate ourselves with time-saving devices, we feverishly fight for more time in the day—again a frame of reference fast forgotten.

Finally, when was something built that was smaller? Gadgets get smaller, but not much else. Have you ever heard of a business developing a strategy to become smaller?

Can a society be simple in its vision, slow in its approach to gestation and remain small, and yet be growing? Perhaps not in GDP, but possibly in happiness, innovation, emotional development and maturity.

Is there a link between growth and sustainability? I have seen very little evidence of coexistence of these two concepts. However, I would like to be proven wrong, as I do not see anyone working to slow, simplify or reduce growth. This may be a critical part of solving the integration puzzle, but is likely to be ignored in the race to prosperity. It was proposed during the integrated reporting session that one of the outcomes of the gathering was setting up a subcommittee to the International Integrated Reporting Committee (IIRC) known as the _Hard Questions Committee_ , a committee that asks the questions that the mainstream chooses to ignore or forget.

After the seventh day, there was stuff!

One of the other subcommittees that were flagged was a _Needs Committee_ , a committee that approves or disapproves certain new products and/or services on the basis of their limited contribution to social/cultural, environmental and human capital. The basis for this was that there are products and services being spawned simply to grow financial capital, and at times, technology is being withheld from society so that goods and technologies could be phased in increasing the financial returns that could be derived from them. Have you ever gone to electronic goods shops and wondered how they managed to get the price to be so ridiculously low for a certain item of electrical wizardry? There are iPods going for as low as $20 now, and transistor radios for a few dollars. How is it possible for such an item to be produced from resources mined from all parts of the globe, to be put together in China and be shipped and sold to us for such a low price? The world is also becoming instrumented. By the end of 2010, there will be a billion transistors per human, each one costing one ten-millionth of a cent. How is this possible? This is _The Story of Stuff_ , a short presentation on the natural, human and social capital that are eroded by the material consumption the world has been shifted into. I encourage all of you to go to http://www.storyofstuff.com and check out this fascinating piece, and then pass it on to your friends.

_The Story of Stuff_ shows us that the real price of producing that gadget is up in the air as pollution and carbon, and in the land and waters as contamination. It is also reflected in the social and cultural capital we lose and the human capital that is eroded away. In a world where over ninety percent of what is bought by US households ends up in landfill within the first six months, a third of all food bought by UK households never makes it to the stomach and over $5 billion dollars worth of food in Australia goes to landfill without being eaten, it is the story of reality—of how excesses are being nourished and the planet undernourished.

The other significant issue addressed by _The Story of Stuff_ is how advertising and our cocooned lifestyles are promoting a material existence. How often have we felt that an item of clothing, footwear or a mobile phone is no longer in fashion? If you don't get the message from the constant barrage of advertisements, you get it from your friends, peers and by looking around you—the whole world just simply seemed to have switched on to iPhones—it was like I'd been in a coma for years! Then there are iPads and Blackberries, Kindles and iPod Touches. And, next year we would have to move onto the next fad, whilst kindly donating today's precious symbols of currency to those ever repressed landfills. So goes the story of stuff. The stuff that we may not need and the stuff that is a growing force against integrating sustainability with anything, let alone performance reporting.

Perhaps we can do with the vision of a guinea pig?

Despite what seem to be insurmountable obstacles such as our insatiable appetite for economic growth and material possessions, the wisdom to mould a more sustainable society has long lived amongst us. This is a story of a certain special inhabitant of the planet who personified this vision in every way, and is, in a strange way, connected to the proceedings at HBS.

With no job and a new baby to support, he became depressed. One day, he was walking by Lake Michigan, when he found himself suspended several feet above the ground, surrounded by sparkling light. Time seemed to stand still, and a voice spoke to him. "You do not have the right to eliminate yourself," it said. "You do not belong to you. You belong to Universe." It was at this point, that he decided to embark on his "lifelong experiment." The experiment's aim was nothing less than determining "what, if anything," an individual could do "on behalf of all humanity." Throughout his life, he was concerned with the question "Does humanity have a chance to survive lastingly and successfully on planet Earth, and if so, how?" In this lifelong experiment, he named himself "Guinea Pig B."

Being expelled twice from, ironically, Harvard (and not completing a degree of any nature) did not stop him from being awarded twenty-eight US patents, several honorary doctorates, a professorship and the 1969 _Humanist of the Year_ Award. He wrote more than thirty books, coining and popularising terms such as "Spaceship Earth," ephemeralization, and synergetics.

He believed human societies would soon rely mainly on renewable sources of energy, such as solar and wind-derived electricity. He hoped for an age of "omni-successful education and sustenance of all humanity."

He noted that petroleum, from the standpoint of its replacement cost out of the energy budget (essentially, the net incoming solar flux), had cost nature "over a million dollars" per U.S. gallon ($300,000 per liter) to produce. From this point of view, its use as a transportation fuel by people commuting to work represents a huge net loss compared to their earnings. He was concerned about sustainability and about human survival under the existing socio-economic system, yet remained optimistic about humanity's future. Defining wealth in terms of knowledge, as the "technological ability to protect, nurture, support, and accommodate all growth needs of life," his analysis of the condition of "Spaceship Earth" led him to conclude that at a certain time in the 1970s, humanity had marked an unprecedented watershed. He was convinced that the accumulation of relevant knowledge, combined with the quantities of key recyclable resources that had already been extracted from the earth, had reached a critical level, such that competition for necessities was no longer necessary. Cooperation had become the optimum survival strategy. "Selfishness," he declared, "is unnecessary and hence-forth unrationalizable...War is obsolete."

Born in 1895 in Massachusetts, about 115 years before our gathering on integrated reporting, Guinea Pig B was Richard Buckminster "Bucky" Fuller, the "B" being for Bucky. The British science writer H.G. Wells once said that life was a race between education and disaster. Instead of destroying himself, Fuller listened to Universe.

Fuller went to the effort of spending fifty years in a headlong, ceaseless act of self-assertion that we are all destined to be destroyed in an environmental catastrophe, but in the optimistic belief that it is possible to build a better world and that humankind can be mobilized for that task. I hope Bucky's dreams materialize, from a possible world of growth in stuff to a magical world of renewable beauty. I believe this sense of optimism walked in with each and every person who attended the HBS session on integrated reporting, and grew and blossomed during the session as we all realized that we had a common purpose.

Terence L. Jeyaretnam is the Executive Director of Net Balance, one of the world's leading dedicated sustainability advisory firms with over 40 specialists based in Melbourne, Sydney, Brisbane and London. Net Balance works with its clients on environmental, social and governance issues to build organisational resilience and long-term value for stakeholders.

#### Integrated Reporting in a Disconnected World? The Macro Measurement Challenge!

Alan Willis, CA

Mississauga, Ontario

Assuming we are successful in devising and gaining acceptance of a "fit for purpose" integrated corporate reporting framework, together with related guidelines and standards, one fundamental barrier will remain to their full implementation and the realization of their maximum value to society and investors. Corporations as we know them today are increasingly out of synch with the global scene within which they are influential actors. Corporations striving to behave sustainably are doing so largely within a context of government-set economic, social and other public policy and market conditions that neither promote nor reward sustainable development at either the macro or micro level. To a greater or lesser extent, this deficiency of necessary government and policy is apparent around the world, in all nations—developed and developing, democratic and otherwise.

The corporate laws and charters that create and legitimize today's corporations were devised and enacted in times when we had a far less complete understanding of the nature of the universe and the limits of our planet Earth within it. Nor was there a true and realistic appreciation of the constructs of economic, natural, human and social capital that many of us now see as essential to the sustainability of human enterprise, society and the planet. Except perhaps in South Africa, there are very few countries where there has been a fundamental rethink and redesign of corporate law and charters to be suitable for the 21st century corporation, although there have been and continue to be many initiatives to consider this and even introduce modest amendments that address, for example, the interests and role of stakeholders beyond shareholders.

Imagine trying to harness nuclear energy or cloud computing or radiotelescopes or particle physics if our thinking were confined to the laws of Newtonian physics. We must now re-invent the corporation that was conceived and defined by 19th century minds if we are to create a corporation fit for the 21st century as we see and understand it today. And we must re-invent the principles of accountability and reporting accordingly. We know now that the successful corporation exists as part of a web of interconnected relationships with many various stakeholders, all ultimately connected within the broader global citizenry.

But at the level of nation states and indeed their international gatherings such as the OECD (i.e., for a select group of developed economies, excluding the BRIC ones), national economic progress is reported and monitored strictly in monetary terms that supposedly (but incompletely) measure human activity in terms of labor, goods and services but totally ignore changes for better or worse in human, social and natural capital that arise from human activity. Indeed, some types of human activity, such as cleaning up after oil spills or clear cut logging of forests, register as gains in GDP, while the adverse costs of depletion and harm to social and natural capital are ignored in national accounts.

So at some stage the way in which we measure and report corporate impact on economic, human, social and natural capital—whether wealth creation or depletion—needs to be aligned with how we measure and report on nation-state economic, human, social and natural capital creation or depletion. Otherwise micro-level, corporate information driven by integrated reporting will not be taken into account in macro-economic analysis and policy decisions affecting society and its citizens. We will then have analysis and policy disconnects even worse than we already have between government, business, investors and other stakeholders.

What is to be done? First, by 2020 (or sooner), the International Integrated Reporting Committee (IIRC) has to fulfill the vision of mandatory integrated corporate reporting by all listed companies, and hopefully all private companies and other types of organizations and institutions of any significance. This itself is no small challenge, requiring at the very least the collaborative international political will of the G20 and BRIC countries to achieve. No sure thing, but essential if real progress is to be made towards sustainable business enterprise.

At the same time, the IIRC can, and arguably should, act as a catalyst in bringing business and civil society pressure to bear on these same influential countries to collaborate in reforming traditional economic progress measures and devising appropriate new macro-indicators of human, social and natural capital. These new measures are essential to inform public policy decision making regarding matters like investment, conservation, regulation, taxation and pricing so as to promote, not impede, sustainable development.

The IIRC has the opportunity to play a key role in stimulating progress on developing and securing implementation of macro-level performance measures, in addition to its self-appointed role at the micro level to bring about integrated corporate reporting. The members of the IIRC individually and the IIRC as a whole already represent considerable convening power to bring to bear in this additional role, promoting collaboration among governments, academia, institutions and business interests—not to mention leaders in civil society.

Academia, both as research and teaching institutions, has an indispensible role to play—way beyond what is already occurring here and there—in pursuit of more enlightened macro-progress indicators and their use in government policy making. Institutional initiatives such as those in France and the European Union in the last year or two deserve the strongest possible support. Uptake of and support for the sustainability indicator work of organizations like Canada's International Institute for Sustainable Development stands to be strengthened significantly if the IIRC can muster greater global collaboration and political suasion in this area. The business sector itself, especially companies committed to integrated reporting, will be a powerful voice for change and progress. The IIRC can be instrumental in bringing about convergence and unanimity among many presently unconnected initiatives to design and apply an appropriate suite of macro-indicators and measures.

Within a new and realistic context of properly informed public policy and market conditions such as is envisioned above, sustainable corporate behavior, accountability and transparency will be the normal expectation for social license to operate, not only embedded in corporate law and charters, but reinforced and rewarded by governments and public policy. Companies, held to account by their stakeholders, will constantly be striving for balance between their economic, social and environmental performance and impacts. Such balance will become the norm for defining and measuring corporate success. Integrated reporting will then be the inevitable, indispensable means by which companies account to their stakeholders and the public for what is expected of them in this new 21st century society.

This will be a truly integrated solution for sustainable success in a more connected world, united in its commitment to social justice and environmental well-being. Companies, governments and stakeholders in both will function in a more aligned manner, consistent both with systems theory and with common sense. For our grandchildren, tomorrow's company will be today's!

Utopia? It's easy to be cynical. But a vigorous and influential IIRC is a sound bet for making genuine progress in the macro as well as micro domains. If not the IIRC of today and tomorrow, then who, where and when?

#### What Should Be Done with Integrated Reporting?

David Wood, Director

Initiative for Responsible Investment, Harvard Kennedy School of Government

Disclosure, by its nature, can only be a means to an end. We hope that information of a superior quality will help its users make better decisions; information alone isn't much use one way or another. When we talk about a better form of corporate reporting—more accurate, complete, forward-looking, timely, strategic, or what have you—we are talking about who will do what once they have this better picture.

The conventional view of corporate reporting is that it serves two key stakeholders above others: primarily, the investors who need to understand relative corporate performance in order to make their investments; and secondarily, corporations themselves, who can take advantage of the reporting process to better understand their own strengths and weaknesses. Public regulation exists to ensure the information is sufficient for its purpose, and accurate. Accounting conventions are meant to ensure the information is usable.

If we take Integrated Reporting to mean a coherent vision of a company's strategy and position—one that places its financial performance in the context of its response to a company's institutional and governance context, and the market and societal trends that will drive performance over the long term—it is a challenge to conventional corporate reporting in part because it calls into question its value to these stakeholders. Advocates for Integrated Reporting may describe conventional reporting—taken broadly as annual reports, mandated filings, letters to shareholders, company websites—in terms of its weaknesses: backward-looking, too rosy, full of defensive boilerplate, bereft of strategic context, focused on the wrong benchmarks. This is part of a familiar critique of investment markets' shortcomings, in which investors do not have the information they need to best assess long term risks and opportunities, and so default to short term benchmarks. Companies then undermine their performance by managing to those benchmarks to satisfy their investors. Both owners and managers are systemically pushed away from companies' core value propositions because the information they use to make decisions is tied to ephemeral measures like short term stock price fluctuation.

By bringing in new information in context, integrated reporting in theory will help markets work as they ought to. Reporting that captures how companies view and react to the world around them, buttressed by financial reporting that reveals the resources they can bring to bear on their strategic position, should allow investors to allocate their capital to those companies who will generate wealth over the long term. (This, of course, leaves aside the fact that, in public equities markets, investors tend to be allocating capital to each other rather than to the companies themselves.) The agency issues created by short term benchmarks should be mitigated by the availability of (and desirability for) trading on long term information more closely connected to a corporation's likely future performance. Better information leads to more efficient markets, because investors and corporations will act on that information—with efficiency measured in terms of financial performance.

But Integrated Reporting advocates also make larger claims about the value of enhanced reporting, by calling into question the efficiency of markets themselves. For Integrated Reporting, by focusing on a company's position within its larger context, almost by necessity forces reporting to confront those situations where corporate activity externalizes costs onto society. Take for instance Eccles and Krzus' account:  
One of the reasons for the urgent need for One Report is that it will make more apparent, to both the company and its many stakeholders, the relationship between financial and nonfinancial performance and the extent to which financial performance for shareholders imposes externalities on other stakeholders. The result is greater transparency about the company's performance and how it is being achieved—including its social costs and benefits. This function of reporting will change behavior (1).  
Changed behavior here implies benefits not to market participants in particular, but to society in general. And the benefits come from having new information to act on, to better identify and measure those costs and benefits that do not have an effect on the shareholder value or the company's bottom line. Integrated Reporting—in an ideal world—should reveal a company's contributions to wealth creation at the societal level.

But in practice, who is going to use this information to change corporate behavior? There is no reason for profit-maximizing corporations not to externalize costs onto society (though thank goodness they do not _always_ behave like the soulless sociopaths of bowdlerized corporate theory). Someone beyond the investor-corporation nexus must take up the information about externalities and act on it. Governments must use this information to make markets better serve social interests. Consumers must change what they buy; non-profits must create reputational risk through advocacy work; and so on.

We can ask investors to enhance their financial analysis with environmental, social, and governance information, but much of the value proposition of Integrated Reporting to investors is the delivery of information on how corporate performance may be subject to stakeholder pressure of various sorts. In other words, from the conventional investors' perspective, the ultimate agency for creating a better society does not rest with investors, but rather with the stakeholders who shape market returns (2).

So what should be done with Integrated Reporting? We cannot just assume that the interests of investors, corporations, and society will converge—people have to make them converge. If Integrated Reporting is to facilitate the achievement of this goal, information in integrated reports will have to respond to the needs of investors and corporations, but also to public policy makers, communities, advocacy groups, consumers, the list will be long. And—this point cannot be emphasized enough—these stakeholder groups will need appropriate channels to act on that information.

So, to sum up: Integrated Reporting is a challenge to conventional reporting in two ways: it calls into question the efficiency of markets based on current reporting standards, and it calls into a question the fundamental efficiency of markets in serving society. As we move from the idea of Integrated Reporting to a framework for its execution, it may not be possible to fully resolve this tension, but it will be necessary to confront it directly. I suggest that one way to do so is to carefully think through _who_ should do _what_ with the information that integrated reports will provide. The reports themselves can only be a means to an end. We will have to be prescriptive in this work (3).

_More information about the Initiative for Responsible Investment can be found at_ <http://www.hausercenter.org/iri>_._

Endnote: (1) Robert G. Eccles and Michael P. Krzus, _One Report_ , New Jersey: John W. Wiley and Sons, Inc. (2010) p. 23.  
(2) There is an important story to tell about alternative views of investors' role in society that unfortunately lies outside the scope of this short comment.  
(3) Thanks to Lisa Hagerman, Katie Grace, and Steve Lydenberg for their helpful comments.

# PART II

The Concept of Integrated Reporting

#### The Five Capitals of Integrated Reporting: Toward a Holistic Architecture for Corporate Disclosure

Allen L. White

Tellus Institute

Achieving truly integrated reporting is far more than a technical exercise. It is challenge to mesh of two fundamentally traditions of corporate disclosure—financial reporting (FR) and sustainability reporting (SR)—that embody distinctly different definitions of the nature of the firm.

On the side of FR is the view that the firm is a "nexus of contracts" among boards, managers, employees, suppliers and other actors whose core purpose is maximization of returns to investors (1). On the side of SR is a broader concept of the firm defined variously as: a community of interdependent stakeholders who come together to create value as a collectivity (2); a "team production" entity bound by a commitment to create long-term value for all stakeholders including, but not primarily, shareholders (3); or an organization created to harness private interests to serve the public interest while equitably rewarding all actors in accordance with their contributions to the created by the organization (4).

If integrated reporting is to evolve into more than the casual juxtaposition of financial and sustainability information in paper or electronic format, these two traditions must converge toward a reporting architecture that builds on the strengths of both while enabling assimilation of new knowledge, new issues and new metrics that flow from the social, environmental and economic dynamics in the 21st century.

While the chasm is wide, it is not insurmountable. A basis for fruitful engagement begins with the recognition of three commonalities shared by FR and SR:

Complexity: FR faces the continuing challenge of keeping pace with the complexity of 21st century economic transactions, sources of value, financial instruments and financial obligations, e.g., intangible assets, derivatives, hedges, stock options, pension fund obligations (5). SR faces an equally daunting challenge but of a different kind of complexity—articulation and measurement, both qualitatively and quantitatively, of the social, environmental and governance performance of the firm, as well as the quality of strategy and management that underpin such performance.  
Diverse beneficiaries: While FR is designed primarily to meet the needs of investors, other stakeholders regularly utilize such disclosures for purposes other than investment decision-making, e.g., employees, host communities, NGOs, suppliers, standard setters. SR, too, serves multiple audiences, some overlapping and some distinct from FR, e.g., employees, host communities, consumers, NGOs, government procurement offices, investors.  
Materiality: For FR standard-setters, regulators and companies, not all possible disclosures are material disclosures. Meeting the dual test of materiality—information that is both relevant to a company's activities and of a magnitude sufficient to affect an investor's decisions—is a continuing challenge in a fast-changing global economy. New risks and opportunities constantly challenge reporters to avoid information overload through judicious selection and clear presentation of material information. This is no less true for SR. Specific risks and opportunities are not equally relevant to all firms across all sectors. The weightiness of climate change, occupational health and human rights varies widely, challenging reporters to think carefully and make tough choices about what emphasis each issue warrants in a sustainability report.

Recognizing these and other commonalities is a helpful first step in the search for a mutually acceptable architecture for integrated reporting. These commonalities should not mask the opposing views of the nature of the firm described above. But they can and should serve as lubricant to begin the process of engagement required to build an integrated reporting regime.

With these in mind, and taking into account the traditions and language of FR and SR, one may imagine a future integrated reporting framework built on the concept of capital stewardship. In this future, capital stewardship is defined as _the preservation and enlargement of multiple forms of capital, all of which contribute to long-term value creation by the firm_. Using the language of capital has the distinct advantage of using a vocabulary familiar to a broad spectrum of stakeholders who will be served by credible, comprehensive and timely disclosures all of which are rooted in a shared conceptual foundation, namely, capital stewardship.

How might capital stewardship be operationalized? One approach is to unbundle the concept into five components which for shorthand we call "INFOS"—intellectual, natural, financial, organizational and social capital. An INFOS framework would not negate conventional reporting approaches typically organized around stakeholders and/or issues. Instead, capital stewardship would provide unifying theme that cuts across stakeholders and issues to frame how a company's activities serve to undermine, protect or expand the stock of various forms of capital.

Consider the following working taxonomy and illustrative sustainability and financial issues germane to each:

Intellectual capital: Intangibles such as capacity to innovate, patents, software and management systems and relational assets such as the quality of relationships with suppliers and joint venture partners. Reporting issues include: governance structure in relation to its capacity to monitor sustainability performance targets; integration of sustainability in compensation structures; expenditures on sustainability-related R&D; capacity building with the supply chain to achieve company-wide sustainability targets and standards.

Natural capital: Goods and services provided by the natural environment such as biodiversity, clear air, clean water, forests, fisheries, and arable land. Reporting issues include: a company's understanding and integration of the value of ecosystems services in product design; climate change strategy; carbon emissions expressed in absolute terms and relative to national and/or global commitments; biodiversity protection policy; application of lifecycle analysis and product design and stewardship policy.

Financial capital: Funds, either owned or borrowed by the firm, that are available for productive uses. Reporting issues include: explication of relationship between financial risks and liabilities associated with future current or future government regulations; risk associated with the application of new or unproven technologies; financial implications associated with pending or recent legal actions taken by or against the firm.

Organizational capital: Systems, procedures, protocols and codes that enable work to be accomplished at continuously higher levels of productivity. Reporting issues include: nature and performance of occupational health and safety systems; adoption of generally-accepted sustainability-related codes and norms, and monitoring and enforcement mechanisms to track compliance with such codes and norms; quality, reach and efficacy of social compliance audits in the supply chain.

Social capital: Cohesion, cooperation and community among individuals in a network that enhance individual and collective well-being. Reporting issues include: mechanisms for stakeholder engagement and methods for assessing their effectiveness; content and enforcement of human rights policies throughout the value chain; policies for protecting privacy of employees and customers.

For integrated reporting, a new architecture built on a foundation of INFOS would require a reporter to analyze and disclose three linked aspects of its performance: (1) the company's ownership, control and influence on various forms of capital; (2) change in the stock of each form of capital from one reporting period to the next; and (3) how change in each form of capital affects changes in the others.

A future integrated reporting standard-setter, of course, will have to set forth principles and rules for addressing these three issues, undeniably a formidable task especially in the early years of a new initiative. It also would have to establish measurement protocols in order to drive the new system toward comparability and consistency across reporting entities.

Some undoubtedly will see INFOS as too radical a departure from extant FR and SR frameworks. We take a different view here. A new architecture that honors the traditions of FR and SR at the same time it offers a new, multiple capitals lens on company performance will, in the long-term, better serve the interests of investors and all stakeholders. INFOS provides a point of departure for imagining the contours of a new architecture, one that overcomes the artificial silos of FR and SR and, instead, mirrors the connectivity and interdependencies of the 21st century.

Endnote: (1) Michael Jensen and William Meckling, "Theory of the Firm: Managerial Behavior, Agency Cost and Ownership Structure," _Journal of Financial Economics_ , 1976.  
(2) Alejo Jose G. Sison, _Corporate Governance and Ethics: An Aristotelian Perspective._ Cheltenham UK: Edward Elgar Publishing Limited, 2010.  
(3) Margaret M. Blair and Lynn Stout, "A Team Production Theory of Corporate Law," Virginia Law Review, Vol. 85, No. 2, pp. 248-328, March 1999.  
(4) Corporation 20/20, _New Principles of Corporate Design._ http://www.corporation2020.org.

(5) Robert G. Eccles and Michael P. Krzus, _One Report: Integrated Reporting for a Sustainable Strategy._ New York: John Wiley & Sons, 2010.

#### Integrated Reporting: A Perspective from Net Balance

Terence L. Jeyaretnam and Kate Niblock-Siddle

"Integrated reporting" is a term that is generating excitement in sustainability circles. The idea that sustainability issues should be fully integrated into business strategy and reflected in performance reporting seems like a no-brainer.

Environmental, social and governance issues do have a very real impact on the bottom line of a company—just look at the negative impacts of the Deepwater oil spill in the Gulf of Mexico on BP's bottom line or the positive impacts of companies like InterfaceFLOR and General Electric rethinking their business to be more environmentally responsible. As such, these issues should be integrated into a business' risk management, target setting and reporting processes.

There is still some way to go however. Companies that integrate sustainability strategies into business strategies are the exception rather than the norm. There is also confusion about what integrated reporting actually means, what format it should take and who the target audiences for the reports are.

What is integrated reporting?

An integrated report provides readers with a complete picture of how an organisation is performing by including non-financial information on environmental, social and governance performance along with financial information.

The development of integrated reporting is being driven by the failures of the current financial and sustainability reporting frameworks to accurately reflect an organization's full sphere of risks, impacts and opportunities.

In 2009, HRH The Prince of Wales said a framework was needed "to help ensure that we are not battling to meet 21st century challenges with, at best, 20th century decision making and reporting systems." The Prince has been a strong advocate for a new approach to accounting and reporting organisational performance and in 2004 established the Accounting for Sustainability initiative. The main objective of this initiative is to develop practical guidance for organisations to link sustainability strategies with business and financial strategies (1). In 2010 Accounting for Sustainability released a Connected Reporting Framework designed to help organizations to integrate environmental and social factors, which are material to the organization's success, into management reporting, investor communications and the Annual Report and Accounts.

Following this, in August 2010, Accounting for Sustainability and the Global Reporting Initiative (GRI) announced the establishment of an International Integrated Reporting Committee (IIRC). The Committee aims to develop a framework for reporting financial, environmental, social and governance information in an integrated format. The IIRC is made up of representatives from civil society and the corporate, accounting, securities and regulatory sectors.

The IIRC, echoing the statement from The Price of Wales, says that there is a need for this framework as "the world has never faced greater challenges: over-consumption of finite natural resources, climate change, and the need to provide clean water, food and a better standard of living for a growing global population. Decisions taken in tackling these issues need to be based on clear and comprehensive information. The intention is to help with the development of more comprehensive and comprehensible information about an organization's total performance, prospective as well as retrospective, to meet the needs of the emerging, more sustainable, global economic model (2)."

Some markets have already established requirements and recommendations on integrated reporting. In Denmark, the largest companies in the country need to report on non-financial information in their annual financial reports and in South Africa, the King Code on Governance requires that listed companies issue an annual integrated report in place of annual financial and sustainability reports.

Much more work still needs to be done to develop measures that account for the interrelationship between environmental, social and financial performance and that seek to assess outcomes (i.e., meeting business strategy) as well as the more easily reported inputs/outputs and profit/loss.

One report or many?

A key question is should this information be presented in one report or via a suite of reports? Currently, it is common for companies to publish financial and governance information in their annual reports and environmental and social information in their sustainability reports. However, in many cases it is difficult to see the link between the two. The aim of integrated reporting is that these aspects be brought together. A number of companies have done so successfully, such as BASF, Novo Nordisk, United Technologies Corporation, Philips and Veolia Environnement. United Technologies Corporation, for example, publishes one report: an Annual Financial and Corporate Responsibility Report, which it says "reflects our belief that our social and environmental performance is an important business issue (3)."

However, one fear in the push for integrated reporting is that the entire sustainability report will be reduced to a "few pages and footnotes in a sprawling Annual Report (4)."

One way of avoiding this is by targeting communications at specific stakeholder groups. Instead of focusing on including all financial and ESG information into "one report," companies can use a suite of reporting tools. So for example, a company may issue a general summary report of its financial and ESG performance and then include links to sections of its website, which are specific and material to each stakeholder group.

Integrated reporting should be an output that communicates the company's strategy and performance for a given period, and therefore can be communicated in many different formats to meet the needs of different stakeholders.

Australia's largest diversified property company, Stockland Limited, has taken this approach. In its 2010 Corporate Responsibility and Sustainability Report (5), Stockland says that to make the report more accessible to "those people who have an interest in the operations of our organisation" the company communicates its performance through:  
an online Corporate Responsibility and Sustainability Report, that provides stakeholders with an interactive version of the report where stakeholders can choose the issue most relevant to them  
a downloadable pdf version for stakeholders who seek full documentation on the company's performance, such as ESG analysts  
summary information from the report forms part of the company's Shareholder Review which is distributed to security holders.

This type of approach may help address the charge that in the push towards an integrated framework we end up with a framework that speaks just to one stakeholder group. Other Australian reporters that seek to integrate their reports to different degrees include Wesfarmers, Woolworths, VicSuper, mecu, Insurance Australia Group, GPT, Landcom, Sydney Water, WSN Environmental Solutions, Melbourne Water, Energy Australia, AGL and CitiPower/Powercor.

Who reads these reports?

It is not clear that either annual reports or sustainability reports are read in any detail by the audiences they are intended for. Some stakeholders say they are too long, some that they are not focused on material issues and are difficult to read, others that they do not go into enough detail on the information that they need. Much work still needs to be done to improve both financial and non-financial performance information and this is one of the tasks of the IIRC—to bring financial and ESG information together in a clear, concise, useful, balanced and comparable format.

It is also important to remember that sustainability reporting is still very much in its infancy—it has only fully been around for the past 15 years. Financial reporting has been around for 150 years. Bringing these elements together may produce a weak union. The GRI guidelines, the world's most widely-used framework for sustainability reporting, were only released in 2000. Since then there have been three revisions of the guidelines and some sector supplements released. The GRI needs to continue to build on this work and to increase its resourcing. In parallel, elements of integrated reporting need to be brought together gradually to ensure the end result is meaningful.

Integrating sustainability strategy and business strategy

A lot of the debate has focused on the format and logistics of integrated reporting. However, a more fundamental and immediate concern is the extent to which companies are linking sustainability strategy to business strategy. Reporting is about communicating these strategies. It is the final stage that closes the loop in a long and challenging process which begins with the business connecting sustainability risks and opportunities with financial risks and opportunities, setting targets and objectives, embedding this in the organisation and reviewing its success.

It is the linking of sustainability strategy to business strategy that is the critical process for an organization in identifying its financial and non-financial priorities. If sustainability is integrated into the broader corporate strategy it can enable stakeholders to understand the connection between sustainability and financial performance. It can also enable the company to make more strategic decisions in prioritizing sustainability issues.

Progress is being made in this area. Novo Nordisk, which publishes financial and non-financial information in its Annual Report, has developed formal systems and controls to manage financial, environmental, social and governance strategic priorities. It has also applied the principles it uses for its financial reporting to its non-financial reporting:

"The US Sarbanes-Oxley Act lays down requirements for documenting and reporting on the effectiveness of internal controls for financial reporting. As part of its objective of full integration, Novo Nordisk has begun the task of applying the principles of the Sarbanes-Oxley Act to all of its reporting in order to ensure that there are no material weaknesses in internal controls that could lead to a material misstatement in non-financial reporting. For the 2008 Annual Report, the internal audit committee took the decision to introduce what some staff informally referred to as 'Sarb-Oxing.' The aim was to phase in, over a number of accounting cycles, the same rigor, sophistication and credibility of existing financial systems to non-financial metrics (6)."

Furthermore, issues such as carbon management are increasingly being integrated into companies' core business strategies due to schemes such as the National Greenhouse and Energy Reporting System in Australia and the CRC Energy Efficiency Scheme in the UK. There is also a push to integrate other sustainability issues, such as biodiversity, into annual accounts. For example, The Economics of Ecosystems and Biodiversity (TEEB) project, which is hosted by the United Nations Environment Program, has called for business accounts to disclose externalities such as environmental damage and for national accounts to be improved to include the value of changes in natural capital stocks and ecosystem service flows (7).

If sustainability strategy is integrated into business strategy, integrated reporting can help companies demonstrate how they are taking both financial and non-financial matters into account in managing their businesses. By so doing, they can provide a complete picture of their performance, risks and opportunities which demonstrates genuine triple bottom line management and reporting.

Robert G. Eccles and Michael P. Krzus reinforce this in One Report: Integrated Reporting for a Sustainable Strategy (2010):

"Greater clarity about cause-and-effect relationships enables a company to better understand the impact of its strategic choices on society. Better decisions improve the allocation of resources across all stakeholder groups to optimize the collective outcome. Deeper engagement ensures that the company's strategy is attuned to society's needs as a whole. Finally, lowering reputational risk increases the likelihood that the company is sustainable over the long term as society's values change."

The development of an integrated reporting framework needs to recognize that integrated reporting will only be possible if it reflects the organization's strategy. Development of such a framework is still at a very early stage, but the involvement of key stakeholder groups such as business, government, civil society and experts in both non-financial and financial accounting will be critical if integrated reporting is going to be something which will be meaningful and worthwhile to companies and their stakeholders.

Terence L. Jeyaretnam is the Executive Director and Kate Niblock-Siddle is a Senior Associate at Net Balance, one of the world's leading dedicated sustainability advisory firms with over 40 specialists based in Melbourne, Sydney, Brisbane and London. Net Balance works with clients on environmental, social and governance issues to build organizational resilience and long-term value for stakeholders.

Endnote: (1) <http://www.accountingforsustainability.org/output/page159.asp>  
(2) <http://www.integratedreporting.org/>  
(3) <http://utc.com/Corporate+Responsibility>  
(4) CRRA Reporting Awards '10, Global Winners and Reporting Trends, April 2010 (<http://www.corporateregister.com/pdf/CRRA10.pdf>)  
(5)  http://www.stockland.com.au/assets/about-stockland/crs-report-2010.pdf  
(6) 'Integrated Reporting at Novo Nordisk', Colin Dey and John Burns in Accounting for Sustainability – Practical Insights (2010).  
(7) http://www.teebweb.org

#### Think Different

Alan Knight

When Steve Jobs rejoined Apple in the mid 90s he rejoined a company that had lost its way. Apple no longer led the pack in ideas; it was an also-ran.

As part of the turnaround, Jobs commissioned a new ad campaign. The tag line for the campaign was "think different." The message was clearly the right one, both for the marketplace and for Apple staff.

I think corporate reporting is the same place Apple was in before Jobs returned. It has lost its way and we need to think differently. We don't just need to reinvent the personal computer as the iMac. We also need the iPod, iTunes, the iPhone and the iPad.

The greatest risk the IIRC faces is a loss of nerve and ambition.

A number of assertions at the conference raised this concern for me.

1. All we need is 6 core indicators that can be put on Bloomberg terminals.  
2. Technology is the answer.  
3. It's all about monetizing environmental and social impact.  
4. Assurance is all about verifying key data sets.  
5. Our audience is the capital markets.

1. Effective corporate reporting is not about adding half a dozen environmental indicators to financial data. Corporate reporting is about presenting a clear strategy and set of objectives for the company that is based on a sound understanding of the market context and drivers, including environmental, social and governance trends and issues; the full range of material risks and opportunities the company needs to understand and respond to; the key stakeholders it needs to engage with and relationships it needs to sustain; how its business model and the elements of its value chain reflect all of this; and how it is helping to create environmental and social value. This future outlook must of course take into account past performance. To say that adding 6 environmental indicators to a Bloomberg terminal is going to answer this need is shocking. Necessary perhaps, but certainly not sufficient.

2. To say that technology is the answer frightens me. I would have thought that we have had enough experience of programmatic trading and guesswork algorithms to be very cautious of placing blind faith in technology. Technology is very good with data. But data must be debated, analysed and considered. Technology can help this process of analysis and consideration but should not be relied on to provide ready-made answers. Technology is only a tool. The buck can never stop at a tool.

3. A very interesting piece was recently published by UNEPFI and UNPRI on Universal Ownership. The premise is that highly diversified and long-term portfolios are representative of global capital markets. As such they are inevitably exposed to the growing and widespread costs of environmental damage. This damage has a negative impact on company performance. They should therefore act collectively to reduce the financial risk of environmental impacts. The analysis, done by Trucost, then goes on to say that the cost of the environmental damage caused by human activity in 2008 was US$6.6 trillion or 11% of global GDP. This hurts. It hurts companies. But what this monetization doesn't help us understand is how much it hurts the environment and society. Not all impacts can be usefully monetised.

4. When you get stuck on adding core indicators and on finding ways to monetise impact you also get stuck on using assurance of corporate reporting only to verify data. Well over 80% of the sustainability and CSR reports that have assurance statements really only have statements that refer to the verification of data. If the real purpose of corporate reporting is to get to the strategy and objectives (see 1 above) so that we can make better decisions, then assurance has to address all of the information behind this articulation of strategy and not just the historical information. The AA1000 Assurance Standard does this by also requiring assurance against three key principles: inclusivity, materiality and responsiveness. Do you understand your context, your stakeholders, your key relationships; do you understand material risks and opportunities and the context in which they are manifest and evolve; and how have you responded to this understanding, that is developed business models, strategies, objectives and so on that are appropriate to this understanding? Assurance that does not address these issues does not really address what the corporate report is all about.

5. Reporting is about communicating with stakeholders. The capital markets are an important stakeholder. They look for information presented in a way that they can use most easily. They are used to quarterly and annual reports and to quantitative indicators. And while integrated reporting must serve this need, it is not just about this need. It is about communicating with stakeholders. It is not about developing a reporting format that is attractive to one important stakeholder group. It is about generating the information discussed in point 1 above. How it is then packaged for specific audiences—and there will be several audiences interested—is about the communications strategy. XBRL tagging can make this easier. Discussions of and guidance on different communications options would be helpful. But integrated reporting is about the information that is gathered and tagged, not about the format it is presented in to a given audience.

The people working on integrated reporting need to continue to "think different."

#### ISO Standards for Business and Their Linkage to Integrated Reporting

Kevin McKinley, Deputy Secretary-General

ISO

Standards addressing the new challenges of business

For decades, Standards have helped to ensure the quality, safety, reliability, efficiency, and interchangeability of products and service. Throughout the world, standards have been traditionally seen as contributing to:

Improving economic efficiency – by ensuring compatibility and supporting variety reduction, allowing the development of markets for materials and components, as well as for complementary products  
Limiting "market failures" – by reducing the asymmetry of information between buyers and producers through quality and safety standards  
Promoting trade – helping to create new markets and to reduce the cost of accessing these markets

However, organizations must now successfully tackle a range of longer-term strategic challenges. Business cannot focus only on satisfying direct customers' needs—stakeholders in all their forms are becoming more critical of businesses that don't adequately address expectations of good governance, environmental stewardship, sustainability and social responsibility. Support from shareholders, employees, customers and even public opinion can collapse if coherent efforts are not undertaken to effectively address these issues. In the face of such challenges, it's also expected that business deliver superior financial performance and ambitious returns, regardless of how well these "other" needs are met. People in business must juggle multiple objectives, exploit new technologies and provide innovative solutions. They must hire and retain top personnel that is constantly learning new skills to meet and anticipate market demands, and they must act ethically in an environment of change, uncertainty and ambiguity.

In short, businesses must master strategic challenges, and deliver operational results. Yet charting this "right" success course is not evident. Different markets require different solutions, with customer expectations varying from one region of the world to another. Well-founded, defensible business decisions can be daunting. It's therefore a powerful notion to consider that leading minds from around the world have debated issues such as strategic risk management, environmental performance, quality assurance, supply chain management and socially-responsible behavior to achieve global agreement on organizational best practices, expectations and guidance in the form of ISO International Standards.

ISO Standards now address some of the most pressing issues facing business today. An ISO Standard on risk management (ISO 31000 (1)) provides direction on how companies can integrate risk-based decision-making into the organization's governance, planning, management, reporting, policies, values and culture. The well-known ISO standard on quality management (ISO 9001 (2)) provides a globally-recognized way to enhance customer satisfaction and demonstrate how products meet customer and regulatory requirements. This series also includes best practices for the measurement of customer satisfaction (ISO 10004 (3)), customer complaints handling (ISO 10002 (4)) and dispute resolution (ISO 10003 (5)). The ISO series on environmental management provide tools for organizations to achieve and demonstrate sound environmental performance (ISO 14001 (6)) as well as conduct product life-cycle assessments (ISO 14040 (7)), assess environmental labelling (ISO 14020 (8) series) and address greenhouse gas/carbon footprint measurements, verification and validation (ISO 14064 (9) and 14065 (10) series). An upcoming standard on "energy management" (ISO 50001 (11)) will provide requirements for energy supply, uses and consumption, as well as measurement, reporting, design and procurement practices for energy-using equipment, systems, and processes.

Emerging challenges such as determining the financial value of intangible "brand" assets are also addressed in a recently-published Standard (ISO 10668 (12)) that describes brand valuation objectives, bases for valuations, approaches, methods and the sourcing of data and assumptions. Other management standards help to systematically address company information asset security issues (ISO/IEC 27001 (13)), traceability and security in the supply chain (ISO 28000 (14)) and approaches to effective food safety management (ISO 22000 (15)).

Standards deal not only with topical business issues, but can also provide rules and guidance for assessing how related business requirements are implemented. Such "conformity assessment" standards (16) can provide benefits to all links in the value chain. Companies within the value chain, as well as end-use customers, use conformity assessment to provide confidence that the products and services that they purchase are fit for purpose (e.g., through inspection, certification). In many sectors, regulators also rely on credible, globally-recognized conformity assessment results, based on ISO Standards, as a basis for their acceptance.

Not all Standards are created equal

Any organization may claim to have developed a "standard" and, even further, may subsequently establish a certification/marking/labelling scheme that demonstrates conformance to the standard. However, not all standards are created equal. ISO Standards are international in nature, and developed on the basis of principles established by the World Trade Organization (WTO) Committee on Technical Barriers to Trade (TBT) (17). These principles relate to the way in which an international standard development process is carried out, and include expectations of transparency, openness, impartiality and consensus, effectiveness and relevance, coherence, and addressing the needs of developing countries. These are further complemented by the disciplines of Annex 3 of the WTO TBT agreement "Code of Good Practice for the preparation, adoption and application of standards" (18)—a Code which ISO national members are encouraged to comply with.

Concern over "private standards" has in recent years been a topic of WTO discussions. But what is meant by "private standards" and what is the role of such standards in supporting public policy and technical regulations that are designed to protect or enhance public health, safety and the environment? ISO has published a brochure (19) that describes the formal international standardization system and clarifies its relation to private standards, specifically in the areas of information and communication technologies, the agri-food sector and on social and environmental issues. Ultimately, there's a need to strengthen linkages between private standards schemes and formal international standard-setting organizations, and achieve simple global solutions with the aim of "one international standard, one test, and one certificate."

ISO 26000: a new authoritative contribution to sustainability

On November 1, 2010, ISO published ISO 26000 " _Guidance on social responsibility_ (20) _._ " Publication of this Standard was the culmination of an intensive 5-year global stakeholder engagement exercise. Using and building on ISO's development processes, the ISO Working Group on Social Responsibility included more than the 450 participating experts and 210 observers, from 99 countries and 42 liaison organizations. As part of the effort, ISO established Memoranda of Understanding with the International Labour Organization (ILO), as well as the United Nations Global Compact (UNGC) and the Organization for Economic Cooperation and Development (OECD), with primary objectives to not amend their respective instruments in the Social Responsibility (SR) field, but to complement their work and provide authoritative, international, voluntary guidance on the breadth of this subject for all organizations (e.g., not just corporate "C"SR).

ISO 26000 is not a management system standard, nor is it intended or appropriate for certification or regulatory use. However, ISO 26000 effectively distils a global understanding of what social responsibility is, and what organizations need to do to operate in a socially responsible way. The Standard specifically provides guidance on:

concepts, terms and definitions;  
the background, trends and characteristics of SR;  
principles and practices relating to SR;  
the core subjects and issues of SR;  
integrating, implementing and promoting socially responsible behaviour throughout the organization and, through its policies and practices, within its sphere of influence;  
identifying and engaging with stakeholders; and  
communicating commitments, performance and other information related to SR.

The following Figure 1 (same as Figure 1 from ISO 26000) provides an overview of the standard and is intended to assist organizations in understanding how to use its guidance.

Taken from ISO 26000:2010 and reproduced with permission from ISO. Copyright remains with ISO.

Linkage of ISO 26000 to "integrated reporting"

ISO 26000 effectively provides a global context for social responsibility, a context in which various existing tools and initiatives already provide important solutions. In the area of "reporting," extensive input and expertise from key global players, such as the Global Reporting Initiative (GRI) (21), has been provided throughout the development of ISO 26000. There are no fewer than 19 instances of the term "reporting" in the body of ISO 26000, intended to provide guidance on communicating results within the organization, with other stakeholders and with society as a whole. However, no requirements for reporting are indicated in ISO 26000, nor are there requirements on how this could be done in a manner that integrates financial and non-financial information. Thus the utility, and complementarity of ISO 26000 and GRI's sustainability reporting principles and indicators is evident. The GRI has published a document (22) on using the GRI sustainability reporting guidelines with ISO 26000, and ISO welcomes the development of this so-called linkage document.

The further proposed step of "integrated reporting" currently being discussed in various fora is a timely issue. Establishment of the International Integrated Reporting Committee (IIRC) (23) presents a unique opportunity to raise awareness of the merits of measuring business success in a new, holistic and integrated manner. The ambitions of the IIRC to discuss integrated reporting at the 2011 G20 meeting could provide needed public policy exposure and debate that can set the context for future international, voluntary standards and initiatives. ISO wishes to express its appreciation to the Harvard Business School for assembling a thought-provoking and informative workshop in October 2010 on this issue. ISO, in collaboration with GRI and other players, is also pleased to participate in future discussions on this issue, and to potentially contribute to the development of related voluntary, consensus-based international standards that can contribute to a more sustainable global business environment.

Kevin McKinley is the Deputy Secretary-General of the International Organization for Standardization (ISO). Based in Geneva Switzerland, ISO is the leading international non-governmental standardization organization comprising a network of national institutes from 163 countries and with a collection of more than 18,000 published standards addressing key global challenges in such areas as healthcare, public safety, information technology, services, climate change, energy, security and the social responsibility of organizations. Previously, McKinley served three years as a Director at the Standards Council of Canada, a Crown Corporation responsible for Canada's National Standards System.

Endnote: (1) ISO 31000:2009, Risk management \-- Principles and guidelines  
(2) ISO 9001:2008, Quality management systems — Requirements  
(3) ISO 10004:2010, Quality management -- Customer satisfaction -- Guidelines for monitoring and measuring  
(4) ISO 10002:2004, Quality management -- Customer satisfaction -- Guidelines for complaints handling in organizations  
(5) ISO 10003:2007, Quality management -- Customer satisfaction -- Guidelines for dispute resolution external to organizations  
(6) ISO 14001:2004, Environmental management systems -- Requirements with guidance for use  
(7) ISO 14040:2006, Environmental management -- Life cycle assessment -- Principles and framework  
(8) ISO 14020:2000, Environmental labels and declarations -- General principles  
(9) ISO 14064-1:2006, Greenhouse gases -- Part 1: Specification with guidance at the organization level for quantification and reporting of greenhouse gas emissions and removals  
(10) ISO 14065:2007, Greenhouse gases -- Requirements for greenhouse gas validation and verification bodies for use in accreditation or other forms of recognition  
(11) ISO/DIS 50001, Energy management systems -- Requirements with guidance for use  
(12) ISO 10668:2010, Brand valuation -- Requirements for monetary brand valuation  
(13) ISO/IEC 27001:2005, Information technology -- Security techniques -- Information security management systems – Requirements  
(14) ISO 28000:2007, Specification for security management systems for the supply chain  
(15) ISO 22000:2005, Food safety management systems -- Requirements for any organization in the food chain  
(16) See <http://www.iso.org/iso/conformity_assessment>  
(17) See Annex 4 on "Decision of the Committee on Principles for the Development of International Standards, Guides and Recommendations with relation to Articles 2, 5 and Annex 3 of the Agreement" contained in the Second Triennial Review of the TBT Agreement at <http://docsonline.wto.org/DDFDocuments/t/G/TBT/9.doc>  
(18) See <http://www.wto.org/english/docs_e/legal_e/17-tbt_e.htm#annexIII>  
(19) See <http://www.iso.org/iso/private_standards.pdf>  
(20) ISO 26000:2010, Guidance on social responsibility  
(21) See <http://www.globalreporting.org/Home>  
(22) See  http://www.globalreporting.org/NR/rdonlyres/E5A54FE2-A056-4EF9-BC1C-2B77F40ED34/0/ISOGRIReport_FINAL.pdf  
(23) See <http://www.integratedreporting.org/>

#### Toward a Model for Sustainable Capital Allocation

Adam M. Kanzer, Managing Director & General Counsel

Domini Social Investments LLC

The dramatic growth of responsible investment over the past ten years—the so-called "mainstreaming" of SRI—has, in my view, been driven by the size of the sustainability crises we face. Significant problems can offer significant opportunities. With a number of notable exceptions, however, this movement has not generally been geared towards finding aggressive _solutions_ to these underlying crises or a rethink of the market functions that contributed to them. Few, for example, have embraced the full implications of the following statement, which guides the $436 billion Norwegian Government Pension Fund Global:  
the management of the assets in the Fund shall be based on the goal of achieving the highest possible return.... A good return in the long term is dependent on sustainable development in economic, environmental and social terms, as well as well-functioning, legitimate and effective markets (1).

Portfolio performance and societal well-being are inter-dependent. This is the ultimate case for integrated reporting. If financial success is dependent upon sustainability, then the omission of sustainability information from financial reporting is materially misleading. When sustainability information is presented in isolation from financial reporting, it is often ignored and fails to enter into the corporation's core decision-making functions.

The "mainstream" responsible investment movement has focused on the financial materiality of sustainability factors, and their use in generating alpha. It remains to be seen how far we are from a general acceptance that the ultimate alpha generator is our planet's life support system, or from the recognition that financial performance is meaningless if society is impoverished by its generation.

There is now ample data to support the argument that sustainability factors can be financially material (2), and a significant number of business leaders seem to recognize this as well. According to a recent survey of 750 global CEOs by the United Nations Global Compact and Accenture, approximately 93% of CEOs say sustainability is critical to their companies' future success, and 86% see accurate valuation of sustainability by investors as important to reaching a tipping point. The Conference Board, however, reports that most corporate boards still lack independent sources of information and detailed metrics to allow them to effectively oversee the integration of environmental, social and governance data into daily business activities (3). There is a consensus forming around the notion that in a global, interconnected economy, usable, reliable sustainability data is lacking, and is sorely needed.

The Promise of Integrated Reporting

Integrated reporting may be an important catalyst to accelerate the shift in our financial markets from "efficient" capital formation to "sustainable" capital formation, but we must be clear at the outset about our ultimate goals. We must be clear that the central problem we face is not the threat to shareholder value due to climate change. The problem is climate change, and the role of the capital markets in exacerbating that crisis. The problem is not the risk that human rights violations may impact portfolio performance. The problem is the persistence of slavery and child labor, and the capital markets' continued tolerance of these violations. The list goes on and on. The sustainability crises and the fragility of our global financial systems require us to rethink the role of the capital markets in our lives. The markets have been dramatically misallocating capital, and we must redirect them.

Integrated reporting offers a number of important benefits:  
-Although many analysts ignore separate corporate sustainability reports, integrated reporting puts this information in front of analysts and highlights its relevance to financial factors.  
-Integrated reporting will ensure that corporate sustainability performance is not an isolated consideration in a company's CSR department, but also the concern of senior management and the board. An integrated report should make this aspect of the company's performance more relevant to senior management as the relationship between the company's sustainability performance and the long-term value of the company is more clearly expressed and measured.  
-If done properly, integrated reporting should improve both financial and sustainability performance, and ensure that they are aligned.

Bob Eccles and Mike Krzus have made a compelling case for the need for integrated reporting, in _One Report_ (4). The ultimate goal, however, is still somewhat unclear to me. For example, the International Integrated Reporting Committee (IIRC)'s website notes the following:  
The IIRC has been created to respond to the need for a concise, clear, comprehensive and comparable integrated reporting framework structured around the organization's strategic objectives, its governance and business model and integrating both material financial and non-financial information.  
First objective: "support the information needs of long-term investors, by showing the broader and longer-term consequences of decision-making;"

These are laudable goals, but they do not seem sufficiently ambitious to address the size of the problems we face. In particular, I share Bob Massie's concern that this initiative appears to be focused on investor needs, and "structured around the organization's strategic objectives." These statements lead me to believe that there is a risk that the true value of sustainability reporting will be subordinated to financial concerns. This would set us back dramatically.

In this essay, I would like to respectfully offer a few considerations for the IIRC to keep in mind as it pursues its important work. I will argue that investor needs are important, but not paramount. The investor has a critical capital allocation role to play in the system, and needs a more holistic understanding of firm performance to perform that role. I will also address a number of shortcomings in the current U.S. securities disclosure regime as applied to sustainability reporting. Along the way, I hope to reaffirm our collective faith in the Brandeis model that presented sunlight as the best of disinfectants for all manner of "social and industrial diseases."

The Role of the Investor – Sustainable Capital Allocation

Paul Volcker recently became the first recipient of the Stanford Institute for Economic Policy Research Prize for Contributions to Economic Policy. In his acceptance speech, he made the following important statement:  
The Stanford Institute prize announcement sets out a simple proposition I suspect we all would support: "Economics is fundamentally about efficiently allocating resources so as to maximize the welfare of individuals (5)."

The official Prize announcement follows that statement with the following clarification: "It is about improving people's standard of living (6) **."** Although it is tempting to quote Mr. Volcker at length, it is sufficient to note for this essay that he called for a reconsideration of the basic tenets of financial theory in the wake of the financial crisis. He questioned whether the financial sector was creating value for society, or value for itself. He notes, for example, that in the past thirty years, "there was one great growth industry. Private debt relative to GDP nearly tripled in thirty years." He also points to our lack of preparedness for the ongoing climate crisis.

Finance should be the engine that drives that larger economic purpose. This is not a new idea—securities regulation in the United States was instituted in the midst of the Great Depression to address the serious risks to society posed by unregulated capital markets (7). Finance theory, however, has narrowly channeled that public purpose into one all-consuming problem: how to understand and predict the movements of the stock market, and how to outperform. Little attention has been paid to how investors can most effectively allocate resources to maximize the welfare of individuals, or society (8).

Humanity is now using natural resources 50 percent faster than what Earth can renew, meaning that we are currently operating as if we lived on 1.5 Earths (9). In the developed, market-based societies, the news is worse. This is the ultimate verdict on our capital allocation decisions. And incidentally, these trends are affecting portfolio values today and will certainly dramatically impact them in the years to come.

Our deficit relationship with the Earth is the result of many macroeconomic factors that lie outside the scope of this discussion. A key contributing factor, however, has been investors' exclusive focus on portfolio returns—stock price—while ignoring the consequences of their investment decisions and the real-world impact of the corporations whose shares they buy and sell. The economic theory that says an exclusive focus on financial success will implicitly reflect all other considerations, incorporating the interests of "the butcher, the brewer and the baker," to paraphrase Adam Smith, has failed (10). The annual Financial Times 500, a list of the largest corporations in the world by market capitalization, can also be seen as a list of the choices global investors have made. The largest companies on the list are a mix of value-creators and value-destroyers, including companies allegedly responsible for some of the most egregious harms, including genocide. By any measure, too much of the world's population lives in abject poverty and wealth disparities in the United States have reached frightening levels.

In the face of climate change, water scarcity, global poverty and modern slavery, integrated reporting—or any system of reporting at all for that matter—seems a rather tepid response. Nevertheless, it is a necessary, if not sufficient response. Without dramatically improved corporate reporting, we will not have the data we need to find a sustainable path forward. In order to shift from " _efficient_ capital formation" to " _sustainable_ capital formation," we need a full accounting—an accounting that provides readers with a complete view of risks and opportunities to the corporation, as well as the risks and opportunities the company presents to society and the environment.

The Brandeis Model

The reason we are discussing reporting in the midst of multiple crises is because we still have faith in the Brandeis model. In "What Publicity Can Do," one of a series of articles he published in 1913 on the problem of the money trusts, Louis Brandeis made the case that "publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman (11)." Brandeis' reasoning, now taken as self-evident, was that investors will make better decisions if they have relevant information and their informed decision making will serve as a check on fraudulent behavior. "Require full disclosure to the investor of the amount of commissions and profits paid," Brandeis reasoned, "and not only will investors be put on their guard, but...[e]xcessive commissions—this form of unjustly acquired wealth—will in large part cease."

Brandeis stressed that disclosure to _investors_ advanced the _public_ interest: "Compliance with this requirement should also be obligatory, and not something which the investor could waive. For _the whole public_ is interested in putting an end to the bankers' exactions." (emphasis added) Investor disclosure, in Brandeis' view, is a means to an end.

The "remedial measure" of Brandeis' system depends upon at least three factors to work properly: an interested, independent party to monitor the data (investors), regulation (the disclosure should be 'obligatory'), and, for certain types of disclosures, a sense of shame. The primary problem with sustainability reporting, at least in the United States, is not the lack of standards—it is the lack of regulation.

The Current U.S. Regulatory Approach to Sustainability Reporting

Although securities regulation in the United States was inspired by the Brandeis model, where Brandeis proposed targeted disclosure to address specific problems, we are left with the concept of materiality to remedy all manner of social and industrial diseases. The IIRC's approach to materiality will, in my view, be perhaps its most critical contribution.

In the United States, there are currently no explicit rules requiring corporate issuers to disclose their social or environmental policies, procedures or performance in their securities filings. A company's safety record, record of regulatory fines or warnings, employee turnover rates, greenhouse gas and other toxic emissions over time, etc., are not currently required to be disclosed to investors (12).

As discussed below, we can no longer afford to rely exclusively upon management's judgment of risk, management's definition of materiality, and issuer-focused disclosure in a world where investors are broadly diversified and subject to a variety of portfolio-level risks. A proper report should aim to provide investors with sufficient information to make truly sustainable asset allocation decisions.

Materiality is in the Eye of the Beholder

In its recent interpretive guidance on climate change, the SEC provided the following definition of materiality: "Information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote or make an investment decision, or, put another way, if the information would alter the total mix of available information (13)."

Materiality is not, as many believe, "what affects stock price." It would be unreasonable to define the concept so narrowly. The reasonable investor wants information to help her evaluate her investment. If "materiality" is defined as "what affects stock price," then the moment a material factor is revealed, the stock will move. A _reasonable_ investor would certainly like a bit of advance notice. In my experience, however, materiality is generally viewed as a limiting, narrowly construed factor to be defined by lawyers, not an analytical tool.

In practice, we take this tool designed to gauge investor needs, and place it in the hands of corporate counsel to implement. The results, perhaps not surprisingly, are often not particularly useful to investors. Management's incentives are to disclose as little as possible, in direct opposition to what investors need. This can be particularly dangerous when there is an Ahab at the helm, as there arguably was at Massey Energy when disaster struck earlier this year, killing 29 miners. A CEO blind to risk should not be placed in charge of determining what information should be disclosed about his operations. The companies that are the most likely to experience avoidable catastrophic disasters are the least likely to provide advance warnings. This is simple common sense. A "reasonable" investor needs something more than management's perception of risk. A reasonable investor needs information to allow her to second-guess management, and to arrive at a more complete view of the company.

It is important to recognize that Brandeis was not relying on the good will or farsightedness of corporate managers to disclose all "material" information. He chose a specific data point to address a particular problem. And clearly, Brandeis did not see the investor as the ultimate beneficiary of the disclosure regime. The investor, by reviewing and acting on the data, was serving a broader public interest. In a sense, he was offering a regulatory version of Smith's invisible hand.

When investors fail to perform their appropriate function in the system and companies realize that nobody is paying attention, Brandeis' "remedial measure" breaks down. That may have been the case with BP. When there are no negative consequences in the marketplace for the publication of damaging information, the incentives to improve performance are severely impaired. Clearly, investor attitudes must change, but data must at least be made _relevant_ to investors, or they will not use it.

The SEC's guidance on climate change should help to illustrate the problem. Because the guidance made no new law, merely interpreting existing interpretations of materiality in the context of climate change, it clearly highlights both the benefits and limits of materiality. The guidance very helpfully outlines the various risks climate change presents to a range of industries, and details the type of disclosures that issuers should be providing. The guidance should prompt many companies to conduct internal risk assessments, and put in place mitigation measures.

Why did the Commission see the need to thoroughly explain to issuers that the most significant sustainability crisis humanity has ever faced might be material to their businesses? Because it is up to each company to define the material risks it faces. And now that the SEC has reminded companies of the true scope of the concept of materiality, I suspect we will see many more companies begin to discuss climate change in their securities filings. I do not expect to see many other material sustainability risks discussed, despite the fact that the law already requires such disclosure.

By contrast, the Global Framework for Climate Risk Disclosure (14), developed by a significant coalition of institutional investors, as well as the Carbon Disclosure Project—now backed by 534 institutional investors managing more than $64 trillion (15)—seeks targeted performance disclosure, including baseline greenhouse gas emissions, strategy discussions and targeted carbon pricing scenarios, regardless of their "materiality." This information would provide investors a deeper understanding of each company's approach to climate change and the actual risks presented, in a comparable format. This information should also allow investors to understand trends over time, a critical analytical need that materiality does not address.

Externalities

Modern portfolio theory has much to answer for in the wake of the recent financial meltdown. One of its tenets—the benefits of diversification—has had both positive and negative implications for sustainability. On one hand, broad diversification has provided many investors with the excuse to ignore issuer-level risks, and has tied a significant percentage of investors to public benchmarks that employ no social or environmental standards. On the other hand, broad diversification has produced the notion of the "universal owner," a concept that has led a number of very large institutional investors to accept their broad obligations to society.

Regardless of its shortcomings, diversification is not likely to go away. It has transformed the public equities markets, but securities regulation has not kept up.

In the midst of a series of _systemic_ crises—financial, ecological and social—we can no longer afford a reporting system that fails to take a holistic approach. And yet, investors who are responsible for decision-making that drives the largest capital allocation mechanism on the planet do not receive systemic information. They receive issuer-focused, inward-looking reports—"corporate self-portraits," as Sanford Lewis puts it in another essay in these pages. Because current rules focus on financial risks to the issuer, there are no securities rules requiring an issuer to disclose the impact its operations may have on its competitors, the environment, customers, employees, or communities. "Negative externalities" from corporate operations, broadly defined as costs that are imposed on third parties, are not explicitly captured by current rules, unless the issuer believes these issues present a material financial risk to the company. Broadly diversified investors, therefore, do not have access to sufficient information to adequately gauge portfolio-level risks of these issues. The Carbon Disclosure Project and the Framework noted above are two investor-driven responses to this information gap.

Material to Whom?

I would recommend that a sign be posted on the wall during all IIRC deliberations, asking the simple question, "Material to Whom (16)?" It is a simple question to ask, but it may not be such a simple question to answer. As discussed above, information that is material to a particular stakeholder may not be relevant to investors, and data that is ignored by investors is unlikely to be taken very seriously by corporate management.

Nevertheless, it is critically important that the Committee recognize that all stakeholders—including shareholders—need to understand how companies are affecting all of their various stakeholders. The only way to truly understand those impacts is to look outward, beyond the shareholder, and certainly beyond stock price. The Global Reporting Initiative offers a different definition of materiality than the SEC definition quoted above, focusing instead on material risks imposed by corporations on their stakeholders. Combined with the SEC definition, a fully integrated report should give corporate stakeholders close to a 360 degree view of both risks and opportunities.

Corporations have an obligation to society to publicly report on these material impacts. Smart investors will pay attention as well, because these issues can provide insights into the quality of management, can signal future risks, and can help the investor to assess system-level risks that would otherwise go unreported. If integrated reporting is focused around company-defined strategy, however, there is a risk that these stakeholder issues will get lost.

Although our globalized economy has narrowed the gap between financial materiality and stakeholder materiality in many cases, there will always be critical stakeholder impacts that will not be easily measured in terms of stock price. Here are a few examples:

Shell v. BP

_The New York Times_ reports that oil companies have deposited an Exxon-Valdez size spill into the waters of the Niger delta each year, for the past fifty years (17). Shell is the major player in the region. The capital markets do not seem to have noticed. By contrast, BP's stock price dropped by almost 50% within days of the Deepwater Horizon disaster in April. A focus on "stock price materiality" would lead one to conclude that oil spills in developing countries and investments in safety measures in those countries are immaterial and need not be disclosed. Clearly, Shell's experience in Nigeria has been costly, widely publicized and litigated, but has it had the severe financial impact of BP's experience in the Gulf?

Clearly, any worthwhile model of integrated reporting would not distinguish between risks to developed and developing country stakeholders, but this will require a broader conception of materiality.

The Atlantic Bluefin Tuna

Costco recently adopted a sustainable seafood policy after dialogue with a coalition of investors led by Green Century Asset Management, and a very public campaign by Greenpeace. The policy bans purchases of Atlantic Bluefin Tuna, a threatened species. Is the survival of the Atlantic Bluefin "material" to Costco? Costco's offerings are broadly diversified. If the species is rendered extinct by over-fishing, Costco may suffer some reputational risk, or even boycotts, but it is not the largest offender and its consumers will most likely move on to another type of fish. After all, none of Costco's competitors will be able to offer an extinct species. Costco's ban may even create some short term risk of customer dissatisfaction. The survival of the Atlantic Bluefin, however, is material to the health of the oceans, and the health of the oceans is material to all life on Earth.

Coffee Farmers

In _Black Gold_ , a recent documentary, a group of Ethiopian coffee farmers are asked the price of a cup of coffee in Europe or America. Their guesses are far short of the mark, and they are astonished to hear the answer. Ethiopian coffee is among the most expensive in the market, and many coffee-drinkers consider Ethiopian coffee to be the finest coffee in the world. And yet the farmers that produce this bounty need to scrape together every last cent to build a school for their children. Screaming children in their community are turned away from emergency nutritional centers because they are not yet hungry enough. Many farmers are growing chat, a fast-growing profitable narcotic, on land that should be growing coffee trees. In the language of economics, this shift to chat is a misallocation of capital based on a significant information asymmetry. Coffee trees take five years to produce their fruit. The markets, however, as we know from so many examples, are driven by short-term considerations. This problem is replicated in coffee-growing regions around the world.

When I was in dialogue with Procter & Gamble about Fair Trade Certified coffee, P&G's head coffee buyer demonstrated the ease with which he could access the current market price on his BlackBerry. A basic requirement of any fair commercial transaction is equal access to information. If our global system of trade cannot provide these farmers with honest prices, the system is badly broken. Perhaps this consideration is beyond what corporate reporting can fix. Or perhaps public reporting by corporations that benefit from these information asymmetries should report on their efforts to level the playing field. Recall Brandeis: "Require full disclosure to the investor of the amount of commissions and profits paid, and not only will investors be put on their guard, but...[e]xcessive commissions—this form of unjustly acquired wealth—will in large part cease."

The $6.5 Billion Indicator

The GRI combines a degree of flexibility and room for management to tell its story, while also defining specific indicators. This is critically important for a variety of reasons already discussed. One additional reason is that targeted sustainability disclosure can educate management about what information is widely viewed as important.

Some indicators are selected to efficiently provide a breadth of insight into management of the company. Other indicators, if appropriately defined, can drive change all the way from senior management down to a community of stakeholders half a world away. Such indicators can help to uncover previously hidden operational inefficiencies and provide management with a basis for managing these costs in the future. In his latest report to the UN Human Rights Council, for example, Professor John Ruggie, the UN Secretary General's Special Representative on Business and Human Rights reported that:  
"a study of 190 projects operated by the international oil majors indicates that the time for new projects to come on stream has nearly doubled in the past decade, causing significant cost inflation. Delays are attributed to projects' 'technical and political complexity.' An independent and confidential follow-up analysis of a subset of those projects indicates that non-technical risks accounted for nearly half of all risk factors faced by these companies, with stakeholder-related risks constituting the largest single category. It further estimated that one company may have experienced a US $6.5 billion "value erosion" over a two-year period from these sources, amounting to a double-digit fraction of its annual profits (18)."

Community opposition to oil industry projects may have cost this company up to $6.5 billion over a two-year period, but prior to Professor Ruggie's study, the company had never sought to measure these "stakeholder" costs. There is no indication that this company's financial reporting was inaccurate, or that it had to restate its earnings. These costs were embedded in a variety of other costs. Nobody thought to pull them together until the right questions were asked. Now, the company can move to mitigate a significant and previously unidentified cost, obtain a better understanding of community concerns, and hopefully do a better job of addressing them in the future. An exclusive reliance on issuer-defined materiality reporting is unlikely to produce such results. Sustainability issues, when they are placed in a financial context, are generally thought to present long-term risks, and they do. But this example also highlights that these issues present _every day_ costs and opportunities.

A Cautionary Note on XBRL

The XBRL format offers significant promise, allowing investors to easily access relevant data points and compare them across firms and industries. The technology, broadly applied, should lead to far broader access to data and new insights. For example, the SEC's Investor Advisory Committee approved a resolution asking the SEC to study the costs and benefits of data-tagging of corporate proxy statements, mutual fund proxy voting records, and corporate filings revealing final vote results (19). As a member of that committee, I strongly supported the idea, as it may provide researchers with new insights into the proxy voting process, a critical corporate accountability tool (20).

It seems to me to be somewhat ironic, however, to be discussing the concept of "One Report" and XBRL in the same breath. XBRL may be a very positive development, but it is also likely to accelerate the atomization of corporate reporting, undermining the integrity of the report itself. Investors will have even less incentive to read the corporate report as published, preferring to extract the data points their models call for. What gets lost, is context, and context is critical to understanding corporate strategy and performance, particularly with respect to those sustainability factors that cannot generally be reduced to a data point.

It is also critical to recall the coffee farmer that lacks access to pricing information, relying instead on a chain of middle-men and brokers. When developing a new architecture of information distribution, we must consider the question of _access to data_ if we truly wish to produce a more sustainable global market. Perhaps an access initiative for the developing world along the lines of the Enhanced Analytics Initiative would be in order. Without expanding access to corporate data, we will end up with more information, but in the hands of the same group of people, and their track record of sustainable capital allocation decisions is not promising.

Conclusion

It is tempting to argue that our systems of reporting—both financial and sustainability—have failed, or are failing us. I believe it would be more accurate to say that our systems of reporting have been inadequate to the task, and need to be dramatically improved. Certainly with respect to sustainability, the Brandeis model has not been given a chance to work.

For Domini Social Investments, and many other social and faith-based investors, sustainability reporting is first and foremost about accountability, and accountability to multiple stakeholders. Integrated reporting offers tremendous promise. It can dramatically enhance the value of both financial and sustainability reporting and, ultimately, drive better, more sustainable decision-making.

Investors are an important stakeholder, but not the only one, and not even the most important one. Investors have a particular role to play in the system, and to perform that role they need a more holistic view of corporate performance. It is critically important, therefore, that integrated reporting not subordinate sustainability factors to financial metrics. Financial reporting must incorporate sustainability factors to be accurate and honest. This, however, is not necessarily anything more than appropriate financial reporting. The goal should be something far more ambitious, incorporating a more enlightened view of value and materiality in a world that is desperate for a full and honest accounting of the consequences of our decisions.

Adam M. Kanzer is Managing Director and General Counsel of Domini Social Investments, a mutual fund manager focusing exclusively on socially responsible investing. His responsibilities include directing Domini's shareholder advocacy department, where for more than ten years he has led numerous dialogues with corporations on a wide range of social and environmental issues. In 2009, Mr. Kanzer was appointed to the Securities and Exchange Commission's Investor Advisory Committee. He serves on the board of the Global Network Initiative, addressing threats to freedom of expression and privacy rights on the Internet and other communication technologies, and the Social Investment Forum's public policy committee. He holds a B.A. in political science from the University of Pennsylvania and a J.D. from Columbia Law School.

Endnote: (1) Guidelines for Norges Bank's work on responsible management and active ownership of the Government Pension Fund Global (GPFG), available at:  http://www.regjeringen.no/en/dep/fin/Selected-topics/the-government-pension-fund/responsible-investments/Guidelines-for-Norges-Banks-work-on-responsible-management-and-active-ownership-of-the-Government-Pension-Fund-Global-GPFG.html?id=594253. The Fund's ethical guidelines are premised on two concepts: "The Government Pension Fund – Global is an instrument for ensuring that a reasonable portion of the country's petroleum wealth benefits future generations. The financial wealth must be managed so as to generate a sound return in the long term, which is contingent on sustainable development in the economic, environmental and social sense. The financial interests of the Fund shall be strengthened by using the Fund's ownership interests to promote such sustainable development" and the Fund "should not make investments which constitute an unacceptable risk that the Fund may contribute to unethical acts or omissions, such as violations of fundamental humanitarian principles, serious violations of human rights, gross corruption or severe environmental damages."  http://www.regjeringen.no/en/dep/fin/Selected-topics/the-government-pension-fund/responsible-investments/the-ethical-guidelines.html?id=434894  
(2) The MSCI KLD 400 Social Index (originally known as the Domini 400 Social Index) is the world's oldest financial benchmark based on social and environmental factors. Since its inception in May 1990, the Index has outperformed the S&P 500 on an annualized basis for the 3 and 5 year and since inception periods (Average annual total return as of July 31, 2010). See <http://www.kld.com/indexes/ds400index/performance.html>. See also, Asset Management Working Group, UNEP-FI and Mercer, _Demystifying Responsible Investment Performance: A review of key academic and broker research on ESG factors_ (October 2007), available at  http://www.unepfi.org/fileadmin/documents/Demystifying_Responsible_Investment_Performance_01.pdf, and UNEP FI Asset Management Working Group, _Show Me The Money: Linking Environmental, Social and Governance Issues to Company Value_ (2006), available at <http://www.unepfi.org/fileadmin/documents/show_me_the_money.pdf>. For a comprehensive list of key studies on socially responsible investing, see: <http://www.sristudies.org/Key+Studies>.  
(3) As reported in Global Proxy Watch, Vol XIV No 26, June 25 2010. The studies are available at:  http://www.unglobalcompact.org/docs/news_events/8.1/UNGC_Accenture_CEO_Study_2010.pdf and <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1626050>.  
(4) Robert G. Eccles and Michael P. Krzus, One Report: Integrated Reporting for a Sustainable Strategy (Wiley, 2010).  
(5) A transcript of Mr. Volcker's remarks is available at  http://siepr.stanford.edu/system/files/shared/PAUL_VOLCKER_Transcript_of_Remarks.pdf. Volcker also presented these remarks as an essay in the New York Review of Books, at  http://www.nybooks.com/articles/archives/2010/jun/24/time-we-have-growing-short/  
(6) <http://siepr.stanford.edu/prize_announcement>  
(7) Describing "the need for regulation', Section 2 of the Securities Exchange Act of 1934, the Act that created the Securities and Exchange Commission states: "[n]ational emergencies, which produce widespread unemployment and the dislocation of trade... and adversely affect the general welfare are precipitated, intensified, and prolonged by manipulation and sudden and unreasonable fluctuations of security prices and by excessive speculation on such exchanges and markets...."  
(8) See, generally, Justin Fox, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (HarperCollins, 2009).  
(9) According to the 2010 edition of the Living Planet Report, a biennial report on the planet's health produced by WWF in collaboration with Global Footprint Network and the Zoological Society of London. Available at  http://www.footprintnetwork.org/en/index.php/GFN/blog/human_demand_outstripping_natures_regenerative_capacity_at_an_alarming_rate  
(10) Although this paragraph in the Wealth of Nations is one of the most frequently used rhetorical tools of free market apologists, it should be noted that the free market has not served the butcher, the brewer or the baker particularly well. In most communities in America, at least, they have been replaced by large corporations.  
(11) Louis D. Brandeis, Other People's Money and How the Bankers Use It (August M. Kelley, 1986. Originally published, 1914), at 92. The original article is available at  http://www.sechistorical.org/collection/papers/Pre1930/1913_12_20_What_Publicity_Ca.pdf.  
(12) There are a few specific rules relating to disclosure of environmental risks to the issuer. Although there are no explicit rules regarding "social" risks, such as human rights violations or community opposition to new capital-intensive projects, general requirements to disclose material risk information apply equally to all sustainability issues, as long as management determines that these issues present "material" risks to the issuer.  
(13) Commission Guidance Regarding Disclosure Related to Climate Change, Release Nos. 33-9106; 34-61469; FR-82 (Feb. 8, 2010), available at <http://www.sec.gov/rules/interp/2010/33-9106.pdf>, citing TSC Industries v. Northway, Inc., 426 U.S. 438 (1976).  
(14) <http://www.unepfi.org/fileadmin/documents/global_framework.pdf>  
(15) <https://www.cdproject.net/en-US/WhatWeDo/Pages/overview.aspx>  
(16) Sr. Ruth Rosenbaum, Executive Director of CREA, would put it slightly differently. Her ultimate question is "Cui Bono?" – "Who benefits?"  
(17) Adam Nossiter, "Far From Gulf, a Spill Scourge 5 Decades Old", New York Times, June 16, 2010, available at  http://www.nytimes.com/2010/06/17/world/africa/17nigeria.html?scp=1&sq=spill%20scourge&st=cse  
(18) Report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, John Ruggie: Business and Human Rights: Further steps toward the operationalization of the "protect, respect and remedy" framework (April 9, 2010), at paragraph 71 (footnotes omitted). Available at <http://www.reports-and-materials.org/Ruggie-report-2010.pdf>  
(19)  http://sec.gov/spotlight/invadvcomm/iacproposedresproxyvotingtrans.pdf  
(20) My views as a member of the Investor Advisory Committee are mine alone, and are not necessarily those of the other Committee members, the SEC Commissioners, or SEC Staff.

#### Learning from BP's "Sustainable" Self-Portraits: From "Integrated Spin" to Integrated Reporting

Sanford Lewis, Counsel

Investor Environmental Health Network

ABSTRACT: Just as the paradigm of integrated corporate reporting begins to gain momentum, the BP oil spill highlighted significant shortcomings of current reporting standards and practice. Mere "integration" of current financial and sustainability disclosure standards could yield little more than "integrated spin," neglecting substantial areas of risk.

To be of value, integration must include concepts poorly handled under current sustainability and financial disclosure standards:

1) Require timely corporate disclosure of substantial enforcement notices, orders and allegations issued by regulators;

2) Require corporate disclosure of credible scientific reports and concerns indicative of potentially catastrophic risks of a company's products and activities, regardless of scientific uncertainty as to the likelihood of such disaster scenarios.

3) Require corporate disclosure of any facts or circumstances that may be needed to ensure that the management's self-portrait of its sustainability strategies, goals and progress is not materially misleading.

*****

After decades of work by NGOs and investors to develop globally applicable corporate sustainability reporting standards, 2010 was a watershed year. The formation of the International Integrated Reporting Committee in August 2010, with its distinguished membership from accounting, regulatory, and government sectors, evokes endorsement of the idea of integrating socially relevant data into corporate annual reports (1).

But in the same year, the Deepwater Horizon oil spill highlighted shortcomings of existing financial and sustainability disclosure standards and practice. Viewed in retrospect, it is apparent that both BP's financial and sustainability reports veiled core weaknesses in how the company managed pivotal issues of maintenance and safety. Assertions of NGOs that BP's sustainability claims were greenwash came through with a vengeance. As such, the Deepwater Horizon experience provides essential lessons for thinking about how to ensure effective integrated reporting, rather than "integrated spin."

BP and its Sustainability Reporting: a Model Corporate Citizen?

The Global Reporting Initiative (GRI) is a network-based organization that has developed a framework for sustainability reporting (2). This standardized framework aims to assess organizational performance on multiple fronts, such as commitment to sustainable development and reducing greenhouse gas emissions.

BP is a prominent and touted GRI sustainability reporter. It has even received awards and recognition for its Global Reporting Initiative formatted reports. Some investors may have  chosen to increase or sustain their investing in the company because its reporting made it "best in class (3)."

Although BP sustainability reports from 2005 through 2009 portrayed a company of high values and integrity, the reports omitted disclosure of available facts, opinions and metrics that would have contradicted this portrayal. Simple integration of BP's flawed sustainability reports with its financial reports would not have yielded a useful "integrated report" from the standpoint of stakeholders. It would only have established "integrated spin."

The  Global Reporting Initiative's Guidance for preparation of GRI sustainability reports (currently referred to as the G3, as in third-generation of guidance) emphasizes the need for a company to "Describe the Management Approach" to an issue—asking companies and their managers to offer their rendition of corporate goals, policies, and practices (4). Consistent with this guidance the BP sustainability report of 2009, for instance, reported these excellent company goals and values:

Our values.  
Responsible. We are committed to the safety and development of our people and the communities and societies in which we operate. We aim for no accidents, no harm to people and no damage to the environment.  
Performance driven. We deliver on our promises through continuous improvement and safe, reliable operations.

These values guide us in the conduct of our business. In all our business we expect our people to meet high ethical standards and to act in accordance with our code of conduct (5).

The 2005 sustainability report contained nearly 1,000 words explaining in detail the company's risk management processes; the reader was given the impression that the company was doing much to manage risks to both its finances and its stakeholders. In retrospect, however, the following passage and the risk management section may seem particularly prescient:

Risks to our reputation could be created if it is perceived that our actions are not aligned to our high standards of corporate citizenship and our aspirations to contribute to a better quality of life through our products and services. For example, risks could arise from incidents of non-compliance with laws and regulation or ethical misconduct; or if it is perceived that we are not respecting or advancing the economic and social progress of the communities in which we operate (6).

The Jarring Reality of BP Safety Culture

In contrast to the shining image of a company working hard towards sustainability and safety presented in the company's sustainability reports, in the aftermath of Deepwater Horizon numerous reviews suggest a company that was cutting corners on safety spending. Numerous press articles after the Deepwater Horizon disaster asserted that skimping on safety was a persistent cultural problem at BP. For instance, an AP story (7) that was typical, described the problem in numerous ways:

-"BP made a series of money-saving shortcuts and blunders that dramatically increased the danger of a destructive oil spill in a well that an engineer ominously described as a 'nightmare' just six days before the blowout."  
-BP rejected the advice of Halliburton, Inc, a subcontractor, in preparing a cementing job to close up the well. Halliburton recommended using 21 centralizers to make sure the casing ran down the center of the well bore. Instead, BP used 6 centralizers. In an email on April 16th, a BP official in the centralizer decision said, "It will take 10 hours to install them, I do not like this." Another official responded, recognizing the risks of proceeding with insufficient centralizers, but commented "Who cares, it's done, end of story, will probably be fine."  
-Waxman and Stupak (Congressional Energy Subcomittee on oversight and investigations) state that "the common feature of these five decisions [questionable decisions BP made before the explosion], is that they posed a trade-off between cost and well safety."

Oil industry expert and geophysicist Roger N. Anderson was interviewed by _Columbia_  _Magazine_ about the technical aspects of the Gulf of Mexico disaster. He noted that drilling mud is expensive (8). He is quoted in the magazine as saying:

"They were also rushing to finish the well, which had been fighting them the whole time, making them weeks behind schedule. The people on the rig called it the "Well from Hell." On the morning of April 20, the crew from Transocean (the owner of the rig), over the strong objections of their own drilling superintendent, was ordered by BP to take the heavy drilling mud out of the drill pipe and replace it with seawater. That was the triggering event that allowed the gas and oil to blow out onto the Deepwater Horizon rig floor—then a random spark ignited a tremendous explosion. The rig sank, allowing the free release of the pressure and the energy of all that oil and gas into the ocean. The rest is history." [emphasis added]

Examining Company Follow-up on the Texas City Refinery Disaster

It will take years for the courts to determine the degree to which BP was at fault in events leading to the Deepwater Horizon disaster.

However, examination of other aspects of the company's record bears out the notion that an internal culture of cost cutting contrasted with its external disclosures of diligent attention to safety (9).

Perhaps nowhere is the contrast between how the company portrayed itself in its sustainability reporting and its actual practices better illustrated than the record of disclosures and actions after the Texas City oil refinery disaster of 2005. BP was assessed $50 million in penalties for felony safety violations leading to the disaster. The company's 2005 sustainability report expressed remorse for what happened in Texas City, where 15 employees were killed and 170 people were injured in the massive explosion. In the aftermath of the disaster, BP sustainability reports portrayed a company that was learning from experience and moving toward safer performance. The company sought to present an image in which unsafe operations were a thing of the past. In its 2005 Sustainability report BP noted:

" _We responded to the industrial accident at the Texas city refinery with a thorough investigation and a fundamental review of systems and processes, leading to a range of new measures and investments being taken to maintain the safety of our people and the integrity of our plant_ (10)."

Over the intervening years, the company reported various investigations and programs that were intended to improve safety. For example in its 2009 BP Sustainability Report the company noted in its continuing follow-up on Texas City that:

" _BP continued to make significant progress in delivering its programmes to strengthen process safety capability at all levels."  
"BP has taken a number of steps to strengthen its process safety culture, and its leaders support process safety positively and sincerely."  
We have taken action to close out our six-point plan, launched in 2006 to address immediate priorities for improving process safety and operational risk management at our operations worldwide, following the incident at Texas City in 2005 involving a fire, explosion, fatalities and injuries_ (11).

No doubt, the company must have improved safety in some areas of its operations. It abated about 500 of the 900 or so issues identified by Occupational Safety and Health Administration (OSHA) as needing abatement after the Texas City disaster. OSHA also found hundreds of other instances in which the company had not done the needed abatement—violations in instrumentation controls in the complicated Texas City refinery that were identified as lacking in 2005. The OSHA  reinspection completed in October 2009 found 439 instances of "willful" violations, most or all of which were designated with gravity of 10 on a scale of 1 to 10 (12). OSHA stated that:"Our information indicates that for some identified hazards, BP either has not specified or allocated the specific layers of protection needed, and for other identified hazards where BP has specified the layers of protection it will use to control the hazards, the specified instrument controls have not been installed or are not operational (13)."

In September 2009, OSHA issued a warning that its audit had identified "systemic deviations from the industry standards" at the Texas City facility that had yet to be addressed. Specifically, areas of concern included a failure, four years after the blast, to complete a determination of which alarm functions in each unit were critical to process safety (14).

Despite notices of these violations and the availability of that information online on the OSHA website, neither the company's 2009 annual report filed with the SEC nor its 2009 GRI sustainability report contained reference to this enormous volume of pending willful violations of the highest possible gravity. On August 12, 2010, OSHA reached an agreement with BP for it to pay a $50.6 million penalty for these failures to abate violations. OSHA reported this was by far the largest penalty ever paid (15).

It is worth emphasis here, that these were not violations leading to the Texas City disaster of 2005; they were violations occurring afterward due to the failure of BP to follow through and implement the needed fixes. The Secretary of Labor stated, "the size of the penalty rightly reflects BP's disregard for workplace safety (16)." The Assistant Secretary of Labor added: "It is perfectly within BP's financial means to make this facility safe and they've admitted they have the ability to make it safe (17)."

Little if anything was reported by the company on OSHA allegations during the 2009 reporting year. However, the company's 2009 sustainability report did contain the following cryptic statement regarding safety instrumented systems:

Safety Instrumented Systems (SIS) – US Refining developed a portfolio-wide plan to mitigate higher-level process risks through measures such as SIS by 2016. Lower-level risks will be mitigated on a site-by-site basis. More than 40 SISs are now in service at US refineries, but elements of the SIS life cycle management systems that are required by BP's internal standards, including SIS documentation, training and auditing, remain to be implemented on these existing systems. US Refining is developing a plan to address these requirements (18).

Was this statement actually referring in part to the fact that the company was deferring instrumentation system fixes that were deemed grave violations by OSHA? Did the reference to higher-level "process risks" include the 439 instances identified in the Texas City plant that needed immediate remediation according to OSHA? If so, it would have been of interest to readers to know that this timetable of completion by 2016 was inconsistent with the timetable expected by regulators overseeing remedial solutions at Texas City (19).

Descriptions of the "Management Approach": an Invitation to "Spin"?

As noted above, the guidance for GRI sustainability reports encourages companies to "Describe the Management Approach" to various issues (20). The expression "management approach" is used at least 26 times in the G3 Reporting Guidance, the currently operative guidelines for corporate sustainability reporting. Typically, the guidance asks the management to describe the relevant corporate goals, policies, and broadly speaking, its practices. It turns out that it is very easy for management to describe a strategy, policy or goal that may give stakeholders an impression that the company is "doing the right thing." These statements of management approach can be relatively subjective; is not so easy to ascertain whether the reporting company is "walking its talk" or only presenting an idealized, marketing version of internal realities.

The undisclosed realities of internal corporate culture can easily trump a company's self-portrait of strategy. As Marcy Murninghan of the Murninghan Post has noted in personal correspondence with the author, the strong pressure on companies to issue these reports can easily create two side-by-side cultures within BP and other firms—a culture of reporting and a culture of practice. While the reporting culture may focus on stating the kinds of values and goals that would be coherent and admirable when viewed by outside stakeholders, the culture of operational practice may nevertheless perpetuate the worst tendencies, focusing on short-term profitability and cost minimization. Current sustainability disclosure standards do not require disclosure of potentially contradictory evidence—documenting when regulators or scientists find the company's practices, implementation or behavior inconsistent with its "management approach."

Some observers have gone as far to state that in current practice the sustainability report should be understood as a corporate marketing tool rather than an effective means of holding companies accountable on sustainability issues (21).

Nevertheless, company reputations may be elevated, rightly or wrongly, by sustainability reporting that principally describes the management approach. Such reporting went a long way to seeing BP recognized for its efforts in sustainability. For instance,  Fortune magazine ranked BP as the 9th out of 10 most accountable big companies in 2008 (22). The GRI listed BP as a  finalist for two categories in the Readers' Choice Awards for sustainability reporting (23).

Integrating EHS Personnel to Integrated Reporting: Beyond Sustainability Marketing

Issues of compliance and safety have been a poor stepchild of the forward-looking criteria of sustainability performance encouraged by the GRI reporting framework. The reduced emphasis on legal compliance issues is probably attributable to the outlook that "compliance" is a lagging indicator of companies' forward-looking, innovative performance and planning—activities that go "beyond compliance." But, in the aftermath of Deepwater Horizon as well as the Massey Energy coal mining disaster, we understand that knowing the status of a company's current regulatory compliance challenges is a baseline for understanding risk.

Regulatory inspectors engage in some of the most detailed examination of facilities and products—the fact that they are finding and alleging problems can be some of the most important information for stakeholders to know when it comes to sustainability risk. Yet under current reporting frameworks, "sustainability" personnel work to portray the forward-looking vision of a company in addressing energy and resource management issues, while the environmental health and safety (EHS) staff of the same company may be wrestling with issues of prevention and compliance that are not necessarily reflected in the public sustainability reports. Effective "integration" may mean, among other things, recovering significant sources of intelligence regarding risk and management that current sustainability reporting frameworks fail to capture.

Bridging the Regulatory Disclosure Gap

While issues of legal and regulatory compliance may be a lagging indicator of sustainability innovation, we now understand they represent a baseline needed by investors, and can be leading indicators of sustainability risk.

The recently enacted Financial Reform Act in the US includes new disclosure requirements for mining companies regarding certain serious enforcement actions, orders and penalties issued to coal mining operations only (24). This set of disclosures goes much further, and with much more specificity, than what is otherwise required to be disclosed in SEC filings regarding ongoing litigation and enforcement actions. The new disclosure requirements can be an inspiration and model for new standards by sustainability and financial regulators—extending far beyond the coal mining sector, to provide an approach for all sectors where compliance issues may be a leading indicator of sustainability risk.

Going beyond the coal mining example, in the US and worldwide, most health or safety related regulators have categories of violations that are "severe," or "health threatening." Disclosure standards should include metrics that ensure disclosure and breakdowns of the number of such major violations once they are alleged by regulators. In addition, certain types of agency actions should be designated as per se material and trigger disclosure requirements:  
Order to close facilities based on health and safety concerns.  
Order to withdraw products based on health and safety concerns.  
Suspension of existing or new permitting for any period of time based on health and safety concerns.  
Cumulative amounts of penalties paid.

Disclosing Scientific Literature Findings Regarding Catastrophic Risk

Where, as with BP, the scientific literature is full of credible studies showing hazards of a company's products or activities, disclosure of these risks is necessary, but not consistently disclosed in sustainability or financial reporting. What is needed is less the management's assessment of such studies, but rather an objective trigger for disclosure when a company's activities—e.g. a major product line or activity like deepwater drilling—are implicated by studies warning of catastrophic risks.

Although treated as news after the Deepwater Horizon disaster, the uncertainties and risks of deepwater drilling were well documented in industry literature. As energy companies transitioned from shallow to deepwater oil drilling, experts identified several technical problems resulting from the more extreme conditions (25). Higher pressures, for instance, can cause seals to fail and choke and kill lines to collapse. Similarly, the lower water temperatures can affect the ability of seals to function. Another concern includes the formation of hydrates, which plug equipment.

Most importantly, many experts were concerned about the inability to control blowouts if they should occur—a prescient sentiment given the Deepwater Horizon spill. In a 1999 article  Offshore: World Trends and Technology for Offshore Oil and Gas Operations, Paul Saulnier of Cudd Well Control admitted that well control companies had not been putting enough resources into developing methods to control deepwater drilling blowouts (26). In recognition of such concerns, the International Association of Drilling Contractors (IADC) and the Offshore Operators Committee (OOC) sponsored a  task force to develop guidelines for deepwater drilling between 1997 and 1998 (27). The  report details many of the potential problems and solution of deepwater drilling, recognizing that "a serious deepwater incident could set deepwater exploration and development back many years (28)."

The US National Commission on the BP Deepwater Horizon oil spill and offshore drilling, convened after the spill, reiterates that these deep water drilling concerns were known within the industry, in its "Brief History of Offshore Oil Drilling" (29):

"It was also recognized within the petroleum industry that deepwater conditions create special challenges for critical equipment, including the blowout preventer. In a 2007 article in Drilling Contractor, Melvyn Whitby of Cameron's Drilling System Group described how blowout preventer (BOP) requirements got tougher as drilling went deeper. "Today," he said, "a subsea BOP can be required to operate in water depths of greater than 10,000 ft, at pressures of up to 15,000 psi and even 25,000 psi, with internal wellbore fluid temperatures up to 400° F and external immersed temperatures coming close to freezing (34° F)." One possible enhancement he discussed involved taking advantage of advances in metallurgy to use higher-strength materials in ram connecting rods or ram-shafts in the BOP. He suggested that "some fundamental paradigm shifts" were needed across a broad range of BOP technologies to deal with deepwater conditions."

"Perhaps the greatest risk factor was the very feature that made the deepwater boom so big in the first place. The prodigious flow rates in the deepwater help create "elephants," industry slang for wells whose production is considered especially high by historic standards. Such fields have very high daily output and good overall economics. But in cases of an uncontrolled blowout, high flow rate becomes the enemy as great volumes of oil and gas are spewed into the environment. This special risk of the turbidite reservoirs was both obvious and largely ignored in public discussions before April 2010."

Were Public Information and BP's Securities Filings Sufficient to Forewarn Investors?

Although most of the specifics discussed above were not in BP securities filings and financial reports, it is also true that some investors were able to read the handwriting on the wall about BP's practices and risk-taking just based on some of the visible problems the company had, and reported in its Form 20-F (foreign company annual report) filed with the Securities and Exchange Commission (30). For instance, the 2005 Texas City refinery disaster and its resulting felony charges, and the 2006 Prudhoe Bay Alaska oil spill resulting from corroded pipelines, were public knowledge and disclosed in the company's filings. This information was sufficient warning to some investors to decide to disinvest from BP, despite the company's artful sustainability presentations and branding.

The financial reports also reportedly revealed BP spending that was significantly lower than some other companies, which could have been seen as a warning flag. However, assessing just how much this was effective frugality, and how much it involved cutting corners on necessary safety or maintenance, would be difficult to do without added disclosure.

Even though limited information was available, the company's state-of-the-art sustainability reporting and relative lack of public visibility of ongoing regulatory enforcement charges, especially in relation to Texas City, surely painted a confusing picture for other investors.

Going Forward Toward Truly Integrated Reporting

The new momentum for integrated reporting, combining financial and sustainability reporting in a single report, poses numerous challenges for those who have been laboring for these years to develop the idea of sustainability reporting. GRI Deputy Director Nelmara Arbex said that "the goal for refinement of GRI standards over the next few years is to develop a 'standards ready' framework, one that is ready for adoption by regulators, financial analysts, among other stakeholders (31)."

Presumably, such standards would also be geared to preventing the kind of "spin" that was evident in the BP reporting experience.

From the standpoint of many investors and NGOs, and as amplified by the BP experience, the standards developed by GRI still have many gaps and shortcomings, and a need for inclusion of additional metrics to provide the most material information needed on corporate risk and performance related to sustainability. Yet there is also a cross current of concerns raised by the reporting community, seeking to reduce the volume of reporting and find those "fewer" metrics for sustainability that "really matter."

Various scenarios exist to reconcile these two views. For instance, the new emphasis on integrated reporting could yield a global practice of issuing streamlined integrated reports, while disclosure of additional, standardized, periodic and real-time sustainability data and analysis could exist on company websites for those who wish to drill down further.

Recommendations for Integrated Reporting

Whether integrated reporting reflects integration of sustainability reporting standards into financial annual report requirements, or a new set of standards that adopt some elements of sustainability reporting, to avoid "integrated spin" there is a need for inclusion of criteria currently neglected in both sustainability and financial reporting practice.

1. Disclosure standards should include metrics that ensure timely disclosure and breakdowns of the number of major violations once they are alleged by regulators. In addition, certain types of agency actions should be designated as per se material and trigger disclosure requirements:  
-Orders to close facilities based on health and safety concerns.  
-Orders to withdraw products based on health and safety concerns.  
-Suspension of existing or new permitting for any period of time based on health and safety concerns.  
-Cumulative amounts of penalties paid.

2. Standards should require disclosure of emerging scientific and technical issues that demonstrate the potential for catastrophic risks to humans, the environment or society:

-Disclosures should summarize credible scientific studies that may relate to public health or environmental risks associated with potentially catastrophic risks of products or activities. The disclosure of these significant developments should be required even if there is scientific debate or uncertainty, such as some studies finding a lack of such impacts.

-Describe the severity and scale of the potential problem, such as the percentage of the company's expected sales volume that a potentially problematic product comprises, the potential extent of workplace exposures where materials are used in the fabrication of goods, or overall potential human health effects and to the greatest extent possible qualitatively or quantitatively describe the magnitude of potential liabilities or opportunities associated with the issue.

-Review measures being taken to minimize adverse impacts or maximize business opportunities associated with the issue. Examples could include consumer education, research, materials modification or substitution, development of new products or services, exposure reduction, public policy efforts, fieldwork, third-party auditing, adoption of new codes, insurance, employee training or other actions (32).

3. Require disclosure of any additional information needed to ensure that sustainability disclosures are not materially misleading.

The existing GRI guidance already contains general provisions requiring under many of the categories of disclosure that reporting companies provide additional relevant information required to understand organizational performance, such as:  
-Key successes and shortcomings;  
-Major organizational risks and opportunities;  
-Major changes in the reporting period to systems or structures to improve performance.

This approach utilized by GRI still represents the process of self portraiture. Instead, analysis should be required from the standpoint of a reader—asking whether they would be misled by what they are reading. Integrated reporting should adapt the principle applicable to all disclosures to investors under SEC rules—the standing obligation to disclose any additional information necessary to make what has been disclosed not materially misleading (33).

As integration brings disclosure of sustainability data into the context of legal credibility checks and enforcement, and further from the suspicion of being a mere marketing tool, such a generic requirement for disclosure of information necessary to not mislead the reader will be an important litmus test.

Conclusion

Robert G. Eccles, who convened an October 2010 Harvard Business School Integrated Reporting conference, and who is coauthor with Mike P. Krzus of the seminal book on the topic, One Report: Integrated Reporting for a Sustainable Strategy (34), says that he has been asked by various observers whether effective integrated reporting could have prevented the Deepwater Horizon oil spill.

Certainly that is a lot to ask of any disclosure standard. Nevertheless, it is possible that if a company like BP were more accountable for how it balances efficient business operations and the prevention of harm to society, it might make better, more precautionary decisions that would avoid some of these catastrophes. Certainly, "integrated reporting" will never replace regulatory controls or civil society; we can hope that it would synergize with other elements in the corporate internal and external environment to produce true corporate social responsibility.

Sanford Lewis is an attorney whose clients include investors, institutions, NGOs and coalitions, including the Investor Environmental Health Network (IEHN). His law practice focuses on the drafting and defense of shareholder resolutions, and review of corporate SEC filings for sufficiency of disclosures related to sustainability and human rights. Mr. Lewis holds a BS in environmental science and urban communications from Rutgers University (Cook College) and a JD from the University of Michigan.

The author wishes to thank Genevieve Byrne and intern Samantha Ostrowski for their research assistance on this paper and Adam Kanzer, Marcy Murninghan, Bill Baue, Richard Liroff and John Harrington for their helpful review and feedback. Any errors or omissions are my own.

Endnote: (1) "International Integrated Reporting Committee," accessed October 28, 2010, <http://www.integratedreporting.org/>  
(2) "Global Reporting Initiative," accessed October 28, 2010, <http://www.globalreporting.org/Home>  
(3) Robert Kropp, "Sustainability Investors Reconsider BP Holdings in Wake of Gulf Disaster," _Sustainability Investment News,_ June 4, 2010, accessed October 28, 2010, <http://www.socialfunds.com/news/article.cgi/2963.html>  
(4) Global Reporting Initiative, _Sustainability Reporting Guidelines,_ version 3.0, accessed October 28, 2010,  http://www.globalreporting.org/ReportingFramework/ReportingFrameworkDownloads/  
(5) BP, _Sustainability Review 2009_ , "This is BP."  
(6) BP, _Making energy more: Sustainability Report 2005_ , 14.  
(7) Associated Press, "Documents: BP cut corners in days before blowout," June 15, 2010.  
(8) Michael B. Shavelson, "Oil + Water," _Columbia Magazine_ , Fall 2010, accessed October 28, 2010, <http://magazine.columbia.edu/features/fall-2010/oil-water>  
(9) See, for instance: Abrahm Lustgarten and Ryan Knutson,  "Years of Internal BP Probes Warned That Neglect Could Lead to Accidents," Pro Publica, June 7, 2010, accessed October 28, 2010,  http://www.propublica.org/article/years-of-internal-bp-probes-warned-that-neglect-could-lead-to-accidents  
(10) BP, _Making energy more: Sustainability Report 2005_ , 11.  
(11) BP, _Sustainability Review 2009,_ 22.  
(12) U.S. Department of Labor, Occupational Health and Safety Administration, _Inspection 311962674 – Bp Products North America, Inc.,_ October 29, 2009, accessed October 28, 2010,  http://www.osha.gov/pls/imis/establishment.inspection_detail?id=311962674&id=310266085#311962674  
(13) Mark R. Briggs, CSP, Area Director, Houston South Area Office, Occupational Safety and Health Administration, to Keith Casey, Business Unit Leader, BP – Texas City Refinery, August 3, 2009, accessed October 28, 2010, <http://blogs.chron.com/newswatch/ohsaletter.pdf>  
(14) Sheila McNulty, "BP given new warning over Texas refinery," _Financial Times_ , September 23, 2009, FT.com  
(15) U.S. Department of Labor, Occupational Health and Safety Administration, _BP Settlement Agreement Fact Sheet_ , accessed October 28, 2010, <http://63.234.227.130/dep/bp/bpsettlementfactsheet.html>  
(16) Remarks by Secretary Hilda L. Solis, telephone conference call, <http://www.osha.gov/dep/bp/Final_Solis_Remarks_BP.html>, OSHA web site  
(17) Ibid.  
(18) BP, _Sustainability Review 2009_ , 22.  
(19) It is worth noting that securities filings in the US require some additional disclosure of ongoing regulatory proceedings, but that BP's securities filings in the US are governed by Form 20-F, which is less detailed than the requirements of a Form 10-K. For US companies, regulation S–K Item 103 requires disclosure of certain anticipated government environmental penalties in excess of $100,000. However, even this requirement of the securities laws has not been well enforced. A 1998 study by the Environmental Protection Agency's Office of Enforcement and Compliance Assurance on the disclosure of environmental legal proceedings in registrants' Forms 10-K (Regulation SK, Item 103) for the years 1996 and 1997 found a non-reporting rate of 74%. Cited in the Environmental Protection Agency's Memorandum on "Guidance on Distributing the 'Notice of SEC Registrants' Duty to Disclose Environmental Legal Proceedings' in EPA Administrative Enforcement Actions" dated January 19, 2001  http://www.epa.gov/compliance/resources/policies/incentives/programs/sec-guid-distributionofnotice.pdf. A 2009 study by a University of Arkansas accounting researcher reviewing corporations with large environmental sanctions over a 10-year period found that 72 percent of the companies failed to disclose this information as required by Reg. S-K Item 103. A brief overview of the study is available at: <http://dailyheadlines.uark.edu/14417.htm> and coverage of the study at  http://www.csmonitor.com/Environment/Bright-Green/2009/0224/study-most-companies-lie-to-sec-about-environmental-fines.  
(20) For example, the G3 suggests that sustainability reports should include "management approach" as one of its standard disclosures: "Disclosures that cover how an organization addresses a given set of topics in order to provide context for understanding performance in a specific area," GRI _Sustainability Reporting Guidelines_ , 5.  
(21) For instance, Daniel Roberts, "CSR/Sustainability Reporting: 6 Recent Myths," _Random Comments: Thoughts on XBRL, Sustainability, Governance and Risk Management_ , April 15, 2010, accessed October 28, 2010,  http://raasconsulting.blogspot.com/2010/04/csrsustainability-reporting-6-recent.html  
(22) Mina Kimes, "10 Most 'Accountable' Big Companies," _Fortune,_ November 14, 2008, accessed October 28, 2010,  http://money.cnn.com/galleries/2008/fortune/0811/gallery.accountability.fortune/9.html  
(23) Global Reporting Initiative, "Readers' Choice Awards," accessed October 28, 2010,  http://www.globalreporting.org/newseventspress/readerschoiceawards/thewinners.htm  
(24) Section 1503 of Energy Security Through Transparency Act, passed on July 15, 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Enacted in response to the Massey Energy coal mining disaster, the amendment requires mining companies in their annual and quarterly filings with the SEC to disclose:  
(i) The total number of significant and substantial violations of mandatory health or safety standards;  
(ii) The total number of failure to abate orders issued under section 104(b) of the Mine Act;  
(iii) The total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under section 104(d) of the Mine Act;  
(iv) The total number of flagrant violations under section 110 of the Mine Act;  
(v) The total number of imminent danger orders issued under section 107(a) of the Mine Act;  
(vi) The total dollar value of Mine Safety and Health Administration (MSHA) proposed penalties and fines;  
(vii) A list of the regulated worksites that have been notified by MSHA of a Pattern of Violation or a Potential to have a Pattern of Violations under section 104(e) of the Mine Act; and  
(viii) Pending legal action before the Federal Mine Safety and Health Review Commission.  
In addition, any publicly-traded mining company must issue an immediate disclosure report to the SEC if it:  
(i) Receives a shutdown order under section 107(a) of the Mine Act (imminent danger), or  
(ii) Receives notice that a mine site has a potential or actual pattern of violations.  
(25) Michael E. Montgomery, "Drill Through Equipment Considerations for Deepwater Drilling," _Proceedings of the ETCE/OMAE2000 Joint Conference Energy for the New Millennium, February 14-17, 2000, New Orleans LA_ , accessed October 28, 2010, <http://westengineer.com/publication/deepwater.pdf>  
(26) Jerry Greenberg, "Managing Loss-of-control in Deepwater Drilling," _Offshore: World Trends and Technology for Offshore Oil and Gas Operations,_ April 1, 1998, accessed October 28, 2010,  http://www.offshore-mag.com/index/article-display/24276/articles/offshore/volume-58/issue-4/departments/drilling-production/managing-loss-of-control-in-deepwater-drilling.html  
(27) "Guidelines Provide Framework for Deepwater Drilling Operations," _Oil & Gas Journal_ 97, no. 10, March 8, 1999, accessed October 21, 2010,  http://www.ogj.com/index/login.html?cb=http://www.ogj.com/ogj/en-us/index/article-display.articles.oil-gas-journal.volume-97.issue-10.in-this-issue.general-interest.guidelines-provide-framework-for-deepwater-drilling-operations.html  
(28) S. Christman et al., "An Overview of the IADC Deepwater Well Control Guidelines," _SPE/IADC Drilling Conference, 9-11 March 1999, Amsterdam, Netherlands,_ accessed October 28, 2010,  http://www.onepetro.org/mslib/servlet/onepetropreview?id=00052761&soc=SPE  
(29) National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, _A Brief History of Offshore Oil Drilling_ , last updated October 25, 2010,  http://www.oilspillcommission.gov/document/brief-history-offshore-oil-drilling, 18.  
(30) See Fn. 17, supra.  
(31) Harvard Business School, A Workshop on Integrated Reporting: Frameworks and Action Plan, October 14 -15, 2010.  
(32) This recommendation is derived from a letter sent by the Social Investment Forum to SEC Chairman Mary Schapiro, July 21, 2009.  
(33) SEC Rule 10b-5: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,  
a) To employ any device, scheme, or artifice to defraud,  
b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or  
c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. (emphasis added)  
(34) Robert G. Eccles and Michael P. Krzus, _One Report: Integrated Reporting for a Sustainable Strategy_ (Hoboken, New Jersey: Wiley, 2010).

#### Will Integrated Reporting Make Sustainability Reporting Obsolete?

Ernst Ligteringen and Nelmara Arbex

For the past year or so, integrated reporting (IR) has been the new buzzword in corporate reporting around the world. Experts in the Corporate Social Responsibility (CSR) field, investors and accountants are talking about it, as are many large multinational representatives. We believe the reason so many are engaged is that more and more organizations are convinced that corporate reporting needs to be transformed. And integration of reporting is a key driver in this transformation.

Historically, corporate reporting was mainly about the financial performance of companies. It provided investors with insight into the historic performance on key financial indicators. This served as an indication of future performance, to support investment decisions. Increasingly, annual reports included more sections on the corporate strategies to drive growth in the future, offering some glimpses of the future performance sought by investors.

Despite this expanded content, most financial reports did not address the information needs of all of a company's stakeholders. Visionary investors and companies foresaw the need to measure and report environmental, social and governance (ESG) performance, to supplement the financial information a company disclosed and for companies to establish a dialogue with other groups in society. This information was called for by various stakeholders, such as employees, communities, civil society, and, in some parts of the world, regulators.

The journey of creating a sustainability report has led to changes in the management practices of many companies. In the last ten years, sustainability reporting has become an extremely important and critical exercise for companies to access their business performance as a whole, and for society to understand it in its complexity. But sustainability and ESG performance should not be assessed, nor managed, in isolation. The transformation of companies' strategies is needed to build a sustainable economy, so reporting and management practices also need to be transformed. This is because sustainability issues, both short and long term, will be increasingly material for the stability and growth of companies and markets. Common management of environmental and social capital will be decisive on a company's future prospects, and therefore become critical economic factors and business issues.

The Global Reporting Initiative (GRI) developed reporting guidelines to address this, driving transparency and comparability across companies, industries and countries. Today, the GRI Guidelines are the most widely used sustainability reporting guidelines in the world. Even though we have seen continuous growth in sustainability and ESG reporting in the past decade, it is still far from mainstream. And this is a problem for companies and for society.

Investors are looking for reliable information in different areas to support their investment decisions. Information brokers such as Bloomberg and Thomson Reuters are collecting and disseminating a range of sustainability related data to investors, but the analysis of this information stream is separate from that of the financial one.

This situation reveals two main challenges to be tackled by the next generation of corporate reports: disclosure of sustainability and ESG performance to become common practice; and the integration of financial and ESG performance analysis.

Increasingly, there is a call to integrate ESG disclosure and financial reporting into one report. Integrated reports are essential to provide relevant information on companies, enabling more holistic assessment of their performance, for both investors and other stakeholders. The call for integration is not new: Over 15 years ago, a multi-stakeholder group of experts proposed that sustainability reporting by should be considered a tool to analyze a company's performance, reinforcing the integration of sustainable practices into corporate strategy. This time around, the call for integration is coming from others as well, such as accounting firms, stock exchanges, investors and companies themselves. This is new.

Sustainability Reporting can be seen as a stepping stone for the required transformation of corporate reporting. Companies reporting on their ESG performance often point out how the reporting process helps them to make the potential impact of the environmental and social scarcities more real and related to the business. Sharing of best practices by these forward looking reporters helps to identify the parameters required for the future of reporting.

To transform reporting, a common language has to be found between the financial and ESG world, bringing the logic of both worlds into reporting. Most financial reporting is based on standards that have been around for decades. Sustainability reporting is a much newer field, and it has already gone through significant change in this short space of time. And continuously new performance metrics are included, as the challenge of the environmental and social impacts of an ever-expanding global population, combined with an unsustainable development model, are still to be faced. GRI has engaged with many different stakeholders around the world to continuously evolve the Guidelines to the current G3 generation. And with the evolving needs for new features for reporting of companies, stakeholders and the world in mind, GRI has just committed to create the next generation of reporting guidelines, the G4 Guidelines.

The development process for G4 will start in January 2011. GRI intends G4 to be an ESG reporting standard that can become the general accepted protocol for environmental, social and governance reporting internationally. The key objective for G4 will be to make ESG reporting more mainstream, which will require it to be more robust and assurable. It will also offer guidance on report formats and will be linked to technological solutions, and normative ESG frameworks, such as the United Nations Global Compact and OECD Guidelines. And last, but not least, it will provide the ESG content reporting guidance for integrated reporting.

GRI sees sustainability reporting as a crucial stepping stone on the way to Integrated Reporting. As the management of this laboratory, GRI engages with a wide multi-stakeholder network to progress the ESG content in corporate reporting.

Finally, it is important to keep in mind that whatever the framework for integrated reporting will be, the resulting integrated reports will be one way to express companies' performance. Other needs will continuously emerge, and, in order to meet the needs of multiple stakeholders, companies will have to create multiple ways to engage, and communicate the same integrated dataset. This is very much in the spirit of the digital communication era in which we are living.

We strongly believe that the way to develop integrated reporting is to use the same approach as the multi-stakeholder network, continuously developing sustainability and ESG reporting, but in an expanded and more collaborative form. We therefore welcome integrated reporting as a powerful force to achieve GRI's mission of mainstreaming ESG reporting by companies around the world.

Ernst Ligteringen is the Chief Executive and Dr. Nelmara Arbex is the Deputy Chief Executive of the Global Reporting Initiative.

# PART III

Benefits to Companies

#### Integrating Integrated Reporting

Steve Rochlin, Director, and Ben Grant, Manager, Advisory Services

AccountAbility

Integrated Reporting holds the potential to function as a vital driver of organizational change towards Responsible Competitiveness (1). Responsible Competitiveness is the enterprise-wide approach to managing environmental, social, economic and governance issues. The Responsible Competitiveness approach builds sustainable competitive performance through measurable, transparent, and accountable commitments to employ renewable resources and to improve the well-being of workers, communities, and ecosystems.

Integrated Reporting will clearly communicate the alignment of sustainable development considerations with core enterprise-wide strategy. Investors in turn will begin to distinguish companies that possess a deep understanding of material risks and opportunities, and will steer capital toward these more accountable organizations thus creating a virtuous cycle accelerating sustainability in business.

This is at least one vision of the power of Integrated Reporting to drive change that embeds Responsible Competitiveness. Currently, however, companies face a paradox. Company leaders (be they senior executives, directors of corporate responsibility, or energized employees) cannot utilize Integrated Reporting to drive the organizational change processes to embrace a Responsibly Competitive approach, until the enterprise advances an organizational change agenda to embrace Integrated Reporting.

Integrated Reporting requires its own integrated strategy—a corporate vision and goals that reflect environmental, social and governance-related (ESG) risks and opportunities while emphasizing financial, environmental and social sustainability—and integrated systems—structures that enable the real-time flow of information and resources as needed across organizational silos. Successful Integrated Reporting will require these things, but few organizations have them.

The organizational change needed for a successful entry into Integrated Reporting requires new commitments and related systems along four areas: Vision, Leadership, Management and Knowledge. In this short paper, we examine these four areas of change and identify major inhibiting factors inherent to each. We also point to potential solutions to bypass these inhibiting factors and move a company from a lagging position to a leading one.

Integrated Reporting's four areas of organizational change:

Vision

A well-conceived and well-articulated vision, the "future state" that sits atop a company's strategic agenda, drives and directs an organization's energy. A vision is determined by aspiration, and aspiration is often limited by what we know to be possible.

The Problem: companies don't see how Integrated Reporting is going to help them achieve their vision.

Companies have a hard time understanding the value any type of non-financial reporting. Ask senior executives why they produce Corporate Responsibility (CR) reports, and if one gets beyond the PR spin, it typically comes down to some combination of four reasons:  
To comply. Often this means consenting to comply with the court of public opinion and/or influential stakeholder expectations, exemplified by voluntary standards such as the UN Global Compact.  
To keep up with the Joneses. A well-known driver of organizational change is the effort to keep up with what peers and competitors are doing.  
To facilitate investor confidence. This is a less common but growing reason. Socially responsible investors rarely possess sufficient stakes to move share price. But they do represent an influential channel to communicate CR commitments to key stakeholders. One does see emerging examples of larger investors asking to review CR reports (and calling for Integrated Reports).  
To advance the enterprise-wide adoption of Responsible Competitiveness. This is the least common reason. However, time and again one sees the following cycle: a company decides to produce a CR report more or less to GRI standards. It forms a cross-functional committee to support the process and data collection. The group becomes a champion for deeper, enterprise-wide commitments to CR. Senior Executives tentatively embrace this agenda. The next cycle of reporting makes a further commitment to adopt leading reporting practices. This enhances the committee's argument for Responsible Competitiveness, and so on.

Each reason represents a useful driver of incremental change. Following these routes over time may help companies move toward Integrated Reporting. To move more quickly, executives need to both believe and communicate a more compelling vision for Integrated Reporting.

The Solution: demonstrate that Integrated Reporting is about more than just reporting.

Integrated Reporting has to be seen as more than just a reporting mechanism. The underlying value proposition can be articulated in several ways, but we submit the following as pillars of a sound argument for Integrated Reporting:  
It will change how the market recognizes CR performance. As one example, certain commodities, such as coffee, cocoa, and tea, see sustainable development concerns threatening stable supply. Embracing and reporting on integrated CR strategies will mitigate risk and create (responsible) competitive advantage. Using Integrated Reporting communicates to investors in their own language why they need to make decisions based on information incorporating ESG factors.  
It will broaden the definition of performance to include important ESG risks and opportunities, more comprehensively and longer-term than competitors.  
It will increase internal integration, bringing disparate functions and processes together to create a more efficient, streamlined organization.

As such, Integrated Reporting could become a vital tool to advance a Responsible Competitiveness Strategy. The intended purpose of Integrated Reporting is to build meaningful connections between ESG and financial performance, both internally and in outward-facing communications. Integrated Reporting could become the missing piece to an approach that would truly integrate CR into the core business.

Leadership

Leadership is the daily guidance of the CEO and other senior executives to achieve the vision. Leadership sets the tone, priorities and targets.

The Problem: leadership often starts and stops at the commitment to publish a report.

After the executive mandate is issued, things are set in motion: resources are marshaled, a project plan is put in place, and a team goes to work. However, producing GRI reports requires extensive cross-functional knowledge integration and supporting data collection (Integrated Reporting will require even more). It leads to a set of findings and public commitments that require cross-functional management follow-through—but the follow-through is too often either absent or insufficient. This constrained leadership can create internal organizational tension and strife.

The Solution: Leaders should be visibly engaged throughout the process.

The value of Integrated Reporting is as much about the journey as the destination. Leaders should understand—at a high level—the full process required to produce an Integrated Report. Their leadership therefore should extend to communicate their expectations that cross-functional teams should commit time and resources to solve knowledge integration and data challenges, and to review and respond to the findings from the reporting effort.

Management

Management is the everyday operation of a company and its employees. Good management ensures that all employees and teams have clear objectives that leverage their skills, are engaged and productive, and feel valued.

The Problem: Companies' employees don't know why they are doing Integrated Reporting—or how to do it.

Many do not understand the value of CR reporting, either, which is likely to make Integrated Reporting seem like even more of an "add-on." And while any team could throw together a "combined" report, it will take education, engagement, and proper incentives for the same team to produce a meaningfully Integrated Report.

The Solution: Managers should make sure their employees know how they fit into the process, and how Integrated Reporting fits into the "big picture."

Next, leaders should thoughtfully select those who will be responsible for delivering an Integrated Report. Leaders from line and staff functions should appoint team members with appropriate knowledge and authority to support the Integrated Reporting process. Leaders should set expectations for managers regarding the quality of the report, and make it clear to employees "what's in it for them." Should, for example, the report receive recognition from third-parties as an example of leading practice? Staff involved in the report should understand how its success will affect their performance ratings. Leaders should also set a cross-functional review to understand and reflect on what the information in the reports suggests regarding future strategy.

Knowledge Integration

The systems used to capture, analyze, and report data determine internal and external understanding of a company's performance. The questions of what to measure, how to measure it, and how to present it are tied to successful Integrated Reporting.

The Problem: Integrated Reporting creates an enormous knowledge management and integration challenge.

Little consensus exists on how or what to measure related to sustainable development. It is not intuitively obvious how to understand the links between "traditional" reporting data and ESG data. Existing systems are often barely adequate to handle financial reporting. Collecting information on sustainable development performance taxes existing knowledge management systems beyond what they can handle.

The Solution: build enterprise knowledge management and data collection systems that enable on-demand information gathering.

This should strengthen knowledge management across all dimensions of corporate performance and not solely ESG performance. In addition, companies need to actively participate in industry and cross-sector forums that define standardized and comparable metrics for ESG performance. With appropriate vision, leadership and management systems in place, companies can begin to tackle the knowledge integration challenge.

Companies have been able to muddle through similar challenges in CR reporting. However, Integrated Reporting holds the potential to change the game—creating a more powerful feedback loop that aligns stakeholder and shareholder expectations for corporate performance. The paradox is that companies need to produce Integrated Reports to create the mix of external and internal incentives to change organizational practices and embrace strategies of Responsible Competitiveness. However, in order to produce a meaningful Integrated Report at all, companies need to launch the same kind of organizational change processes the report is meant in part to catalyze.

Breaking out of this conundrum will require internal champions to articulate how Integrated Reporting supports corporate vision, and leaders to actively embrace and advance it. Integrated Reporting must also be translated into clear management and knowledge integration processes. By driving organizational change in these areas, companies, their shareholders, and their stakeholders will find Integrated Reporting a valuable tool to drive a Responsible Competitiveness agenda.

Endnote: (1) Please visit http://www.accountability.org for background on Responsible Competitiveness. Responsible Competitiveness(TM) is a trade mark registered to AccountAbility Strategies, no. 2521826

#### Integrated Reporting: The Future of Corporate Reporting?

Paul Druckman and Jessica Fries

The Prince's Accounting for Sustainability Project

"To make our economy sustainable we have to relearn everything we have learnt from the past. That means making more from less and ensuring that governance, strategy and sustainability are inseparable." So said Professor Mervyn King, Deputy Chairman of the International Integrated Reporting Committee (IIRC), at the committee's launch in August 2010.

The recent financial crisis has raised fundamental questions about the functioning of the capital markets and the extent to which existing corporate reporting disclosures highlight systemic risks and the true cost of doing business in today's world. It is becoming increasingly recognized that a company's overall governance and performance in the context of macro-economic factors such as climate change, depletion of the world's finite natural resources, working conditions and human rights are of strategic importance to companies' long-term success, as well as to society as a whole. However, at present, organizations are having to find the right balance between the short-term expectations of customers and investors and the actions needed to assure long-term continuity and success without the full information needed to make these judgements.

In 2004, His Royal Highness The Prince of Wales, recognizing the vital role that accounting and accountants could play in addressing these issues, established The Prince's Accounting for Sustainability Project (A4S).

One of A4S's first objectives was to develop practical guidance that organizations could use to integrate sustainability into their mainstream reporting, bringing together more traditional financial information with narrative and sustainability information; the result was the Connected Reporting Framework, developed with input from over 100 organizations. The Framework helps organizations to identify and report on the connections between strategic direction, financial performance and environmental and social considerations. This was one of several steps being taken by A4S and others towards what is now being referred to as "integrated reporting."

What is integrated reporting

Integrated reporting is a holistic approach that enables investors and other stakeholders to understand how an organization is really performing. It addresses the longer-term consequences of decisions and actions and makes clear the link between social, economic and environmental value. It shows the relationship between an organization's strategy, governance and business model. Integrated reporting also gives an analysis of the impacts and interconnections of material financial and non-financial opportunities, risks and performance across the value chain.

The practical benefits of integrated reporting

In May 2010, _Accounting for Sustainability: Practical Insights_ (1) was published, a series of eight case studies by leading academics asked by A4S to investigate the impact of accounting for sustainability on eight organizations, in particular those that had been earlier adopters of connected or integrated reporting. The research highlighted a number of common themes around the benefits derived by those organizations who had sought to report, both internally and externally, in a connected manner. These ranged from an ability to focus on the issues of greatest significance, a better ability to communicate the indirect and direct impacts of sustainability to structure the links between financial and non-financial reporting and build a business case for actions taken.

"In this regard, connected reporting information needs to be of a nature to help managers at each level to identify, and not just in economic terms, the risks associated with a lack of sustainability. By doing so, accounting for sustainability helps these managers and their organizations to identify and understand the risks and financial costs incurred through failing to operate in a socially and environmentally sustainable manner (2)."

Interviews with pilot companies and outputs from roundtables involving CFOs, investors and sustainability directors highlighted a number of additional benefits:  
Connected reporting helped to identify cost savings by bringing together the analysis of financial and sustainability information.  
Sustainability awareness was increased as a result of adopting a connected reporting approach, both internally at Board and operational level, and externally with investors and customers.  
The use of connected reporting drove increased collaboration between different parts of the business, in particular finance and sustainability teams.  
The use of a common language and demonstration of the relevance of sustainability to business performance led to greater engagement and integration of sustainability issues into decisions taken.  
Questions from investors and other stakeholders were pre-empted, reducing demands on management time for completion of questionnaires, surveys and other requests for information.

This is not to say that integrated reporting is without challenge. In particular, many companies will need to improve the systems in place to gather information related to sustainability performance on a more timely and more frequent basis. Further, a more holistic and integrated picture of performance means bringing together different parts of the organization in a connected way. That said, if the issues being reported are material to the success of the organization—one of the principles underlying integrated reporting—then better quality information on a more timely basis combined with a driver to join the dots across different functions of the organization can only help to improve decision-making and have a positive impact on performance.

The need for action to create an integrated reporting framework has been underlined by the findings from a CEO survey published by the UN Global Compact and Accenture in June 2010 (3) which found that 93% of the 766 CEOs surveyed believe that sustainability issues will be critical to the future success of their business. 96% believe that sustainability issues should be fully integrated into the strategy and operations of a company. Despite this belief, only 48% said that they currently integrate these issues into discussions with financial analysts supporting a commonly held perception that investors and analysts are not interested in sustainability. This contrasts with evidence of a growing body of investors aware of the linkages between environmental, social and governance factors and economic value, as reflected by the membership of the UN Principles for Responsible Investment, an initiative now representing over 800 signatories from 45 countries with roughly $22 trillion of assets under management (4).

The UN Global Compact-Accenture survey also identified the need for new concepts and measurement of value and performance, embedded at both organization and individual levels—assessing positive and negative sustainability impacts as well as the impact on business drivers and future value. These results provide strong evidence in support of the need for an integrated reporting framework as a key element in transitioning to a sustainable economy and for the establishment of the IIRC to oversee its development.

Integrated Reporting and The International Integrated Reporting Committee (IIRC)

Every publicly listed company is required to file an annual report on its financial performance in compliance with, in most cases, either International Financial Reporting Standards (IFRS) or U.S. Generally Accepted Accounting Principles (U.S. GAAP). Increasingly companies are also producing, mostly on a voluntary basis, corporate social responsibility or sustainability reports but these can vary widely in terms of relevance and quality. Often the picture presented in an annual report differs significantly from that in a sustainability report; in some cases, the reports could easily be for two completely different companies with different views of the world and what matters to them.

During 2009 a number of initiatives, organizations and individuals began to converge around a central theme: integrated reporting. These included the launch of the revised King Code and Report on Governance for South Africa ("King III"), which requires companies listed in South Africa to produce an annual integrated report that focuses on the impact of the organization in the economic, environmental and social spheres. At the same time, Bob Eccles and Mike Krzus were researching their book _One Report_ , in which they address why it is in a company's best interests to practice integrated reporting, with examples of companies that are beginning to do this.

In December of that year The Prince of Wales convened a high level meeting of investors, standard setters, companies, accounting bodies and UN representatives. At the meeting it was agreed that The Prince's Accounting for Sustainability Project and the Global Reporting Initiative should work together with other organizations to establish an international body to oversee the creation of a generally accepted integrated reporting framework that would connect financial and sustainability reporting: the formation of the International Integrated Reporting Committee ("IIRC") was formally announced in August 2010.

At the Harvard Business School Workshop on Integrated Reporting, Paul Druckman and Ian Ball, co-chairmen of the IIRC's working group, provided an update on progress that the IIRC is making. In particular, they set out key milestones, summarized organizations involved—and plans to expand the range of involvement to ensure broad participation in particular from investors and companies—and described some of the principles that they felt needed to underpin integrated reporting. Some of the key points made are summarized below.

Key milestones

In June 2011, the IIRC plans to release a Discussion Paper setting out the business case for integrated reporting, the proposed integrated reporting framework and proposals for its further development and adoption. Following a period of public consultation, proposals will be put forward at the time of the G20 meeting in the second half of 2011.

Organizations involved and broader participation

Key to the IIRC's formation was a recognition that different elements of the reporting landscape have to a large degree evolved in silos. As a result, there is a risk that the volume of information reported increases while the insight provided is reduced. International coordination is critical—both between those setting reporting and accounting standards and guidelines and between different parts of the world. With this in mind, the IIRC has brought together those from across the financial reporting, governance and sustainability arenas to develop an integrated approach to reporting.

To ensure sufficient representation from preparers and users, a range of companies, investors and other stakeholders are represented on the IIRC, the working group and on the individual taskforces. In addition, some of the key international organizations representing these stakeholders are involved at all levels with the explicit intention of enabling involvement of their membership: for example, the UN Principles for Responsible Investment will be engaging the investor community and UN Global Compact will be engaging with companies, in both cases to seek their input in the development of the framework and to pilot the proposals.

Wider consultation and participation will be sought at key stages in the framework's development, notably through a call for evidence to be issued in November 2010, input from an advisory community of experts throughout the framework's development, through a series of regional roundtables in the first half of 2011 and through the public consultation period in June-July 2011. Further, pilot companies from a broad range of sectors and countries will be sought to input to development and test the proposed framework.

Principles of integrated reporting

At the HBS workshop, Paul went on to set out the eight key principles that he felt underpinned integrated reporting:  
Strategically important and material  
Connectivity and linkage  
Impacts along the value chain  
Time horizon, providing insight into prospective as well as past performance  
Consistent with management information  
Trusted  
Flexible and able to evolve over time  
Behavioral change

The working group and framework development taskforce will be developing the principles of integrated reporting as a core part of the overall framework over the next six months, grounding the recommendations made in current practice and evidence of future needs. The intention is to consider not only the content of integrated reporting, but also the format, looking at trends around how information users currently access information and how they might do so in the future.

Next steps

There has been huge support for the IIRC and, with the backing and participation of organizations such as the International Federation of Accountants, United Nations, International Organization of Securities Commissions, the Financial Accounting Standards Board and International Accounting Standards Board, in addition to the many companies and investors involved in developing and testing the proposals, we stand a real chance of achieving vital and fundamental change to corporate reporting.

As The Prince of Wales said at the first annual A4S meeting in 2006: "There was a time when we could say that there was either a complete lack of knowledge, or at least room for doubt, about the consequences for our planet of our actions. That time has gone. We now know all too clearly what we are actually doing and that we need to do something about it urgently. Better accounting must be part of that process."

Paul Druckman is Chairman of The Prince's Accounting for Sustainability Project and Co-chair of the IIRC working group. Jessica Fries is Director of The Prince's Accounting for Sustainability Project and member of the IIRC working group.

More information about the IIRC can be found at www.integratedreporting.org. More information about The Prince's Accounting for Sustainability Project can be found at http://www.accountingforsustainability.org.

Endnote: (1) Hopwood, A., Unerman, J. and Fries, J., _Accounting for Sustainability: Practical Insights,_ Earthscan Publications, London, 2010  
(2) _Ibid._ p. 242  
(3) Lacy, P., Cooper, T., Hayward, R. and Neuberger, L., _A New Era of Sustainability UN Global Compact-Accenture CEO Study 2010_ , UN Global Compact and Accenture, June 2010  
(4) UN Principles for Responsible Investment, www.unpri.org, accessed November 2010

#### Integrated Reporting Contributes to Embedding Sustainability in Core Business Activities

Olaf Brugman, Senior Manager Sustainability

Rabobank Nederland

Rabobank first integrated its financial and sustainability reporting in 2008. Being a privately-owned, co-operative bank operating in 45 countries worldwide, our ambition and corporate values explicitly focus on providing financial stability and growth in the long run, recognizing that sustainable development is at the heart of our matter. One of the main motives to integrate our reporting was to frame our external corporate reporting the way we see sustainability and corporate responsibility aspects: as an inextricable part of our business. Therefore, our reporting should reflect this basic principle that is part of our corporate identity. Coming from a fourteen year tradition of publishing annual sustainability reports, this was a logical step to make. And also a way to further innovate our reporting, now that the concepts and tools are becoming available to offer financial and sustainability information in one.

The major challenge in implementing integrated reporting was striking a balance between professional, administrative and legal traditions underlying financial and sustainability accounting and reporting. The financial perspective is used to dealing with high level consolidated numbers and clearly defined financial metrics and financial statements. Compare that to sustainability reporting, which is less clearly defined, much more narrative, case-based, and dealing with dilemmas and ethical issues at the organizational and the societal level.

Now that they are presented side by side in one publication, we experienced an internal redefinition of what is material to us. When you assess your material issues, risks and opportunities in the context of a pure sustainability report, every aspect of the sustainability reporting frameworks is relatively important. And when you mix this with a similar assessment from also the economic and financial perspective, there is just less space and air time available for all the different topics. This sparked quite a number of interesting discussions, and I feel that the colleagues involved in our commercial, financial and sustainability domains were able to expand their frame of reference because of this.

Looking back on two years of working on integrating our reporting, we see that we cut back the size of our sustainability reporting from an odd 125 pages in a separate sustainability report, to about 35 pages in the integrated report. At the same time, we now publish more sustainability information permanently in our corporate website, complementary to our external report. From a reporting and accountability perspective this is a good thing, since we are more transparent and available 24/7, and less dependent on the annual report, published on a single point in time.

We were able to realize these changes whilst fully maintaining our external reporting quality standards, which means a GRI G3 and AA1000 compliant report, with cover to cover high level of assurance. And finally, our strategy to move to online integrated reporting has resulted in a significantly stronger involvement of clients and from within our own organization, showing that external reporting is a matter of all stakeholders. All in all, we feel that the current reporting practice leads to a better and more material assessment of sustainability matters vis-a-vis our core business activities.

With regard to expectations for the future, I expect that our integrated reporting is here to stay, since it adds value to our stakeholder relationships in terms of increased transparency and trust. At the same time, it is clear that integrated reporting has much more to offer than being an innovation in stakeholder communications: it may facilitate internal embedding of sustainability in core business activities, and will allow for a fairer and more balanced evaluation of our business activities.

Some elements of the current approach to integrated reporting keep us pondering, though. For example, the professional development is mainly driven by the auditors' community, biasing the development of external reporting models towards audit standards. Whilst this may make sense from the perspective of auditor business models, the risk of under-involving the business organization is not an imaginary one. Second, the current focus with sustainability reporting standard setters (Accounting for Sustainability, GRI, AccountAbility, UN Global Compact/FI/PRI/PRE, ISO, OECD, etc.) seems to be on alignment and broadening the content-matter scope of their standards and frameworks. This unification process is a trend that has potential benefits for companies and the world at large. However, we may see the variety in reportables becoming increasingly complex as alignment only takes place at a high in the sky level of general principles. Besides the "what" of new reportables, forgetting to define the "how" leaves companies without specific solutions to respond to increasing transparency requirements. Therefore, standard setters could invest more in providing operational definitions of broader concepts. This may actually facilitate rapid adoption of new reporting standards. To conclude, the integrated reporting movement should be careful to address the issues and solutions from a broader perspective to facilitate change and to maximize its benefits for all stakeholders.

Dr. Olaf Brugman is a senior manager, sustainability, at Rabobank Nederland, responsible for sustainability reporting of Rabobank Group. He holds an MA in public administration from Twente University, and a Ph.D. in business studies from Radboud University Nijmegen. Before, he held managerial and management consulting positions at Rabobank and PricewaterhouseCoopers Management Consultants, and had a twelve year career in academic research and teaching at Nijmegen Business School and the Royal Dutch Military Academy. He lives and works in the Netherlands.

#### Six Reasons Why CFOs Should Be Interested in Sustainability

Simon Braaksma

Sustainability is being embraced by many companies. A recent survey by Accenture ("A new era of sustainability") even indicated that 93 per cent of CEOs see sustainability as important to their company's future success. In addition to the growing popularity of sustainability, there are compelling reasons why CFOs should be interested in sustainability as well. This article highlights these reasons and gives some background on recent developments at Royal Philips Electronics ("Philips").

1. Business opportunity – Many companies are discovering that sustainability can be a very good business opportunity. This can be in the shape of new—sustainable—products, like energy efficient cars and lighting, or products with a high recycled content, but also new business models such as light leasing and new market developments. Additionally, sustainability initiatives can often save a company money; examples include energy efficiency improvement projects, waste reduction and/or material reuse and efforts to "green" the company's car fleet.

2. Investor push – Investor attention to corporate performance on environmental, social and governmental aspects (often called ESG in the investor world) is already significant and continues to grow. The Eurosif SRI 2010 study showed that the European Sustainable and Responsible Investment (SRI) market has almost doubled since 2008 reaching approximately €5 trillion assets under management using ESG criteria. Mainstream investment banks and information providers like Goldman Sachs and Bloomberg are considered leaders in this evolution.

3. Risk management – Only a few companies include sustainability risks in their regular risk assessment, whereas two recent examples underline the impact such risks can have—an oil company destroyed an enormous amount of shareholder value with an oil spill with large environmental consequences and an electronics manufacturer of smart-phones and tablet PCs was (partially) held accountable for labor circumstances resulting in a number of suicides at one of its key suppliers in the Asia Pacific region. Just analyze the reputation risks companies run in the supply chain and add to that the more active NGOs that monitor the behavior of companies, particularly those with a well known global consumer brand. It is obvious that sustainability risks should be included in a company's risk assessment process.

4. Integrated reporting – Many large companies issue a sustainability report, but an emerging trend is the integration of the financial report with the sustainability report. In a number of countries (e.g., South Africa) the regulatory bodies already defined a standard for this. It is expected that other countries will follow. At the same time investors, analysts and other stakeholders are pushing for companies to disclose more sustainability information. A good example is the initiative of the European Federation of Financial Analysts Societies (www.effas.net), which recently published its "KPIs for ESG 3.0" exposure draft defining sector-specific ESG KPIs that it would like companies to include in their reporting.

5. Upcoming regulation – Quite recently, the SEC published two sustainability-related documents that will impose new reporting requirements. The first relates to reporting on carbon emissions, whereas the second relates to reporting on conflict minerals (sourced from Congo). Although the exact reporting requirements are still being assessed, it can be assumed that other regulatory bodies will follow.

6. Employee engagement and talent attraction and retention – Companies that are at the forefront in applying sustainability principles discover that it is a strong engagement and pride factor for employees in the relation with the company they work for. At the same time it appears in some companies to be an additional talent attraction factor, particularly for scouting talents from universities.

A closer look at Philips

At Philips, sustainability has been integrated into its company strategy for many years and embedded in its business processes like research, design, manufacturing, supply management, IT, HR and logistics, based on a strong foundation of business principles.

Integrated reporting

The integration of sustainability into the company strategy was the key reason why Philips decided to integrate its (Financial) Annual Report 2008 with its Sustainability Report. In addition, Philips wanted to live up to its brand promise of "sense and simplicity" and offer its stakeholders a single website (paper versions of the integrated report have been reduced to the minimum). Finally, a single report enabled cost savings.

Major challenges

The major challenge Philips had to face while working towards the integrated report was to align the sustainability reporting processes with the financial processes. In most organizations, the financial processes are very mature and finance staff is used to monthly reporting cycles and very tight deadlines. For listed companies, the quarterly financial closing process and subsequent external reporting adds a useful routine.

Sustainability reporting on the other hand is in most organizations less mature. Data sources are diverse, data is mostly captured manually, and consolidation and reporting tools are often less automated. As a consequence, if assurance is provided on the sustainability content, the assurance level is normally "limited" versus "reasonable" for financial reporting.

Aligning the sustainability reporting process with the financial process therefore required significant process redesign involving many different functional disciplines as well as the assurance provider. This process improvement is an ongoing journey, but is helped by the fact that sustainability is part of the Philips Management Agenda. Progress updates are sent to the Board of Management on a quarterly basis, where good progress can be lauded and any backlog be pushed for improvement.

Apart from the efforts within Philips, the assurance provider has had to align its sustainability and financial assurance processes.

Benefits

The benefits of Philips' integrated reporting are obvious. The process improvements result in more timely and higher-quality data that is now delivered more frequently to a very senior audience in many categories of stakeholders. More frequent information also means that corrective action can be taken in a timely manner—and the company can deliver on its sustainability commitments.

Another effect is that more internal stakeholders review the data which results in further data quality improvements.

The way forward

Philips has identified a number of improvements it wants to implement.

-Improved engagement by feedback loops – Traditionally, sustainability data collection processes are "one-way." Data is entered into an application by a diverse group of data collectors, who subsequently do not get a lot in return. The best way to increase engagement and improve data quality is to provide good reporting functionality to the data collectors. To start with, this reporting should cater for internal benchmarking ("How well does one factory compare to another?" or "How does the carbon footprint differ between countries") and can later be expanded to include external benchmarking.

-Improved workflow management – The sustainability data collection process should be more automated, requiring fewer resources, and contain more evidence. The latter will facilitate the assurance process and be a step towards "reasonable assurance."

-Reasonable assurance – As mentioned, financial information normally has a "reasonable" assurance level whereas sustainability information almost always has a "limited" assurance level. With a move to integrated reporting the assurance levels should also be the same and culminate in one assurance statement. The assurance providers need to work towards an integrated assurance statement as well.

Simon Braaksma works at the Corporate Sustainability Office ("CSO") of Philips and is responsible for its sustainability reporting. Before joining the CSO he held various positions at Philips in Treasury and Control and started his career at Citibank.

#### Sasol's Reporting Journey

Stiaan Wandrag, Manager, Sustainable Development, Sasol and

Jonathon Hanks, Incite

Sasol is an energy and chemicals company based in South Africa. We convert coal and gas into liquid fuels, fuel components and chemicals through our proprietary Fischer-Tropsch processes. We mine coal in South Africa and produce gas in Mozambique and oil in Gabon. We have chemical manufacturing and marketing operations in South Africa, Europe, Asia and the Americas. In South Africa, we refine imported crude oil and we retail liquid fuels through our network of retail convenience centres. We also supply fuels to other distributors in the region and gas to industrial customers in South Africa.

Formed in 1950, Sasol started producing synthetic fuels in 1955. We have operations in 38 countries, employ about 34,000 people and are listed on the JSE Limited in South Africa and on the New York Stock Exchange.

Sasol produced its first Environmental Report in 1996, with data reflected from 1993. Even at this early stage the environmental and safety data were externally assured by an independent third party. Sasol made a formal commitment in 2000 to sustainable development as a strategic priority and we produced our first stand-alone sustainable development report in 2002. Since then, we have published separate Sustainable Development reports, firstly on a bi-annual basis and, since 2005, annually. In addition to these separate sustainability reports, we have also consistently included a review of our most material sustainability issues within our Annual Report.

Almost every year since 2002, we have received an award for our reporting activities—both in terms of our sustainability reports and our annual financial reports. Our sustainability reports have been recognized for their explicit focus on reporting on material issues and on engaging stakeholders, while our annual financial reports have been recognized for including an assessment of the implications of societal trends on the company's financial performance. We believe that these are key components of an effective approach to integrated reporting, and that this will stand us in good stead as we seek to continue to demonstrate leadership in reporting practice as part of the global movements towards integrated reporting.

Reporting requirements in South Africa have evolved over the years and are driven through listing requirements on the JSE and through the King Code on Corporate Governance. To meet these requirements, Sasol produces Annual Financial Statements, the Form 20F (to meet NYSE requirements), and an Annual Report and a Sustainable Development report. This is supplemented by various other forms of communications to meet specific stakeholder requirements, such as the Sasol Facts and quarterly newsletter from the Chief Financial Officer to investors. Targeted communication to employees on Sustainable Development also takes place, using various media such as a small leaflet and intranet-based reports and surveys.

As noted earlier, since 2005 we have included a summary of our sustainability performance and strategy within our Annual Report. We have refined this process with our 2010 reporting cycle to further meet the requirement for integrated reporting as per King III. We will be examining opportunities for further integration during our 2011 reporting cycle, informed by our experience as a member on both the South African Integrated Reporting Committee Working Group (IRCWG) and the International Integrated Reporting Committee (IIRC).

What we have learned through our experience is that reporting is a journey, and that we need to adjust our reporting year-on-year in response to feedback from our stakeholders. Because of the different needs from different stakeholder groups, we don't believe that one report alone can fulfil all these needs. We see the Annual Report as Sasol's "integrated report," answering the requirements of King III and the needs of the broader stakeholder community. This is supported through the various other reports, both in printed format and web-based. The web-based reporting provides us with an opportunity for more active interaction with stakeholders, by providing the opportunity for questions to be posted.

One of the challenges we continue to face is that of communicating to our various stakeholders over many languages and cultures in the countries we operate in. This will continue to be a challenge as we grow internationally through joint ventures. Responsible investors also require a different set of data than most of our other stakeholders, and we will continue to understand their growing requirements and adjust the dataset accordingly. The engagement by specific investors in the sustainable development report continues to grow and we learn about their needs as we improve our reporting year on year.

We will continue with assurance of our sustainable development performance data as the assurance process provides value to us. It helps us in improving our internal managemenet and reporting systems, as well as in addressing surveys such as the DJSI, the JSE SRI, and the Carbon Disclosure and Water Disclosure Projects.

Sasol's latest report, released in October 2010, can be viewed at www.sasolsdr.com.

#### One Report; One Message to All Our Stakeholders

Frank Janssen, Director Corporate Communications

Van Gansewinkel Groep

For us, the Van Gansewinkel Groep, it was a very clear decision two years ago. Our core business is sustainability. The only way to make that business case work is to translate our strategy into clear ambitions on all the 3 Es, Economy, Equity and Ecology, that effect our business.

We collect waste and process waste into raw materials and (green) energy. Our home market is Benelux, but we are also active in the rest of Europe. Our vision, waste no more, makes that recycling or even upcycling is what we do. That means our strategy is on People, Planet and Profit. Making one document for transparancy, our annual report, means that you have to be clear in the information on those 3 Ps. By setting the goals in an integrated internal team it is possible to increase quality. It gives our stakeholders a holistic view on our company. It not only improves the quality of your report, but more basically improves the quality of steering your company. You're forced to choose for the right balance in management decisions.

The management of the organization has the challenge to take not only financial implications into account. It encourages discussions on what is the right decision for the company. You are also forced to think and ask not only your shareholder, but all your stakeholders on your strategy and performance.

The positive thing is that you get new feedback from your stakeholders. It is sometimes difficult to accept that the critical questions must be answered in a better way. That is why the accurate facts and figures are so important. Of course there is a lot of experience with the financial KPIs. And there is always our accountant to check it. But with the non- financial KPI's we had to start that process 3 years ago. We improved a lot just by doing it. We chose to ask our accountant to check this information too. It helped us to improve but more important, we wanted to "handle" our non-financials as serious as the financials. That's the only way our stakeholders can use all our information at the same level.

Of course you always have to work on transparency. Every day we meet dilemmas. And we as a company are not the only ones. We want to contribute to the improvement of integrated reporting. And we do that in our own way: learning by doing with a positive mindset.

Frank Janssen is responsible for internal and external communication of Van Gansewinkel Groep. The company is now owned by private equity partners CVC and KKR. Although the company is not bound to give information to all stakeholders, it has chosen to do so.

#### Southwest Airlines One Report(TM) Review

Aram Hong

The "Workshop on Integrated Reporting: Frameworks and Action Plan," held at Harvard Business School on October 14-15, 2010, began with the "Southwest Airlines One Report (TM)" case. This case study provided a starting point for the discussion such as one report's basic concept, implications, and outlook for multi-stakeholders who were gathered at the workshop—including financial and accounting professionals, regulators, corporate executives, educators, fund managers and environmental sustainability advocates. In addition to the case, the online "2009 Southwest Airlines One Report" (1) (hereafter referred to as the "2009 One Report") displayed an overall look of the integrated reporting, which has only been adopted by a few companies. In this essay, as a practitioner, I point out the weakness and the limitations of the 2009 One Report, while suggesting specific improvements. Furthermore, I anticipate that my suggestions can contribute to development of integrated reporting framework and GRI guidelines changes.

Why Southwest Airlines One Report?

CorporateRegister.com annually publishes "The Global Winner & Reporting Trends" (2) to identify and acknowledge the best in regards to corporate, non-financial reporting. In the integrated reporting sector, Novo Nordisk A/S was selected as the 2010 winner, followed by BASF SE and Veolia Environment. Why, then, were we concerned with the Southwest Airlines case at the workshop instead of the best practice companies? Some of the reasons why the workshop organizers picked Southwest Airlines One Report as the cornerstone are as follows (3):

-The 2009 One Report was a "basic" case of integrated reporting. Since most companies aren't adopting the integrated reporting yet, a sophisticated example was rather unnecessary.  
-Southwest Airlines is a U.S. company and this will help generate interest in the largest capital market in the world.  
-Southwest Airlines is a B-to-C company, an iconic brand, and has a reputation for being innovative and a well-managed company, which adds to the credibility of integrated reporting.

Is the Southwest Airlines One Report Integrated?

At a glance, the 2009 One Report looks great. The report entitled _"Performance. People. Planet. It's our passion."_ is a 46 page PDF download. Although the report covers both financial and non-financial information with balanced page arrangement, due to its relatively short volume, its application of the GRI reporting framework is assessed to be at level C+ when it's checked by a third party. Their financial information is briefly dealt with at pages 5, 9, 12, and 13—i.e., the "Financial Highlight (p.5)," "Financial Strength (p.9)," and "Ten-Year Summary (p.12-13)." (See Appendix 1 for structure of the 2009 Southwest Airlines One Report.) However, is the 2009 Southwest One Report really integrated?

Volume and web use

The Internet technologically allows the online version to be compact. In addition, as most reporting organizations republish the report annually, they are equipped with skills to reduce the volume of the report by using graphs, tables, compact sentences, etc., while developing methods to select material issues that need to be reported. Despite this trend, many integrated reports still have more one hundred pages because they include financial information in a paper document. Even BASF has 257 pages in its 2009 report. The heavy integrated reports contain all the information that is posted on the web site.

However, the 2009 Southwest Airlines One Report is just 46 pages. This looks very smart! But the question is, is the information that is not covered in the report linked to web sites well? Well... As shown in the notes of Appendix 1, we have to wander through some web pages if we want to seek financial or nonfinancial details. It is _One Report_ , but in actuality, it does not allow us to access all the details in _one click_.

Application Level of the GRI reporting framework

Assessed to be at level C+ is somewhat an inevitable consequence due to the small volume of the report. According to GRI Portal, the Application Levels are just guidance for continuously improving the reports. It does not necessarily mean specific grades or quality of the report. However, in business practice, most executive officers want their reports to be assessed at level A. They seem to think that the more money and efforts spent, the higher application level is. To be assessed at level C+, Southwest Airlines put the required information that is not included in the report on other web pages, as shown in the notes of Appendix 1. Southwest Airlines could have earned application level A+ by putting some information that GRI G3 guidelines request on the web site, and reporting others as N/A. Thus, the Application Levels is of no use in the integrated reporting framework in regards to web based reporting.

Financial Information

Financial information provided in the 2009 Southwest Airlines One Report cannot satisfy stakeholders who desire to monitor corporate transparency. Such disclosure is very common in Korea, even though the reports are not named One Report. Particularly, in the 2009 One Report, "Financial Highlights (p.5)" and "Ten-Year Summary (p.12-13)" are largely overlapped. However, when I stress the fact that the integration of financial and nonfinancial reporting is about much more than simply issuing a paper document, providing of financials is not to be integrated. In the report, Southwest Airlines should answer a fundamental question: Just how does nonfinancial performance contribute to financial performance and vice versa? (4)

My Recommendations

Integral to the integrated reporting is utilization of Internet that serves as a platform to provide more detailed data than what is available in the hard copy only (5). Nevertheless, hard copy (including PDF download format) in integrated reporting is still important because it is the summary that is well-organized with the key information on the web site for integrated reporting, which provides corporate information for readers who still like traditional tools or are not familiar with Internet use. As such, I suggest these three recommendations.

1. Through integration with the web sites, it becomes possible for organizations to report all of the information that they want to disclose. However, the technological convenience can be wrongfully used by some companies—e.g., green washed companies—through making hard copy with only advantageous information for them. Meanwhile, they can cleverly hide disadvantageous information in the web site. Thus, we should be able to suggest threshold of information necessarily included in the paper document.

2. In the integrated reporting era, the GRI Application Levels need to be amended. Included by web information, all the reports might be able to earn level A. Accordingly, a new application level should be assessed with information only in a hard copy; and, needs to employ order-less words such as "Advanced," Broad," and "Compact," substituting A, B, and C.

3. Disclosure of financial information matters. However, financial information that stakeholders need and expect to see in the integrated report is not main information or summary of the existing 10-K report. We have seen that a number of companies face serious challenges and become unsustainable, even though they annually submit their 10-K reports to U.S. Securities and Exchange Commission or to the relevant regulatory authorities. Thus, we have to develop analytical metrics that determine and reveal the relationship between financial and nonfinancial information. Although difficult, we all must realize that it is integral to the creation of the real One Report.

Aram Hong is a Researcher at the Sustainability Management Center of Korea Productivity Center (KPC). He is very interested in developing frameworks or guidelines of corporate reporting. This review is his individual opinion and he welcomes comments or questions via email (hongaram@gmail.com). He thanks Professor Robert Eccles for recognizing his vision and enthusiasm for this issue and inviting him to the HBS workshop.

Endnote: (1) <http://216.139.227.101/interactive/luv2009/>  
(2) <http://www.corporateregister.com/pdf/CRRA10.pdf>  
(3) Beiting Cheng, e-mail correspondence with Aram Hong, October 22, 2010.  
(4) Mike Krzus, "Integration: The future of corporate reporting," Contribution to a Korean business magazine ( _"Shin-DongA"_ ), October 2010.  
(5) Ibid.

Appendix 1: Structure of the 2009 Southwest Airlines One Report

Notes: Some GRI G3 Indexes for C+ level that are not the above table can be found in other places.

1. 2009 U.S. Securities and Exchange Commission Form 10-K (<http://www.southwest.com/investor_relations>)  
[2.2] Primary brands, products, and/or services  
[2.3] Operational structure of the organization  
[2.5] Number of countries where the organization operates  
[2.6] Nature of ownership and legal form  
[2.9] Significant changes during the reporting period

2. Addressed throughout the report  
[3.7] State any specific limitations on the scope or boundary of the report  
[4.14] List of stakeholder groups engaged by the organization  
[4.15] Basis for identification and selection of stakeholders

3. 2010 Proxy Statement (<http://www.southwest.com/investor_relations>)  
[4.1] Governance structure of the organization

4. N/A  
[3.8] Reporting on joint ventures, subsidiaries, leased facilities, outsourced operations, and other entities  
[3.10] Explanation of the effect of any re-statements of information provided in earlier reports

Appendix Source: Aram Hong.

#### Integrated Reporting: Managing Corporate Reputation to Thrive in the New Economy

Hampton Bridwell, CEO

BrandLogic

"Financial results are the product of other things done right," said Bob Lane, former John Deere CEO (1). How true. Unfortunately, this simple notion is difficult to execute inside companies and even harder to demonstrate to those outside the organization. This is especially true in today's business environment, where corporate reputations—and hence consumer trust—have been severely damaged by the misdeeds of certain companies.

A new and equally simple idea is going to make orchestrating and communicating these "things done right" much easier. That idea is Integrated Reporting. For organizations that embrace it, the rewards may be significant. Early evidence suggests that leaders of corporations that have integrated financial, environmental, social and governance performance measures into their business strategies and management practices are gaining important competitive advantages and market differentiation.

What is most exciting about Integrated Reporting is its potential to not only change perceptions, but actually _reverse_ poor corporate behavior by properly aligning values and everyday actions with tangible financial and non-financial performance measures. Opening up the organization to scrutiny and directly linking environmental, social and governance (ESG) compliance to financial performance creates a powerful incentive to do the right things. Public exposure of those actions to customers and investors gives corporations a motive to not only engage in good behavior—thus restoring trust and influencing purchase decisions—but to do so in a way that improves the bottom line.

The importance of reputation

Companies have historically focused on brand management without directly addressing reputation management. But as recent events in the corporate world have demonstrated, reputation is vital.

To help understand how Integrated Reporting intersects with branding and corporate reputation management, the definitions put forward by Richard Ettenson and Jonathan Knowles provide useful context. "Simply put, brand is a 'customer-centric' concept that focuses on what a product, service or company has promised to its customers and what that commitment means to them. Reputation is a 'company-centric' concept that focuses on the credibility and respect that an organization has among a broad set of constituencies, including employees, investors, regulators, journalists and local communities—as well as customers (2)."

If a brand is about a promise to customers and a reputation is about credibility and stakeholder respect, it is fairly easy to see how these two elements work to support each other. Recent research shows that the interdependence between corporate reputation and corporate brand is growing stronger as economies around the world reset. In the post-recession economy of 2010, it is becoming clear that business-to-business relationships and consumers are increasingly influenced by corporate reputation and a set of new factors—specifically, the company's performance on ESG issues. These trends are causing a shakeup in how executives build and manage both brand and reputation for long-term viability.

Current attitudes towards companies are strikingly illustrative of this shift. Out of 10 factors measured by the 2010 Edelman Trust Barometer, 83 percent of respondents chose "transparent and honest business practices" and a "company I can trust" as the two most important components of corporate reputation. What is most surprising in this study is that "top leadership" and "financial returns" were ranked at the bottom, at 47 and 45 percent respectively (3).

It's not only attitudes that are changing. Enabled by instant access to information and influence through social media, people are experiencing a newfound desire to drive change in corporate behavior. Consumers are becoming less passive and are acting on their beliefs; 66 percent of Americans feel they and their friends can change corporate and institutional behavior by supporting those that "do the right thing (4)."

A changed world, a changed role

Today, it is important for executives to see the depth and ramifications of the individual and societal relationships associated with the corporations that they run. Leaders need to understand that mutual support from many constituencies is required to achieve sustainable profit and value creation.

With $30 trillion in sales, the Forbes Global 2000 represent roughly half of all Gross World Product (5), giving leading corporations an increasingly important role in society. Making mistakes can exact a high price, putting great numbers of people at risk. Avoiding these mistakes is the primary purpose of ESG compliance.

In a fundamental sense, corporate misdeeds have created the need for both ESG compliance and Integrated Reporting. Unethical banking and finance practices (Lehman), short-changing required investments in safety in energy production (BP), taking shortcuts in design and quality control (Toyota) and the embezzlement of corporate assets (Enron) are just a few examples of events that have destroyed corporate value, damaged people and the environment, and shaken the confidence of consumers to the core. Dramatic events like these are reshaping how consumers view corporations and are forcing leaders to reexamine the role of the corporation in society.

The tension between pursuit of profit, use of resources and contribution to society is growing every day. More than ever before, people are looking closely at the activities of companies. And investors are beginning to turn a critical eye to ESG factors that are likely to enhance value and mitigate risk. This is the key value of Integrated Reporting. By linking ESG to financial performance, it shows both of these critical stakeholder groups what the corporation is doing to address their concerns in a way that satisfies all constituencies.

The role of Integrated Reporting in reputation management

One of the central questions being posed to executives is how the corporation is managed for sustainability, not just quarterly returns. Unlike developments over the past few decades that have shaped business management practices, the intersection of complex global factors are forcing companies to demonstrate that their organizations are meeting an entirely new set of requirements and embracing a wide array of innovative management strategies.

Showing that a corporation is aware of and attending to these factors through its business strategy and performance is vital to its success and reputation. More important, a way to integrate these practices into business strategy is essential. The Integrated Reporting process can provide the means to do both.

To start the journey towards rebuilding trust, executives have to come to terms with four new reputational realities:  
1. Which performance KPIs link to corporate reputation  
2. How performance will be measured by many different stakeholders  
3. How reputations are likely to be formed across stakeholder groups  
4. How to embed ESG factors into the corporate brand.

The beauty of Integrated Reporting is that it is the most powerful framework yet devised to meet the new realities of—and need for—reputation management. For example, it can help overcome the "soft side" of reputation management by providing much needed proof points grounded in concrete performance measures.

If treated as a management framework, Integrated Reporting both embeds and reports on key performance indicators to all stakeholders. Its elegance and simplicity as a performance system provides business leaders a robust platform to build great companies, fortify corporate reputations, and deliver value through sustainable brands.

Hampton Bridwell is CEO, BrandLogic Corporation, and leads the firm's core practices. For over 15 years, he has worked closely with senior executives of Fortune 500 companies to advise on a range of corporate reputation, brand, identity, and communication issues. Clients include BASF, GE, IBM, JPMorganChase, Merck, PepsiCo, Travelers, and Xerox. His recent speaking engagements include The Conference Board Corporate Image Conference in New York, World Brand Congress in Mumbai and HiBrand Identity Conference in Moscow. Hampton holds a B.S. from Rochester Institute of Technology and training in strategic finance from Harvard Business School Executive Education.

Endnote: (1) John Deere 2009 Annual Report  
(2) Ettenson, Richard and Knowles, Jonathan, "Don't Confuse Reputation With Brand," _MIT Sloan Management Review,_ January 1, 2008  
(3) 2010 Edelman Trust Barometer, _edelman.com  
_ (4) Gerzema, John, "How U.S. Consumers Are Steering the 'Spend Shift' Five Eye-Opening Takeaways From an in-Depth Analysis on How Americans Are Changing in a Post-Crisis Society," Advertising Age, October 11, 2010  
(5) DeCarlo, Scott, "The Grand Totals: Even in a down year, the Global 2000 generated some staggering statistics," www.forbes.com, April 21, 2010

#### A Team like No Other; Who Will Own Your Integrated Report?

Christoph Lueneburger

Sustainability, ultimately, describes the sustainability of your company. The implications of that starting point encompass the economic, environmental and social sustainability of your organization and its stakeholders. It all matters. It is all connected. Accordingly, the International Regulated Reporting Committee speaks of bringing together "financial, environmental, social and governance information in a concise, consistent and comparable format...making clear the link between sustainability and economic value."

That sounds straightforward enough, but the moment you commit to Integrated Reporting, you confront jarring complexity. How does a company capture such varied information and bring it all together into a single, coherent, accurate corporate report? The task demands competencies far more diverse than what's required to do in traditional corporate reporting. Integrated Reporting is, in fact, a whole new ballgame. Your CFO can't do it alone. You'll need a dedicated team—a team like no other in your business.

Choosing Your Players

Who should tackle the complexity of Integrated Reporting in your company? To answer that question, we must consider two more:  
1) How do sustainability initiatives evolve?  
2) What makes teams driving this evolution with integrated reporting effective?

We need to understand how sustainability initiatives unfold because Integrated Reporting is both a critical driver _and_ a logical of outcome that larger process. In their book _One Report_ , Robert G. Eccles and Michael P. Krzus remark: "One Report can only happen if sustainability is embedded in a company's strategy. It is the most effective way of demonstrating internal integration, and it is also a discipline for ensuring that integration exists." It is therefore essential, when choosing the team that will create _your_ "One Report," to understand how _your_ sustainability is achieved and what matters most in each phase.

Based on extensive search work, management appraisals, and the results of its Sustainability Pulse Check, the industry-leading Sustainability Practice of Egon Zehnder International has assembled a framework describing the ascension of sustainability as a commercial strategy in companies, as outlined in the figure below:

Which brings us to the second question: What makes integrated reporting teams effective? The short answer is: Competencies. Teams with the competencies required to fulfill their missions generally will succeed. Those lacking requisite competencies most often fail. While this sounds self evident, companies often charter teams without first identifying which competencies the team must have to do its job.

Egon Zehnder International has developed a comprehensive model of team effectiveness that defines key team competencies. This model is based on our experience working with senior teams across many industries, and on more than 25,000 senior management appraisals conducted over the past five years. Our executive search and management appraisal work suggests that six team competencies define the character of teams: _Balance, Alignment, Resilience, Energy, Openness_ and _Efficiency_. These competencies can be measured, and effective integrated reporting teams bring to bear specific subsets of these competencies depending on the phase of organizational capability in the context of sustainability.

Competencies by Phase

While your Integrated Reporting team needs ability across all six competencies (Balance) throughout all three phases of your sustainability initiative, certain subsets will be most essential as the process unfolds.

Phase 1

Key competencies at the outset of Integrated Reporting include:

Energy: _the ability of the team to proactively conceive of and pursue productive initiatives aligned with the transition to integrated reporting._ The team is energized by working together; members support and reinforce one another. All members volunteer to take on substantive workloads.

Openness: _the ability of the team to engage with the broader organization and the outside world and build the connections required to develop Integrated Reporting._

Critical thinking and debate are encouraged among all team members. The team challenges itself by seeking new information, best practices, and outside perspectives. Everyone questions current thinking.

Phase 2

During the second phase of your sustainability initiative, your Integrated Reporting team turns its vision into action. Key team competencies in Phase 2 are:

Resilience: _the ability of the team to remain cohesive and composed under persistent internal or external stress and effectively overcome resistance as trends emerge and expectations grow._ Within effective teams, members rely on mutual respect to constructively and transparently deal with internal conflicts and with the resistance that may arise from stakeholders across the organization. Team members take responsibility for their actions, trusting the team to support them. When things go wrong (as they inevitably will, at times, when tackling a mission as challenging as Integrated Reporting), the team focuses on finding fresh solutions.

Efficiency: _the ability of the team to harness all available resources and efficiently translate their aspirations into the measurable results at the core of effective integrated reporting._ The team continuously monitors performance against plan and makes calculated trade-offs to optimize resources and minimize wasted effort. Team meetings have clear agendas, schedules, and rules of engagement.

Phase 3

In the advanced phase, your company is weaving sustainability into the fabric of your organization. Your business units make sustainability metrics an explicit part of their performance dashboards, quarterly reports and annual reviews. Key competencies for the Integrated Reporting team in Phase 3 are:

Openness: _the ability of the team to engage with the broader organization and the outside world to determine how to continually improve the Integrated Report._ While Openness was vital in Phase 1, in Phase 3 it must be evident on an even broader scale, as your maturing Integrated Reporting process encompasses every aspect of operations and long-term strategy. The team must remain innovative, translate feedback into heretical questions and continuously evolve (and re-design, if necessary) your Integrated Reporting approach.

Alignment: _the ability of the team to consistently distill individual and collective actions congruent within the overall sustainability strategy._ Phase 3 of sustainability gives rise to many teams working on a broad range of initiatives under the umbrella of sustainability. These teams must not only be aligned with each other but also with other functions and teams across the organization as well as external stakeholders.

Based on our research, the prevalent dysfunctional mode in each of these phases is not the absence of the identified key competencies, but a notable weakness in another set. In Phase 1, for example, lack of progress is most frequently correlated to low efficiency and alignment, giving rise to a debating society that either does not get things done or gets them done late with too many compromises.

Your Integrated Reporting team plays a key role in fostering alignment, in part by continuing to ask tough, probing questions. How can we create differentiation and competitive advantage in our markets? What will consumer expectations be, and how do we stay ahead of them or shape them? Above all, the Integrated Reporting team asks: What _evidence_ can we present to quantifiably demonstrate that our operational reality matches our aspirations and the public perceptions they inform?

Integrated Reporting is central to achieving sustainability and to ensuring that your company's sustainability commitment remains real, effective, and permanently joined with your business strategy. The team to which your company entrusts this crucial responsibility should be chosen with great care and clear intent, with the aid of reliable data, and with a clear understanding of how organizations actually move from traditional corporate reporting to Integrated Reporting.

Christoph Lueneburger is based in the New York office of Egon Zehnder International, a leading executive search and human capital assessment firm with 62 offices worldwide. Lueneburger leads the Sustainability Practice of the firm, which advises clients pursuing sustainability as a commercial strategy.

#### Will the USA Take a Leap? Barriers to Integrated Reporting

Mike Wallace

Traditionally, the USA has been a global economic leader, a state reflected by its stringent rules around financial reporting. The U.S. Securities and Exchange Commission requires all publicly traded companies to produce annual financial reports, which must be assured by an external party. However, there is growing public concern about the reliability of financial reports and assurance following several recent cases of fraudulent accounts resulting in prosecution. CEOs and CFOs can be held personally liable for inaccurate financial statements, making some companies increasingly cautious about what they report and how.

The upward trend in sustainability reporting globally, and particularly in Europe, has not been mirrored in the USA, where many companies remain reluctant to disclose information on a voluntary basis. In fact, the legal context in the USA has caused some companies to stop providing data that is not required by law. The Global Reporting Initiative (GRI) collates sustainability reports produced using the GRI Guidelines, and the resulting statistics can be indicative of wider trends in reporting. In 2008, less than 14 percent of the sustainability reports listed on the GRI Reports List were from US companies, and this percentage was even lower in 2009, at 12.2 percent. In comparison, 45 percent of the reports in both 2008 and 2009 came from European organizations.

Organizations that produce sustainability reports based on the GRI Sustainability Reporting Guidelines can choose to declare the level to which they followed the Guidelines. Level C reports are the most basic, appropriate for smaller companies, and Level A reports cover most of the Performance Indicators in the guidelines, suitable for larger organizations. In 2009, 30.6 percent of the US reports on the GRI Reports List had "Undeclared" Application Levels. Although the Levels do not indicate the quality of a report, US companies seem reluctant to declare the level. This may be in part due to the next step: assurance.

Those US organizations that do report on their sustainability and ESG performance are reluctant to have their reports assured. In 2008, 11.5 percent of US companies on the GRI Reports List had their reports assured, rising slightly to 12.4 percent in 2009. In comparison, almost half the reports from European companies were assured in both years. Why? Does assurance catapult ESG reporting into the domain of financial reporting? Is this making companies nervous about the data they are publishing?

GRI has established a "Focal Point USA" to address the needs of the unique marketplace in the USA, and to boost the quality and quantity of sustainability reports coming from US organizations. By having staff on the ground in New York, GRI can understand the challenges to and concerns of US organizations when it comes to sustainability reporting and assurance.

Despite the concerns of many US organizations about the voluntary disclosure of information, a few have raised their heads above the crowd and taken the next step in assured reporting: integrated reporting. An integrated report presents information about an organization's financial performance with information about its ESG performance in an integrated way. This kind of report needs to be assured, in line with existing financial requirements, so some organizations, both in the US and worldwide, have pushed against the movement.

GRI's mission is to mainstream ESG reporting worldwide, and one of the ways to do this is to put ESG reporting hand in hand with financial reporting. GRI produces the world's most widely used sustainability reporting framework. By updating this framework and making it more robust, GRI can help strengthen the foundations of integrated reporting. As such, on August 2, 2010, GRI and the Prince's Accounting for Sustainability Project (A4S) announced the formation of the International Integrated Reporting Committee (IIRC). The aim of the IIRC is to create a globally accepted framework for integrated reporting: a framework that brings together financial, economic, environmental, social and governance information in a clear, concise, consistent and comparable format.

Will US companies start to produce integrated reports? It would certainly help them. In a world in which greenwashing is rife, organizations need ways to demonstrate their credibility and lift them above their competitors. Producing an integrated report based on a framework developed by global leaders in ESG reporting and financial reporting shows an organization's stakeholders they mean business. A robust and assured integrated report can provide evidence to support the sustainability credentials of an organization as well as presenting their financial performance. But integrated reporting is more than that—it can show how financial and ESG factors are interwoven in a company's business strategy, and by doing that, organizations can show stakeholders how important these factors are for them.

However, although integrated reporting is likely to be the norm in the future, we are still a long way off from this globally, and especially in the USA. While so many of their competitors are spending large proportions of their budget producing television ads to promote their green credentials, or publicizing sustainable products, a company would do well to use the GRI Guidelines as a roadmap to success and produce a sustainability report. Those that do so can do so publicly, showing stakeholders and the public their commitment to sustainability and confidence in their performance. Reporting demonstrates leadership, pride in performance and success, and a willingness to discuss and tackle the challenges a company faces.

Sustainability reporting is gaining a foothold in the US, and we expect to see an increase in the number of reports from US companies registered on the GRI Reports List in 2010. While this number increases year on year, moving towards GRI's mission to mainstream ESG reporting, GRI will continue to work together with financial standards setters to produce a robust framework for integrated reporting. My prediction is that the US will catch up with Europe and run with integrated reporting, once its true value is realized. GRI's new Focal Point USA will help US organizations reap the benefits of ESG reporting, enabling them to think about integrated reporting in the future.

Mike Wallace is the Director, Focal Point USA for Global Reporting Initiative.

#### Integrated Reporting in a Competitive World of Cities

**Jen Petersen**
Introduction

Our present and future depends on cities, the irreplaceable nodes of the networked global economy. Similar to multi-national corporations, the fiscal and regulatory actions of city governments have resonance well outside their geographical limits. Large corporations can reproduce vast supply chains linking dispersed production sites and markets around the world only because cities create social and spatial resources that couple the links (1). And while all forms of urbanization concentrate financial capital, social and cultural resources, technology and public infrastructure, certain cities produce these in enormous densities. Such cities have become command centers (2)—hypernodes—anchoring the most powerful global industries. As such, policies that deal with urban land and people, and even shape the terms of New York's internal functions, may be felt on a distant factory floor in Shanghai or at a cobbler's bench outside of Florence. Yet these policies are not created or implemented by city governments alone—they could not function without cooperative relationships with the private and not-for-profit sectors on various levels, from social service provision and cultural funding to infrastructure. Moreover, the product of these relationships and policies is not direct profit. Instead, the production—and productivity—of a city must be measured in the social and built environments where residents find meaningful work and live out healthy, dignified lives. This is a complex task, made all the more challenging and vital as cities face realities of energy scarcity and a global climate crisis.

Because the role of "stakeholder" and "shareholder" align in cities, integrated reporting could be an invaluable governance tool. Within an integrated reporting model, cities could quantify their investments and yields towards shaping land and social conditions for resilience, and with additional benefits to civic engagement. Similar to how it offers model for businesses to take account for the many ways their financial profits rely on social and environmental resources and within regulatory constraints, integrated reporting in the public sphere is a means to fiscal transparency. From the vast internal operations of city departments and the functionality of their infrastructure networks, to the terms policies set for growth, if cities adopted integrated reporting methods for their far-reaching footprints, they could spur socially equitable, environmentally just institutional change in the global economy writ large.

In this article, I will lay out an argument for why Integrated Reporting is as valuable and viable a change mechanism originating in the public sphere, as it is with private companies. I will review the ways explosive urban growth, global warming, and impending energy scarcity unify many of the interests of place-based and extra-local city stakeholders—a set of dynamics especially crystalline in the most globally-important cities. I profile what precedents New York City's PlaNYC 2030 "sustainability" planning and reporting processes have set for urban transformation. But moving towards an Integrated Reporting framework could resonate deeply into the City's business dealings, allowing its sustainable growth priorities to principle how it weighs and invites foreign direct investment and service sector workers alike. Finally, I suggest some key tenets of Integrated Reporting for cities, and the ways they could be instrumental in cities and well beyond.

Can cities be global change agents?

I. The back story

In the last several years, the combined long-term trends of urbanization and steady population growth have culminated in an emergent global phenomenon: more than half of the globe's inhabitants live in urbanized areas. The bulk of these live in regions proximate to the world's major cities. But urban growth has proceeded unevenly, and to starkly different effect in rapidly industrializing versus already industrialized countries (3). As global companies have shifted much industrial and services production to cheaper sites in less developed countries over the last several decades, workers have crowded to their urban areas. Simultaneously, environmental degradation, natural resources disputes, and the shrinkage of arable land have prompted migration to urban places in these countries. Though city centers are growing, much of the developing world's resulting rapid urbanization takes the forms of unplanned sprawl, informal settlements and slums (4). Class disparities are nowhere more graphic than in these urban areas, where the state, market and civil society have yet to agree on just and equitable growth plans (5).

Meanwhile, after decades of deindustrialization and reconfiguring population shifts, growth has resumed in the city centers of the industrial North. In the U.S., the furthest-reaching suburbs and exurbs that sprung up during a long century of cheap fuel and automobile-dependence (6) appear perched on a precipice (7). The middle class that filled these suburbs is suffering from high rates of unemployment, debt, and a correlated collapsed housing market (8). Former industrial powerhouse cities have spent the uncertain, intervening decades trying to reinvent themselves. They have sought to attract foreign direct investment, new kinds of firms like financial services, technology, medical and insurance, and rolled out creative forms of subsidy to spur redevelopment (9). Many such cities have invested heavily in strategic appeals to tourism (10). The related low skill, low wage service sector has also expanded in post-industrial cities, attracting foreign migrants from all over the world. Such cities face their own challenges of socio-spatial justice and growth with equity (11).

II. The global cities

A derivative of this kind of growth is underway in certain "global cities" (12) that function as "command and control" centers of the post-industrial, "knowledge-based economy (13)." In 2010, according to the journal _Foreign Policy_ , the cities of New York, London, Tokyo, Paris, and Hong Kong top this global urban hierarchy. While all cities are in certain ways "global," these offer the highest densities of what are considered the knowledge-based economy's pediment: financial and human capital, information-dispersing media outlets, universities, cultural resources and broad-based consumption opportunities, and profound influence on global policymaking. In a world of cities, theirs are highly coveted positions. Conversely, companies of many kinds are eager to root their business in these places.

And so it is that the last many decades have brought about change in the terms under which companies conduct business in these localities. Aside from offering employment, corporations play an expanding governance role. While different cities create specific climates for corporate governance, inter-firm competition and the visibility of large firms in global cities can translate to extensive private sector involvement in public programs (14). The private sector has long been an irreplaceable part of sustaining cultural programming, arts institutions, and mega-events in cities. But increasingly, experimental and pilot projects in energy efficiency, retrofitting city infrastructure, and other traditionally public services have produced a revised social ecology of public, private, and not-for-profit mutualism (15). Because they anchor academic and research institutes, attract entrepreneurs and investors, global cities produce both business and public sector innovation.

The influence of these trend-setting cities is readily evident in other cities, too. Because they have often served as policy laboratories, their actions can bring about shifts in institutional conditions even in other national contexts. Some of this influence occurs through mechanisms for inter-governmental policy sharing—like policy networks—where elected officials and research institutes can exchange ideas on shared conditions. But private sector leaders also have networked interests across localities, and are vessels of portable policies (16). The combination means that some cities adopt governance strategies incubated in other, distant cities if they think these enhance their attractiveness or might push them up the global urban ladder (17). As a result, in contemporary New York City alone, one may walk the streets of Copenhagen and Bogotá or dine in the trans-fats free restaurants of Tiburon, California (18).

Though they venture out regularly, the governments even of the most powerful global cities are geographically tied, place-bound. New York City's elected officials and public servants, for instance, even as they steward foreign direct investment, undocumented migrants, and global corporate headquarters, are accountable to represent the interests of local voters and taxpayers. As such, their actions have the most immediate impact in the daily lives and long-term life chances of the City's own residents. In short, governing cities of any kind in the current global economy's configuration is a many-layered pursuit and requires consideration of near and distant places, domestic and foreign residents, capital markets and farmers markets. Is it possible for cities to balance the pressures of global competitiveness with place preservation?

III. Cities and sustainable growth

Perhaps the most promising development of the past decades' urban growth is the realignment of local and extra-local, short and long-term interests in urban territories. Especially as their populations expand, cities can no longer ignore their aggregate impact on global climate change and energy consumption—their networks have brought the globe home (19). At a local level, they face the long-defrayed costs of coal-fueled industrialization: air pollution, aging infrastructure, congestion, and a dearth of quality public spaces—all of which already affect public and civic health, economic productivity, and the general quality of daily life. In the U.S., the country's circulatory system—its transportation network—has become a primary target for revisions. The automobile dependence planned into much suburban growth is incompatible with even the most conservative ideas about healthy urban circulation (20), and its costs are now being weighed for their effect on air quality and global warming, energy use, worker productivity (21), and even civic engagement (22).

US federal government is shifting its priorities and promoting more holistic development models. In 2009, a partnership between the US Department of Housing and Urban Development (HUD) Department of Transportation (USDOT), and the Environmental Protection Agency (EPA) was formed to help communities improve access to affordable housing while reducing automobile dependence and transportation costs and restoring local natural environments re-connect land uses made separate over the last century (23). The collaboration recently awarded $68 million in planning grants to 62 local and regional government-non-profit partnerships through whom such efforts will be pursued. This sum is part of the larger Transportation Investment Generating Economic Recovery programs (TIGER I&II), which have awarded a combined $2.2 billion for transportation projects in US urban areas this year (24). Half of the $600 million in funding awarded through TIGER II was for public transport, street rail, pedestrian or bicycle-focused projects (25). Together, these projects signal a re-prioritization of locality—they create jobs out of making nice places for people to be, where the natural environment also may flourish. But they are also designed to enhance local competitiveness.

And so it is that post-industrial cities have both immediate local and global incentives to plan for better futures. While attracting knowledge-based economic growth requires all post-industrial cities to promote themselves as clean and attractive places to locate—industrious but not industrial—this is immeasurably important for place-advantaged global cities (26). For these, competitiveness, reducing greenhouse gas emissions, and anticipating an energy-scarce future urgently require fixing their cities now. But improving the energy efficiency of infrastructure networks; reinvesting in local systems of production to decrease reliance on goods and services provided at distance's great costs; and improving public spaces are all place-focused investments in the present and future, good for cities no matter what their global economic role (27).

"Sustainability" has become the moniker of what in cities should be a process of growth within ecological limits, along with a move toward intra- and intergenerational equity, while seeking to balance and integrate economic, social and environmental priorities and broadening decision-making (28). Many cities have undertaken versions of sustainability planning in their governance models. These are becoming both a local and global tool, a selling point for non-city dwellers and often very visible demonstrations of revised long-term commitments to local stakeholders. Current models of sustainability planning and reporting demonstrate key steps towards a better urban future, but integrated planning—and the integrated reporting strategies it could yield—would stimulate fundamental global economic transformation.

IV. From sustainable to integrated growth

New York City has begun to take public stock of its environmental, social, and financial investment in sustainable growth. Led by Mayor Michael Bloomberg, The City undertook a sustainability planning process at the end of 2006. On Earth Day 2007, the outcomes were announced in the form of PlaNYC 2030—a growth model that suggested ways the City could simultaneously accommodate 1 million new residents and shrink its greenhouse gas emissions before 2030. The Plan set out specific sustainability targets for the _five key dimensions of the city's environment: land, air, water, energy, and transportation. Through a series of meetings with community-based organizations and city leaders, together with feedback submitted through the city's website from the general public, the resulting document addressed affordable housing, transit capacity, air quality, CO_ _2_ _emissions, parks and waterfront access, and specific efficiency and usability targets for city infrastructure—streets, subways, sewers_ (29) _._

In collaboration with many city agencies, the Mayor's Office of Long-Term Planning and Sustainability has coordinated the plan's implementation. Many of its measures have been undertaken with aplomb and others quietly, and some have already changed the flow of everyday life. From a public relations perspective, new parks opened, easier access to city information, more bike lanes and pedestrian plazas are so tangible they have easily become points of pride for New Yorkers. At the same time, in-progress infrastructure projects underway lend themselves to informal monitoring. Highly visible PSAs draw attention to everything from PlaNYC's commitment to planting 1 million trees and its updates to the city sewer system. Meanwhile, PlaNYC's website runs press release-style, real-time updates on the city's progress, accompanied by photos and quotes. For visitors interested in the numbers, the Mayor's Office of Operations website hosts the PlaNYC Sustainability Reporting initiative, an interactive reporting portal where one may view specific measures taken towards the Plan's environmental and infrastructural targets, tracking their progress over time. Reports appear as a single table or can be broken down by category and city department or agency, together with the benchmarking indicators for every category (30). The data is updated monthly, and easily navigable.

But to proceed from a sustainability plan to an Integrated Plan and Report, PlaNYC might take two primary next steps. First, it would deal with human capital as an infrastructural network, setting out specific targets for its sustainable development. This is particularly important because New York's global dominance is a direct outcome of the people it gathers close together. At the same time, it remains the most socio-economically polarized city in the country (31). The City could gather a range of indicators borrowed and scaled for local applicability, from the UN's Human Development Programme. Human Development, the Programme's website claims, is about:  
"...Creating an environment in which people can develop their full potential and lead productive, creative lives in accord with their needs and interests. People are the real wealth of nations. Development is thus about expanding the choices people have to lead lives that they value. And it is thus about much more than economic growth, which is only a means—if a very important one—of enlarging people's choices (32)."

"What sort of population do we want to have by 2030?" might be a decent opening for the human capital portion of New York's Integrated Plan. Its answer would begin with a close survey of the city's demographics and their spatial distribution, and a careful audit of its many social programs, motivated by the value they generate toward a sustainable city.

As fuel scarcity is more palpable daily reality, local investment in human capital is essential. Difficult as it is to imagine such a globally-connected city as New York reworking itself for local reliance on everything from agriculture to manufacturing, this is part of what it means to acknowledge ecological limits, a primary tenet of urban sustainability. Just as cities can calculate future savings on more efficient energy, transport, and water systems, investing in people-developing institutions should be considered for their long-term returns in sustainable growth. PlaNYC already considers the City's affordable housing investments as a sustainability measure. And indeed, the Bloomberg administration has led ambitious efforts to increase and improve the City's supply of affordable units (33). Programs like those offered by The City's Department of Small Business Services and its Industrial Development Agency (NYCIDA) are already investing in small-scale, locally-based economic growth projects, many of which have additional sustainability elements, such as green energy incentive programs (34,35). But if these, together with planning in public schooling, libraries, hospitals, cultural institutions and various extensive programming—all of which also involve private sector investment—were integrated into the City's sustainability planning and reporting process, weighed for how they invest in human capital, the City's efforts and the outcomes they produce might garner more attention. Most importantly, this would begin to make today's New Yorkers partners in tomorrow's sustainable growth.

Second, before it could realistically assess how growth's gains might be better spread, PlaNYC might incorporate better financial break-downs. The fiscal category of New York's Integrated Report would make clearer the often opaque roles of the non-profit and private sector in city governance as they impact sustainability efforts—physical and social. In addition to providing financial sustainability reports for city departments and their contractors, this disclosure would include the many financial tools and deals used to incentivize economic development, and particularly property-led economic growth. For example, in such a thorough financial telling, residents could compare over time the public returns on development incentives like Tax Increment Financing for major public-private projects. Residents could also better quantify the social value of Payments in Lieu of Taxes (PILOTs), made by many kinds of non-profit organizations operating in the City. Such an addition would empower taxpayer/voters to participate more actively in city budgeting considerations. And perhaps most important as a tool for democracy, to see themselves and their futures more clearly in the complex city budget.

V. Integrated Reporting and the future of cities

The brilliance of Integrated Reporting is in the questions. When an organization of any kind accepts the challenge of transparent responses to their net social, environmental, governance, and financial performance for any stakeholder/shareholder, it is taking a bold step. Once the organization quantifies, qualifies, and is ultimately held accountable for generating externalities long thought deferrable, the impact is immediate. Soon it must negotiate creative new terms in its business and social dealings, and eventually so too must those secondary agents in their own processes and transactions. In contemporary cities, a globe's worth of production, consumption and all of their externalities come home to roost. While the regulatory structures of cities vary around the world, they all set up their environments with various forms of infrastructure, land, and human capital, for which they are responsible.

Just as it is with companies and their supply chains, if cities take next steps towards quantifying [old] growth's externalities they've long been expected to absorb in order to attract investment, they'd slowly modify their terms of engagement with private investment, pressing "reset" on old regulatory paradigms and actively make way for sustainable growth. These actions would invite social equity and environmental health to take root at the heart of local public and private investment, treating local systems as the DNA of a yet-to-be, more resilient city. Integrated Planning and Reporting models originating in the most powerful global cities could do revolutionary good locally but also demonstrate to stakeholder/shareholders everywhere what a sustainable world is worth.

_Jen Petersen is a Ph.D. Candidate at New York University, Department of Sociology. She can be emailed at_ jen.petersen@nyu.edu _._

Endnote: (1) Sassen, Saskia. (ed.) (2002). Global Networks, Linked Cities (1st edition). Routledge.  
(2) The idea of 'command and control' economies at the center of the global economy has been made popular by Saskia Sassen, whose 1991 book The Global City: New York, London, Tokyo. (Princeton University Press) elaborated an earlier theory put forth by John Friedmann in his article "The World City Hypothesis." (Development and Change 17(1), pp. 69-84). With nuances indicative of their different disciplinary orientations (political science and political geography, respectively), the theoretical claim elaborated was that, though instant communication technology had facilitated the rise of a dispersed but unprecedentedly networked global economy, its productivity remained dependent on centralized coordination. Very few cities could produce the regulatory, market and infrastructural environments necessary for powerful global firms' functions, and offer the lifestyle conditions executives, CEOs, and major investors preferred. Such cities came to be known as 'global cities', and in the original hypothesis, New York, London and Tokyo had locked in the top cedes. Subsequent treatment of the idea has re-framed the concept along an index, as this which appeared in the August 18, 2010 issue of Foreign Policy:  http://www.foreignpolicy.com/articles/2010/08/18/global_cities_index_methodology (Accessed 11/4/10).  
(3) For an extensive discussion of global economic, social, and environmental trends in uneven urbanization, see: United Nations. (2009). _Planning Sustainable Cities: Global Report on Human Settlements._ Accessed 11/4/10, from  http://www.unhabitat.org/content.asp?typeid=19&catid=555&cid=5607. For a more rarefied view of urbanization dynamics in different parts of the globe, see: Neal Pierce, Curtis Johnson and Farley Peters. (2009) _The Century of the City: No Time to Lose._ Rockefeller Foundation.  
(4) Davis, Mike. (2007). _Planet of Slums._ Verso.  
(5) Al Sayyad, Nezar. (2004). _Urban Informality: Transnational Perspectives from the Middle East, Latin America, and South Asia._ Lexington Books.  
(6) For a complete chronicle of the 20th century history of US suburbanization, see: Jackson, Kenneth. (1987). _Crabgrass Frontier: The Suburbanization of the United States._ Oxford University Press. For a more recent telling that situates US suburbanization in the context of post-World War II politics, prosperity and national identity, see: Beauregard, Robert. (2006). _When America Became Suburban._ University of Minnesota Press.  
(7) Andres Duany, Elizabeth Plater-Zyberk and Jeff Speck. (2010) _Suburban Nation (10th Anniversary Edition): The Rise of Sprawl and the Decline of the American Dream._ North Point Press.  
(8) Edward L. Glaeser, Joseph Gyourkob _,_ and Albert Saiz. (2008). "Housing Supply and Housing Bubbles." _Journal of Urban Economics 64_ (2), pp. 198-217.  
(9) Fulong Wu and CJ Webster. (ed.) 2010. _Marginalization in Urban China: Comparative Perspectives._ Palgrave Macmillan.  
(10) Lily Hoffman, Susan Fainstein, and Dennis Judd. (ed.) 2003. _Cities and Visitors: Regulating People, Markets, and City Space (Studies in Urban and Social Change)._ Wiley-Blackwell.  
(11) For an extensive philosophical and political discussion of urban planning and uneven development in reviving, post-industrial cities, see: Fainstein, Susan. (2010). _The Just City._ Cornell University Press. and Peter Marcuse, James Connolly, Johannes Novy, Ingrid Olivo, et al. (ed.) 2009. _Searching for the Just City: Debates in Urban Theory and Practice._ Routledge. For a specifically spatial characterization of uneven development in recent US city growth, see: Soja, Edward. (2010). _Seeking Spatial Justice (Globalization and Community)._ University of Minnesota Press.  
(12) See (2) above.  
(13) The expression "knowledge-based economy" is widely and disparately used to refer to the contemporary, post-industrial economy where knowledge is both tool and product. It was made popular by management consultant and writer Peter Drucker in his book _The Age of Discontinuity_ (1992).  
(14) Campbell, John. (2007). "Why Would Corporations Behave in Socially Responsible Ways? An Institutional Theory of Corporate Social Responsibility." _Academy of Management Review_ 32(3) pp. 946-967. For a combined analysis of the business issues and public policy implications of CSR, see: Vogel, David. (2005). _The Market for Virtue: The Potential and Limits of Corporate Social Responsibility._ Brookings Institution Press.  
(15) The Fund for the City of New York is only one such arm through which individual and corporate investors may support social innovation of many kinds in New York City. See <http://www.fcny.org/fcny/> (Accessed 11/5/10).  
(16) Cook, Ian. (2008) "Mobilising Urban Policies: The Policy Transfer of US Business Improvement Districts to England and Wales." _Urban Studies_ _45_ (4) pp. 773-795.  
(17) See Sassen, ed. (2002).  
(18) Stone, Diane. (2001). "Learning Lessons, Policy Transfer and the International Diffusion of Policy Ideas." Working Paper. University of Warwick, Centre for the Study of Globalisation and Regionalisation.  
(19) For an international perspective on urbanization and the climate crisis, see: Peter Newman, Timothy Beatley, and Heather Boyer. (2009). _Resilient Cities: Responding to Peak Oil and Climate Change._ Island Press. For a US regionalist perspective, see: Calthorpe, Peter. (2010). _Urbanism in the Age of Climate Change._ Island Press. For primary research addressing challenges and opportunities posed in variously-positioned global, urban concatenations, see: Cynthia Rosenzweig, William Solecki, Stephen Hammer, and Shagun Mehrotra. (2011). _Climate Change and Cities: First Assessment Report of the Urban Climate Change Research Network._ (Forthcoming). Cambridge University Press.  
(20) Jacobs, Jane. (1961) _The Death and Life of Great American Cities._ Random House.  
(21) For an array of reliable studies addressing particularities of the relationship between sprawl and quality of life indicators in urban areas, see The Texas Transportation Institute (http://tti.tamu.edu) and Victoria Transport Policy Institute (<http://www.vtpi.org/>).  
(22) Williamson, Thad. (2008). "Sprawl, Spatial Location,and Politics: How Ideological Identification Tracks the Built Environment." _American Politics Research 36_ (6) pp. 903-933.  
(23) Environmental Protection Agency. (2010). "Partnership for Sustainable Communities: Background." Accessed 11/5/10, from <http://www.epa.gov/smartgrowth/partnership/#background>.  
(24) US Department of Transportation. (2010). "Transportation Investment Generating Economic Recovery Grants." Accessed 11/4/10 from: www.dot.gov/documents/finaltigergrantinfo.pdf _.  
_(25) An interactive map of all TIGER I&II projects can be found at: <http://t4america.org/blog/2010/10/22/tiger-map-launch/>.  
(26) Short, J.R. (1999). "Urban Imagineers: Boosterism and the Representation of Cities" in Andrew Jonas and David Wilson (ed.) _The Urban Growth Machine: Critical Perspectives Two Decades Later._ State University of New York Press.  
(27) Sustainability Reports and Sustainability Planning documents are becoming common among high-profile cities in the global economy. Copies of the City of Amsterdam's sustainability reports from 2007-2008, and 2009-2010 can be downloaded from www.nieuwamsterdamsklimaat.nl/ _. New York City's PlaNYC 2030, a sustainability planning document that set its current sustainability targets can be viewed at:_ <http://www.nyc.gov/html/planyc2030/html/plan/plan.shtml>_._  
(28) Haughton, Graham. (1999a). "Searching for the Sustainable City: Competing Philosophical Rationales and Processes of 'Ideological Capture' in Adelaide, South Australia." _Urban Studies 36_ (1), pp. 1891-1906.  
(29) City of New York, (2006). "PlaNYC 2030 Background." Accessed 11/5/10 from:  http://www.nyc.gov/html/planyc2030/html/challenge/challenge.shtml.  
(30) City of New York. (2010). "PlaNYC/Sustainability Reports." Accessed 11/5/10 from <http://www.nyc.gov/html/ops/planyc/html/home/home.shtml>.  
(31) Yen, Hope. (2010). "Income Gap Widens: Census Finds Record Gap Between Rich and Poor." _The Huffington Post 9/28/10._ Accessed 11/5/10 from  http://www.huffingtonpost.com/2010/09/28/income-gap-widens-census-_n_741386.html.  
(32) United Nations Human Development Programme. (2010). "The Human Development Concept." Accessed 11/6/10 from <http://hdr.undp.org/en/humandev/>.  
(33) City of New York Department of Housing, Preservation and Development. (2010). "2010 New Housing Marketplace Plan." Accessed on 11/5/10 from <http://www.nyc.gov/html/hpd/html/about/plan.shtml>.  
(34) City of New York Small Business Services. (2009). Accessed on 11/5/10 from <http://www.nyc.gov/html/sbs/html/about/about.shtml>.  
(35) New York City Industrial Development Agency. (2010). Accessed 11/6/10 from  http://www.nycedc.com/SupportingYourBusiness/Industries/Pages/Industries.aspx.

# PART IV

The Investor's Perspective

#### Some Thoughts on Integrated Reporting and its Possibilities

Farha-Joyce Haboucha

Rockefeller Asset Management (1)

There is little understanding in the investment community today about the importance of the many social and environmental programs that large corporations have been undertaking. In fact, even within such companies, there is sometimes little understanding about the value of these programs. The perception is that mainstream investors do not care about these issues and therefore there is little reason to engage with and to communicate such information to them.

In spite of this perception, however, and as a result of pressure, prodding and encouragement by the social investor and activist community, reporting on "ESG" issues has grown tremendously over the last 5 years. Those of us who value the importance of ESG reporting are hoping for another wave of growth in the years ahead.

As a result of our many years of dialogue with companies, we have learned that beyond the report itself, there are two other major benefits to reporting: commitment and clarity. During the process of gathering data for a "CSR" or "Sustainability Report" many companies have unexpectedly found themselves on an internal journey of discovery and communication. This journey helped to break down barriers within the company, which enriched the report, gave rise to new initiatives and created a base for a better report in subsequent years. One key lesson from this process is that reporting spurs action and, although time consuming and expensive, brings benefits to the company and serves as a tool for improving practices.

ESG reporting, however, has remained the domain of a very narrow population and is still considered to consist mainly of "soft" data. Thus, it has not yet been able to adequately meet the demands of investors who have been trained to look for "hard data."

And yet, in recent years, more and more CEOs have been focusing on the growing importance of social and environmental issues for their businesses and have been linking these issues to the companies' "license to operate." At many companies senior management now understands that to manage their businesses well for the long term they must also take into account the risks and opportunities associated with ESG issues. Unfortunately, few companies actually report such data to the financial community and therefore there is very little information available to be factored into investment decisions. In addition, actually integrating the available information is difficult because of the way it is presented. Even when we suspect that the programs do contribute to the financial success of the company, there are challenges associated with making the connection and proving the thesis. In short, we believe that integrated reporting holds big promises, but to add ultimate value to the investment process it must be done right.

Investors who do gather and incorporate ESG into their investment decision-making process are still considered out of the mainstream in the US even as this approach continues to gain traction in Europe and Australia. We have been making the business case for good corporate environmental, social and governance practices since the 1990s, and it has been gratifying to see the number of company executives who are now committed to this view. The rise of the mega-corporation and the increased visibility of the impact that these practices have on society have highlighted the importance of these practices. While there is often a lack of trust in companies on the part of the public with respect to these matters, the reality is that companies and societies are linked intimately with each other.

We believe that the business case for good citizenship springs from the moral case in that society will stop tolerating corporate behavior which counters its values. For example, child labor was prevalent in the United States at the start of the 20th century until it was viewed as unacceptable by our society. The environmental and social issues have become more numerous and global because corporations have become larger and their impacts are more significant. In a connected world these issues are also more visible.

ESG issues focus on risk management and future avoidance. The vulnerability of a company to social and environmental risks lies in every aspect of its business model, including the type of resources it uses (e.g., whether physical, human or financial), its operating, manufacturing and distribution processes, the life cycle use of its product and services, and the balance or imbalances it has with its various stakeholders. Some risks may be more obvious than others, and may only come to light as we advance as a society and as the impacts become greater and more complex. ESG issues are also about productivity, innovation and good will and how the approach to such issues can increase margins and sales. An engaged work force, new products and happy customers that are willing to come back or even to pay more for goods and services are the potential results of ESG programs and initiatives. These are the issues that social and environmental activists focus on, management understands, but unfortunately the traditional investment community has trouble incorporating directly into its valuation models although indirectly many of these issues are not foreign to industry analysts.

ESG reports, whether they are called CSR or sustainability or, in the old nomenclature, EHS and community reports, cover the ways companies manage in these spheres. These reports have become quite sophisticated over the years when produced by progressive companies. However, on the whole, we have created two parallel universes. Within the companies, the CSR and sustainability professionals who help create the programs and initiatives rarely interact with the financial professionals. And in the investment community, ESG analysis has become a profession whose practitioners rarely interact with the financial analysts. There are very few people in the corporate world, in the investment world and in the activist world who hold all the information at the same time. Unless we make the connections explicit, it will take us longer to solve the pressing issues that are facing companies and society and it will take longer for investors to understand the issues and allocate capital accordingly. As we see it, the goal is to have companies that understand their impact on society work to mitigate the negatives and improve the positives and, in the process, become good investments.

So the parallel universes—financial and social—must come together. The stakeholders in the whole system need to understand all the pieces and how they relate to each other. We do not need less financial reporting or less sustainability reporting. Instead we need reporting that explains how they relate to each other. That is the promise of integrated reporting.

So while none of us want to increase the burden of reporting on companies, integrated reporting cannot be about "either/or." Integrated reporting must instead be about "and," as well as about making the bridge between a company's social, environmental and governance practices and its business performance, past, present and future. It must be about the long term and it must tie to strategy and risk mitigation, reputation management and cost of capital. Integrated reporting is aimed at the investment community. There is, however, a great deal of concern that because integration is seen as a route to "simplified" reporting, it will become an excuse for companies to report less to other stakeholders. While that is a valid issue, we do not see it as a necessary development. We believe that integrated reporting can become a better way for companies to communicate with "the allocator" of capital and can spur competition toward better reporting as companies that do a good job are typically recognized in the market.

Done well, we believe that integrated reporting will spur companies to rethink how they function as members of society and can also become a platform for communicating with financial analysts about the long term drivers of the business. In conjunction with reporting that ties ESG programs to risk mitigation and strategies, we believe that companies should develop indicators that point to the usefulness of the programs. Cost savings associated with decreased energy use might be one such indicator and we have seen a number of companies report such numbers. But there are other indicators that might be valuable for analysts for comparative purposes. For example, in a business to business setting, where many assume that reputation and environmental practices are of little import to clients, we have found that many technology companies report that they get asked about these issues in requests for proposal. As a result, the disclosure of how many such requests were received in any one period may be valuable information to the financial analyst as he or she assesses the company and its competitors and seeks to tie environmental programs to the probability of competitive wins.

In workplace issues where high tech companies routinely report a fierce competition for talent, it might be helpful to connect the company's initiatives for creating an "engaged" workforce to its ability to attract and retain talent and to disclose the metrics they use to assess their performance in these areas such as retention rates, or profitability per employee.

Ultimately, the burden and the responsibility of integrated reporting does not lie just with the corporations, it lies as well with the user of the reports. We must become more integrated. We must cross train and educate the social activists and the ESG analysts on the functioning of business and the challenges of reporting, and we must educate the financial analysts on the mysteries of environmental, social and governance issues.

In sum, we are pleased by the formation of the International Integrated Reporting Committee. As it works on developing a framework for integrated reporting, we believe that it would benefit the Committee to involve as many companies as possible and provide them with a safe forum to help develop protocols and indicators. Equally beneficial would be for the Committee to involve the various users of the reports and help them to connect the environmental and social data with their respective initiatives.

_Farha-Joyce Haboucha, CFA,_ _is the Portfolio Manager of the Libra Fund, Director of Socially Responsive Investments within the Investment Group and a Managing Director of Rockefeller Asset Management. She has been with the firm since 1997. Joyce has 33 years experience as a portfolio manager, 22 of them integrating ESG factors into investment decisions._

Endnote: (1) Comments and observations are subject to change. These are the views of Farha-Joyce Haboucha and not necessarily those of Rockefeller Financial or its affiliates.

#### Integrated Reporting: What's Faith Got to Do with It?

Laura Berry, Executive Director

Interfaith Center on Corporate Responsibility

As the Executive Director of the nation's oldest and largest coalition of faith based institutional investors, my participation at Harvard Business School's recent "Workshop on Integrated Reporting: Frameworks and Action Plan" might seem to indicate a serious case of mission drift. The 300 members of the Interfaith Center on Corporate Responsibility (ICCR) have long worked toward a goal to "build a more just and sustainable corporate world." Through our long-standing commitment to productive dialogue with corporate management, ICCR members have had a significant impact on corporate environmental, social and governance practices. Why do we believe that the "One Report" framework will accelerate the changes we seek as investors and people of faith?

As investors who view their portfolios through the lens of faith, our forty-year history of extensive engagement as shareholders is typically driven by moral or ethical principles that, unlike environmental impacts, are frequently difficult to describe via any reporting framework. Our work is often admired for its aspirational vision, as well as its remarkable prescience and effectiveness; however we are not often cited for our quantitative or analytical prowess. One might imagine the integrated or "One Report" framework could exacerbate the challenge by focusing on what "can be measured," rather than "what matters," to paraphrase Einstein.

When the topic is integrated reporting, mainstream investors and corporate leadership ask again and again why ICCR is involved in the debate. In short they are asking, "What's faith got to do with it?" ICCR members and many other sophisticated, values driven investors come to the opposite conclusion. From our perspective, our grounding in faith makes integrated reporting the obvious next generation of corporate reporting. Having been at the forefront of the corporate social responsibility movement for over four decades, it is quite clear that integrated reporting will amplify transparency and accelerate corporate progress toward our goals.

The conviction comes from our deeply held belief that when a corporation commits to produce a "Sustainability Report" or a "Corporate Social Responsibility Report" for its investors, the organization begins to reframe questions about its environmental, social and governance impact that lead to better management and more powerful value creation. This process is the first step in addressing the concerns of faith based investors and leads to the kind of enduring innovation and growth that all investors want from their companies.

Since the earliest days of humankind's attempts to understand our impact on the world in which we live, we've looked for clues regarding how to harness creation to improve our lot. In asking these questions, we've developed technologies that allowed us to move from primitive, hunter-gatherers to a largely urban population that is rapidly approaching 7 billion individuals; individuals who will need three times the Earth's planetary capacity to survive.

ICCR's coalition was formed in the early 1970s when a dozen faith based investors began questioning their role as holders of capital. How were they called upon to express their values as investors? Did equity ownership interests call them to work to change the practices of the corporations in their portfolios or should they simply divest or disengage from companies that were unlikely to change? These types of early inquiries were precursors to the activities that led to ICCR's commitment to integrated reporting.

In a world where egregious breaches of responsibility occur every day, our commitment to better more effective corporate reporting may seem "off mission," or perhaps it should not be among the highest priorities for people of faith. In fact, from our perspective, effective reporting is clearly on mission. For thousands of years people of faith have asked essential questions to better understand our relationships to each other and to creation.

As faith organizations with active missions worldwide, we are acutely attuned to the concerns of the most vulnerable and are called upon to seek justice and reverence for all creation. As active, engaged and knowledgeable investors we are convinced of our agency. Throughout history, religious traditions have wrestled with the balance of reason and faith, in the hope that the struggle would lead to a better future. It is easy to argue that modern investors struggle with a similar balance. What do we believe impacts corporate financial performance? How can we demonstrate materiality? What role do externalities play in our hopes for a better future? One does not need to be a practitioner of religion to understand the importance of making the connections implied by these questions and supported by a framework that integrates financial and sustainability reporting.

These reports are necessary, but insufficient to the task of truly embedding global stewardship into the 400-year-old corporate model. We cannot count on good intentions, best practice or even reputational risk to drive this much-needed change. All investors have a stake in questions of materiality and risk and all investors need a reporting framework that will break down the barriers to elucidating relationship between emerging CSR data and traditional financial reporting. By integrating sustainability data into traditional financial reporting, higher standards of comparability and materiality will follow. As faith based investors with broader and longer term performance expectations, providing integrated reporting infrastructures will help us all to measure what really matters.

Laura Berry became executive director of the Interfaith Center for Corporate Responsibility in 2007, a 300-member coalition of faith based institutional investors based in New York City. After working for five years as a chemical engineer, Laura began a 17-year career as a Large Cap Value Portfolio Manager on Wall Street, gravitating to socially-responsible investing and handling accounts for religious orders. In 2001 Laura left Wall Street and began her non-profit career serving in senior management positions, first at a community development corporation and then at a large community foundation.

#### An SRI Perspective on Integrated Reporting

Peter DeSimone, Director of Programs

Social Investment Forum

Members of the Social Investment Forum (SIF) have been incorporating environmental, social and governance (ESG) factors into the investment process for more than two decades. Some joined this field out of a sense of mission to build a more sustainable and just world, while others believe investment strategies that take sustainability risks into account are better informed and offer superior prospects for long-term returns on capital. Many fall into both camps and in working on integrating ESG factors in investing models, socially responsible and sustainable investors of all stripes have been advocating for companies to:  
-Instill better board and management oversight of ESG issues;  
-Offer discussion and analysis on how the company will mitigate risks and seize opportunities related to sustainability challenges;  
-Set firm goals and related targets related to ESG issues;  
-Devise ESG metrics to measure progress;  
-Issue public reports of the results; and  
-Secure third-party verification of claims.  
The formalization of the effort to obtain integrated reporting is therefore a long time coming and one that our community hopes will play a significant role in insisting on far more ESG data from companies.

A More Favorable Landscape

Indeed, a reporting framework that would make sense of a set of material, audited, quantitative and qualitative sustainability indicators in the context of a company's financial performance is a very welcome development. What too is heartening is that the integrated reporting debate is unfolding in an environment ripe for a sea change in the approach of evaluating corporate ESG performance.

In the United States, despite the recent economic downturn, sustainable and socially responsible investing or "SRI" is continuing to grow at a faster pace than the total universe of investment assets under professional management, according to the new 2010 edition of the Social Investment Forum Foundation's Report on Socially Responsible Investing Trends in the United States. Released just this month, SIF's Trends report found that the pool of assets engaged in SRI strategies—the use of ESG criteria in investing and shareholder advocacy, as well as community investing—has grown more rapidly than the overall investment universe due to such factors as net inflows into existing SRI products, the development of new SRI products, and the adoption of SRI strategies by managers and institutions not previously involved in the field. In numbers, the report found that SRI assets have increased more than 34 percent since 2005, while the broader universe of professionally managed assets has increased only 3 percent. From the start of 2007 to the end of 2009, a three-year period when broad market indices such as the S&P 500 declined and the broader universe of professionally managed assets increased less than 1 percent, assets involved in SRI increased more than 13 percent (from $2.71 trillion to $3.07 trillion). Today, nearly one out of every eight dollars under professional management in the United States—12.2 percent of the $25.2 trillion in total assets under management tracked by Thomson Reuters Nelson—is involved in some strategy of socially responsible and sustainable investing. (For more information, see <http://www.socialinvest.org/trends>.)

Globally, the growth within five short years of the United Nations Principles for Responsible Investment (UN PRI), a group of investors that endorses the view that ESG issues can affect the performance of investment portfolios and therefore must be given appropriate consideration, to a movement today with the backing of more than $22 trillion in assets under management illustrates mounting support and need for sustainability reporting. Furthermore, with a burgeoning list of countries and stock exchanges adopting mandatory reporting regimes and a growing consensus among financial professionals that sustainability risks are material issues for investors to consider, widespread ESG reporting appears to be within reach.

Challenges and Opportunities

Nonetheless, the challenges of integrating ESG information into investing can be daunting, from data acquisition to comparing data sets and verifying claims. Additionally, there are myriad views of what integrated reporting is and is not. On this spectrum lies everything from attaching a sustainability report as an addendum to a financial report to discussing a company's financial results and prospects in the context of its long-term sustainability risks. We advocate for the latter but realize this leaves many details undefined for reporting companies until a credible integrated reporting framework is developed.

Still, we believe champions of integrated reporting must forge ahead because of these challenges, not despite of them. Even while recognizing possible constraints, bringing the considerable knowledge in standards setting and auditing of the major accounting firms and standards boards together with the expertise from civil society organizations, labor unions, corporations and members of the SRI community that have worked on sustainability reporting offers a unique opportunity to leverage a breadth of specialized knowledge to create an integrated reporting framework that serves many types of users. To do so, all parties will have to acknowledge the strengths and weaknesses of existing systems, even when they already have vested considerable time in them. For example, there is still much work to be done in harmonizing the various sets of General Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) and all of the accounting standards have much work to do to address weaknesses in reporting contingent liabilities. At the same time, the Global Reporting Initiative (GRI) _G3 Guidelines_ and its sector supplements are a huge leap forward from earlier iterations, but still fall short of offering clear guidance to many industries on what is material for them to report on and more refined indicators that can be audited. All of these issues should be up for discussion as we work together toward a better system for all.

We in the sustainable investing field certainly do not have all of the answers, but our members have been working on reporting standards, including GRI, and engaging companies on the topic of sustainability reporting for many years. Based on this experience, socially responsible and sustainable investors can put forward key lessons to keep in mind as this process to define an integrated report moves forward.

Stakeholder Input

Discussions surrounding integrated reporting have surfaced the viewpoint that sustainability reporting efforts to date have been too stakeholder focused and, therefore, do not serve any one of the stakeholders, including investors, very well. Therefore, some argue that investor supremacy should be the order of the day for developing a new framework. As an industry organization serving investors, we caution others coming to the ESG reporting table that the information that other stakeholders, including workers, consumers and community members, have been asking for is not only quite valuable to them, but is of very high worth to investors too.

The most recent global financial crisis is a good example. For years, community and consumer advocacy groups warned of the predatory lending practices of payday and mortgage lenders. The groups' cries of foul prompted SIF members to investigate the claims and to engage financial services firms on the issues raised by these unsustainable business practices. Research findings and, at times, unproductive dialogue with some financial services firms prompted many SRI shops to limit exposure to the financial services sector as they saw a growing real estate bubble preparing to burst, a move that allowed those funds to preserve value.

It was consumer, community and environmental civil society organizations that warned the SRI community about scores of environmental toxins in products and pointed out double standards in companies' compliance with a growing list of more stringent standards in Europe and potentially less safe product offerings in the United States and other markets. Challenges by shareholders on these issues have led to product reformulations, as well as a host of industry reforms in recent years.

In addition, the same facility-level data that helps local groups understand a factory's impacts on its environs also warns investors of potential liabilities and, in aggregate with data from a company's other facilities, of companywide trends that might point to weaknesses in environmental management systems. While different groups might want to view data in varying formats and contexts, the underlying information and needs for accuracy and comparability are the same. Therefore, we believe a multi-stakeholder approach be used in forging the better tools for measuring and auditing that are supposed to be part of the next generation integrated reporting framework.

Thinking Outside the Reporting Box

Naysayers protest that one report can never serve the needs of all of the various stakeholders reading annual, sustainability, philanthropy and other reports being issues by companies, but perhaps that is because they are still thinking of reporting in the form of the traditional paper report, with a cover and a single beginning and end. However, existing technologies make these types of standard paper reports obsolete. Rich datasets, audited by certified third-party entities, can drive dynamic reports customized for the user requesting the information, while still generating mandatory regulatory filings. Tagged data, meanwhile, can be easily imported into data models used in analysis to find the best performers and the outliers.

Investors' Duty

We investors too have an obligation to give reporters the proper incentives to innovate. As called for by Al Gore and David Blood in their June 24, 2010, op-ed in _The Wall Street Journal_ , asset managers need to enter into contracts with multi-year rolling performance fees with fund managers. These and other incentives need to be instituted so that fund managers make investments with a long-term horizon in mind. Overreliance on the quarterly review by asset managers assessing fund managers and fund managers assessing companies, still the mainstay in financial services, must come to an end. This is the definition of short-termism. Furthermore, contracts also should include requirements for fund managers to integrate factors, including environmental stewardship, employee satisfaction and well-being, customer satisfaction, good community relations, and, most of all, sound governance, in investment decisions.

Urgency

One point is certain: time is not on our side. Challenges and business opportunities posed by climate change, water, biodiversity, population, terrorist and genocidal regimes, and poverty are just a few of the areas companies and their stakeholders will be confronting in the coming years. They will not wait for us to sort through a decade's long debate on integrated reporting. In fact, the debate over shaping an integrated reporting framework should not be viewed by companies as an excuse to sit back, do nothing, and wait for the next standard to unfold. After all, the best performing companies are those that recognize changing market demands and develop cutting-edge products and services to seize these prospects. Reporting this information to investors and other stakeholders in a truly integrated report is essential, but it is in the end only part of the solution.

Peter DeSimone manages SIF's policy, communications and programmatic work. He is a veteran of the SRI industry, with more than 15 years experience in SRI research. DeSimone took the lead in drafting SIF's proposal on mandatory ESG reporting to the Securities and Exchange Commission (SEC), as well as SIF's comments to the SEC on its concept releases and rules on proxy access, proxy plumbing, say on pay, and disclosures surrounding payments to host governments, conflict minerals and mine safety.

_The Social Investment Forum (_http://www.socialinvest.org _) advances investment practices that consider environmental, social and corporate governance criteria to generate long-term competitive financial returns and positive societal impact. The Social Investment Forum is the U.S. membership association for professionals, firms, institutions and organizations engaged in socially responsible and sustainable investing (SRI). Our vision is a world in which investment capital helps build a sustainable and equitable economy._

#### Towards a 21st Century Balance Sheet: The First Three Steps

**Toby A.A. Heaps**

Summary: Sustainability is the megatrend of the 21st century and corporations are its mega-institution. The aphorism that no business can succeed in a society that fails has never been truer, and as such it is no longer tenable for our time's megatrend to be kept off the balance sheet of its mega-institution. Among global stock exchanges, regulators and institutional investors, there is no longer a question of whether we need to move toward a new balance sheet for the 21st century that more fully reflects a company's impacts on the planet and society; rather, the question is, "Where do we start?" In this regard, crowd wisdom drawn from existing disclosure thresholds and indicators sophisticated investors are already integrating into their analysis points to a surprisingly clear path of six first generation metrics (carbon, water, waste, energy, payroll, and injuries) that, if disclosed across the board by all large corporations, would enable a radical improvement of corporate valuation models with a more forward looking orientation. Three steps are required to accelerate the evolution of the balance sheet and corporate valuation:

1. Mandate: A critical mass of investors and companies issue call for all large companies to report a New Balance Sheet consisting of a focused list of first-generation metrics at the same time as their regular financial filings by a certain hard date, and back this call up with a public relations and lobbying campaign to give regulators the impetus and courage to take action.  
2. Correlate: A "Stern Report" showing where green pays to reveal where there are strong linkages within industries for certain social/environmental metrics and profit/revenue growth.  
3. Integrate: As investors integrate these clear metrics into their valuation models, they will create a virtuous cycle where the most sustainable companies attract the most capital and earn the best returns.

The 21st Century Mega-Trend

The emerging "megatrend of sustainability" is driven by three overriding factors:

Emerging natural resource scarcity at a macro level: Our global economy has already over-stepped the limits of our planet's ecological systems capacity to maintain a stable climate, and many regions around the globe are facing natural capital shortages or large-scale land degradation, as detailed by the Millennium Ecosystem Assessment, which found approximately 60 per cent of the ecosystem services that support life on Earth—fresh water, fisheries, air and water regulation, and the regulation of regional climate, natural hazards and pests—are being degraded or used unsustainably. Humanity is now using nature's services 50 per cent faster than what Earth can renew, according to the 2010 Living Planet Report. In a world approaching a population of nine billion people with a burgeoning consumer class, the proficiency by which companies can generate wealth from constrained natural resources will be an increasingly important determinant of their success.

A shifting of greater responsibilities onto the corporation as part of the social contract: Over the last 30 years, the publicly traded corporation has grown in importance and stature from being a relatively minor part of the global economy to becoming its paramount characterization. The ratio of the value of all publicly traded companies to global GDP has increased by a factor of ten, to the point where they are now on par. According to the TEEB for Business report, the world's top 3,000 listed companies are estimated to produce negative impacts or "environmental externalities" totalling about $2.2 trillion annually and representing a third of their profits. Many of these externalities will be moved onto the balance sheet in coming years, which will have significant implications for companies who are able to make progress on their resource productivity. Additionally, in the current era of large government deficits and rising long-term commodity prices (underpinned by scarcity of resources and growing global demand/population), tax authorities are reconsidering untenable fiscal regimes, as well as clamping down on tax loopholes (including transfer pricing schemes) and other forms of fiscal evasion. Against this context, companies who live up to their end of the social contract will be better insulated as governments shift more of the fiscal burden of running a society onto companies.

An increasingly intertwined global landscape: As the recent financial meltdown made crystal clear, the world's economic fate is connected like never before. This complex interdependency is intensifying and organizations can no longer afford to draw all of their leadership ranks from monocultures. The more diverse an organization's senior leadership is, the less susceptible it is to falling into traps of groupthink and the more likely it is to solve dynamic problems.

What do the investors say?

Capital markets are the oxygen chambers of the global economy, and they are strongly focused on maximizing value, as it can be measured. Up until recently, there existed considerable ambiguity as to whether or not investors were interested in the social and environmental performance metrics of their holdings.

Four significant developments in 2010 helped to clear up this ambiguity.

1. The two powerhouse corporate news behemoths, Bloomberg and Thomson Reuters, smelling an appetite from their clients, added social and environmental data feeds to their standard corporate metrics and intelligence platforms.

2. A fall 2010 survey of large global institutional investors by the Canadian Institute of Chartered Accountants (CICA) helped to clear up this ambiguity. The CICA discussion brief "Environmental, Social and Governance (ESG) Issues in Institutional Investor Decision Making" (available online www.cica.ca/cpr), based on interviews with investors, found:  
A. Mainstream institutional investors are beginning to incorporate environmental, social and governance (ESG) factors into their decision making.  
B. The integration of ESG factors into their analysis is hindered by the "wild west" nature of disclosure.  
C. Regulators have a responsibility to ensure that material information needed by capital markets is provided in regulatory filings so that key environmental and social metrics are disclosed in a standardized manner which enhances reliability, availability, timeliness, and comparability.

3. The biggest business story of 2010: One needs look no further than BP's recent experience in the Gulf—which came on the heels of a several years of lack-luster safety performance, and produced what is currently estimated to be a $40 billion hit to the company—to see why investors are increasingly taking into account companies' social and environmental records.

4. In August of 2010, The Prince of Wales' Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) announced the formation of the International Integrated Reporting Committee (IIRC) with substantial support form global accounting bodies to promote the adoption of integrated sustainability reporting by relevant regulators and report preparers.

Where to Start: Tap Crowd Wisdom

Now that the existential drivers for holding corporations to better account for their social and environmental performance are accepted by mainstream capital markets actors, what is the first step to cut through the thick fog that currently envelops corporate environmental and social performance?

For good reason, author John Elkington has characterized the present state of corporate environmental and social reporting, with the plethora of metrics from workplace deaths or number of charity runs sponsored, as akin to carpet-bombing. To bring some order to the chaos of ESG reporting, focus is required. A useful way to hone in on what really matters is by tapping crowd wisdom: namely, which ESG metrics are sophisticated investors already using, and which metrics are already reported at critical thresholds.

Over the course of 2009, Corporate Knights Research Group (CKRG; an affiliate of the author's company) undertook a comprehensive review of mainstream brokerage research, papers and reports contributed by fiduciary investors to the PRI Enhanced Research Portal, work by the Canadian Institute of Chartered Accountants, and the annual Thomson Reuters Extel/UKSIF Socially Responsible Investing & Sustainability Survey to identify which ESG metrics were being used by investors. As part of this industry scan, CKRG also conducted a series of direct interviews with the ESG teams of 15 asset managers (including eight UNPRI signatories) with a combined $3 trillion of assets under management.

The review found 60 universal indicators. Data availability thresholds were then determined (for both a broad universe of companies and the top ten per cent identified 300 companies), using ASSET4, a Thomson Reuters business, and The BLOOMBERG PROFESSIONAL ® service. With the support of the Global 100 Council of Experts (http://www.global100.org) CKRG identified ten key performance indicators intended to represent the best attainable balance between universality, availability of data and materiality at this time.

The ten key performance indicators (KPIs), plus a transparency bonus, are listed in the below graphic:

There are two things to note about this basket of universally applicable KPIs. Half the indicators can be obtained via a thorough mining of information in regulatory filings including the audited financial statements (% taxes paid), and proxy circular (board diversity, compensation linked to ESG metrics, CEO pay, ESG board committee) and can produce valuable insights. The four key resource metrics most often cited by sophisticated investors, all of which still fall under voluntary disclosure, most available at critical thresholds are water, energy, waste, and carbon.

While injury data was cited by investors as integral to comprehensive valuation, despite the fact that almost every firm internally tracks injuries, the level of public disclosure was so low that it was still insufficient to allow for meaningful comparisons between firms.

The six universally applicable indicators that would create the most value for investors are:  
1. Gigajoules of total energy consumed  
2. Total cubic meters of water consumed  
3. Metric tons of total CO2 emitted (scope 1,2,3)  
4. Metric tons of total waste produced  
5. Company's total number of injuries and fatalities including no-lost-time injuries per one million hours worked  
6. Payroll for entire company

At a minimum, most large companies are already tracking the above metrics, but this information is not being made available in convenient formats to allow investors to integrate it into their valuation and allocation models. As such, there would be insignificant extra costs for firms to comply with associated reporting requirements, with considerable upside for more accurate valuations and optimal allocations for investors.

The 21st Century Balance Sheet: Making it Happen

There are three steps required to accelerate the evolution of the balance sheet and corporate valuation to include these six first generation universally applicable metrics.

Mandate: Regulators need the impetus and courage to take action to mandate disclosure of these six metrics. This can be achieved via a "Coalition for Clear Reporting" backed by a critical mass of global capital market actors to credibly issue a clarion call for a mandated reporting of these six first-generation metrics at the same regular time periods as financial disclosures. The coalition could be coordinated by the International Integrated Reporting Committee with support drawn from the Carbon Disclosure Project, World Business Council for Sustainable Development, United Nations Principles for Responsible Investment, and World Economic Forum. This clarion call will need to be backed up with a public relations and lobbying campaign.

Correlate: Securities analysts, like most people, do what they have done and what they know. For each industry, analysts employ tried and true rule-of-thumb valuation assessments. With the deluge of data now available via Bloomberg terminals, it is now possible to carry out a "Stern Report" to reveal where there are the strongest linkages within industries for certain social/environmental metrics and profit/revenue growth. These findings would provide a good starting point for analysts to experiment with integrating social and environmental data into their valuation models.

Integrate: As investors integrate these clear metrics into their valuation models, this will create the opportunity for a new type of optimized forward-looking investment allocation. Firms can be scored and ranked against their industry group peers on not just financial metrics but across a set of focused meaningful sustainability metrics, which will allow for tilted portfolio construction to enable a virtuous cycle where the most sustainable companies attract the most capital and earn the best returns.

Conclusion

While no one knows where the journey toward truly integrated reporting will end, we do know where it starts. With the proper focus, it is ambitious but possible to work toward the 2011 G20 date in France as a target date for achieving global consensus to bring the sustainability megatrend of the 21st century onto the balance sheet of our time's mega-institution.

Clearing up these information asymmetries would be a significant step forward toward better functioning markets and a cleaner, more just form of capitalism.

The six initial metrics would empower technology-savvy consumers to select sustainable products from leading companies, boosting the sales/profits of those companies, and generating additional alpha for investors.

These six metrics would also empower NGOs, who would leverage this information in campaigns to enhance their effectiveness at calling out laggards and reinforcing leaders.

Over the longer-term, as an ever more critical part of the economy orients toward rewarding companies who operate in symbiosis with the planet and society, governments around the world will have more leeway to enact full-cost pricing (internalizing externalities) and tax benefits to companies who excel on core social metrics including safety, diversity and social contract fulfillment—helping to further reinforce early corporate leaders, and generating more alpha for investors.

The full potential of the free-market economy to deliver sustainable value to human society has never been tapped. We have the ingenuity to make this happen. With the right information and prices that reflect true costs, markets can be a powerful tool to make the world a better place. The six first-generation metrics for the 21st century would be a small ask of companies, while opening the door for a huge leap forward for better functioning markets.

_Toby A.A. Heaps is the president, editor and co-founder of Corporate Knights Inc. He spearheaded the_ first global ranking of the world's 100 most sustainable corporations _in 2005. Toby is committed to cleaning up capitalism with practical tools, intelligence, and insights so that markets work to make the world a better place._

# PART V

The Importance of Auditing

#### Does an Integrated Report Require an Integrated Audit?

**Bruce McCuaig, Vice President Risk and Compliance**

Paisley, Thomson Reuters

Integrated reporting is based on the premise that financial and non-financial information are tightly related. Understanding the firm's environmental performance, for example, is relevant to evaluating the economic performance of the business. That makes sense.

Investors and stakeholders are entitled to understand both the basis for presentation of financial and non-financial information and the reliability of reported financial and non-financial information. What is presented in integrated reports is determined by standards developed for reporting financial and non-financial information. The internal work flows and management processes to determine reported financial and non-financial information is referred to as internal control. The reliability of internal controls is also subject to representations by management and for many public companies subject to Sarbanes Oxley (SOX), external auditors are required to evaluate internal control over financial reporting as well.

A striking element of integrated reporting is the difference between the form and content of the opinion by statutory auditors on the financial statements and internal control over financial reporting and opinion on the basis and reliability of non-financial information.

In the case of Southwest Airlines, excerpts from the auditor's report on the financial statements and internal control over financial reporting and the verification statement for Southwest Airlines 2009 One Report are shown below (1):

Extract from the Verification Statement for Southwest Airlines 2009 One Report  
 _"To the best of our knowledge, we have found that Southwest has satisfactorily applied the GRI sustainability reporting framework and meets the report content requirements as specified by GRI to the best of its ability. The content provided for the 2009 One Report meets the content and quality requirements of the GRI_ _Sustainability reporting guidelines_ _version 3.0 C+ application level_."

Extract from the Report of the Independent Registered Public Accounting Firm  
The Board of Directors and Stockholders of Southwest Airlines Co.  
 _"In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Southwest Airlines Co. at December 31, 2009 and 2008, and the consolidated results of operations and its cash flows for each of the three years in the period ended December 31, 2009,in accordance with generally accepted accounting principles.  
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Southwest Airlines internal control over financial reporting as of December 31, 2009, based on criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated January 29, 2010 expressed an unqualified opinion thereon."_

Auditors typically report on the basis of presentation of information—GAAP for Southwest's 2009 financial statements and the GRI sustainability reporting framework for the sustainability reporting. International Financial Reporting Standards (IFRS) will replace GAAP as we know it.

But under any reporting framework some auditor will need to evaluate the reliability of internal control over financial and non-financial information.

To do so, some standard will need to emerge for reporting on the effectiveness of internal control over non-financial information. And, if the SOX model is followed, audit standards need to be developed to provide guidance to auditors of non-financial information what they must do to conclude on effectiveness of internal control over non-financial information.

If the corporate reporting system is due for an overhaul, the rules for auditing and reporting on the effectiveness of internal control over financial reporting should be considered as well. Some questions to consider are:

1. How reliable is the auditor's report on the financial statements if it does not directly reference to or include an opinion of the non-financial information?

Current accounting standards and existing disclosure requirements already consider the economic impact of non-financial events. But the degree of reliance to be placed by financial auditors on publicly reported non-financial information such as sustainability reporting is not completely clear. How does climate change risk disclosed as a risk factor drive sustainability and financial disclosures?

2. How reliable is the verification statement by the external assurance provider on non-financial information in the absence of defined audit standards identified?

Audit professionals speak of the "reasonable assurance" standard and a presumably lower "limited assurance" opinion. Opinions on financial reporting and internal control effectiveness are considered to provide "reasonable" (vs. "absolute") assurance. Yet publicly reported statistics suggest the rate of restatements required for published financial statements in the early years of SOX was relatively high, in some years in excess of 10%. Reasonable assurance is a subjective standard. Currently the verification statements such as those appearing in Southwest Airlines One Report are to a lower, (but unstated) "limited assurance" standard. It is difficult to tell, in the absence of any audit standard how "limited" such an assurance statement is. Some standardization in the form of audit opinion seems necessary.

3. How can the reports on the internal control effectiveness over financial and non-financial information be compared to other companies?

Internal control effectiveness reporting is a pass/fail standard. For SOX purposes, the existence of a "material weakness" as defined by the PCAOB Audit Standard 5 is evidence of a "material weakness" and a denial of an internal control effectiveness opinion. In the absence of such a determination, there is no basis for comparison. A company that far exceeds the requirements for internal control effectiveness is not differentiated from a company who barely passes the test.

For non-financial information companies reporting to a set of standards such as those provided by the Global Reporting Initiative (GRI) may be more comparable. As a minimum, the level of reporting and assurance is stated. For example the verification statement for Southwest specified that "...the content and quality requirements of the GRI Sustainability reporting guidelines version 3.0 C+ application level."

4. Is the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission suitable for evaluating internal control over non-financial reporting?

COSO was developed in early 1990s in response to the fraudulent financial reporting of the 1980s. While it is a general framework for evaluating internal control, it is tilted towards fraudulent financial reporting. It does not provide a pass/fail rule and at best its criteria are vague and somewhat subjective. Since the 1992 COSO framework was developed, the Open Compliance and Ethics in Governance (OCEG) organization has published a very detailed set of criteria called the GRC Capability Model "The Red Book" intended for broad application. Its use as an alternative to COSO warrants consideration for both financial and non-financial reporting.

5. Is PCAOB Audit Standard No. 5 (AS5) an appropriate standard for auditing internal control effectiveness over financial and non financial reporting?

External audit costs under SOX spiraled upwards and in the early years of implementation and the cost of SOX implementation was opposed fiercely by most business groups. AS5 is uniquely designed for auditing internal control over financial reporting. It is focused on financial controls and financial statement accounts. It does not consider business performance as a factor in evaluating internal control effectiveness and regards management self reporting with significant suspicion. It is unlikely to be welcomed or effective for non-financial reporting. Interestingly, the OCEG organization, producers of the "Red Book" described above, have developed the "Burgundy Book" a set of assessment tools for evaluating the implementation of the "Red Book" standards.

It makes sense to rethink the basis for reporting on and auditing internal control effectiveness over both financial and non-financial reporting if the rules for corporate reporting are being rewritten in a world of integrated reporting. Like other aspects of corporate reporting, internal control effectiveness reporting has become complex and costly and its value is uncertain. The markets did not significantly penalize companies who failed control effectiveness tests under SOX.

One paradigm that comes to mind is that used to inform and caution restaurant patrons in Los Angeles, and increasingly in other jurisdictions.

Every hungry visitor to Los Angeles County, on entering a food service establishment, is greeted at the door with a poster showing the letter A, B or C in large colored print.

That poster is the estimation of the residual risk to your health of dining in that establishment as determined by a Los Angeles County health inspector. It tells potential diners the tradeoff they may be making between health risk and culinary reward in their dining decision.

As simple as the paradigm seems to be, it may have merit. Restaurant inspectors have criteria for assessing the conformance of restaurants to food safety rules. It is not difficult to imagine a set of criteria to determine the degree of conformance to rules for reporting on financial and non-financial information. Investors and stakeholders can decide the risk they wish to assume. Comparisons can be made between companies and trends developed over time. There would be no more fuzzy distinction between "reasonable" and "limited" assurance and companies who go the extra mile in improving the reliability of their reporting would be rewarded. The real pressure would be felt by auditors and assurance experts who would need to sharpen their tools.

Endnote: (1) The Southwest Airlines 2009 One Report can be found online at <http://216.139.227.101/interactive/luv2009/>.

#### One Audit—Moving towards 21st Century Integrated Assurance

Nick Ridehalgh

Kiewa Consulting Pty. Limited, Sydney, Australia

In the foreword to _Accounting for Sustainability: Practical Insights_ , HRH Prince Charles states that organizations are currently " _battling to meet 21_ st _Century challenges with, at best, 20_ th _Century decision-making and reporting systems_ (1) _._ "

As described in this EBook, One Report will integrate strategically-relevant and material financial and non-financial performance information from a range of different sources, into one virtual "document." In designing and developing One Report, organizations will totally restructure decision-making processes and both internal and external market information flows.

Users of an organization's One Report will still want confidence in the accuracy of the disclosures prior to decision making. One Report will still require some form of independent integrated assurance.

Therefore assurance providers have an opportunity to fundamentally re-define their independent assurance solution so that it is more user-relevant and ready to support organizations' 21st century integrated reporting—One Audit.

Opportunity to fundamentally re-define independent assurance

In developing a more user-relevant One Audit framework, assurance providers will not only need to understand what disclosures will be included in One Report, but also how they will be reported, who will use them and so where and to what level independent assurance will be valued.

Answering these questions will also provide an opportunity to revisit and address some common user complaints about the independent assurance process, such as: removing assurance report restrictions; reporting on the organization's governance, risk management and internal controls effectiveness; and providing assurance over material non-financial disclosures.

One Report—what disclosures will be included?

One Report will include both financial "lag" indicators and business relevant "lead" indicators, providing the user with a good picture of the organization's past performance against strategy, and future prospects. The user will be given a better look at what information the Board and executive think is important in making decisions and running the business.

We can already see evidence of this occurring when executives change their organization's financials to provide more meaningful "unaudited" pro-forma information for users.

There has also been a significant increase in the number of organizations producing sustainability reports, or at least including unassured non-financial performance information in their Annual Reports, analysts' briefings, and presentations.

Some of these unassured disclosures are being used by analysts in their models and reports (i.e., GHG, waste, water, OH&S performance information is now available on Bloomberg and Thomson Reuters screens) whereas some assured "technical accounting" entries and immaterial disclosures are being removed (i.e., revaluations) or ignored (i.e., certain notes to the financial statements) by these same users.

One Report should provide a broader suite of strategically-material and relevant financial and non-financial disclosures to support user decision making.

How will users utilize disclosures in One Report?

The use of XBRL for regulatory filings is growing rapidly in many parts of the world, including the US, UK, the Netherlands, China, Japan and Australia. Once implemented, it drives significant enhancements in disclosure transparency (e.g., more accessible and reusable), compliance and analytical processes and controls, as well as cost and time reduction for organizations and users. With the next generation of techno-literate users already in the work-force, One Report will not be a paper "document," but rather XBRL structured disclosures that can be seamlessly accessed and assembled into user driven report templates.

Standing data will be stored. Relevant and material financial and non-financial performance data will be provided on a regular basis, with certain operational facts being reported "real time" through the appropriate XBRL taxonomy from the organization's various underlying core systems.

Who will use the One Report in making their various decisions?

Legislation in most jurisdictions requires the Board and management to prepare annual reports, and the independent assurance provider to audit the truth and fairness of the financial statements and report to the organization's owners. According to the recent EC Green Paper _Audit Policy: Lessons from the Crisis_ (2), the assurance role is even more important and under review after the global financial crisis as " _robust audit is key to re-establishing trust and market confidence_."

Other reports, including sustainability reports, are made available to multiple stakeholder groups. Assurance over these reports is mostly voluntary, and the assurance report is addressed to the parties who have set the scope of work, usually the Board or management.

In all cases the assurance provider seeks to limit legal duty of care, and so potential exposure, to the addressee of the reports. However, this may not be allowable in future, as the EC Green Paper referred to above, goes on to state that assurance providers are entrusted in law to undertake statutory audits, and " _this entrustment responds to the fulfilment of a societal role in offering an (audit) opinion_."

The One Report disclosure elements will be the independently assured "single source of the truth," and all internal and external users (society at large) will therefore want to place some reliance on the assurance work undertaken when making their decisions.

Where, and at what level do One Report users actually value independent assurance?

There are several issues that assurance providers will need to address when developing a more user-relevant and valued One Audit framework, including:

\- _An opportunity for users to engage with the organisation (and the assurance provider) regularly to explain their concerns and material information needs_ – Lessons can be learnt from sustainability assurance providers, who are involved from the start of each reporting period in understanding users' concerns and information needs. This up-front involvement enables the assurance provider to challenge the materiality and relevance of what is ultimately reported by the organization to ensure it addresses user needs and expectations.

However, once the material disclosures have been determined, including forward looking non-financial indicators, responsibility for determining the scope of assurance work, and the skills of the team required, should be determined by the independent assurance provider based on judgement, experience and in accordance with international standards.

\- _A more detailed report on the effectiveness of the organization's governance, risk management and internal controls frameworks_ – The One Audit solution is likely to require independent opinion on the adequacy and effectiveness of the organization's governance, risk management and internal control frameworks. This could be a section of the One Audit Report, similar to the "findings and conclusions" section in a sustainability assurance report, or alternatively provided in a separate more detailed document, for example like a SAS70, Service Organisations, performance report.

\- _Confidence that the financial and non-financial disclosure elements provided are complete and accurate and assured by experts in accordance with latest international standards_ – Users will want regular access to the disclosure elements to enable them to spot issues and opportunities "real time," as well as track trends "over time." The structured disclosure elements will facilitate access to the information and an opportunity for users to pull down templates or create their own reports.

XBRL provides the assurance provider with authentication capabilities including explicit relationships between One Report (scope, findings and opinion) and the organization's disclosure elements drawn from various systems. It will be important for One Audit service providers to keep their assurance procedures at the right level of disclosure (i.e., underlying XBRL instance documents) using up-to-date technology-based assurance solutions.

In addition, technical experts will be required to confirm that "regulatory reporting templates" (i.e., statutory financial statements), which can be pulled down by users, and accounting policies used (for financial and non-financial disclosures) have been prepared in accordance with the appropriate legislation and regulation.

Realizing the benefits from the One Report and One Audit

There is no doubt that One Report will fundamentally change the scope and approach of One Audit. However, these changes will realise multiple benefits for organizations, their key stakeholders and assurance providers including:

\- _Cost reduction_ – The end result should be fewer disclosures being redundantly reported and assured, and the removal of many layers of internal and external reporting as users can pull the information they need in a tailored format, as and when they need it.

\- _Improved transparency and data accuracy_ – This will be delivered through the real time release of strategic and material financial and non-financial information, which has been through a continual assurance process.

\- _Improved consistency and standardisation_ – As industry sectors develop tailored XBRL taxonomies and sector specific KPI definitions there will be a marked improvement in the consistency of disclosures.

\- _Improved analysis and valuation_ – Analysts will have improved real time financial and non-financial information, as well as available sector benchmarking information, to assist them in developing detailed analysis and improved investment models.

\- _Enhanced brand and reputation_ – The organization and the assurance provider's brand will be enhanced through the delivery of candid real time assured information together with an independent commentary on the organization's governance, risk management and internal controls effectiveness.

Embarking on the One Audit journey

Assurance providers should not wait until the One Report framework is finalized to start on their integrated assurance journey. They should start to determine what assurance on One Report will be, and take preliminary actions in the following areas.

\- _Skills assessment and future needs_ – The traditional financial assurance provider will need to adapt and develop new skills. There will undoubtedly be an increased role for the _systems auditor_ in reviewing the systems, processes and controls to tag and process data, changes made to the data libraries, taxonomies and business rules, and data access security.

In addition _, a broader group of technical experts_ will be required to assure complex financial and non-financial disclosures, and review the business rules (formulae) used to convert non-financial base systems data (i.e., GHG data into CO2) and prepare it for disclosure. These experts will also be required to provide assurance over the regulatory reporting templates that can be "pulled down" by users to address statutory obligations.

Financial assurance providers will also need to learn from _sustainability practitioners_ , and use new tools (e.g., social media) to engage key stakeholders in the reporting and assurance process in order to better understand their information needs.

\- _Review of legal and risk impediments_ – Many of the changes required to meet user information and assurance needs appear to increase risk for both the organization and the assurance provider, and so potentially require legal and regulatory changes. Assurance providers should consider the questions in the EC Green Paper referred to above, and stay close to the One Report dialogue to understand the likely disclosure changes, whilst researching how to mitigate risks from providing more relevant and valued assurance reports.

Actions could include development of the One Audit report, including integration of assurance over financial and non-financial data, as well as the development of a Governance, Risk Management and Internal Controls performance report.

Further work is required to lobby and work with Government and standard setters to reduce assurance providers' professional liability exposure if and when the scope is extended, as well as remove the mandatory requirement to report annually on "standing data" reported on the website and certain "non-material" note disclosures.

\- _Technology development_ – Assurance providers should become more involved in the roll-out and development of XBRL for data management and reporting purposes. In particular, assurance providers should develop a robust and secure methodology to tag disclosure elements and report frameworks as having been assured prior to their publication as the "single source of truth." In addition, assurance providers should start to design and develop their real time assurance software tools.

In conclusion, the disclosures and the way in which One Report information is structured and delivered will be fundamentally different to meet the needs of the new generation of techno-literate users. The development of One Report is an opportunity for assurance providers to add richness to their One Audit processes and reports, address some of the legacy assurance issues, and provide real insights to both the organization and its key stakeholders. It is an opportunity for independent assurance to be both relevant and valued into the 21st century.

Endnote: (1) Accounting for Sustainability: Practical Insights, Hopwood, Unerman and Fries (Earthscan, 2010)  
(2) EC Green Paper _Audit Policy: Lessons from the Crisis_ (Com(2010)561 dated 13 October 2010)

#### Auditors at the Crossroads

Keith L. Johnson

_"Sustainability reporting and disclosure should have independent assurance._ _A formal process of assurance by an independent party is essential for impartial sustainability reporting. Sustainability reports should clearly state the name of the assuror. Integrated reporting should be assisted by the Audit Committee." [_ _South African Institute of Chartered Accountants, Summary of Report on Governance for South Africa – 2009 (King III),_ King Committee on Governance, Principle 6.5.]

Developing Challenges to Audit Usefulness

Enron, WorldCom, Lehman Brothers, Bear Stearns, Massey Energy, British Petroleum. Each of these companies is associated with massive destruction of corporate and social value during the first decade of the 21st century. They all harbored unrecognized risks and presented public images that disguised the real dangers of their business models. Nevertheless, in retrospect, warning signs were plentiful and obvious at each company long before disaster struck.

Unhealthy companies often exhibit symptoms like poor internal controls, misaligned incentives, myopic business plans, inadequate risk management, deficient implementation procedures and corrupt company culture. These and other forewarnings were evident in the lead-up to most recent crises. Unfortunately, such signs are often missed by auditors and ignored by stakeholders, neither of which are trained, nor provided with sufficient information, to recognize the significance of sustainability risk indicators.

As you read this, similar predictable and devastating financial disasters are likely building in the economy, perhaps in your investment portfolio. They might be obvious to risk managers, financial analysts, organizational behavior specialists and others who are trained to look forward, as well as backward, when examining company information. However, without strategic deployment of those professionals in the financial services industry, predictable disasters will go largely undetected until damage has been done.

The European Commission, in an October 2010 press release announcing a public consultation on the audit function, explained its response to events of the last few years. "In the wake of the financial crisis, we need to ask the question whether the role of auditors can be enhanced to mitigate any new financial risk in the future (1)." The Society of Actuaries has even responded to recent circumstances by establishing a new professional credential of Chartered Enterprise Risk Analyst (2).

Indeed, reliance solely on backward-looking and silo-based financial measures to evaluate the status and health of companies is becoming outdated. Tools established for industrial companies in the cultural context of the 19th and 20th centuries are simply inadequate for the 21st century (3). How will the audit industry evolve in response to challenges presented by these trends?

A More Useful Paradigm

Integrated reporting presents an opportunity for the audit profession to rethink its future direction. As corporate directors, investors and other company stakeholders develop more interest in holistic company reporting on sustainability, the need for independent assurance of reporting reliability will continue to expand beyond examination of measures relating to historical company financial performance (4). Will audit firms cede this territory to other service providers that assemble the expertise needed to evaluate those reports?

To win the contest for expanded assurance assignments, audit firms might first re-visit the paradigm that underlies their service model. Audits currently evoke the image of an inspection, perhaps a regulator, going through a checklist to ensure compliance with required items. The process is backward-looking and focused more on financial data or operational procedures than the human behaviors and organizational dynamics associated with items on the checklist.

If the goal is to maximize usefulness of audit assurance services in a world becoming more concerned about sustainability and enterprise risk exposures, a physician paradigm might be more appropriate. By viewing goals of the audit examination more holistically, value of the service to directors, investors and other company stakeholders could be greatly enhanced.

Which paradigm better fits the needs of audit report users: (a) a regulatory compliance inspection; or (b) a company physical health examination? The medical paradigm contemplates evaluation of not only blood test results (i.e., financial performance numbers), but also consideration of behavioral and genetic risk factors (i.e., organizational design, environmental issues, implementation procedures and company culture) in a forward-looking evaluation concerned with ongoing health and sustainability. It recognizes the potential for use of specialized expertise tailored to unique company characteristics. It also acknowledges that companies are made up of human beings and resemble organic systems more than predictable machines.

Paradigms can be powerful in framing expectations and guiding the execution of responsibilities. A paradigm shift could do wonders for the audit profession. It would force audit firms to integrate their established accounting acumen with expertise in risk management, organizational behavior and other disciplines that bear on assessing the accuracy and completeness of company integrated business sustainability reports. If this can be done, the future benefits of a more useful annual company audit examination could be enormous.

Then again, perhaps actuaries with the Chartered Enterprise Risk Analyst designation would be better up to the task (5)?

Keith L. Johnson is Program Director for the University of Wisconsin Law School's International Corporate Governance Initiative and Head of Institutional Investor Services at Reinhart Boerner Van Deuren, s.c.

Endnote: (1) October 13, 2010 European Commission press release announcing a public consultation on how the statutory audit could be improved.  
(2) See <<http://www.ceranalyst.org/>>, viewed on November 5, 2010.  
(3) For example, the Ontario Securities Commission, in "OSC Corporate Sustainability Reporting Initiative - Report to Minister of Finance," (December 18, 2009) reported that, "During our consultations, stakeholders expressed concerns regarding the adequacy of corporate governance and environmental disclosure. In particular, they noted that . . . in the case of environmental disclosure, the information is often not integrated with financial reporting, nor is it typically audited or verified by an external party."  
(4) Growing perceptions of the importance of sustainability is illustrated by the UN Global Compact-Accenture CEO Study 2010, "A New Era of Sustainability." It reported, "CEOs around the world are starting to see the shape of a new era of sustainability coming into view. In the face of rising global competition, technological change and the most serious economic downturn in nearly a century, corporate commitment to the principles of sustainability remains strong throughout the world: 93 percent of CEOs see sustainability as important to their company's future success."  
(5) The views expressed in this article are those of the author and do not represent positions of any employer or organization with which he is associated.

#### Sustainability Reporting – Can It Evolve Without Assurance? The Audit Profession Can Help to Build an Assurance Model

Cindy Fornelli, Executive Director

Center for Audit Quality

An emerging trend in corporate reporting is the inclusion of non-financial information that reveals how the company is managing risks to its strategy and business plan. Of particular interest are risks that deal with environmental issues and resource needs, as well as labor and other social issues, and how these impact the bottom line. The recent "Workshop on Integrated Reporting: Framework and Action Plan," convened by the Harvard Business School, brought together a wide range of stakeholders to discuss the current and future state of "sustainability" reporting. One thing is clear: different stakeholders have varying views on what is meant by "sustainability," how it is measured, and how it gets reported.

Some view sustainability narrowly, as focusing mainly on environmental concerns—greenhouse gas emissions, toxic waste, energy consumption, use of finite natural resources, for example. Others expand the concept of sustainability to include corporate and social responsibility issues such as human rights, child labor, fair trade practices, and consumer product safety. Still others view it as including any issue that poses a risk to the long-term sustainability of the enterprise. There is no "one-size-fits-all" when it comes to sustainability reporting. The needs will be different across industry sectors, and could also vary among companies within a given sector.

However one views sustainability, there is a common challenge—the complexity of measurement and reporting. There currently is a lack of standardized metrics that companies can use for reporting purposes. While organizations such as the Global Reporting Initiative and the recently formed International Integrated Reporting Committee aim to create a globally accepted framework for accounting for sustainability, these efforts are still maturing. Agreement on what form the reporting should take is also lacking—should all metrics be monetized, or is there room for more descriptive data on company performance? How prescriptive should the standards be, and how closely should they reflect the differing regulatory requirements established by individual countries?

Whatever shape the standards eventually take, widespread acceptance of sustainability reporting will depend on confidence in the veracity of the information provided. How can governments, regulatory agencies, investors and other stakeholder groups be assured that the data presented by a given company is accurate? Third-party verification is likely to play an essential role. Just as the auditor's opinion lends credibility to financial reports filed with the SEC, third-party verification of claims made by companies can lend credibility to sustainability reporting.

Given there is currently no framework for verifying the data that companies present in their sustainability reports, some attention should be paid to this issue in these early stages, and much can be learned from the audit assurance model. The process of third-party verification should be standardized, to eliminate any question about the rigor that was applied in analyzing company-generated data. The audit profession can assist in this effort by drawing on its vast expertise in analyzing financial data. The disciplined approach to the audit of financial statements can serve as a basic blueprint for an audit of non-financial measures. Further, the profession can leverage its expertise in assessing internal control over financial reporting to develop an assurance framework for sustainability reporting initiatives. This might involve testing of the processes that a company has developed to capture data, testing how the data is rolled up, analyzed and reported, and reviewing the accuracy of the documentation of the processes.

Another important aspect to the audit assurance approach is the application of professional skepticism. Skepticism presumes a questioning mindset, and involves the validation of information through probing questions, critical assessment of evidence, and attention to red flags or inconsistencies. The importance of approaching the analysis of information with a skeptical attitude and the need for corroborating evidence will be integral to whatever type of assurance program is adopted for sustainability reporting.

In the development of an assurance framework, consideration should also be given to the relationship between the reporting company and the assurance provider. The assurance provider should be independent of the company for which they are providing an opinion. However, consideration will need to be given to determine what level of independence will be sufficient and whether independence requirements should be built into the standards. An open question is whether the independence standards should be as strict as those required for the auditing of financial statements or whether something less rigorous can be applied for non-financial measures.

As evidenced from the discussions at the Workshop on Integrated Reporting, we are still in a learning phase with respect to sustainability reporting and assurance. Companies will have different motivations for incorporating non-financial performance measures into their public reporting, but they will, in all likelihood, have to subject these metrics to a third party for some level of review. Just as important as the integrity of the claims made by companies is the integrity of the assurance provided on those claims. For that reason, it is critical that a framework be developed so that stakeholders can be confident that a standardized level of rigor was applied to the assurance process. The tools and methodologies of the audit profession can be invaluable in establishing a standardized assurance process.

# PART VI

Leveraging Technology

#### The Role of XBRL and IFRS in Integrated Reporting

Maciej Piechocki and Olivier Servais (1)
Introduction

Integrated reporting. One report. Corporate reporting. Although there may not be common agreement on the scope of these three, they have one key thing in common—the need to embrace technology in order to evolve. In a world where it is generally assumed that all information can be found on the Internet, one cannot imagine trying to obtain a company's financial information by searching through paper reports or PDF files. Surely company financial and non-financial performance disclosures are available online and analysis of the information, metrics and narrative contained in these reports can be done with the click of a mouse.

For financial information in a number of markets around the world this is true, and has been a reality for over a decade. How? Through the implementation of a technology called eXtensible Business Reporting Language (XBRL). Currently, the use of XBRL is largely restricted to financial information however, as a technology—and as its name suggests—XBRL is highly adaptable. It can be applied for general business reporting, and there are a number of global initiatives looking to leverage XBRL for non-financial reporting, e.g., environmental, social and governance reporting.

This chapter will provide a brief overview of XBRL and its current implementation in financial reporting. It will examine the importance of information comparability and how XBRL can, and is beginning to, be applied more broadly in non-financial reporting. It will also seek to anticipate and address some of the challenges and lessons for XBRL and integrated reporting, should the implementation of XBRL for financial reporting be considered a blueprint for integrated reporting.

About XBRL

XBRL is a dialect of Extensible Markup Language (XML), the universally preferred language for transmitting information via the Internet. Like its most commonly-known sibling, HyperText Markup Language (HTML), XBRL applies computerized mark-up tags to information that is communicated using the Internet. However where XBRL sets itself apart from its XML siblings is its structure and its adaptability. HTML tags are only used to format blocks of text, but in terms of content and meaning these tags do not enrich or become part of the text. XBRL is different because the mark-up tags, which are codified in taxonomies, are applied to each item of data and these tags and taxonomies enrich the data by providing structure and additional metadata. The result of this is that data becomes "intelligent" and can be recognized, processed, stored, exchanged and analyzed automatically using software. And because XBRL is a licence-free standard, it is software and hardware independent, therefore information can be transmitted in a variety of formats and via a host of tools.

It was for the purpose of automating business information requirements—such as the preparation, sharing and analysis of financial reports, statements and audit schedules—that XBRL was originally developed. XBRL was initially conceived in 1998 by a certified public accountant as eXtensible Financial Reporting Markup Language (XRFML). However the realization soon followed that the technology could be adapted and applied more widely than originally conceived, to cover virtually all reporting needs. In order to reflect this wider scope, it was re-named eXtensible Business Reporting Language.

The benefits of implementing XBRL reporting for financial reporting can be substantial, and it would not be unrealistic to surmise that these benefits would also apply if XBRL were implemented for integrated reporting. The automated, computerized processing of information brings the benefit of greater accuracy and speed (and therefore reduced cost) when collecting, storing, exchanging and analyzing this information. Issuers can compile reports more speedily and with less chance of error, while preparers can make better, more informed decisions because they have access to more timely and accurate data. Users and regulators can spend less time gathering information, which is also real-time and better quality, thus resulting in easier and improved analysis. Furthermore XBRL tags can easily handle language differences, therefore the burden associated with information translation is eased. Also, the descriptors within the tags allow for increased comparability.

Financial reporting convergence and comparability

Today, XBRL is a part of daily life for a multitude of business users in an information value chain—European banks reporting to their supervisors, United States Securities and Exchange Commission registrants reporting to EDGAR, or Spanish companies reporting to the Mercantile Registry. In all of these cases, financial information is being reported. A key component in a number of these reporting scenarios is the XBRL taxonomy for International Financial Reporting Standards (IFRS), known as the IFRS Taxonomy.

IFRS are intended to standardise financial reporting by providing the world's integrating capital markets with a common language for financial reporting. Through this standardization, it is hoped that IFRS will promote transparency and improve the quality and comparability of business information. IFRS are currently permitted or required in over 120 countries which is a tremendous step towards encouraging convergence in financial reporting. In terms of IFRS reporting in XBRL, a large number of companies, regulators and users around the world are interacting with the IFRS Taxonomy, therefore it too is playing a role in promoting information comparability. If financial and non-financial metrics are integrated for reporting, it would be logical to leverage the unprecedented level of convergence engendered by IFRS for financial reporting content, with the framework comparability that is enabled by XBRL.

Beyond XBRL financial reporting

As previously mentioned, XBRL can be applied to a wide variety of reporting needs however, its most recognized and common function remains business reporting. Financial reporting itself is becoming more complex and integrated reporting requires an outlook that extends beyond financial disclosures, to encompass other metrics and performance indicators. To identify a means of supporting these increasingly complex reporting needs, there is a growing interest in the broader application of XBRL for transmitting non-financial information.

As a technology, XBRL is neutral to the content that it transmits, and an increasing amount of research is being conducted on the use of XBRL in areas such as environmental, social and governance reporting. For example, Gräning and Kienegger have successfully applied XBRL to reporting energy performance for buildings (2), while Mena, et al. used XBRL to transmit project-related information (3).

There are a number of projects around the world that aim to use XBRL in a non-financial context, and where XBRL taxonomies have been developed. The Global Reporting Initiative (GRI) has published the GRI Taxonomy to reflect GRI Sustainability Reporting Guidelines. The World Intellectual Capital Initiative (WICI) is conducting a similar effort in the area of intellectual capital and has developed a taxonomy that reflects Gartner and Enhanced Business Reporting Consortium metrics, management discussion and analysis, and the WICI framework. There is also interest in XBRL from projects such as the Prince's Accounting for Sustainability Project, the Carbon Disclosure Project, and the International Integrated Reporting Committee, and although XBRL implementation in the GRI and WICI projects is still in the relatively early stages, these will provide interesting findings for implementing non-financial reporting in XBRL.

Framework comparability

In addition to considering how comparable content should be achieved, the need to identify a robust reporting framework that protects and supports the comparability of information where it exists, and encourages framework comparability where comparability would otherwise be missing, is an important consideration for integrated reporting. If integrated reporting is to provide globally comparable information, a widely-accepted framework will be necessary and, as already mentioned, XBRL can provide this framework.

Because XBRL is a robust and flexible technology, it can be—and often is—applied for a number of purposes by tailoring its framework (known as an architecture) to meet the reporting needs of various information chains. However this flexibility also poses risks, and one draw-back of such an adaptable technology is that this adaptability can lead to inconsistencies between different information chains. In the worst case, differences in XBRL frameworks can lead to incomparability. For example, if an XBRL framework is tailored in a particular way by a securities regulator in Chile, and then tailored in another way by a similar regulator in South Africa, this will create issues for investors trying to compare information about companies from these jurisdictions, even if they are reporting using the same financial reporting principles. Therefore XBRL implementation is not without its risks however, it is important to note that the potential benefits of XBRL reporting far outweigh these risks, and also these risks can be mitigated.

In the XBRL community, there are a number of projects working to align XBRL frameworks and to achieve architectural convergence. One such project is the Interoperable Taxonomy Architecture (ITA) project, which is an initiative between the taxonomy development teams for Japanese and US Generally Accepted Accounting Principles (GAAP) and IFRS to ensure the cross-border interoperability in XBRL reporting. Put simply, the aim of the ITA project is to support information comparability by removing technical obstacles and frameworks differences that might hinder this comparability.

One of the key risks posed by differences in XBRL architectures is interoperability between major XBRL taxonomies, which may then result in the development of heterogeneous platforms and software. This would in turn pose problems for preparers of financial information, in particular those managing underlying multi-GAAP reporting requirements, for whom dealing with multiple, heterogeneous filing formats will present significant challenges. Receivers and users of this information are more likely to become dependent on software solutions that are only able to support certain taxonomy architectures, which will create challenges for cross-border analysis when transferring reported information between different tools. Therefore the primary objective of the ITA project is to avoid such pitfalls by aligning the architectures of the taxonomies used for IFRS, Japanese GAAP and US GAAP reporting.

The project has made significant progress in aligning the frameworks of these taxonomies, and has also published guidance on how to prepare, file and check (validate) XBRL documents created using these three taxonomies. This Global Filing Manual is the first significant effort to align XBRL filing rules for global use, and is intended to encourage the consistent implementation of the aligned framework.

While the efforts of the ITA project are focused on the implementation of financial reporting GAAPs, it is clear that the lessons of framework comparability learnt from such projects could be applied to the broader scope of integrated reporting. Furthermore, preparers, regulators, software vendors and users who have invested time and resources to understanding and implementing a set of globally-aligned reporting framework and set of filing rules would struggle to accommodate another architecture and another set of rules, whether for financial, non-financial or integrated reporting. As previously mentioned, existing systems and principles—and in particular those that have achieved significant convergence—should be leveraged where possible.

Conclusions

As stated before it seems very clear that the future for integrated reporting lies with the eXtensible Business Reporting Language. If the integration of financial and non-financial metrics should be pursued the consideration of the IFRS Taxonomy for financial oriented disclosures goes without a question. Furthermore a set of important lessons learnt from the alignment and convergence under the ITA umbrella efforts combined with wide support of regulators for such effort present a great opportunity to further align in the context of integrated reporting.

Considering that relevant taxonomies are available or becoming available, that preparers made already investment in systems supporting XBRL and that users seeing financial information in interactive format are starting to require non-financial information in the same format clearly indicates that the time for XBRL and integrated reporting is now.

Olivier Servais is Director of XBRL Activities at the IFRS Foundation and also Chair of the XBRL International Nominations Committee. He has served as European Director of XBRL International, and is a member of a number of global XBRL working groups and committees.

Maciej Piechocki is Project Manager at the IFRS Foundation. He is responsible for the technological development of the IFRS Taxonomy, as well as the coordination of other global IFRS and XBRL initiatives such as the Interoperable Taxonomy Architecture (ITA) project. Maciej is also a member of the XBRL International Standards Board.

Endnote: (1) The IFRS Foundation is an independent, not-for-profit private sector organisation working in the public interest. Its main mission, through its standard-setting body – the IASB – is to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs). The opinions expressed in this document are those of the authors and do not necessarily reflect the views of the IASB or the IFRS Foundation.  
(2) Gräning A, Kienegger H (2007) Standardisierung der europaweiten Berichterstattung im Rahmen der Messung der Gesamtenergieeffizienz von Gebäuden. Wirtschaftsinformatik 49(5):370-379.  
(3) Mena Á, López F, Framiñan JM, Flores F, Gallego JM (2010) XPDRL project: Improving the project documentation quality in the Spanish architectural, engineering and construction sector. Autom. Constr. 19(2):270-282.

#### Bringing Order to the Chaos: Integrating Sustainability Reporting Frameworks and Financial Reporting into One Report with XBRL

Liv A. Watson and Brad J. Monterio

Linking the Global Vocabularies of Sustainability Reporting

As the markets become more knowledgeable about the myriad of environmental, social and governance (ESG) practices and data sets around the world that are used to assess an organization's overall sustainability, the linking of "vocabularies" governing those practices and data sets becomes more critical. This need for linkage—a common thread to tie them together—causes us to search for a unifying standard that systematically brings order to all of the ESG and sustainability vocabularies that exist around the world today.

These vocabularies exist in the form of sustainability frameworks that have been developed by a sundry of associations, standard setters, consortia, NGOs, quasi-governmental bodies, foundations and others to define the data sets that need to be tracked, reported and analyzed in order to understand an organization's sustainability practices. Although well intentioned individually as frameworks, when taken as a whole, this global, disjointed patchwork of sustainability and ESG reporting frameworks has grown so large that it now works counterproductively to the original intent—it breeds confusion, inconsistency, contradiction, lack of credibility or reliability, and conflict—rather than bringing structure, standardization, comparability and quality to integrated reporting.

Competing Frameworks Create Chaos and Inconsistency

Too large to fully enumerate here, the assortment of sustainability frameworks (1) span the globe. Some of the more well-known frameworks include:

Any organization looking to gather and report information about its sustainability practices—and weave that data into one integrated report that includes financial disclosures—faces a somewhat daunting task to determine which of these ESG frameworks is the best fit with the organization's overall culture, strategies, mission and vision.

Sector, country-specific and proprietary frameworks for reporting on sustainability are at odds with what the market needs today. Solutions need to be global, uniform, consistent, comparable with current needs and extensible to meet current and future needs; they need to help the market understand an organization's sustainability practices, no matter in which country or industry sector they operate.

Trends in Sustainability Reporting – Adding Another Layer of Complexity

In addition to understanding the landscape of available sustainability reporting frameworks, it is important to look at the current trends in sustainability reporting as featured in CSR Insight's 2010 "10 Trends in Sustainability Reporting (2)." These trends add another layer of complexity to sustainability reporting and further highlight the need to develop XBRL taxonomies... and to do so as soon as possible.

CSR Insight's 2010 "Top Trends in Sustainability Reporting":  
1. Financial statements capture only a portion of corporate risks and value-creation potential, with the balance derived from intangible factors such as strategy, product innovation, brand and reputation management, energy/resource efficiency, commercial risk reduction, and environmental and social risk reduction. In fact, "About 70% of a company's actual value does NOT appear on the balance sheet (3)."

2. Sustainability reporting is largely voluntary worldwide—at least for the time being.

3. Sustainability reporting is now the norm among large companies globally, increasing from about 300 sustainability reports in 1996 to 3,100 (The Global Reporting Initiative  reported more than 1,000 organizations worldwide that have registered sustainability reports in 2008 based on the GRI G3 Guidelines).

4. Sustainability reporting in the U.S. has been much slower to develop than in Europe.

5. Most industrialized countries have long-standing environmental laws that restrict environmental-impact activities and require some form of environmental regulatory reporting.

6. The evolution of metric frameworks for sustainability reporting is a major challenge for suppliers and users—there are simply too many to choose from.

7. Multiple metric frameworks, a lack of uniform definitions, and a lack of consistent applications are producing variable and unreliable measurement and disclosure results—how can we compare and trust this information?

8. The emergence of national and regional legislation and regulation, which have not been integrated and/or synchronized with multiple metric frameworks, is a major challenge.

_9. Synchronization of voluntary reporting frameworks with governmental and regulatory requirements may be driven in part by_  recent initiatives _by the Global Reporting Initiative and the World Intellectual Capital Initiative_ _to develop XBRL taxonomies for non-financial information, as well as by a new U.S. Securities and Exchange Commission rule requiring financial statements in a XBRL format as part of SEC filings_ _._

10. Governmental, regulatory, and audit oversight of sustainability issues will become the norm within five years, in both the developed and developing world, across all industries.

The Role of XBRL in Sustainability Reporting

As the 9th trend indicates, the XBRL standard can be used to weave both financial _and_ non-financial information (i.e., ESG and sustainability data) into one integrated report and imbue that information with the power of an underlying structure to make it easily discoverable, reusable, consistent and reliable across geographies, currencies, markets and industry sectors. With XBRL already being used by millions of companies in North America, Asia, Latin America, South Africa, and Europe to report financial information to regulators, investors, analysts and others, it has been established as the de facto standard for financial reporting. XBRL is the logical choice for supplementary data sets such as ESG/sustainability information and the only logical choice to achieve usable integrated reporting that can be easily discoverable, reusable, consistent and reliable across geographies, currencies, markets and industry sectors.

Background - XBRL Components

XBRL is a supply chain-driven, freely-available information standard for financial and business reporting information. There are two main components to XBRL: the XBRL _Technical Specification_ and the XBRL _Taxonomies_. They are:

1: XBRL Technical Specification

The XBRL Technical Specification provides the fundamental definition of how XBRL actually

works and is free for anyone to use. It allows software vendors and programmers who adopt it as a specification to enhance the creation, exchange, and comparison of financial and business reporting information. The documentation of the Specification is published by XBRL International, Inc., the global standard setting body for XBRL, and is available at www.xbrl.org/Specifications.

2: XBRL Taxonomies

The key to understanding the benefits of XBRL lays in the notion of taxonomies—it is time for ESG framework developers to add "XBRL taxonomy" to their professional vocabulary. XBRL taxonomies are the dictionaries that the framework languages use. These are the categorization schemes that define the specific 'tags' for individual items of data, such as < Carbon footprint>< 6.6% reduction> in <CO2 emissions> from <2007>.

Streamlining Integrated Reporting through XBRL Taxonomies

Using the XBRL standard, ESG/sustainability data would be tagged according to an ESG XBRL taxonomy so that it can be easily understood and processed by computers (i.e., it is "machine-readable") and pass it seamlessly between enabled applications. These tags are like barcodes giving relevant information about each piece of data. The tags describe each ESG data element with human readable and machine understandable labels, its relationship with other data as well as the reference to the relevant ESG frameworks. This makes XBRL data highly intelligent and interactive. Once ESG and financial disclosure information is tagged into one integrated report, everyone along the information supply chain—investors, creditors, analysts, stock exchanges, auditors, regulators, policymakers and others—can quickly, accurately, easily and inexpensively access, validate, compare, analyze, slice, dice, mix, match and manipulate information from any number of companies.

Since transparent corporate reporting is a means of achieving the ultimate goal of protecting investors, encouraging capital formation and promoting healthy capital markets, it is easy to understand why integrated reporting should adopt the XBRL standard and develop XBRL taxonomies for ESG.

In capital markets, better information usually makes for better choices, and the best information means a disclosure framework that is readily accessible, easily understandable and comparable. To benefit from an enhanced information environment, we need data that can be shared interactively, easily, reliably and cost-effectively. This, however, demands that everyone in the financial and business reporting supply chain embrace one single global information standard platform and develops taxonomies for business concepts.

Obstacles to Overcome

XBRL for financial disclosure is already well established in many major markets, however if the market place is going to be able to consume Integrated Reports vis-a-vis financial reports today, ESG data must be tagged to an ESG XBRL taxonomy. XBRL for integrated reporting (i.e., weaving financial and ESG information into one integrated report) has to overcome a few hurdles before it can be adopted by the market place.

1. Commercial strength ESG XBRL taxonomies need a neutral, trusted organization to coordinate their development: ESG reporting needs commercial strength XBRL taxonomies before the market place can trust and adopt it. The question is still who will fund and maintain the taxonomies. The US GAAP XBRL taxonomy is funded and updated by FASB in the U.S.; the IFRS XBRL taxonomy is developed by the IFRS Foundation in the UK; no organization in the ESG sector has produced commercial strength XBRL taxonomies on which the market can rely of today. ESG reporting needs a neutral, trusted globally-focused organization to coordinate the development of ESG XBRL taxonomies. One option is for the newly formed International Integrated Reporting Committee (IIRC) to become the trusted neutral facilitator to bring the global stakeholders together and facilitate development of coordinated ESG taxonomies. However, even if the IIRC can bring the supply chain participants together to build out an XBRL taxonomy framework and best practices for ESG taxonomies, another key issue is funding—how will the future maintenance and development of ESG XBRL taxonomies be solved? This is still to be determined.

2. Key stakeholders must come together to support a coordinated ESG XBRL taxonomy and collaborate on global adoption: If bringing commercial strength, well-funded taxonomies to the market was the only key element to success, then XBRL for integrated reporting would already be a reality. XBRL for financial reporting was adopted because it relied on stakeholders in the entire financial reporting supply chain to drive adoption around the world. The previous US SEC Commissioner Christopher Cox was one of the greatest supporters of the XBRL standard and mandated it for all U.S. listed companies—this made XBRL adoption a reality. For XBRL-tagged integrated reporting to be successful, we need many more influential leaders in the ESG community to step up and compel others to participate in ESG XBRL taxonomy development and promote its adoption. This will ensure that data can be easily understood and processed by computers (i.e., it is truly "machine readable" and shared seamlessly between XBRL-enabled applications just like we see with XBRL-tagged financial information today.

Until XBRL, no worldwide effort existed to develop a global standardized financial and business reporting. When the vision was first introduced, there was no way of estimating the cost savings by adopting a standard versus the cost of working with unstructured financial and ESG reporting content. However, we can qualify some of the costs as:  
-Time wasted in unsuccessful searches to retrieve and analyze data.  
-Low return on investment in information collection/storage efforts, such as data warehousing and content management, because users cannot find information.  
-Poor decisions made due to inaccurate or incomplete information.  
-Frustrating user experiences potentially damaging a company's reputation.

The growing public distress about the corporate world's impact on our environment is driving executives and investors alike to see their activities through an increasingly greener lens. Today's environmentally-focused investors take center stage with many stakeholders reviewing their existing portfolios to see how "green" their investments are. They are also analyzing the extent to which companies are reporting on their "Eco-Friendly" progress. These forward thinking companies increasingly understand that a commitment to sustainability can contribute to long-term financial success, allowing companies to reach a broader range of investors and customers, to increase operational efficiency, to improve brand positioning and potentially lead to opportunities that develop leadership in the marketplace. Integrated reporting data must be shared interactively if we are to satisfy these market needs—by developing ESG XBRL Taxonomies, we can start bringing order to the current chaos with truly integrated reporting.

Liv Watson is one of the Founders XBRL International and an Executive Advisor to WebFilings, LLC.

Brad Monterio is Managing Director of Colcomgroup, Inc., a global consultancy specialized in XBRL and ESG advisory services, and Chairs the Institute of Management Accountants' XBRL Committee. He can be reached at bmonterio@colcomgroup.com.

Endnote: (1) See the  International Corporate Sustainability Reporting web site for more details about additional sustainability reporting frameworks around the world.  
(2) <http://www.csrinsight.com/default.aspx>.  
(3) Roland Schatz, CEO, Media Tenor International, _SENSEX_ , p. 49, January – March 2009 issue, a publication of the Bombay Stock Exchange.

#### Sustainable Investing and Integrated Reporting: Driving Systematic Behavioral Change in Public Companies through Global Sustainability Rankings, Indexes, Portfolio Screening and Social Media

Michael Muyot, President and Founder

CRD Analytics
Introduction

Professor Robert G. Eccles, of Harvard Business School, along with Michael P. Krzus, of Grant Thornton, co-authors of the recently published book, _One Report_ , and several graduate students put together a world class group of critical thought leaders to tackle a two-day Workshop on Integrated Reporting. All of the major players in Integrated Reporting, Regulation, and Sustainability were at this event: the newly formed IIRC, FASB, SEC, GRI, CERES, ISO, IFRS, Prince's A4S, The Conference Board, PwC, Deloitte, KPMG, MIT Sloan, Wharton, NYU, XBRL, etc. The handful of companies that were invited _are_ _viewed_ as the leaders in integrated reporting: Phillips, Novo Nordisk, Santander, Sasol, AEP and now Southwest Airlines (also there were Rabobank—private—and Cognizant Technology Solutions—working on its first integrated report).

Several Responsible Investment association and firms were in attendance: CERES, Social Investment Forum, ICCR, Initiative for Responsible Investment, CalPERS, KKR, Domini Social Investments, & Rockefeller Financial Asset Management. These are the global change agents that are impacting real tangible and sustainable change within every facet of the Sustainability mosaic.

What was least represented were the Analytical/Rating firms. CRD Analytics, Carbon Disclosure Project and Corporate Knights were the only three in attendance. Also, there were no social media companies in attendance. My article will expand in detail as to why these relatively new entities are playing such a critical role and why they need to have a seat at the table.

What is Driving Companies to Stand up and Pay Attention?

Companies who consider themselves industry leaders are actively adjusting the corporate strategy and operations to protect their brand, stay on top of sustainability/CSR rankings, be included in sustainability indexes and maintain top ratings from sell-side investment analysts and credit rating agencies. The stakes have never been higher due to the democratization of information via social media platforms such as Facebook, Justmeans and Twitter to name just a few. The Millennials (people born between 1982 and 2004) are more likely to choose which company to work for, which brands to buy and which stocks to invest in based on the recommendation of their social network than any traditional research report. There are new online investment platforms such as GetaYou.com that are putting the power of actively managed Personalized Investment Portfolios (coupled with independent research reports) in the hands of both everyday retail investors and investment managers. Fidelity now offers any of its registered investors to obtain environmental, social and governance (ESG) performance based research to help them their investment decisions. This is not just for their exclusive high net worth individuals or institutional clients.

In January 2010, Michael Berg and Mike Wallace, U.S. Director of the GRI Focal Point, released a commentary outlining  Why Investor Relations Officers Should Care About Wall Street's Interest in Sustainability. Their article highlights how we are past the tipping point when "over 400 institutional investors and financial services firms representing over $13 trillion in assets convened in New York City for the 2010 Investor Summit on Climate Risk. Why? For investors, carbon emissions and sustainability performance now equals dollars—preservation of capital, reduced systemic risk, and opportunity for new capital and revenue sources."

Most companies are lagging in understanding how fast this is transforming the future of investment decisions. It is having a dramatic impact on public companies as they are hesitant to release too much information; a constant debate with their internal legal and risk compliance officers. The Chief Sustainability Officer (CSO), Director of Sustainability and Corporate Social Responsibility Managers are tasked with releasing more information to keep up with the demand for surveys, indexes and rankings from a larger and more active investment community. This is no longer coming from a niche group of SRI investors but from every facet of the mainstream investment community: Institutional Investors, Pension Funds, University Endowments, Foundations, Boutique Investment Managers and now Retail investors. Internal sustainability and CSR teams understand what it means to their brand, employee recruiting, investor relations and customers to rank poorly in Global Sustainability Rankings, get dropped from sustainability Indexes or be made an example of what not to do by the very viral and active social media sustainability network. Information—good, bad and ugly—gets passed around the globe in milliseconds and lasts a lifetime.

One of the biggest challenges is convincing a more risk averse and conservative group of executives, managers and employees to take the leap of faith that this is not a fad but a fast accelerating global trend. For every year, month, week and day that goes by that they are not implementing new systems to capture, measure, analyze and disseminate all relevant and material extra-financial information, they are losing their competitive advantages and worse yet creating serious competitive disadvantages that become increasingly harder to recover from. At CRD Analytics we have classified the following Sustainability Ratings system based on the SmartView 360 Methodology, our rules based algorithm using 200 quantitative and qualitative financial, environmental, social and governance performance metrics.

SmartViewTM Ratings

We created a universal rating system that makes the complex simple and useful. Just about everybody is familiar with the concepts of reception bars on cell phones. We look at them so frequently it has become ingrained in our subconscious. We intuitively know that full bars are very good and no bars are very bad. The SmartViewTM Ratings uses the same reasoning but are tied to hard quantitative mathematical algorithms. These are now available on a recently launched iPhone application via one of our strategic partners, Justmeans.com, a global leader in social media for the sustainability community.

Case Study of How Social Media is Impacting Public Companies:

Microsoft, Cisco & Oracle

_Timeline of Events:  
_ -On October 31, 2009, Microsoft, Cisco and Oracle were all removed from the NASDAQ CRD Global Sustainability Index (QCRD) for inadequate environmental reporting. The index methodology explicitly requires companies to report at least 1 out of 5 core GRI G3 environmental metrics along with 40% of the 175 ESG metrics as part of SmartView 360 index methodology.  
-On April 5, 2010, Michael Muyot wrote a post titled  Is Microsoft Going to Walk the Talk? on Triplepundit.com  
-On August 6, 2010 James Farrar wrote a post on his ZDnet Blog, titled  Microsoft lobbies for mandatory sustainability disclosure regulation ('do as we say' or 'do as we do'?), highlighting the pleasant surprise of Microsoft doing a 180 and actively lobbying for better environmental and social corporate disclosure. Farrar points to directly to the Triplepundit.com post as being a possible driving factor.  
-In March 2010, Harrington Investments filed shareholder resolutions with Microsoft, Cisco and Oracle for being removed from the NASDAQ CRD Global Sustainability Index (QCRD) for inadequate environmental performance disclosure.  
-On September 8, 2010 James Farrar wrote another post on ZDnet Blog, titled  Oracle bats away pesky shareholder resolution on sustainability, highlighting the Harrington Investments shareholder resolutions filed due to the QCRD Index removal.  
-On September 15, 2010, Elaine Cohen of BeyondBusiness wrote  an in-depth article for CSRwire after the launch of the Global 1000 Sustainable Performance Leaders on Justmeans.com, highlighting the Microsoft story along with the intrinsic value of Integrated Reporting within the SmartView 360 methodology.  
-October 27, 2010, Sustainable Investments Institute publicly released an  Action report with the full shareholder resolution filed by Harrington Investments, explaining the details and sending it to the largest university endowments and pension funds in the United States with actionable intelligence on how to join and vote.  
-Prior to the QCRD November 2010 Reconstitution, Microsoft and Cisco prepare and produce new sustainability reports in 2010 with more complete disclosure of all of 175 environmental, social and governance performance metrics, per core GRI guidelines & the NASDAQ CRD Global Sustainability Index (QCRD), powered by SmartView.  
-On October 29, 2010, SPECIAL AC ALERT was sent from SustainabilityHQ.com, titled "Corporate Proxy Seasons - Engagement Ground (or not) For Activist and Involved Investors and Corporate Management" to over 3,000 active recipients in the Sustainability and Sustainable Investing Community.  
-Microsoft and Cisco both currently rank in the Top 50 and are fully eligible to be included in the November 19th new reconstituted QCRD index. Results will be officially release on November 19, 2010.

This is a very tangible example of how social media can have a major impact on large public companies and drive not only systematic behavior change within the company but also the company's willingness to embrace sustainability performance reporting and push for government policy. If they have to do it then they want their peers to have to do it as well approach. This is a classic multiplier effect.

Why this important right now?

The global, regional and local stakes have never been higher. There are over 75,000 multi-national companies yet only 3,500 or less than 5% produce a sustainability/CSR/integrated report. And of that less than 1,200 companies pass the most basic screen of publicly disclosing a minimum of 5% of quantitative environmental metrics according to the SmartView 360 methodology, which aligns with the GRI G3 guidelines. This is quite simply unacceptable and not a sustainable trend.

With the power behind global sustainability rankings, indexes and portfolio screening companies simply will not be able to compete in the new world of social networks and media. They are struggling now for limited consumer interest, adverting saturation, survey fatigue, quarterly financial deadlines and resource constraints of every nature. There will be winners and there will be losers. It's pure capitalism at its best.

As I mentioned at the beginning of the article, the stakes could not be higher. To re-iterate, based on speaking directly with Global 5000 corporations it is very surprising as to how little attention, planning and technologies go into making their sustainability/CSR information accessible by the investment analytics community. This is a very technical community and it demands direct access to data via Excel spreadsheets, Bloomberg/Reuters downloads or XBRL taxonomies, not printed reports and not static jpegs on websites. Companies need to make data accessible in form that best suits the intended audience, or they will not get the proper credit or rankings they deserve.

What's missing from current Sustainability and Integrated Reports?

1) What are the Risks?  
2) What is the company doing to measure, manage and minimize the risks?  
3) What are the new Opportunities?  
4) What is the company doing to identify, leverage and maximize the opportunities?

So What's the Solution?

In my opinion the solution will come from the global technology companies like Cognizant Technology, SAP, IBM, Cisco and others. It will also come from the growing community of expert Sustainability consultants, the progression of the Big Four (PwC, Deloitte, Ernst &Young and KPMG) making Integrated Reporting more systematic with a Board and C-suite top down approach, which would be a very promising sign.

What are the Future Trends?

The future key drivers of systematic behavioral changes will be:  
-Global Stock Exchanges & Sustainability Indexes  
-Global & Regional Sustainability Rankings  
-Universities with Sustainability MBAs, theoretical Sustainability Funds and Endowments  
-Active Investor Communities & their Shareholder Resolutions  
-Social Media and the proliferation and democratization of information  
-XBRL Taxonomy

_As President and Founder of CRD Analytics, Michael Muyot oversees the development of the SmartView_ TM _360 Platform, which is responsible for building all of CRD Analytics' indexes, benchmarks and products. SmartView_ TM _powers both the NASDAQ CRD Global Sustainability Index (QCRD) and the Global 1000 Sustainable Performance Leaders on Justmeans.com. As a Fellow of the Governance & Accountability Institute, Mr. Muyot has been interviewed as an innovating leader on Sustainability & Investing by Fortune, CFO Magazine, Financial Executive International, The Economist and Wired magazine. Michael has also been cited in The Green Economy, Green Nurture and regularly contributes to Justmeans - the premier social media platform for sustainability. Hewelcomes opinions, comments, questions, and intellectual challenges via email (_mmuyot@crdanalytics.com _)._

#### Integrated Reporting Enablement

Richard L. Gristak, Practice Director Performance Management

Cognizant Technologies

There are numerous forces coming together to push companies to do Integrated and Sustainability Reporting. The forces include government pressure, market pressure, competitive pressures, and social pressure. These forces are at different maturity points and they are collectively funneling the requirements to achieve comparative commonality so the groups wanting the information can evaluate it in a cohesive fashion. Some of the preliminary findings are that the more transparent companies are achieving better access to capital and markets.

Expansion of standards from governing bodies to include reporting standards for sustainability metrics are evolving, driving better disclosure and increasingly corporate information availability. Governments are increasingly weighing new disclosure information. Investors are looking for better information to compare companies and market potential. Social mechanics are playing a large part in disseminated information in a variety of forums.

With new demands for information come new requirements to capture and funnel the data to the various parties. This necessitates expanding our view of key data and methods of collection and distribution information. Careful evaluation of internal data to meet these demands needs to be done in a manner that does not disclose competitive advantages inherent in the metrics companies manage.

Performance management analysis is evolving to encompass the non-traditional data. In many cases data will need to be gathered in a substantially different manner than financial data is gathered. This presents new, unique challenges to companies and opens the opportunity for new approaches to the gathering and management and analysis of the data. And, as always, one challenge will be to meet new requirements (formal and informal) in cost effective ways.

Several technologies come together to offer ways for cost effectiveness. These include the expanding usage of XBRL, better Web tools, improved financial and general reporting tools, access to large amounts of storage cheaply through "clouds," and a World Wide Web infrastructure that allows the rapid collection and movement of data.

Increasingly, data from many different sources will need to be gathered and analyzed in new ways at both the company and the community level. As the reporting environment matures, more demand will be seen for improved analytics in evaluations. The information will be presented in a variety of formats, often utilizing the interactive capabilities of the web in the most advanced companies to give them a competitive edge to market and funding.

#### Leveraging the Internet for Integrated Reporting

Kyle Armbrester

Harvard Business School MBA Class of 2012

To many companies and organizations, the concept of integrated reporting simply means combining their financial and sustainability reports in one, unified paper document. However, this is drastically underestimating the potential power and benefit of what integrated reporting has to offer. Aside from moving towards truly integrating financial and nonfinancial metrics—showing their relationships to each other and collective impact—integrated reporting has the capability of encouraging an increasingly robust level of dialogue, engagement and interactivity with all of a company's stakeholders.

By moving away from static, PDF documents and other dated reporting formats, companies are increasingly utilizing the Internet to report their financial and nonfinancial performance. The benefits of this shift are immense. Aside from the obvious benefits of a dynamic, non-static document that can leverage new media like videos and podcasts, integrated reporting in the Internet age enables companies to achieve truly sustainable practices through increased stakeholder engagement.

A company that is truly pursuing a sustainable strategy via integrated reporting has the ability to engage stakeholders on the Internet in numerous beneficial ways. The first is through providing more detailed information of particular interest to different stakeholders. A common criticism of integrated reporting is that in combining the truly material financial and nonfinancial information into a single document, information that is of interest to shareholders and other stakeholders will be lost and that transparency will be decreased rather than increased. This criticism reflects a paper-based document view of the world. Taking an Internet-based view of the world, a company can easily use its website to provide as much information as it chooses, targeted to specific stakeholders, arranged by topic and accessible through drill-down capabilities.

Second, by moving to a platform that enables dialogue, engagement and interactivity—a robust website-based report—companies and organizations can build a platform for users to engage directly with core business functions and other stakeholders. SAP is a great example of a company pushing this integrated stakeholder agenda to the next level. Though, unfortunately, not in a truly integrated report format, SAP's sustainability report exhibits true innovations with stakeholder engagement and dialogue. Users are encouraged to provide comments throughout the site on specific issues and pages and are directly responded to by SAP employees and other community users. Additionally, numerous layers of interactive data, media and graphing capabilities are embedded throughout the site to enable users to access information in a plethora of ways.

A third beneficial way that companies are leveraging the Internet to increase their reporting capabilities is through exposure of data and flexibility in self-report creation. This shift is somewhat radical for many companies, but, I believe, is the future of corporate reporting. Numerous companies—Philips, SAP, Timberland, and BASF to name a few—are now exposing, directly, the underlying data from some or all portions of their corporate reports. This exposure is often complemented by the capability to literally "build your own report," in real time on the Web. Thus, an investor, an academic and an employee could mix-and-match data, commentary and other elements of the overall integrated report to compare, analyze and drill-down to a level that is suited to their specific needs. Some companies are even taking this a step further and enabling individuals to post their analyses, data sets and other comparables directly on the corporate reporting website for broader community-driven discussion and analysis.

The future of reporting is through the use of robust Web 2.0 technologies, including the extensive use of social media and networking technologies. While this may sound like common sense, the number of companies that continue to publish corporate reports—financial and nonfinancial in nature—online in a completely static format that prevents real-time collaboration, engagement, dialogue or interactivity is astounding. In the future, as integrated reporting becomes more commonplace with companies and organizations around the world, the focus should be on more than just a combination of financial and nonfinancial information in a paper-based "integrated report." To truly take advantage of the power of the integrated reporting concept, and thus truly move towards a sustainable business strategy, companies will be well-served to leverage numerous web technologies to enable real-time stakeholder engagement, dialogue and interactivity directly in their corporate report.

Kyle Armbrester graduated from Harvard College in 2007 and was a project manager at The Exeter Group, an IT consulting and services company. He is now a first year MBA student at the Harvard Business School. He is also the President and co-founder of Glenelg Partners, a company dedicated to spreading the adoption of integrated reporting around the world through an ecosystem business model based on partnerships with leading technology and professional service firms.

# PART VII

Better Engagement

#### The Business Imperative of Stakeholder Engagement

Sandy Nessing

Managing Director, Sustainability and ESH Strategy & Design; American Electric Power

Today's loss of faith and trust in companies and government is rooted in a lack of stakeholder engagement and transparency. The landscape is littered with those who thought they knew the right and best path forward but found themselves losing trust, respect and credibility. The financial and auto industries are recent examples of companies "out of touch." They didn't listen to others' viewpoints nor were they transparent about their actions and performance. They determined neither was relevant to business strategy or as a value-add for investors and customers. As a result of this narrow view, they lost profits, customers, public support, competitiveness and opportunities for innovation and growth.

A sustainable business strategy is one that is informed and engaged. It requires leadership and courage to invite others inside to comment on, critique, or oppose a company's performance and business approach. These dialogues can inform a company's long-term strategic view and often result in collaborative efforts that are good for people, the environment, the economy and profits. Companies must be willing to engage, be transparent about it and candid about the outcomes. Stakeholders have to be willing to engage constructively and honestly. The goal is not to agree on everything; sometimes there is no agreement. The purpose is to be inclusive and honest and to listen to other viewpoints, whether those lead to change or not. American Electric Power Company (AEP) is an example of a company transformed by stakeholder engagement.

In early 2007 AEP held its first formal stakeholder meeting with more than a dozen groups representing investors, labor leaders, social activists and environmentalists. AEP's Chairman directed his management team to participate in the process, something few on the team had ever done before. The meeting resembled something of a boxing match: Stakeholders challenged and AEP defended. No one was really listening—on either side. There were misperceptions and misinformation on both sides and the opportunity to have meaningful discussion was almost lost. When it ended, it was not clear whether much progress had been made. It was an important first step but it was apparent the path ahead was long.

A few days later, AEP executives regrouped to talk about what they heard and how they thought the company should respond. At first, it was déjà vu. Participants were defensive; they felt that stakeholders did not understand the business and had misinformation about the company's performance. That moment was the turning point. It took one person to recognize the opportunity of the engagement process. By listening to stakeholders' concerns and ideas, the company gains a clearer picture of how it is perceived and what is expected of it. In AEP's case, the company seized the opportunity to learn more about itself and others.

Today, stakeholder meetings attract dozens of AEP executives, including the Chairman, who want to participate because it allows them to take the pulse of what people are saying, thinking and doing. It allows them to use what they learn as an input into decision-making and goal-setting. Stakeholder engagement is all about relationships—with employees, customers, investors, regulators, environmentalists and others. People naturally want to do the right thing and this process creates a platform for discussion, collaboration and innovation. Through this process AEP learned that its many stakeholders wanted more information about the company, not less. The appetite for a more holistic and deeper view of the company led AEP to move to integrated reporting in 2010. It was listening to its many different stakeholders.

As companies move toward integrated performance reporting, stakeholder engagement increasingly becomes a business imperative. Investors and other stakeholders will continue to take a broader view of measuring a company's worth. Integral to that benchmarking will be its interactions with stakeholders as it relates to overall business strategy, operations and performance. Companies that don't listen to their stakeholders risk losing market share, access to capital, competitiveness, their reputation, and the public trust. Why would any company deliberately risk that?

Sandy Nessing has responsibility for managing sustainability strategy, corporate stakeholder engagement and annual performance reporting for American Electric Power (AEP). AEP published its first Corporate Sustainability Report in 2007 and in 2010 published its first integrated Corporate Accountability Report. AEP also participated in the Global Reporting Initiative's (GRI) Electric Utility Sector Supplement Pilot Program, an international project to develop electric utility-specific sustainability performance indicators.

#### Integrated Reporting as a View into Integrated Sustainable Strategies

Scott Bolick

As I left the Workshop on Integrated Reporting at Harvard Business School in mid-October, I was conflicted with two distinct thoughts running through my mind. First, I was absolutely excited by the open, robust debate amongst a broad set of stakeholders, including reporting companies, investors, nongovernmental organizations, technology providers, accounting standard bodies, government regulators, and auditing firms. There was clear consensus on the need to drive towards integrated reporting—for the health of individual companies, growth of the global economy, and preservation of the earth.

However, I was also concerned by the desired pace of the push for integration from many of the participants. There was a push for mandated integration _now_. Based upon my interactions over the past two years with executives around the globe, I have concerns that this pace could lead to unintended consequences—adopting form over substance. Most executives believe in the sustainability imperative and have a desire to be more sustainable. But many struggle to implement sustainability strategies across their organizations and business networks. It is not a trivial effort. It reflects a cultural, operational and business model shift. It takes time. And we must be conscious that integrated reporting will only be meaningful if it reflects the results of an integrated strategy.

Let me explain my concerns through three lenses.

Commitment to Sustainability

Many companies—particularly outside of Europe—have only in the last 5 to 10 years focused on moving their sustainability efforts _from the philanthropic to the material_. Indeed, the initial sustainability reports of many companies reflect this recent adoption. They are often merely an aggregation of the company's tactical sustainability efforts: volunteering, donations, greening of buildings, etc. The reporting is an important first step, but a well-structured materiality analysis has not been conducted. With a materiality perspective, CEOs can develop corporate strategies which reconcile sustainability material risks and opportunities to collective corporate objectives where performance accountability to stakeholders is acknowledged.

Therefore, we need to make sure that any drive to integrated reporting fosters this analysis of what is important to critical stakeholders that can impact or be impacted by the firm AND what is important to the company. This analysis will not only ensure companies are focusing management attention and precious resources on the most critical risks and opportunities, but also will support a balanced view of success across short, mid, and long-term horizons. With this analysis, we will know that the board room is embracing sustainability as core to the company's profitability and integrating sustainability into its strategy.

Credible Operations

We had a significant dialogue around the correct key performance indicators (KPIs). The conversation bounced between a desire for consensus driven industry- or company-specific KPIs and a belief that mandating a basic set of sustainability indicators was the right first step towards integrated reporting. We did not reach a firm conclusion, but I was left with the impression that many favored a basic set of indicators.

The reality is that this effort would likely not be difficult. Earlier this year, I completed with several colleagues a quick review of The European Federation of Financial Analysts Societies' KPIs for ESG as well as aggregations of sustainability KPIs from other sources. It became clear that this analysis by industry points to common, lowest common denominator measures –  
\- Environmental: Green House Gas, Water, Energy, Waste  
\- Social: Turnover, Employee Engagement, Customer Satisfaction, Diversity  
\- Governance: Customer Satisfaction, Total Cost & Impact of Incidents, Total Cost of Compliance

So, I do believe that it is possible to have core set of metrics across industries. However, I would not encourage this approach. Instead, I would encourage a push away _from transparent reporting to accountable performance_. Why?

First, we need to make sure that targets are set on the most material items and then cascaded across reporting organizations. Each industry, geography, and company must focus on items best balancing their unique short- and long-term profitability. If we do focus on the material, we will see both the rise of sustainability accountability and the increased embedding of sustainability performance into incentive structures. Financially motivated individuals will then turn integrated strategies into integrated operations by embedding sustainability into business processes. The end result will be accelerated improvements in sustainability in both the short- and long-term.

Only then will we, as outside stakeholders, be able to look at improvements in sustainability performance and know that improvements are more than the results of grabbing low hanging fruit. We will also gain insight into whether or not any relative measure such as ton of GHG per million dollars of revenue reduced is the result of a concerted strategy or whether it is the result of other external forces such as the recent economic downturn. We will have proof that efforts are scaled and will be sustainable over time.

Second, we have to face the fact that there may be a corollary to the old adage "what gets measured gets done." I would put forward "only what is critical is measured reliably." In other words, an immediate rush for transparency will, unfortunately, lead many companies into a world of spreadsheets in which data reliability is suspect at best as it is not fully integrated into existing systems. We all know this from the first measures of GHG emissions. They were primarily calculated in error prone, multiple megabyte files with links across 10s of worksheets. The quality was often dubious, but seen as good enough for transparency. This situation is now changing as companies establish clear accountability across the enterprise for carbon reduction targets, and the measured performance begins to determine rewards. One result is that we are now seeing accelerated deployment of carbon management solutions from SAP and others. These systems provide required data reliability, and we, as an industry, have rapidly increased the time-to-value of systems. But we also need to recognize the adoption of these systems will take time as companies begin to fund business transformation projects.

Collaborative Engagement

Finally, I really want to see us all recognize that sustainability is a journey—with a destination that none of us can truly imagine. We need to work together, exchange visions, share best practices, and incrementally bring about more sustainable businesses. There is too much on the table to ever make "sustainability as a non-compete" arena similar to safety in mining and other industries. However, we do need to continue to push for collaborative engagement. We need to move _from annual static publishing to frequent dialogue_.

Integrated reporting certainly takes care of the "frequent" portion of this equation as quarterly reporting will become the norm. This is an area where Timberland has been in the lead. I was satisfied to see my company move down this path as well in 2010 with a  quarterly update that includes our GHG footprint.

However, by integrating sustainability into the financial report, we risk losing the dialogue. Sustainability data would certainly gain an audit stamp that it often lacks today. This credibility is critical and should be a goal for every reporting entity; however, we would also risk positioning sustainability as a compliance function rather than as a framework for seeking continuous improvement through open dialogue. This dialogue drives improved performance by encouraging comparative analysis in context and by looking at leading indicators of success rather than historical records. The era of joint exploration is critical to our overall long-term performance. It could end if we have compliance owning sustainability reporting too soon—and that will be the norm in an integrated report.

Sticking to the already aggressive targets of 2015 for Environmental, Social, & Governance (ESG) reporting and 2020 for integrated reporting guidelines gives us enough run way to ensure that sustainability strategies take-off.

Concluding Thoughts

So, we should accelerate the adoption of sustainability reporting and embrace the drive towards integrated reporting. But in doing so, let's not lose sight of our true goal—making companies accountable to their stakeholders and then systematically improving performance. We want to have commitment to sustainability in the board room. We want to foster credible operations for driving improved performance. And we want to collaboratively engage on the road to a sustainable future. In short, we want our efforts to primarily encourage integrated strategies.

_Scott C. Bolick is Vice President of Sustainability at SAP. He can be reached at_ scott.bolick@sap.com _or followed on his Twitter (scottbolick)._

#### Integrated Reporting and the Collaborative Community: Creating Trust through the Collective Conversation

Kathleen Miller Perkins, Owner and CEO

Miller Consultants, Inc.

As we enter the second decade of the 21st century, the creation of one report integrating social, environmental and financial data will help companies succeed by building trust within their stakeholder communities. Conversely, companies that restrict reporting to only financials or disclose financial and non financial information separately as if the variables are unrelated will risk losing credibility in the marketplace.

Corporations that are ready to take control of their own futures will embrace the process of open and rigorous integrated reporting. Effective reporting will demonstrate how both material financial and non financial variables are affecting the performance and long-term health of the company. In the process, these companies will increase their trustworthiness with their stakeholders.

Why Integrated Reporting?

Currently all publicly held companies are required to file annual financial reports. And many also voluntarily release corporate social responsibility reports (CSR). However the content and format of the CSR documents differ considerably. Many are still "feel good" reports on corporate philanthropy. Others contain qualitative narrative concerning environmental efforts. Most do not demonstrate a business case for the activities represented. Alex Hausman, CSR Reporting Manager for the Timberland Company stated, "As the corporate landscape changes and 'doing good' is no longer good enough, the challenge is to apply the 'return on investment' mindset to the service we do in the community, to protecting human rights in our contract factories and to lessening our impact on the environment (1)." Effective integrated reporting would do just that—show the relationships between financial and non financial drivers of corporate performance.

Proponents of integrated reporting are arguing for more than just changes in documentation. Kzrus and Eccles in their book _One Report_ assert that companies should move from producing a static document to ongoing reporting about the company's financial and nonfinancial successes and failures. They state that integrated reporting is "about a collective conversation between companies acting as corporate citizens; analysts and investors; standards setters and regulators; and civil society, as represented by NGOs (nongovernmental organizations), associations of many kinds, and individual citizens (2)." Companies that are willing to interact transparently with their stakeholders can achieve the kind of trust which builds cooperation, loyalty and long-term collaborative relationships.

Organizations in Integrated Networks

Increasingly the global landscape is a web of relationships and associations. Corporations live in this integrated space along with many and varied stakeholders who assert their own concerns. The boundaries between who is "inside" and who is "outside" of any given organization have blurred. The organizational structure that is emerging in this post bureaucratic era is an open, collaborative community characterized by people and organizations coming together to create shared value (3). For example, lateral networks such as cross-functional teams within a company typify this type of organization. Likewise, complex supply chains and business alliances exemplify this new model as do corporate relationships with non-profits (NPOs) and non-governmental organizations (NGOs). In fact corporations exist in collaborative communities with all of society where the various stakeholders are attempting to balance self-interest with common interest.

In her book _Supercorp_ , Rosabeth Moss Kanter stated, "As the world becomes more globally connected, assumptions that used to guide organizations are rapidly being consigned to the trash bin of history. Boundaries that kept things simple and contained are being breeched. Organizational structures are flattening, and hierarchies are giving way to networks (4)."

These networks are held together by webs of mutual expectations and the belief that all have value to bring to the community. Success depends on the degree to which trust is established and maintained throughout the web. Integrated reporting can serve as a tool for facilitating this trust. Through the integrated reporting process, businesses can demonstrate to all stakeholders that their social and environmental goals aren't competing with the financial agenda (5) And those companies that are willing to reveal both successes and failures as they attempt to balance the variables are likely to increase their credibility within the community.

Integrated reporting cannot be accomplished without integrated management. Therefore integrated reporting is likely to increase stakeholders' trust that the company is embedding social and environmental factors into its business strategy. Stakeholders will get a holistic view of company performance and health, and the company will have a clearer picture of the value that the variables bring to the bottom line as well as to the collective community.

How Integrated Reporting Can Build Trust

Interpersonal trust is rooted in beliefs that the parties are competent, open, concerned and reliable (6). This type of trust traditionally has developed through personal interactions and first-hand experiences that created familiarity and common history. However social conditions in our globally networked world have changed the nature of how we interact. Now we depend heavily on people whose skills and expertise we can't test. Trust in business relations is more likely to be based on impersonal and indirect information about the company such as reputation, brands, and adoption of quality standards and commitments to people and the planet (7).

Thus sound integrated reporting over time should build trust within the stakeholder community. The ability to show the relationship between the financial and non financial less tangible variables will demonstrate _competence_. The transparency of the company in providing data will show that the company is _open_. The inclusion of not only activities but also metrics pertaining to social and environmental targets will establish the organization's real _concern_. And, over time, the company's ongoing reporting of progress towards the holistic goals will prove _reliability_.

It's All About the Process

Ultimately the methods companies employ for integrated reporting are far more critical to effectiveness than is a final document. Processes that allow the company and its stakeholders to learn more about each other and act to increase their reciprocal value are most likely to build trust. Thus, opportunities for stakeholders and the company to interact with each other provide the greatest opportunities for shared learning, innovation and trust-building.

For example, Krzus and Eccles in their book One _Report_ , argued for a process that includes data reporting on the internet. They suggested that companies provide tools to allow stakeholders to analyze the data themselves according to their own needs (8). Some companies facilitate stakeholder exchanges by convening panels to provide input and reactions to the integrated reports. Undoubtedly companies that are committed to integrated reporting can find many creative means by which to engage stakeholders in the process.

Vancouver City Savings Credit Union (Vancity for short) is the largest credit union in Canada with over 400,000 members and more than 55 branches in Vancouver, Victoria, and surrounding areas of British Columbia. They are actively involved in environmental and community causes. Vancity made its first effort at integrated reporting with its 2010 Accountability report. They are aiming for fully integrating financial reporting with their (social and environmental) bi-annual accountability reports in 2012. Vancity is one of the most trusted organizations in Canada even though they rarely talk about trust. Instead of discussing it, they engage with stakeholders to create trust. And by introducing their integrated reporting process, they are taking another step to develop the ongoing conversation with their stakeholders.

Barriers to Integrated Reporting Embedded in Organizational Culture

Clearly, integrated reporting is a tool whose time has come. However, to accrue real benefits from the process, companies must challenge assumptions that are likely to be embedded deeply in their organizational cultures. For example, boundaries that separate functions within the company, while perhaps impenetrable in the current culture, must become immaterial. Experts within departments will need to collaborate to create systems and processes that will enable integrated management as well as integrated reporting. Internal players across all internal boundaries will need to negotiate, make choices and compromise. Companies that are comfortable with cross-functional collaboration are most likely to succeed. Those that are still working in silos will be required to face significant change. Companies that cannot or will not change the silo approach to work will risk more than just failure at implementing integrated reporting. They will endanger their ability to succeed in the marketplace in comparison with their competitors who, as a result of cross-functional collaboration, are faster, more innovative, and more engaged with the complexities of the marketplace.

Perhaps the most daunting change will involve the organization's approach to external stakeholders. Effective integrated reporting demands transparency and relationships that cross traditional borders. Corporations are partnering with NGOs. Suppliers are forming tight networks with each other and with their customers. Even competitors are uniting with each other to address thorny environmental and social issues. To truly derive the benefits of integrated reporting, companies must embrace more than just transactional relationships with stakeholders.

Companies can't refuse to interact with external stakeholders even if they don't actively engage them. The informational world has opened and companies cannot hide within their own boundaries. If the company is perceived to be withholding information or using it selectively only for public relations purposes, their trustworthiness suffers in the eyes of the public. Therefore companies with isolationist cultures have much to gain by embracing change.

Conclusion

The time has come for corporations to move towards integrated reporting. It will enable them to better address the realities of this open web-related world within which they operate. The management practices that allow for integrated reporting will strengthen companies for the long-term. The reporting processes will build trust with their stakeholders. And trust is the collateral for successful value creation within the collaborative communities. Thus integrated reporting is an invaluable tool.

_Kathleen Miller Perkins is a psychologist and the CEO of Miller Consultants, Inc., an organizational and leadership development firm celebrating its 30_ th _year in business. Miller Consultants provides team development, culture assessments and leadership coaching world-wide. Miller Consultants specializes in assisting companies in building an organizational culture to support the execution of sustainability strategy._

Endnote: (1) Alex Hausman. Finding Value In CSR Reporting. Environmental Leader . Online] February 12, 2008. [Cited: November 3, 2010.] [ http://www.environmentalleader.com/2008/02/12/finding-value-in-csr-reporting/.  
(2) Eccles, Robert & Krzus, Michael. One Report. Hoboken, New Jersey: John Wiley & Sons, Inc., 2010.  
(3) Heckscher, Charles & Adler, Paul S. The Firm as Collaborative Community. New York: Oxford University Press , 2006.  
(4) Kanter, Rosabeth Moss. Supercorp : How Vanguard Companies Create Innovation, Profits, Growth and Social Good. New York: Crown Business, an imprint of the Crown Publishing Group, a division of Random House, Inc., 2009.  
(5) Eccles, Robert & Krzus, Michael. One Report. Hoboken, New Jersey: John Wiley & Sons, Inc., 2010.  
(6) Mishra, Aneil K. Organizational Responses to Crisis: The Centrality of Trust. R. M. & Tyler, T. R. Kramer. Trust in Organizations. Thousand Oaks California: Sage Publications, Inc., 1996.  
(7) Lane, Christel. Introduction: Theories and Issues in the Study of Trust . C. & Bachmann, R. Lane. Trust Within and Between Organizations: Conceptual Issues and Empirical Applications 2nd Edition. New York: Oxford University Press , 2000.  
(8) Eccles, Robert & Krzus, Michael. One Report. Hoboken, New Jersey: John Wiley & Sons, Inc., 2010.

#### Online Co-Creation Communities: A New Framework for Engagement

Denis Riney, Executive Vice President

BrandLogic

The Integrated Reporting community is working hard to resolve procedural hurdles, converge on common standards, and spread the word that it's an idea whose time has come. Much of the discussion thus far has been focused on how to align the interests and objectives of shareholders, investors, regulators, standard-setters, technology providers, and non-governmental organizations. Very little attention, however, has been given to the role of customers as major stakeholders and their potential for influencing adoption of environmental, social and governance (ESG) factors. (For the purposes of this article, "customers" refers to buyers of goods and services, including end-consumers, businesses, governments, etc.)

In theory, if enough customers were educated about the benefits of ESG adoption, they would use their collective purchasing power to reward the ESG-compliant firm and pressure non-compliant companies to get on the bandwagon. If it could be shown that ESG compliance has a strong impact on purchase behavior, convincing the reluctant CEO would be an easier task.

The traditional approach to uncovering the link between purchase behavior and ESG awareness is market research, either through focus groups or a quantitative study. Today, however, there is another way to get customer involvement and feedback that offers several advantages. With the power of social networking tools, it is now possible to create large-scale, online co-creation communities that allow for a richer, more interactive dialogue between companies and their customers.

Engaging customers in this way can yield considerable value, because it goes beyond the gathering of intelligence about customer attitudes—information that can be obtained through more traditional methods such as focus groups and surveys. Co-creation makes the customer an active participant in the process, giving them an opportunity to shape how ESG gets factored into a company's business strategy.

Co-creation is not a new idea; it has been used in product development processes for some time. A professor from the University of Michigan, the late C.K. Prahalad has been a long-time believer in co-creation as a way to break free of the traditional "company-centered value creation" approach:

"The answer, we believe, lies in a premise centered on co-creation of unique value with customers. It begins by recognizing that the role of the consumer in the industrial system has changed from isolated to connected, from unaware to informed, from passive to active. The impact of the connected, informed and active consumer is manifest in many ways (1)."

When Prahalad's article was written, social networking tools were just beginning to mature. Now, the availability of powerful web-based tools makes it relatively easy to organize and moderate an online co-creation community—a highly collaborative, interactive forum that encourages debate and discussion among a large number of participants, all in a secure, walled-garden environment.

Large corporations such as IBM, Kraft, Citigroup and others have used variations of this co-creation technique to engage in two-way dialogues with their employees, partners, customers and other audiences. A key benefit of this approach, as opposed to conducting a conventional market research survey, is the ability to gather stakeholder input rapidly and, depending on the nature of the conversations, redirect the discussions towards topics of interest that emerge from the community.

Using co-creation to its best advantage

Creating an online community is simple, but to derive maximum benefit from the actual engagement with customers, the profile of the audience and the course of the interaction should be carefully controlled.

Participants should be asked to opt in to the discussion and provide honest, candid feedback in response to a series of questions, exercises and what-if scenarios. In this context, invitees should include current customers of the firm who are generally knowledgeable about the company's business practices. This is quite different from "crowdsourcing" schemes, which typically involve participants who have little, if any, knowledge of the topic being discussed prior to being invited.

Depending on the situation, co-creation communities can be organized to last either a few days, or be conducted over the course of several months. A skilled researcher who has a keen sense of the specific issues the firm is facing should facilitate the discussions. The co-creation community could involve as little as a few hundred participants, or it could be scaled up to involve thousands of voices.

The likely sponsors of such an effort in a large organization would be the chief marketing officer and the head of corporate communications. Taken together, these functional executives typically are responsible for looking after customer acquisition and loyalty programs, customer satisfaction, corporate reputation, investor relations and related functions. Other functional areas can certainly contribute content as well.

What co-creation can do

The potential outcomes of engaging in co-creation are quite varied. In the context of a dialogue about Integrated Reporting or ESG, co-creation could help a company involve its customers in determining the impact of various proposed business strategies.

In the case of a hotel chain, for example, it might be revealed that guests place much more importance on labor practices than on environmental issues when it comes to making a decision on where to stay. In the course of that discussion, customers can provide input on how the company might take steps to correct any real or perceived shortcomings in this area. New alternatives can be presented and actively debated in a near real-time setting.

Beginning a two-way dialogue using the co-creation technique can also result in a variety of positive unintended consequences. By demonstrating a commitment to greater transparency around key factors, for example, firms can potentially gain a measurable uplift in their overall reputation scores. The process might also reveal new opportunities for innovation and differentiation around these factors.

Although this discussion focuses on the value of customer engagement, there is no reason why the online co-creation process can't be used to engage other stakeholder communities. Providing a more comprehensive view of stakeholder interests and concerns can be of great value to firms considering Integrated Reporting because the process offers a larger, richer and more varied knowledge base to support strategic decision-making.

A valuable addition to the ESG toolkit

For the firm that is willing to take the first step, co-creation can be an enlightening and powerful way for customers to shape the future of ESG adoption. In addition to its potential to provide deeper insight into materiality issues and their impact on business strategies, it provides another way for businesses to demonstrate their commitment to these important issues.

Denis Riney is Executive Vice President, BrandLogic Corporation, leading the firm's marketing and client development efforts. For over 25 years, he has been a board-level advisor to global corporations on the topics of branding, corporate reputation and their linkages to business strategy. He is a sought-after speaker on these topics and has appeared in major media outlets such as CNN, CNBC, The Wall Street Journal, Financial Times, The New York Times, The Los Angeles Times and others.

_Denis holds a B.S. from Fordham University and an M.B.A. from Columbia University. He is a contributing author to_ Strategic Development for High Technology Businesses _(1987), noted by Dr. Thomas Kosnik at Stanford University as one of the best books ever written on strategic planning for high-tech executives (ISBN # 0-9618891-0-7)._

Endnote: (1) C.K. Prahalad and Venkat Ramaswamy, "Co-creating unique value with customers," Strategy & Leadership, Vol. 32, No. 3 2004, pg. 4.

#### Employee Engagement and the Holy Grail

Kathy Miller Perkins, Owner and CEO

Miller Consultants, Inc.

Recently, I experienced one of those rare "Aha!" moments when several concepts which heretofore had seemed only mildly related suddenly appeared to be interconnected. I had returned from Harvard Business School's Workshop on Integrated Reporting: Frameworks and Action Plan. The focus of the meeting was on issues pertaining to effective corporate reporting. The group addressed the relationships between financial and non-financial variables on the performance and future health of companies. The meeting included discussion of regulations, desires of the investment community and global standards for reporting. In addition, the group brainstormed what would motivate corporations to adopt integrated reporting.

My 30-year career has been focused on corporate culture, leadership, and company productivity. Part of that work has involved helping companies address issues pertaining to employee engagement. As I thought about what needs to happen to bring integrated reporting into the corporate mainstream, I realized how closely the process of integrated reporting connects to corporate culture, and more specifically, to employee engagement.

Why Employee Engagement?

In an ideal world, all of us would love our work, feel connected and engaged with the companies for which we work, and understand the business so that we knew how to make a personal contribution to its success. In addition, the achievements of the business would contribute to the well-being of our communities and our world. Some exemplary companies come close to fitting this profile. However, many companies exhibit a lack of connection between what employees want and what the organizational culture makes possible. Most employees really want to do a good job, and most company leaders really want to create an environment that enables them to do so. However, companies struggle to understand and address the factors that prevent them from achieving these goals.

The divide stems from many factors including the fuzziness of the concept of organizational culture. Also, leaders often place priority on short-term financial success and lack understanding of how employee engagement affects company performance and long-term health. In a recent article in _BusinessWeek_ , the Corporate Executive Board reported that employees who are most committed to their organizations put forth 57 percent more effort and are 87 percent less likely to leave their company than employees who consider themselves disengaged. The article concluded that employee engagement is a critical factor in an organization's overall financial success (1).

Creating a Culture of Engagement

Even when leaders recognize the impact of employee engagement on the company bottom line, they often lack the knowledge of how to impact it. Engaged employees are involved in their work and are eager to contribute to the success of the company. They will put in discretionary effort including extra time and brainpower (2). Among the factors that drive engagement are perceptions that the job is challenging and meaningful. Employees want to see the connection between what they do and the company's results. When they can see how their efforts impact the greater good of society, they are likely to experience even more commitment.

Many times organizational structure obscures the relationship between individual employees' roles and company results. Departments within functionally structured organizations frequently are inwardly focused and disconnected from the larger system. Under these conditions, employees are likely to struggle to see the relationships between their jobs and the bigger picture. At the same time, company leaders assert that they would like for their employees to possess a keener understanding of the business. This increase in business savvy is unlikely to occur in an organization with silos.

Yet by increasing employees' understanding of the processes and systems that create value for their company, leaders could also impact employee engagement. The greater the understanding of the company picture overall and the processes that comprise it, the more likely that the employees will recognize how their own jobs connect and contribute to its success. Their engagement in their jobs is likely to increase with their appreciation of their own contribution.

Where Does Integrated Reporting Fit?

As Christoph Lueneburger argues in another article in this book, integrated reporting is complex. Companies will need dedicated teams representing many if not all functions within the organization to capture and bring together all of the information (3). And strategic integrated reporting which truly shows how the financial and non-financial factors interact cannot happen in the absence of integrated management. The process of embedding non-financial factors such as environmental and social goals into the company strategy will require cross-functional collaboration. To implement an integrated strategy will require the competencies and cooperation of all members of the corporate community.

This scenario could provide the company with many opportunities. The processes involved in creating and executing an integrated strategy that will deliver an integrated report also could create a culture of higher employee engagement. As employees come together across functions to strategize, problem-solve, create and share expertise and information, they will learn from each other. Together they can grasp the big company picture and their own contribution to it. If engagement truly hinges on a sense of challenge and meaning in one's job, integrated management leading to integrated reporting provides a golden opportunity to impact the company culture. Through the process of integrated reporting, the company can accomplish several results:  
1. Increased business savvy throughout the organization.  
2. Greater employee engagement which correlates with greater productivity.  
3. Enhanced understanding of the linkages between company financial performance, risk and environmental and social factors.  
4. Consistency of messages both internally and externally (4).

And in that ideal world that I imagined in the beginning of this article, the integrated management that would deliver the integrated report would lead to a more cohesive culture where all could make better decisions.

Kathleen Miller Perkins is a psychologist and the CEO of Miller Consultants, Inc., an organizational and leadership development firm celebrating its 30th year in business. Miller Consultants provides team development, culture assessments and leadership coaching world-wide. Miller Consultants specializes in assisting companies in building an organizational culture to support the execution of sustainability strategy.

Endnote: (1) Corporate Executive Board. _The Role of Employee Engagement in the Return to Growth_. Bloomberg _BusinessWeek_ August 2010.  
(2) Towers Perrin. _Working Today: Understanding_ _What Drives Employee Engagement_. The 2003 Towers Perrin Talent Report.  
(3) Lueneburger, Christoph. _A Team Like No Other_.  
(4) A brief research report prepared by Solstice Sustainability Works for Vancity discusses the benefits that integrated reporters describe. _Integrated Reporting: Issues and Implications for Reporters._  https://www.vancity.com/lang/fr/SharedContent/documents/IntegratedReporting.pdf

#### Engagement as True Conversation

Kate Parrot

Recently a company executive shared this reflection about her experiences with stakeholder engagement: "In our meetings I feel like I could script the conversation before it starts. I know what everyone is going to say. There's no new information. But in a true conversation, people would enter into it with an openness to change."

Every year, investors pour enormous amounts of time, energy, and resources into both pressuring and partnering with companies to improve transparency and performance on environmental, social, and governance issues. Their strategies range from lodging shareholder resolutions and initiating short-term, focused negotiations, to conducting long-term dialogues that sometimes span years.

While some companies, like the one represented by the executive quoted above, genuinely welcome engagement for the opportunity to gain access to specialized knowledge about CSR issues, and to communicate their efforts to the outside world, others are wary of engagement, especially if they have been targets of public shame/blame campaigns in the past. Even companies who have sophisticated engagement strategies perceive risks in extending trust or transparency too far, and imperiling trade secrets or creating new reputational risks. Questions persist about which stakeholders to work with and for what purposes, what the goals and agreements of engagement should be, how to broaden engagement participation within the firm, and how to carry forward a CSR agenda that may have mixed levels of internal support.

For their part, investors and other stakeholders say they desire transparency, trust, honesty, and mutual learning in engagements. This ideal is not, however, easily achieved. Engagement can be an exercise in frustration if company representatives are perceived as "trying to pull the wool over our eyes," being "self-promotional rather than self-reflective," or are trying to "use the shareholder dialogues to give the company protection...or to control what is happening [in the external world]." Investors' questions revolve around managing the ongoing tension of fulfilling their fiduciary responsibilities while maintaining integrity around their ESG values and goals, maximizing the use of limited resources for engagement, and measuring the impacts of their efforts.

Some general guidelines for engagement do exist, for instance those published by Business for Social Responsibility, AccountAbility, the Conference Board, and the Global Compact. There has been some research done to understand what makes engagements effective from the investor point of view (1), but there has been very little research done on engagements from the inside out to understand why some work well, and others less well. As a result, there is a lack of widespread knowledge about how to design and carry out engagements that reliably generate productive outcomes.

Perhaps some of what we know about negotiation and organizational learning can offer insight into how to make engagements more effective. For instance, we know that conversations can stall or break down simply because people do not really listen to each other, and either cannot or do not attempt to understand what the other party really wants.

In their well-regarded book _Getting to Yes_ (2), Roger Fisher and Bill Ury point out that focusing on _interests_ —people's underlying needs, desires, concerns, and fears—is far more likely to generate solutions than negotiating around committed _positions_. This is because there is often more shared overlap at the level of interests, and more mutually satisfactory solutions can be found at that intersection. Susskind et al (3). in their research on consensus building explain that by asking and explaining not only what they want, but also why they want those things, people provide other parties with information essential to reaching an agreement. In doing so, participants may find that their interests are not in fact best served by positions they initially held. At this point a new kind of inquiry can emerge to explore how all parties' interests may best be served.

When participants begin to explore the interests that underlie their positions, they open up a space for what Argyris and Schön (4) call "double-loop learning." While single-loop learning is akin to detecting and correcting errors in a system—like turning a thermostat up or down to make a room hotter or colder—double-loop learning involves exploring the reasons underlying why people do what they do. That is, a deeper level of learning involves understanding the interests that drive actions and decisions, and then taking different actions in light of that new knowledge.

The kind of engagement that opens a space for companies and external stakeholders to explore underlying interests and to engage in learning together is a rare phenomenon. It would be naïve to assume that this approach is always possible, or even desirable, for the issues at hand. However, such engagements can be satisfying and transformative for the people who participate, and can generate creative outcomes that no one imagined at the outset. This is what a "true" conversation might look like.

Kate Parrot is a PhD candidate at MIT Sloan. She is doing her dissertation research on the group dynamics that lead to effective engagements between companies and external stakeholders around sustainability issues.

Endnote: (1) See for instance Gifford, J. (2009) Effective shareholder engagement: An analysis of the factors that contribute to shareholder salience, PhD Thesis, University of Sydney, School of Business and Piani, V. (2009) Effectiveness of Shareholders' Collaborative Engagement Activities with Companies on CSR Issues. Master's Thesis, University of Nottingham.  
(2) Fisher, R. & Ury, W. (1991) Getting to Yes: Negotiating agreement without giving in. New York, Houghton Mifflin.  
(3) Susskind, L, McKearnan, S., Thomas-Larmer, J. (1999) The Consensus Building Handbook. Thousand Oaks, CA. Sage Publications.  
(4) Argyris, C. and D. A. Schön (1978). Organizational Learning. Reading, MA, Addison-Wesley.

# PART VIII

Perspectives on an Action Strategy

#### Tomorrow's Corporate Reporting

Patricia Cleverly, Tomorrow's Company; David Phillips, PricewaterhouseCoopers;

and Charles Tilley, CIMA

Background

Corporate reporting should play an essential role in the effective functioning of the market economy, enabling shareholders and investors to assess the performance of a business across all aspects of activity, establish its value and exercise effective oversight. To be effective, corporate reporting should set out a company's strategy, explain its business model and key relationships and risks, how it is funded and governed and provide an overview of its historic performance and future potential. In short, it should provide the building blocks of information necessary for effective decision-making by investors and other key stakeholders.

The global economy is still recovering from a financial crisis that has reinforced how important sound, transparent and vibrant capital markets are to its healthy functioning through enabling good judgements to be reached about long-term opportunities and systemic risk. The crisis has also highlighted the critical role that corporate reporting must play in the overall regulatory framework and has posed many questions about its current utility.

Many have suggested the crisis was a problem waiting to happen given that we have for too long been trying to manage the needs of the 21st century using outdated market and regulatory mechanisms and tools designed for a time when the dynamic and needs of society and the market economy were different. Now, companies operate at the intersection of the global economic, social and political and environmental systems (what Tomorrow's Company calls the "triple context"). There are more and more disparate demands made on businesses and higher expectations in terms of their impacts on society and the environment.

One of these tools is the corporate reporting model and it is questionable whether it has changed sufficiently in response to previous crises to help prevent similar events happening again.

Preparing a good concise report on a company's business model and its prospects in the context of the overall environment and market is challenging. But, there is a growing recognition that the understanding of corporate business models and financial instruments and the role incentives play around behaviors and risk taking could have been enhanced. Furthermore, the current reporting model has grown in volume and complexity, often running to many hundreds of pages, leaving the reader struggling to understand the underlying performance of the entity and its future sustainability.

At the same time there is growing recognition that the reporting model has not developed in a way which adequately responds to a business environment in which:  
-non-financial factors, particularly intangibles, are recognized as being significant drivers of corporate performance  
-value creation depends on a company's ability to understand and respond to social and environmental issues and not just economic ones  
-the quality of corporate governance and the nature of a company's culture and behaviors are recognized as having a significant impact on performance and long term sustainability.

Over the past decade there have seen numerous studies in the field of corporate reporting that have highlighted the limitations of the existing core financial model. Commentators have routinely raised concerns, for example, about the complexity of reporting standards and about the degree to which they offer genuine insight into the economic activity of an entity.

At the same time market practices have evolved and there are companies who are considered exemplars in how they report but the transfer of knowledge has been limited and the pace of change in the mainstream has been slow. Furthermore, as one goes around the world one finds significant variations in reporting even within the constraints of financial information.

So while limited progress has been made, inconsistency in the scope of what is reported and the fact that information has been progressively bolted on in a haphazard way, means that today's model fails both in its coherence and accessibility. To overcome this situation many are now calling for the introduction of an integrated reporting model that provides a strategic picture of the company, focusing on all the issues which will have a material impact on its business model and future sustainability. In this regard, the recent announcement of the creation of a new body, the International Integrated Reporting Committee (IIRC), should be met with guarded optimism. With its ambitions of developing an integrated reporting framework and to gain the engagement of the G20 to ensure the right structural changes occur, it has an important role in helping to effect change.

The work and objectives of the IIRC provide an important platform for the research being undertaken by PwC, CIMA and Tomorrows Company. This research is focused on providing further insights into how the reporting system's architecture and its interaction with key stakeholders can be enhanced. At the same time, it is vitally important that the IIRC does not become another initiative which should succeed, but does not, in part or full. The Tomorrow's Corporate Reporting program seeks to understand why past attempts to improve the effectiveness of corporate reporting have seemingly had limited success.

The core question that this program of research is asking is: What aspects of the system are preventing or supporting the effective development of corporate reporting? And what changes are needed to make the system fit for purpose for the future?

By corporate reporting we mean all the mechanisms by which companies communicate their performance and activity to their stakeholders, with a particular emphasis on the flow of information into the investment community.

The focus is on the systems architecture and the behaviors and values of its stakeholders, not on the content of the "ideal corporate report." The emerging issues and challenges discussed below have been presented using the underpinning themes which have framed the research, but recognizing that they are by their nature connected and interlinked:  
-Common goals - To what extent is there a shared understanding about the purpose of corporate reporting and the overriding objective of reporting standards?  
-Ability to deal with complexity and change - Are the transactional, regulatory, technological and other changes as a result of globalization creating too much complexity and change for the system to deal with?  
-Competence of key stakeholders - Is the level of technical knowledge and understanding of financial and non-financial information and metrics a barrier?  
-Incentive structures - To what degree are investors, accountants, standard setters and management incentivised to engage in any dialogue about changing the reporting model?  
-Ability to influence - Who is best placed to change the system and what is needed to help them do this?

Emerging Findings

While the research project is ongoing and there is substantial further work being undertaken to analyze the initial findings, some key issues are emerging which we outline below.

1. Common goals

We have been gathering views regarding the extent to which there is a shared understanding about the purpose of corporate reporting and the overriding objective of reporting standards. In summary we believe "Few stakeholders are on the same page" for the reasons set out below:

-First, there are parallel systems operating which are not necessarily joined up—the regulated system (primarily focused on financial information) and the unregulated system (which includes sustainability reporting and also provides additional information and insights). There is substantial investment being made in the latter system, especially in terms of corporate time in, for example, investor relations and briefings. While it is normal for new areas of thinking to evolve in isolation the question remains regarding what information should be regulated and what should be unregulated—have the lines been drawn in the right place.  
-Secondly, the "public interest" that underpins the reporting model is not clearly defined. Different stakeholders and different nationalities come at the issue from varying positions. This translates into comments that the reporting model is for shareholders, the investment community, all stakeholders (with primacy to investors), regulators (acting on behalf of society).  
-Thirdly, inherent tensions exist in the system—such as long-term versus short-term, the need for comparability of data versus the need to communicate what is unique and material.

2. Ability to deal with complexity and change and competence of key stakeholders

In looking at how the reporting model has evolved and changed we have been particularly interested to understand whether social, political, economic, regulatory and technological changes together with the impact of globalization have created too much complexity and change for the system to deal with.

We have also wanted to assess the competence of the key stakeholders, their level of technical knowledge and expertise of both financial and non-financial information and to assess whether they act as a barrier to change.

The picture emerging from the research is one in which complexity, scale and pace of change is transforming the operating environment in which business is operating. One of the reactions to the above has been the creation and reinforcement of new cultural silos and increasing specialization in skill sets. For example, the complexity demands a new ability to understand the links between financial and non-financial factors in terms of corporate performance for all the stakeholders in the system; each group within the system have established their own mindsets, languages and traditions, epitomized by the rise of the professional standard setters and the rise of the CSR community. This has created barriers which are sometimes difficult to cross. Furthermore, the scope of mainstream knowledge does not extend to some critical areas of non-financial information e.g., business models, risk, intellectual capital, people and culture.

In summary, there appears to be what we describe as "Silos of specialization" where mindset, language and traditions vary from one stakeholder group to another. With the consequence that while there are mechanisms for engagement the groups are often talking across each other and the impact of their efforts is dissipated.

Furthermore this environment has led to a world where it has been easier to add more information and disclosures to the reporting model. While there are some people who believe the information provided is both useful and necessary there are others who question whether the result has been a growth in the quantity of what's reported to the detriment of its quality. Also the increasing volume of information, has brought with it an escalation in the volume of guidance, standards and hence length of annual reports. This situation has arguably had a negative impact on the behavioral response from all those involved in the reporting system who have seen reporting as a compliance process not the communication of what's important.

3. Incentive structures and ability to influence

Finally, in considering the future we wished to explore who is best placed to change the system and what is needed to help them do this? In this regard we wanted to ascertain the degree to which investors, accountants, standard setters and management are incentivized to engage in any dialogue about changing the reporting model.

To date, the emerging picture is one where there appears to be a lack of trust between key stakeholder groups and little incentive for them to be engaged in a meaningful process of change.

In particular, the main issues emerging are:  
Trust – there are some built in perceptions which create barriers to sharing, learning and hence innovation across the system e.g., companies and professions are sometimes perceived as untrustworthy and self-serving, NGOs are too single-issue focused and some key institutions are seen as too remote. Damaged trust and hence legitimacy due to the financial crisis has led to increased calls for regulation in some territories.  
Resources and willingness to engage – the escalating demand for information in terms of quantity, quality and subject has escalated with attendant resource and cost implications for stakeholders in the system. Many stakeholders have given up trying to influence the system as their past efforts have been ignored.  
Vested interests and conflicts of interests – as a result of communication barriers, perceived and actual competitive advantage, the creation of silos of expertise, the desire to retain or build legitimacy and concerns about retaining membership or business. At country/regional levels, sovereignty remains a critically important issue and is unlikely to change while domestic political agendas dominate. There are also a number of system participants who are happy to act as free riders and to allow a few people to make the running.  
Lack of aligned incentives – there is little internal encouragement or incentive to help influence or change the system e.g., remuneration is often focused on narrow performance areas and investing time to improve the utility of the system is not something most organizations are willing to support. This is particularly the case given the slow speed of change the difficulty in measuring the success.

The group is intending to progress the research program over the next few months and will be reporting more fully in early 2011. The report will contain a systems map for reporting system; it will identify the key opportunities and barriers for the development of the system and key recommendations to take the research to its second phase. The report will provide recommendations of actions which should be explored at three levels: international, national and stakeholder levels. At a national level the group is keen to provide a framework to assist individual countries undertake their own reporting system assessment as a mechanism for enhancing the overall utility of the reporting model.

Patricia Cleverly, MA is Director of Research, Strategy and Policy at Tomorrow's Company.

David Phillips is Senior Corporate Reporting Partner, Assurance practice at PricewaterhouseCoopers LLP.

_Charles B Tilley, FCA_ is the _Chief Executive of CIMA._

#### Push, Nudge, or Take Control – An Integrated Approach to Integrated Reporting

Shelley Xin Li

In Chinese, "crisis" literally means "a dangerous opportunity." Corporate reporting on issues beyond financial performance has been around for a long time. The financial crisis, the Great Recession and shocking stories like the BP spill in the Gulf of Mexico, led the topic of integrating financial and non-financial reporting (on sustainability, governance and safety, etc.) to a salient and urgent status. We would regret if not taking this opportunity to push the world toward adopting a framework of integrated reporting (which will hopefully induce companies to make more sustainable and responsible business decisions and provide a better information environment for all stakeholders), since we humans tend to forget the pains when wounds start to heal.

However, a top-down approach of drafting an "idealized" framework, selling it to political leaders and pushing it down to business practice, is definitely not the only way or most effective way to truly establish the practice of integrated reporting and decision-making. "Thick ice does not appear overnight." The process of adopting integrated reporting itself should also adopt integrated strategies, engaging all the stakeholders affected by this process (especially those who have to produce and use integrated reports ultimately). The adoption of integrated reporting needs to generate values for all actors (companies, investors, civil society, regulators, etc.). And different actors need to take different approaches to build this new practice.

Engage "true forces"

Integrated reporting is something we want companies to _willingly_ use in practice and help them make integrated business decisions. For a long time, companies, especially those in the U.S., are most concerned with the benefits of investors, as seen in the powerful principle of "maximizing shareholder value." No matter if we agree with such a principle or not, investors and the business they invest in are to a large extent the "true forces" that eventually power up any new practice. Therefore, it is extremely important to know their motivations and secure their commitments.

I interviewed my friend, David Kirkpatrick, who works as a venture capitalist at "SJF ventures," a venture fund investing in socially responsible businesses. The major questions I was interested in are: why are investors interested in socially responsible business in the first place? What is the relevant information that investors would love to see in a company's report?

There was a time when investors considered efforts on social responsibilities a useless burden that would produce no value. Now private funds, even mutual funds, invest in companies with sustainable and responsible business. Some investors formed "Impact Investing Network," through which they learn from each other how to make better investments that have a positive social impact. What made investors change their mind is that they saw real business opportunities in such investments. For instance, they believe there is a future for the clean energy industry, since the world will run out of fossil fuels and resort to alternatives one day and efforts have to be made to maintain the environment we live in. Whoever participates in such investments earlier would have more advantage in sharing the business values created from such new industries. Even in established industries where the business itself is not exactly about social responsibility, investors realize that such issues would significantly affect the cost and risk profiles of business operations and have a huge impact on values.

David said that "financial information only shows the tip of an iceberg" to investors. In order to assess business opportunities and risk factors, investors need more non-financial information. Let's say that BP had disclosed in detail its implementation status on safety issues in timely reports, some investors might have seen the potential risk and drawn back their money to avoid a loss. Even information on how a company satisfies its other stakeholders (regulators, customers, community, etc.) is valuable to its investors, because it provides a long-term view to investors assessing the potential value-consequences of the company's business strategies.

Investors want to see an integrated report with timely (even real-time) information beyond financials that would link back to a company's strategies. They want to see such information integrated with product attractiveness, market potentials, cost of operations, safety and political risks, etc. They do not want to see a showoff of random accomplishments in charitable donations or empty statement of "investing in human capital."

For companies using strategy maps, a good place to start is to look at the corporate level map, fit the non-financial information and activities in the map, and mark the linkage between non-financial measures (or goals) and the high-level business strategies. Then companies can provide customized reports to investors with the non-financial information that fits in the map and also the perceived linkages to business strategies. Many companies create strategy maps anyway. So this is probably not a redundant procedure that costs much in extra efforts. Investors would welcome such reports. And companies could use this process to plan and review their sustainability-related actions and stakeholder engagement efforts for the purpose of creating economic value.

Grow, not manufacture, the practice

It would certainly be great if regulators can design a framework of integrated reporting and get necessary political support before people move on from the crisis and forget the pains. However, the adoption and effective use of integrated reporting are not something that can be perfectly designed in a top-down way.

Standards and practice evolve, and thus cannot be manufactured. Creativity and innovation most likely will come from companies that practice integrated reporting. In order to grow the practice, bottom-up experiments need to be encouraged. And since many companies have not adopted such a practice yet, we cannot foresee exactly what innovations would emerge in which industry and which part of the world.

So the implications are:  
1. The framework regulators propose should be flexible principles at this stage and allow creations and innovations. The larger the application scale of such a framework, the more flexible it should be.  
2. The framework should include a development plan that periodically includes new practices and standards from the business community and incorporates feedbacks from all stakeholders in the integrated reporting process.  
3. The process of adopting integrated reporting should not be led by only one single group of the stakeholders. It should be forces working simultaneously and cooperatively. Regulators can push and monitor the process; civil society can nudge the process; companies need to take control of the process as a means to develop their business strategies.  
4. Foster an encouraging culture in the process, not a judgmental one. Different companies have different goals and face different trade-offs. There probably is not a single-best standard in many of the integrated reporting issues. Stakeholders of a particular company are the ultimate information users of this company's reports. And companies are the ultimate decision-makers as to what trade-offs they want to make (and that will be reflected in the way they present their information). Companies need to be encouraged to choose whatever is "right" for their unique business situations, rather than pushed into a meaningless competition of doing what is judged to be right by others.

Tolerance for divergence

If we adopt one single standard or framework, and it fails, we have nothing left but lessons. If we allow more solutions, one of them might survive and prosper. There might be parallel integrated reporting frameworks run by different groups or in different regions. We should try to make the framework we develop work. At the same time, we need to be aware of and tolerate other frameworks, and learn from them. It is too soon to make the resolution of convergence when a framework is in its infancy.

The ideal process I would love to see is:  
1. A principle-based framework is developed by non-official organizations and gains political support in as many regions as possible.  
2. Find the motivations and values for each group of stakeholders and make sure that they have mechanisms to effectively reward or punish companies' actions.  
3. Companies start adopting integrated reporting and try to form integrated strategies. Some of them do well and gain supports from stakeholders; others fail and have to either improve their practice or be punished by stakeholders.  
4. After trials-and-errors, companies would find their respective ways to present integrated reports to stakeholders and take their needs into business decisions.  
5. Groups involved in the process of adopting the practice communicate periodically, updating frameworks and sharing experiences.  
6. Official standards get established according to widely adopted frameworks and practices, with monitor and enforcement procedures in place.

Push, nudge, or take control. We need to find our group and choose our action. We cannot sit around, let other groups do the work and then judge their work. The evolution of a new practice is a dynamic process that all players need to participate, because this is how a new and robust ecological system develops.

Shelley Xin Li is a Doctor of Business Administration student at Harvard Business School.

#### Integrated Reporting: Long-Term Thinking to Drive Long-Term Performance

Mindy Lubber, President and

Andrea Moffat, Vice President, Corporate Program, Ceres

We all know how crucial it is to move to a sustainable economy, but we also recognize we're not getting there as quickly as we need to.

One reason why is that some of the key drivers and information that will move us in the right direction are missing. "What gets measured gets managed," goes the saying. So providing comparable quantitative and qualitative information on a company's environmental, social and governance (ESG) risks—and opportunities—is a _must_ for building a sustainable economy.

Our expectation is that integrated reporting will lead to better measurement of risks and opportunities that have not largely been quantified to this point, including the cost of biodiversity impacts, license to operate in the communities where they are located, and the value-add of natural resource services to production processes. Rigorous and credible integrated reporting will help companies see the value of—and their dependency on—the long-term health and viability of the environment and the communities where they operate.

It's important to keep in mind, however, that integrated reporting as a way of deepening accountability and transparency is not an end in itself. Actual performance results, from lower greenhouse gas emissions to better human rights protection and more, are where tools like this need to take us.

At Ceres, disclosure is a bread and butter issue. We're the birthplace of the Global Reporting Initiative (GRI), and led the charge to secure the U.S. Securities and Exchange Commission's (SEC) interpretive guidance on the kinds of information companies should be disclosing about climate change risks. Now, working with partners such as the Social Investment Forum, we are making the case for including other material ESG risks in formal corporate SEC filings.

We have a strong interest in the burgeoning attention on integrated reporting. On the one hand, it's exciting to see a growing recognition by companies that sustainability is a bottom-line business issue that, along with other material risks, should be disclosed in corporate annual reports and financial filings.

On the other hand—and given Ceres' broad constituency that includes advocacy groups, labor groups and community groups that pioneered the push for corporate sustainability disclosure—we need to balance this intense focus on the financial and accounting community and ensure that it doesn't disenfranchise some of these other key groups or consumers. These groups are looking for a wide-range of credible sustainability information on issues like waste, water pollution discharges and working conditions. These issues are not measured in the same way as certain financial issues and thus are not necessarily going to meet the current financial definition of material issues for all companies.

The International Integrated Reporting Committee, with its mandate of developing a broadly accepted framework of standards and guidelines for integrated reporting, has an important role to play at this critical time. Given the urgency of planet-wide sustainability threats such as climate change and water scarcity, we hope for the emergence of such standards sooner rather than later. The Committee also needs to engage and take into account the feedback and interests of the broad swath of constituency groups that make use of corporate disclosures in all its forms—financial, sustainability-focused and a combination of the two. And there's a need to ensure that integrated reporting is not a pure communications exercise within companies. It should be backed up by an integration of sustainability into overall business strategy and decision-making.

The bottom line for Ceres is that integrated reporting is a positive development, but it's critical that corporate integrated reporting be backed by integrated governance systems, robust stakeholder engagement and tangible performance improvements. Such reporting should show financial information while also recording specific, on-the-ground environmental and social risks and improvements. When done right, integrated reporting will help companies make the connections and measure the consequences of their actions and policies. Sustainability must not be allowed to languish in a corporate silo but must percolate through the ranks, from boardrooms, through operations, and across supply chains.

Earlier this year, Ceres released _The 21st Century Corporation: Ceres Roadmap for Sustainability_ (1). This comprehensive report outlines 20 key expectations for how corporate sustainability should evolve by 2020. The report's first three sections address accountability systems that companies must put in place to integrate sustainability into their DNA. The rest of the report is about actual performance improvements, ranging from energy efficiency and carbon reduction goals to improvements in human rights and water use. The report's bottom-line message: accountability and performance are both integral to a sustainable business strategy.

That's where integrated reporting fits—as a tool that needs to be leveraged by companies and their constituencies to push for the accelerated performance improvements that are a _must_ if we're to achieve a truly sustainable global economy.

All of us have responsibilities if we're to ensure that robust and credible integrated reporting is driven by, and in turn drives, our economy's shift to a long-term sustainability orientation. Below are some actions that Ceres will help drive in partnership with our key constituencies, including investors, businesses and advocacy groups:

\- Companies should use documents like the Ceres Roadmap to identify accountability systems and performance targets needed to drive sustainability through their organizational structures and value chains. This information can then be highlighted in integrated reports that marry financial and sustainability data. Companies should also explain how sustainability challenges are factored into long-term business strategies.

\- Investors should keep pushing companies to disclose their sustainability performance and strategy through both emerging and traditional financial conduits—such as the Bloomberg platform, 10-K disclosures, quarterly analyst calls and annual meetings.

\- The advocacy community should continue its push for robust disclosure and performance targets on environmental and social issues. Our expectation is that companies will continue to disclose the range of their sustainability impacts in a credible, clear and comparable manner using GRI Guidelines and relevant sector supplements. The growth of integrated reporting does not mean that companies can skimp on their overall sustainability disclosure.

\- Regulators should issue specific guidance directing companies to disclose material ESG risks in their financial filings. We believe that material ESG disclosure and integrated reporting are two sides of the same coin—that one will drive, and in turn be driven by, the other.

\- The accounting industry has a key role to play in the development of integrated reporting. We need new standards and systems that will help us capture the costs of sustainability impacts—not to mention the implications of heretofore hidden risks—and help prioritize key issues. It's important to keep in mind in this context that not all issues can, and not all should, be reduced to financial terms.

A final thought: Integrated reporting should help us capture corporate performance in the short term, but its greater importance lies in helping us think through corporate vision and goals for the longer term. In the final analysis, it's the future that counts, and urgently so, for society, our economy, and the planet.

Mindy Lubber is president of Ceres, a leading coalition of investors, environmental organizations and other public interest groups working with companies to address sustainability challenges such as global climate change. Lubber also directs the Investor Network on Climate Risk (INCR), a network of more than 90 investors representing $9 trillion in assets focused on the business impacts of climate change.

_Andrea Moffat is vice president of Ceres' Corporate Program and oversees Ceres' corporate accountability, governance and outreach programs. Moffat manages a team that engages with over 70 companies, more then two-dozen of which are Fortune 500 companies, to help them meet sustainability commitments and achieve greater performance results. For more information, visit_ www.ceres.org _._

Endnote: (1) Ceres. _The 21st Century Corporation: Ceres Roadmap for Sustainability._ March 2010. Available online at <http://www.ceres.org/ceresroadmap>.

#### Integrated Reporting: Now What?

Michael P. Krzus, Partner

Grant Thornton LLP

Listen to or read the remarks made by Harvard Business School Dean Nitin Nohria to open the October 14-15 Workshop on Integrated Reporting. Implicit in Dean Nohria's thoughtful yet thought-provoking comments was a challenge to every conference participant to examine his or her personal commitment to making generally accepted integrated reporting a reality.

Dean Nohria's personal support made the integrated reporting workshop possible. The Dean added, "We're [HBS] going to produce our own one report." The question for every person attending the HBS workshop is, what action are we ready to take now that we have returned to our "day jobs?"

Five breakout groups, analysts and investors; companies; regulators and standard setters; technology and data vendors; and stakeholders, met during the workshop to create a vision for the year 2020 as seen through each group's eyes. Here are my thoughts on a single action that members of each group can take to bring us closer to making those visions for the future a reality.

Analysts and investors

_Analysts and investors who believe that integrated financial and nonfinancial information—whether about strategy, plans, opportunities, and risks or environmental, social and corporate governance issues—is critical to their decision-making should tell regulators that integrated reporting is good for investors and markets_. Analysts and investors must directly engage in a conversation with regulators. It is not enough to sign a letter or a petition proclaiming that the signatories represent X trillion dollars or Euros under management; institutional investors and pension funds, not just their membership organizations, need to look regulators in the eye and explain why integrated reporting matters.

Companies

_The CEOs of the 40 or 50 companies voluntarily issuing integrated reports should be much more vocal about why their companies have chosen to issue "one report."_ There is no stronger, more forceful advocate for integrated reporting than the CEO of a company actually doing it. CEOs should tell their employees, shareholders, customers, suppliers, regulators, and others about how the process of implementing integrated reporting has led to: (1) greater clarity about the relationship between financial and nonfinancial performance and the trade-offs that must be made when balancing financial and societal demands; (2) better informed decisions, which have improved the allocation of resources; (3) deeper engagement with all stakeholders resulting in a business strategy more attuned to society's ever changing needs; and, (4) two-way conversations that have helped to lower reputational risk, thereby increasing the likelihood of long-term corporate viability.

Regulators and standards setters

_Regulators should create an environment that encourages innovative companies to experiment with integrated reporting._ Even though I firmly believe in the eventual need for mandates around integrated reporting, the inchoate state of reporting frameworks and assurance standards means that it is premature to call for regulation today. Integrated reporting "laboratories" similar to the U.S. Securities and Exchange Commission XBRL Voluntary Filing Program should be established by, for example, members of the International Organization of Securities Commissions. In a voluntary filing program, companies could furnish integrated reports and provide what they consider to be critical measures of financial and nonfinancial performance and explain how they are related. Investors, NGOs, and others could comment on these voluntary filings, thereby helping the reporting companies to improve their communications. This Wikipedia-like approach could also result in a more enlightened and participatory approach to regulation and standards setting.

Technology and data vendors

_XBRL, which was highly touted in the vision statement created by this group at the HBS workshop, will not become a widely adopted reality unless technology and data vendors are willing to commit their financial and human resources to building taxonomies for the public good._ Today's financial reporting when coupled with the potential volume of relevant nonfinancial information threatens to overwhelm the most sophisticated of analysts and investors. The promulgation of standards from the U.S. FASB, IASB, IOSCO members, European Commission, Global Reporting Initiative, or the International Integrated Reporting Committee must be accompanied by a robust XBRL taxonomy. I don't see this happening without private commitments to build public taxonomies.

Stakeholders

_Stakeholders, as it was said at the HBS workshop, must continue to ask tough questions._ However, stakeholders need to understand that hard questions rarely result in simple black-and-white answers. Management will be making difficult choices that will result in one stakeholder group or another being disappointed, angry, or both. All stakeholders need to understand that an obvious and overwhelming "victory" by any single constituency is in fact a Pyrrhic victory. The value of "tough questions" is not necessarily reflected in the ultimate answer, but rather in the resulting understanding of how to balance the demands of the capital markets and the demands of the society on which business entities rely to create value.

I believe the decision to attend the 2010 HBS Workshop on Integrated Reporting created a collective and individual obligation to work for the adoption of integrated reporting. Integrated reporting is a necessary step towards long-term viability—whether of a business, the economy, our society, or the planet Earth. This is a high stakes game and we have got to do this right!

#### Transformative Innovation towards Integrated Reporting Passes through a Hands-on/Transition Phase and Leads to Real Innovation in Management

Livia Piermattei, Managing Partner, Head of Sustainability Practice

Methodos

"Integrated Reporting does not mean simply combining financial and sustainability reporting," Paul Druckman very clearly pointed out in his presentation at the Harvard workshop. Consistent with this view, my feeling is that if we look at IR as an evolutionary process deriving from a mixture of financial and sustainability reporting we risk not being in the conditions to catch a significant opportunity.

The process which can lead us to create and adopt IR does not only wish, for very good reasons, to change existing paradigms but builds an entirely new way of reporting mostly based on what we need to achieve rather than on what exists.

Its goal in fact is a continued, timely, easy to read organizational narrative, with data easy to process and easy to use differentiated by various internal and external stakeholder groups, that provides a full picture, both general but also very detailed, according to various modes of fruition, of an organization's impact on both stakeholder groups and society at large. This process is consistent with what is frequently described as a transformative and not simply evolutionary innovation process.

Procter & Gamble's Connect and Develop model for innovation may be a good analogy of the conceptual approach I am referring to. Like most companies, P&G traditionally thought that "innovation must principally reside within their own four walls... But those happening were incremental changes, bandages on a broken model...Then the P&G CEO, A.G. Lafley, challenged us to reinvent the company's innovation business model...and the company discovered that external connections could produce highly profitable innovations too. It was, and still is, a radical idea....Through Connect and Develop innovation model our R&D productivity increased by nearly 60%. Our innovation success rate has more than doubled, while the cost of innovation has fallen. For Connect and Develop to work, P&G had to nurture an internal culture change while developing systems for making connections. The process was fully driven by the top leaders of the organization (1)."

There are many points in common with IR:  
\- a significant challenge –IR goal is to give a full picture of the organization, thus helping companies making better management decisions. IR in fact will allow "Greater clarity about the relationship between financial and nonfinancial key performance indicators helping managers understand and confront the trade-offs necessary to balance financial and societal demands (2)" and making better informed decisions on the allocation of resources. In addition to this, Harvard Business School Dean Nitin Nohria told at the Harvard conference that "The development of corporate integrated reporting (IR) standards has the promise to be one of the great business innovations of the 21st century, and could be pivotal in restoring public trust in business institutions (3)."  
\- a network of external connections that can produce highly profitable inputs – the many different initiatives on IR "popping up simultaneously and independently (4)" around the world.  
\- a radical change – "Many participants at the Harvard conference called the existing financial reporting model broken, and not to be emulated (5)."  
\- a full endorsement and challenge by the leaders of the organization – we will not achieve IR without the active involvement and promotion by CEOs and CFOs of organizations around the world. The significant role of Boards of Directors should also be considered in the actual context of development toward a stakeholder governance model.  
\- the "nurturing" of an internal culture change – IR needs an organizational (and cultural) change inside the company, or its benefits won't be fully achieved as clearly shows the experience of Group Santander in Brazil described by Maria Luiza Paiva at the Harvard conference

At the same time IR needs a strong external cultural change: it needs strong collaboration among different professions; a full re-definition of the positioning and meaning of reporting in the culture and practice of accountants, analysts, investors, directors, auditors, standard setters and regulators, public relations, assurance providers, journalists, etc. And Bob Eccles's initiative to bring so many and so different professionals, from so many different countries in Harvard can be considered the first step in this process.

In addition, since discontinuity can be facilitated by sophisticated technologies that make innovations more practicable, XBRL is confirmed to be the most promising enabling technology at hand.

But I think that a fully successful innovation towards IR cannot exist if the process does not quickly pass through a hands-on, prototyping phase of structured, open collaboration, design and implementation, such as that described by Deborah Ancona (6), that goes through three steps: Explore, Exploit, Export.

To innovate successfully, in the Exploit phase it is necessary "to choose one option and move from ideas to reality; to engage in rapid prototyping and search for best practices to hone the product, process, or idea." If companies start practicing on a prototype that could be developed by IIRC and/or at any local level, they could actively contribute to its definition in order for it to suit their needs best and at the same time they could take "the creative idea and move it all the way through to manufacturing." This could lead to the sharing of good practices and accelerate the development of the final standard which could actually be boosted by the evolution of existing regulations in terms of reporting on financial and ESG indicators as is happening in South Africa.

Pilot projects should be carried on across the world so that "there's more distributed information and expertise and more work done across disciplinary, functional, geographic and even corporate boundaries." This networking and "vicarious learning" could definitely help finalize the innovation and the standard. "If another team has done all this work, you can build on what they've done so you don't have to start from ground zero," Ancona says. "There's a huge amount of hidden information and expertise in companies."

And after the Exploit phase, the Export phase should take place during which the innovator companies, those who've bought it in at an early stage, could become its Ambassadors and export the model developed to others in the same country, industry, company size in order to boost its adoption. "A lack of ambassadorial activity has been responsible for some of the most legendary head-scratchers in Silicon-Valley history. Vertical disconnects were responsible for Xerox giving away GUI technology to Apple Computer, and Apple letting Microsoft walk away with key technology years later (7)."

The process described, if accomplished, is more than just a simple, even if deeply transformative, innovation process. It can lead to Innovation in the principles and processes of management, which, as Gary Hamel describes in his "The Future of Management," can, more than any other kind of innovation, "change the way managers do what they do, and does so in a way that enhances organizational performances (8)."

IR has in fact all the characteristics of a management innovation which could yield a competitive advantage both to companies practicing it and community at large. It is an innovation "based on a novel management principle that challenges some long-standing orthodoxy; is systemic, encompassing a range of processes and methods; and/or is part of an ongoing program of rapid-fire invention where progress compounds over time (9)."

The case of DuPont (cited by Hamel in his book) is a good example. Du Pont based its 20th century success on the development of new ways of controlling performances in its various departments and new budget techniques introducing ROI: radical management innovations in order to enhance organizational performance.

Companies that will first adopt integrated reporting could well induce a competitive advantage in the 21st century. In fact "as noted by the creators of the Balanced Scorecard, HBS professor Robert S. Kaplan and David P. Norton, there is compelling evidence that better measurement, and therefore better information, leads to better decision-making (10)" and deeper engagement with the broad stakeholder community can offer a full picture of risks and opportunities companies face anticipating competitors.

Livia Piermattei is the Managing Partner at Methodos, a management consulting company with a strong focus on Change Management operating in Italy since 1978.

Endnote: (1) Connect and Develop, by Larry Huston and Nabil Sakkab, _HBR_ March 2006  
(2) One Report: Integrated Reporting for a Sustainable Strategy, by Robert G. Eccles and Michael P. Krzus, Wiley, 2010  
(3)  HBS Workshop Encourages Corporate Reporting on Environmental and Social Sustainability, HBS Working Knowledge, October 20, 2010  
(4) One Reporting: Integrated reporting for a regional sustainable strategy, HBS Faculty Research Symposium, May 20, 2010  
(5)  HBS Workshop Encourages Corporate Reporting on Environmental and Social Sustainability, HBS Working Knowledge, October 20, 2010  
(6) X Teams: how to build teams that lead, innovate and succeed, by Deborah Ancona and Henrik Bresman, Harvard Business School Press, 2007  
(7) X Teams: how to build teams that lead, innovate and succeed, by Deborah Ancona and Henrik Bresman, Harvard Business School Press, 2007  
(8) The Future of Management, by Gary Hamel, Harvard Business School Press, 2007  
(9) Ibid.  
(10) One Report: Better Strategy through Integrated Reporting, HBS Working Knowledge, April 12, 2010

#### Two Worlds Collide – One World to Emerge!

Ralph Thurm

Preamble:

The Harvard Business School's first conference on integrated reporting (October 14/15, 2010) has been sort of déjà vu for me since it reminded me of some of the early workshops I attended between 1998 and 2000 when GRI was working on the first generation of its GRI Sustainability Reporting Guidelines. At that time I was with Siemens, working on the business case for sustainability and transparency, but also bringing in views from the perspective of a European industry expert to GRI's emerging multi stakeholder process. Between 2002 and mid 2008 I had great pleasure to help the GRI as Associate Director Business Engagement and later as their CFO/COO/CIO, to prepare and deliver the G3 Guidelines and making the GRI a self-sustaining independent organization. Since 2008 I am Director Sustainability Strategies at Deloitte, working both on the Deloitte's internal sustainability and also advising relationship and audit clients towards integrated CR and a holistic approach on sustainability. So, here's the déjà vu: when I looked around in the conference room at Harvard I saw at least half of the people that I also met in 1998, many of them companions and partners in the strides towards more and more accurate sustainability reporting. The other half were part of the great new generation of advocates for sustainability, ranging from IT companies, proactive companies leading in various industry sectors, regulatory body representatives, consulting and assurance experts, and finally more representatives from the financial markets and accounting standard setters.

I observed that I was one of the very few that have played a role in this community from three different perspectives: that of a representative of a multinational heavyweight enterprise, of a non-for-profit multi stakeholder initiative (somewhat NGOish, although GRI would see it more sort of a platform and networking organization), and finally as someone working for one of the Big Four accounting firms. My contribution to the Harvard e-book is therefore based on this "triangular view" and written as a proactive contribution to help increase the speed of the immense challenge in front of the IIRC, that is to come up with ONE standard for overall company reporting. These views do not necessarily constitute a Deloitte view; they should be seen as my personal contribution deriving from 20 years' experience in the field of sustainability and transparency.

Language

Interestingly, and still astonishing to us experts, sustainability is still a blurry concept to many. While sustainability reporting has helped quite a bit to structure the aspects, issues, information demands and process steps towards "triple bottom line" reporting over the years, there are more concepts out there. Not all of them cover the full holistic of sustainability, but are prominent contributors as well, e.g. the ecological footprint concept or the new "Ruggie Framework," introducing human rights due diligence, amongst others. Even GRI recently started to shift language and profiles so-called ESG (Environmental, Social, and Governance) disclosure as a step towards a coming GRI G4 Guideline. One could say this is just a slight recalibration of the importance of certain parts within the existing G3 Guidelines, but I observe a growing number of people that ask what this sudden shift is all about. Is the economic dimension less important in the future? Does it mean that GRI decided to only focus on financial markets where ESG is better known and the focus on governance is better understood? Examples like these add additional questions and language to the discussion as we are now starting to also discuss and try to develop structure for integrated reporting. This also means that the sustainability experts need to (again?) dive deeper into the vocabulary of the financial world. In short, we are still far away from understanding each other. I believe, although this may sound as extra homework, a first task within the IIRC should be to achieve a necessary level of language alignment, a sound compendium or glossary of terms used in the several constituencies involved in the IIRC process. It may look somewhat odd to recommend this since the parties do talk to each other for quite some time already, but still I do think it merits extra attention at the beginning of the process to pay some extra attention to the overlaps and the gaps that are still caused by language and to constantly focus on needed updates of this compendium as we go forward over the years; 10 years is a long timeframe.

Funding

The IIRC process will need a proper funding basis from the beginning of the process. GRI and A4S will need to put focus and resources to the development process while they still drive forward their own developments, e.g., G4, as an interim step to better cater standards alignment. This means extra money! To my firm belief, seeing many companies already experimenting with integrated reporting, the chances are good to secure a proper funding basis at the beginning of the process coming from corporations. Having observed the difficulties in the ISO 26000 process to secure the availability of NGOs/civil society around the table and enabling a proper and balanced working process (the ISO 26000 process suffered a multi-year delay which was in my view heavily based on—partially financial—shortcomings at the beginning of the process), I strongly recommend a multi-year financial plan and roadmap how to get to that stable situation. A process of that magnitude and time span can't live off from just in-kind donations by the organizations behind the steering committee and the working group. Having the strong backing of the Prince of Wales for this initiative and seeing the stronger links to the governance community through Mervyn King, I recommend revisiting the idea of an endowment fund for the IIRC, mainly charged by corporate contributions and foundations. I am less positive to believe that the European Commission or governments are willing to support through finance, although more and more governments look into the movement and see what their neighbors are doing. Great to see first examples of countries that demand integrated reporting, but they would normally rather support their country-specific approaches than an overarching non-regulatory initiative (starting in tough financial times for governments). Addressing the G20 next year in Paris in November is great for the necessary political commitment, but won't guarantee monetary support, and if yes, it will take a year to two before money is actually made available, so securing a certain upfront commitment is crucial to not delay the overall movement towards the 2020 "North Star" goal.

Scope

Reflecting the discussion at Harvard, there was quite some attention given to the overall scope of reporting and if the current financial accounting system should be used as a starting point at all? Some in the room interpreted the current accounting system as "broken" and also asked to think about a "New Theory of the Firm in the 21st Century." Well, while there is in my view merit to rethink what the purpose of an organization should be in the long-term and in how far it contributes to preserve the global public goods in time of a more and more crowded planet and in which social entrepreneurism is slowly developing as the third pillar of the economies, it would much delay the framework needed for creating integrated reporting. I would rather say that an iterative process in the next years will be more effective to reaching the 2020 timeline.

In my view it all starts by admitting that the current financial accounting systems serves its purpose, but that this purpose—delivering financial statements for the short-term—are unsatisfactory to answer what success of an organization really means, especially for the mid-term to long-term. Additional components are needed, and it will be part of the multi-year process  
-to test out in how far these components can or have to be interwoven in the current setup of the financial accounting or remain separate modules in the context of a multi-faceted success measurement landscape in which non-monetary indicators remain to describe the success of an organization as well (will this be accepted to be called integrated reporting?),  
-if—given these tests—the rationale behind many of the existing financial accounting rules can remain or have to be adapted or dropped because they fail to define the purpose to define short-, mid-, and long-term success (how much revolution is possible, how much evolution is needed?),  
-if new paradigms are by any chance globally applicable and accepted, e.g., the whole idea of the internalization of external effects is ongoing for 30 years, but only recently reached some traction to really think about their internalization (will success be defined by how much we can agree to a global level playing field in measurement of success?),  
-if the necessary assurance mechanisms can be developed for all of these coming modules, in which the ISEA 3000 and the AA 1000 AS are the existing starting point, but will most likely need to develop in parallel to the IIRC integrated reporting journey (will assurance of any reporting be a market-driven mandatory component?).

New purpose – planetary limits – the micro/macro link

Admitting that the scope of the existing financial reporting is too much single-purpose focused (even with the existence of additional sustainability reports that are often delinked with the annual reports, so don't enjoy the same status internally) asks for a better definition of a "good" purpose. In my view the time has now finally come to again take up the idea to focus reporting towards the impact of any organization against certain planetary limits. One of the major shortcomings of the existing reporting—even the financial reporting—is to respond to the one essential question: what IS actually GOOD performance and against what set of criteria? Today we can only answer if one company is better than the other regarding certain existing indicators, and benchmark and rank them mostly really only within their industry. We are not connecting micro performance against macro targets, but that will have to be the big difference in the purpose of future reporting: in which way does an organization contribute positively or negatively against set global, regional, or local targets, and what is the consequence of non-performance? Thriving financially will remain one essential criteria describing success, but that can only be the translation of the following underlying assumptions: with what resources and in what manner has this success been achieved, looking at the given limits? In my view we can't let the IIRC work (so far the microcosm) be disconnected to the developments of the macrocosm, and in that sense the work of the IIRC also needs to focus on making that link and promote the development of that specific sustainability context. We simply can't wait another 5 to 10 years after the IIRC concludes its journey to let the macrocosm develop their own universe of statistical data or let them move into different directions; a parallel development is crucially needed.

I'd like to underscore my plea for that link with the real shortcomings of the now published sustainability reports: they begin already when a CEO or Board is incapable of answering this one crucial question: "are we part of the problems or are we part of the solutions (or maybe both)?" regarding the top planetary issues we have to solve in our industry in the next 20 years, followed by the second crucial question: "what is our vision of the world in 20 years and what/where are we going to be in 20 years from now, enabling a backtracking of the targets for the next 2 to 3 years?". Sustainability context gives future reporting the purpose and the focus it deserves; how will a company ever thrive and have a story to tell if it remains quiet on its overall impact and its contributions? The financial success of the organization needs to be a function of the factual answers and shown performance to these questions. In consequence the consumer reactions, the market circumstances and the regulatory boundaries (including awarding and fining on positive or negative performance) and their change in the years to come until 2020 are also to be thought through by the IIRC, which is part of the micro/macro link and will ask the IIRC to advocate for developments outside of the accounting reporting and assurance boundaries.

Will the IIRC be able to be successful without governmental alignment, helping to define the planetary limits? Having worked in this field for so long I recommend an iterative steps approach, which will open the doors to come to agreements within a 10 years' timeframe. Some would argue we would need them earlier, and I am convinced that some of them will be ready earlier, e.g., based on the environmental footprints methodology, water footprints, emission trading schemes, human rights due diligence, but also through the communities that are active from the macro-side, e.g., the whole "Beyond GDP" movement and the various groups that work on different indicator models already. Government will align, as a matter of fact, due to the growing upheaval from civil society and the massive community building (I recommend Paul Hawken's book _The Blessed Unrest_ , describing the "silent revolution" going on all over the world), and finally also because more companies are now vocal and ask for governments to serve the purpose they have been elected for (see reactions before and after the COP 15 summit in Copenhagen, where for the first time in history companies and NGOs spoke with one voice, asking governments to agree on a global level playing field).

Technical revolution requires standards' evolution—real time reporting

The internet has had such a big influence to the transparency agenda in the last decade already, it is now common that companies understand that if they are not transparent about certain sustainability issues, somebody else will table it for them. The GRI has helped to underscore this development by asking for "completeness" and "materiality" in reporting, enabled by "stakeholder inclusivity" and "sustainability context" as the four principles to define a report or reporting approach content. More often can one hear the famous phrase "If you're not around the table, you're most likely on the menu" in this context.

Information transmission has become a commodity, and standards like XBRL have moved into the mainstream financial reporting world already, decreasing the cost of information transmission by 90% or more. Bloomberg or ThomsonReuters terminals are able to capture some sustainability performance information on their screens already. This will result in consequences for the IIRC to think about:

-Accounting, Reporting and Assurance Standards need to capture the move from reports to reporting, an online and constantly updated business. The screens of the major information providers will recalibrate the visibility of certain sustainability related indicators if demanded by their clients, so will longer be hidden in the backend nirvana;  
-Catering reporting for various stakeholder groups on company websites will be a service demanded, it is a question though in how far that will influence the IIRC's mandate to come up with the one framework for reporting;  
-While the focus of reports in the past was much on the usefulness of aggregated information and many omissions were used in sustainability reports why certain information didn't make sense or was irrelevant on corporate level, technology enables the transmission of various levels of information, so disaggregated publicly available information will in my view become a demand from either local or regional stakeholders, asset managers and investors who would like to slice and dice information for specific information needs and investment decisions, regulators in various countries, or business partners or co-creators in the product or services value "cycle" of a reporting organization. We will eventually see the death of the 'report' apart from what is the legal minimum and still demands reasonable assurance.

ONE report – ONE company

I'd like to make a rather bold statement regarding the step towards integrated reporting that some companies have already made and would like to commend them for that step! Out of experience and the many contacts to companies that I have both from my GRI time and now also with Deloitte, I realize what a big step this is given the many thresholds there are to overcome. To name some:

-Integrated reporting would be a perfect fit if sustainability was really in the DNA and genes of a reporting organization. I observe that whatever far a company is, these—often made—statements have to be taken carefully. I think that I have not seen one company where this is really contested yet, apart from those who started because their business really wanted to address an environmental or social shortcoming in the first place. Sustainability is often well addressed through the necessary "technicalities," meaning policies, management systems, data and reporting approaches, targets, objectives, KPIs etc. And still, there is the behavioral change side that very often leaves these "technicalities" seen as extra burden or—just—additionalities. If there is no comprehensive learning or leadership development that aligns with the "technicalities," mental stereotypes, specific work or private experiences made, missing incentives, cultural perceptions, silo thinking and the personal egos and not invented here syndromes will prevail.  
-We still live in times where the heads of sustainability represent the first generation of sustainability managers that have over the years found their niche and have certain reservations for an even more integrated approach. If the top management is somewhat indifferent on how to strategically embed sustainability in the core business model(s), integrated reporting will not take off the ground.  
-There is a major imbalance regarding the capacity and budgets available for the annual reports and the sustainability reports, a factor 10 is more usual than unusual. Why should an existing sustainability team like to be "eaten up" by the rolling annual report process machinery, having to fear that "their" flagship document will be reduced to a certain number of pages, just to fit into a given design, and there isn't enough money left for additional website support.  
-Often, there is also a simple timing and data quality difference. While information for the annual report is internally audited and pulled together on monthly basis, this is by far not often the case for the sustainability data spectrum. Also, the sustainability data is very often simply not available at the needed moment for an integration into an integrated report. Closing the books on the same day is a massive challenge!  
-Would the assurance provider be ready and able to accompany a reporting organization in this journey? What sort of statement will be given? How to differentiate between factual data of the past and forward-looking statements? Are the financial analysts and the internal investor relations people ready for it? And how will ranking and rating organizations see this move if it will be more difficult to find the right quotes and data given the more integrated structure of the report, meaning will the ranking position be in danger through integrated reporting?  
-Would the reader base understand a move towards integrated reporting? Although shareholders are also a special stakeholder group, are the other stakeholder groups happy with a move towards integrated reporting, even if the management supports this by saying that the move towards integrated reporting would be a sign of importance and a signal pro sustainability?

To me, every company that has already taken the step without a standard clearly defining what integrated reporting really means, deserves a great applause, since they are the ones that still went for it, took the challenge and were ready to experiment and explore. Let's note that the annual report still is the most important document an organization normally produces for its stakeholder groups in a given fiscal year, so an integrated report is a risk, often a rewarded risk, but still a risk. The point that counts most for me is that the ONE report tries to cater the process towards the ONE company as well. The outcome of this venture might well be the report, the added value internally is based on the procedural steps taken to get there.

Co-creation – pilot testing – scaling up

The statements above point to the extremely positive effect it could have for the IIRC to build off of that group of very committed and experienced reporters. I would like to recommend instigating regional working groups that can support and advocate the IIRC developments. They are a great voice to the movement, and this voice should be coordinated. They would be the pilot testers, sounding boards and advocates from day one onwards; they might be the ones that are willing to fund the IIRC setup to allow the right staffing, additional research and outreach, and they can be the ones in their own environments to instigate governmental alignment for the already mentioned micro/macro link and the needed political moves to foster those.

Another great leverage for integrated reporting could be organized through the more proactive industry federations that can also work through their regional or country chapters. Although the GRI experience has shown this to be an often difficult path to go (having tried that out in several sector supplement developments myself), I see more chance for success, now that there is already a relatively broad set of companies that have experience, some publishing integrated reports for the third time already next year (and some even longer, but these are not mostly not the bigger multinationals).

Aligned learning

The IIRC is now starting to work towards the 2020 timeline; in the meantime the GRI is developing G4 to be adaptable and more "standard ready," while also taking into account the new technological developments. Within these 10 years many developments are still to come, and it is difficult to assess the impact of some of the developments at this moment already, so such a time span needs to be organized aligned with a learning impulse for those outside of the IIRC working group and steering committee. Many of the standard setters have made the experience that a reduced one-way communication just to inform of what is going to be developed leaves future users with suspicion. I therefore recommend working on a learning outfit/platform that also serves as an additional sounding board of the understanding developed in those learning events. Learning events can also be a risk buffer and litmus test for interim directions that IIRC might want to take. Finally a learning arm of the IIRC can contribute to the fundraising needed for the IIRC. Learning services are well-known, e.g., GRI, AccountAbility, Social Accountability International (SAI), and many other standard setters already use these mechanisms; they could probably be used as hubs for the IIRC outreach and trainings as well.

Summary

Some say we have 20 years left to not lose control over this planet. Ten years for the development of the IIRC outcome is just half of the leftover, and then there's 10 years left to get it all done? Is that realistic? I have simply decided to personally not stop to be a hopeless optimist. However the IIRC needs to be aware of the responsibility it is charged with, even if there is no legal mandate for it (yet). I hope that the first Harvard conference I was privileged to take part in is just the start of a huge movement and that we all understand how important the IIRC outcomes will be for all of us. I wish the IIRC process all the resources, attention and support it needs.

_Ralph Thurm joined Deloitte in July 2008 as Director Sustainability Strategies. With 20 years of experience in sustainability, Thurm supports both Deloitte internally and its clients regarding the development of sustainability strategies and performance. Previously, Thurm worked for_ for the Global Reporting Initiative and _Siemens, has also co-authored books, is a well-known writer on the subject of sustainability and has given more than 300 presentations on sustainability strategies and transparency all over the world._

#### Success Factors for Integrated Reporting: A Technical Perspective

Ralf Frank, Managing Director

DVFA Society of Investment Professionals in Germany

Intuitively, integrated reporting makes sense to both companies and investment professionals. Today's practice, i.e., issuing financial reports and ESG reports and other information separately, is most probably one of the biggest obstacles for those investors interested in understanding corporate risk. However, while there is general consensus within the corporate reporting community and among companies, investors, the auditing profession and academia that integrated reporting is the right way forward, so far practical and technical questions have not been given sufficient thought. This paper seeks to outline some of the challenges which the integrated reporting community and its proponents will have to deal with in order to successfully take corporate reporting to a better future.

Financial reporting, by and large, has a history of some 70 to 80 years. On both sides of the Atlantic, accounting frameworks (GAAP) exist for financial reporting of corporate performance. Not only do both US-GAAP and IFRS possess an extensive body of rules and directives for the reporting of financial and economic performance of corporates, there is also a large body of intellectual resources, i.e., the accounting profession, available to develop accounting rules and improve their applicability. Arguably, financial reporting has a significant benefit from its history, its process-based production and a collective acumen regarding other items of information with which financial information needs to be integrated. Extra-financial information, ESG data, sustainability or CSR information, as well as corporate data on intellectual capital or "traditional" extra-financial aspects (share of market, customer satisfaction or KPIs on productivity) typically do not have the benefit of a generally accepted accounting framework. True, frameworks such as G3 of the GRI, the highly instructive examples from Accounting for Sustainability, WICI, or EFFAS/DVFA's KPIs for ESG 3.0 have been considered good steps in the right direction, i.e., toward definition of extra-financial accounting frameworks. However, one should not forget that, unlike US-GAAP or IFRS, which are legally endorsed existing frameworks for ESG or intellectual capital reporting etc., the extra-financial reporting criteria are voluntary frameworks that, given their nature, allow companies a significant amount of leeway, including the ability not to report under these frameworks at all.

"Mainstreaming ESG" has been one of the biggest promises over the past 10 years, the idea being that conventional investors and financial analysts will start using ESG-information in the course of time once relevance and reliability of ESG-information has been properly understood and a sufficient set of data from a sufficiently large universe of companies is available to them. So far, mainstreaming ESG has not taken place. Many will argue that assets under management dedicated to ESG approaches have increased in the last 10 years or so. Also, some of the bulge bracket brokers do employ teams of ESG specialists. The majority of investors and financial analysts, nevertheless, do base their investment decisions or advice almost exclusively on aspects of financial or economic performance of corporates in monetary terms. How can the disregard or ignorance towards ESG be explained?

In a rational economic paradigm, investors need to incorporate ESG information into investment decisions if ecological, social or corporate governance related aspects have a direct impact on the alpha or the beta of the investment. There cannot be any doubt that some ESG aspects in specific situations can indeed have a detrimental impact on corporations, and thus on investments in corporations. While financial or economic aspects are typically utilized as evidence for a specific investment decision, it is rarely the case that ESG aspects are given the status of evidence.

Investment professionals often argue that the quality of available ESG information is not sufficient. Accounts of corporate activities, e.g., in sustainability reports, are typically reported in prose, which goes hand-in-hand with a lack of quantification, so that this ESG data cannot be used for investment modeling. But even if companies report quantified aspects, these numbers are not comparable within peer groups of companies. They leave the impression of being of lesser quality than financials. Moreover, the current practice of separate financial and ESG reports is sufficient proof that ESG information does not contribute to the valuation of economic circumstances.

Success Factor No.1:

In order to integrate financial and extra-financial information, the quality and reliability of both sets of data need to be uncompromising and at a similar high-level. Just like financial data, extra-financial data must rest on an accounting framework.

Extra-financial information, either stand-alone or as an ingredient to integrated reporting, must be based on a solid accounting framework. Efforts to build accounting frameworks for extra-financial information should not be decreased or given up. The quality and reliability of extra-financial information needs to be controlled through well-defined and well-conceived frameworks, which guide the production of extra-financial reports. This is important to safeguard that lack of quality in extra-financial items to be integrated with financial items does not lead to a deterioration of the overall quality of information offered. Investors and financial analysts will only use items from an integrated report if they can be sure that the relevant items are backed up by a sufficiently exact accounting rule.

In academic literature, standards are defined as a set of rules with a formalized character, authored by a recognized body and built through transparent, consensual processes (1). Typically, standards are described as expert knowledge in the shape of rules (2). The general notion is that experts have the authority to build rules and norms because they can define good standards through access to specific knowledge as to how problems can be solved within a given subject field via their specific networks. Political or legislative bodies commonly lack this expert knowledge (3). Two success factors have been identified for accounting standards: 1) a well-established and well-maintained due process for the definition of rules and 2) adequate representation of stakeholders (4). Representation of stakeholders is often interpreted as the necessity to deploy a multi-stakeholder approach. However, while multi-stakeholder approaches are considered to promote dialogue among different stakeholder groups, as well as helping to achieve consensus, contributing to sharing of knowledge and expertise (thus increasing the effectiveness of the standardization process), the practical implementation of multi-stakeholder standardization efforts often differs significantly from what is claimed (5).

It may well be the case that any attempt to define an accounting framework for extra-financials will encounter some of the same challenges and discussions as have been known for financial accounting standards. Within the accounting profession, a controversy known as "rules versus principles" has taken place over the last 30 to 40 years. At the core of the discussion is the question as to whether general principles for accounting are better suited than detailed rules for the definition of accounting rules. In order to contribute to proper evaluation of investment decisions, accounting standards must not be based on vague principles nor on a proliferation of rules for single cases, as this overburdens users and preparers alike. The controversy is not about a trivial matter of design. At the core is the question: how much professional judgment is granted to companies? Proponents of a rule-based approach maintain that objectivity and comparability of financial statements can only be safeguarded when the latitude of decisions for preparers is bounded by detailed rules. On the other hand, advocates of the principles-based approach assume that managerial discretion can hardly be regulated, and thus needs to be counterbalanced by professional judgment (6).

It is my conviction that, despite criticism of financial accounting frameworks' imprecision and despite the ongoing discussion about rules versus principles, US-GAAP and IFRS will most probably serve as role models for extra-financial accounting frameworks. Moreover, even in an integrated reporting regime, there will be a need for companies to serve specific stakeholders who may not consider the integrated report their prime source of information. Thus, there is a good reason for GRI and others to continue building their frameworks in the knowledge that some complex issues may have to be resolved.

One of these issues is the quantification of extra-financial aspects. Investment analysis rests on modeling of financial and performance data in quantitative formats. Eccles and Krzus (7) suggest, for instance, that ESG data not only complement financial data but also add value if presented in monetary formats. This leaves the process of standard setting with the task to define unit conversions, i.e., monetizing non-monetary aspects. It has been suggested elsewhere that ESG aspects should be integrated into the internal risk management systems of companies through monetization, in order to allow senior management to calculate ROIs. This was considered necessary in order to put costs and resources for implementing a sustainability strategy into relation with future earnings (8).

Success Factor No. 2:

Corporate reporting is already complex. Defining a framework for integrated reporting offers the opportunity to reduce complexity. This, however, requires a reassessment of which information is relevant.

Regulators and legislators, as well as the accounting profession at large, share a common love of annual reports (AR). ARs have grown in size. Three hundred or more pages is no longer an exception, but rather the rule these days. In 2006, postal workers in the UK refused to deliver the ARs of a major British bank, because it contained 500 pages and weighed more than 4 kilograms (8.8 US pounds). Moreover, regulators and legislators around the globe have forced corporations to disclose more information more frequently. This is one of the main reasons that ARs have grown in size. There are other reasons as well, e.g., the communication consulting industry, which has been found guilty of seducing companies to utilize the AR as a marketing tool. CSR or sustainability reports are produced under similar conditions and similar motives.

Sometimes, increased transparency is brought forward as the argument for the ever-increasing amount of corporate data. The call for more transparency is probably as old as the capital markets themselves. Transparency has been referred to as "the opiate of the people in the capital markets (9)." There can be only one answer to the typical credo of the "More transparency!" proponents who claim that more data from corporates increases the usefulness of corporate reports. And that answer is: "more data is simply more data!" Marylin Strathern's highly instrumental paper on the topic, entitled "The Tyranny of Transparency (10)," may serve to add to this point.

"Information is the lifeblood of financial markets," as the saying goes. However, we should not forget that users of information in capital markets act under severe time constraints and, as humans, may—or effectively do—become victims of information overload. Michael Lissack (11) points out

"As the twentieth century draws to a close we find ourselves drowning in a sea of data, all purporting to be information, and to which others may ascribe the label, "knowledge." While computers have aided our ability to deal with these data, it seems not to be an exaggeration to state that for many of us the sea is complex, our confidence in our ability to recognize and make use of value added knowledge is under attack, and our way-finding skills seem lacking."

There is an intricate relationship between time on hand for making a decision and the information available. If there is sufficient time, i.e., no pressure, then decision quality can increase as the amount of information increases. However, under time constraints, decision quality typically decreases when the amount of information increases (12). Also, the way in which information is used for decisions, how it is used, when it is used, and which proportion of it serves as a reason for taking a decision are very complex. Herbert Simon, as early as 1955, examined rationality and the way that information is processed in organizations in order to make decisions. He coined the now famous phrases "approximate rationality" and "satisficing," to describe that, in organizations, tasks such as strategy building, planning, implementation, controlling etc., follow a purely linear and rational path independent of the postulate of rationality: "the task is to replace the global rationality of economic man with a kind of rational behavior that is compatible with the access to information and the computational capacities that are actually possessed by organisms, including man, in the kinds of environments in which such organisms exist (13)."

A more recent study on perceived causes for information overload based on a survey of corporate managers reveals that 79% of respondents perceive excessive volume of information, 62% consider the difficulty or impossibility of managing information and 53% complain about irrelevance or unimportance of most of the information as root causes for information overload (14). And yet, March and Olsen remind us that there are common phenomena with regards to individuals handling information, especially the tendency to ask for more information which then somehow is not used to improve the decision at hand:

"It has been observed that individuals fight for the right to participate in decision-making, then do not exercise that right with any vigor; that organizations ignore information they have, ask for more information, then ignore the new information when it is available... (15)"

The objective of financial and corporate reporting is to provide investors with relevant and timely information. With the task of defining a framework for integrated reporting, those involved have the opportunity to reconsider what relevance for decision-making, or decision usefulness, means in the eyes of users.

Nassim Nicholas Taleb has not only been a proponent for a behavioral-based approach to investing, but also a critique of the financial industry for the way the industry accounts for investment decisions, i.e., which information is used and how it is used to substantiate decisions. Critical of information, "the problem with information is not that it is diverging and generally useless, but that it is toxic (16)," he points out how he—Taleb also has a career as a successful securities trader—handles information in order to differentiate between noise and information. It may seem a somewhat extreme example, apart from the fact that trading in many ways is different from, say, pure-play equity investments, but for the sake of understanding relevance for investors with a choice to invest in several asset classes and many thousand investment vehicles, it is the difference between noise and information that seems to point towards behavioral aspects of using information for investment decisions:

I have a trick to know if something _real_ in the world is taking place. I have setup my Bloomberg monitor to display the price and percentage change of all relevant prices in the world: currencies, stocks, interest rates, and commodities. By dint of looking at the same set up for years, (...) I managed to build an instinctive way of knowing if something serious is going on. The trick is to look only at the large percentage changes. Unless something moves by more than its usual daily percentage change, the event is deemed to be noise. (...) The headline of the Dow moving by 1.3 points on my screen today has less than one billionth of the significance of the serious 7% drop of October 1997 (17).

Success Factor No.3:

We need to develop a better understanding as to exactly what we mean when we say "integrated." In order to provide companies with the guidance, we must not shy away from defining best ways of integrating and presenting financial information in an integrated reporting regime.

What does an integrated report look like? Does "integrated" mean that financial and extra-financial items are published in the same volume? On the same page? Recognized in a table-like structure, such as financials are structured today? At first glance, these questions seem technical and, as such, perhaps profane. And yet, successful implementation of any integrated reporting format will have to rest primarily on the quality of the reporting format itself. This, undoubtedly, requires rules for how to disclose and present extra-financial items together with financial items.

Here is a quick shorthand example of the kind of challenges companies are confronted with when looking at integrating financial and extra-financial information. Assuming that the question of relevance has been solved (as was pointed out above), a manufacturing company may consider reporting on its use of resources, such as energy, gas and water. Typically, reporting resource efficiency requires the company to relate, for instance, energy consumption in kWh to output, e.g., unit sales, revenue. Additionally, energy consumption can be displayed in terms of a monetary value, i.e., the cost of energy. How would the company disclose the information? There are several alternatives. Figures could be disclosed in a footnote, but could likewise be inserted in a table containing cost-related items. In order to fulfill the criteria of integrated reporting as was quoted from Eccles and Krzus above, however, any indication of energy efficiency would have to be put into a direct context with those financial items that would receive additional context and plausibility through the energy efficiency figure. This, on the other hand, leaves the company with an enormous amount of discretion as to where to put disclosed data. Consequently, comparability of integrated reports from companies within the peer group could be limited.

Behavioral Accounting Research (BAR) offers a whole list of studies which examine how the presentation of financial data impacts investment decisions. Given a rational-economic perspective, there is no difference between, for instance, relevant financial data being disclosed on the same page of a financial report or on two consecutive pages: the information is available and can be consumed for investment decisions. However results from experiments in BAR demonstrate that aggregated data lead to different investment decisions when compared to unaggrgated data (18). Likewise, placement of financial data within the report (19), the alternative presentation of data in income statement or balance sheet (20), graphical presentation of financial data (21), and the alternative presentation of data recognized as merely disclosed, e.g., in footnotes (22), produce different results when investors use the data to arrive at investment decisions.

I have touched on only three success factors for integrated reporting. There may be many more. While developments for defining accounting frameworks for extra-financial information are on a good path (as there is no shortage of organizations working on frameworks for ESG, intellectual capital, or corporate governance), the other two success factors like reduced complexity and an appropriate definition of what exactly integrated reporting should look like require more effort. Here, I feel that research both from the academic world and from practitioners is necessary to arrive at practical and feasible solutions. It is encouraging to know that there is a global community of accounting experts, accounting firms, standard setters and academics in the field of financial accounting who have experience built over decades to offer for the definition of an integrated reporting framework. The task at hand requires us to be quick and efficient. There are global challenges out there, such as climate change, resource depletion or demographic developments, which necessitate a better understanding of underlying cause-effect relationships. Corporate activities will play an important role in coming to terms with these challenges. Investors in corporates can exert influence on the companies. Integrated reporting is an essential tool for helping investors fulfill this role.

Endnote: (1) Vries, Henk J. de (1999): Standardization. A business approach to the role of national standardization organizations. Boston, Mass.: Kluwer, 155.  
(2) Jacobsson, Bengt (2000): Standardization and Expert Knowledge. In: Brunsson, Nils; Jacobsson, Bengt (Eds.): A world of standards. Oxford: Oxford Univ. Press, pp. 40–49.  
(3) Ibid: 47  
(4) Botzem, Sebastian; Quack, Sigrid (2008): Contested rules and shifting boundaries: International standard-setting in accounting. In: Djelic, Marie-Laure; Sahlin-Andersson, Kerstin (Eds.): Transnational governance. Institutional dynamics of regulation. Paperback re-issue. Cambridge: Cambridge University Press, pp. 266–286.  
(5) Fransen, Luc; Kolk, Ans (2007): Global Rule-setting for Business: A Critical Analysis of Multi-stakeholder Standards. In: Organization, Vol. 14, No. 5, pp. 667–684.  
(6) Mennicken, Andrea; Heßling, Alexandra (2007): Welt(en) regulierter Zahlenproduktion zwischen Globalität und Lokalität: Reflexionen zu globalen Standards in Rechnungslegung und Wirtschaftsprüfung. In: Mennicken, Andrea; Vollmer, Hendrik (Eds.): Zahlenwerk. Kalkulation, Organisation und Gesellschaft. Wiesbaden: VS Verlag für Sozialwissenschaften | GWV Fachverlage GmbH Wiesbaden, pp. 207–227.  
(7) Eccles, Robert G.; Krzus, Michael P. (2010): One report. Integrated reporting for a sustainable strategy. Hoboken, NJ: Wiley, 10.  
(8) Epstein, Marc J. (2009): Making sustainability work. Best practices in managing and measuring corporate social, environmental and economic impacts. 1. ed., [Reprint.]. Sheffield: Greenleaf Publ, 183.  
(9) I owe this phrase to, I believe, Matthew Kiernan, who said this at the G3 launch in Amsterdam in October 2006.  
(10) Strathern, Marylin (2000): The Tyranny of Transparancy. In: British Educational Research Journal, Vol. 26, No. 3.  
(11) Lissack, Michael (1997): Of Chaos and Complexity: Managerial Insights from a New Science. In: Management Decision, No. 35, pp. 205–218.  
(12) Buchanon, John; Kock, Ned (2000): Information Overload: A Decision Making Perspective. Avaliable online at  http://merlin.mngt.waikato.ac.nz/departments/staff/jtb/infoovld1.pdf.  
(13) Simon, Herbert A. (1955): A Behavioral Model of Rational Choice. In: The Quarterly Journal of Economics, Vol. 69, No. 1, pp. 99–118.  
(14) Farhoomand, Ali F.; Drury, Don H. (2002): Managerial Information Overload. In: COMMUNICATIONS OF THE ACM, Vol. 45, No. 10, pp. 127–131.  
(15) March, James G.; Olsen, Johan P. (1986): Garbage can models of decision making in organizations. In: March, James; Weissinger-Baylon, R. (Eds.): Ambiguity and Command: Organizational Perspectives on Military Decision Making. Cambridge, Mass.: Ballinger, pp. 11–35.  
(16) Taleb, Nassim (2005): Fooled by randomness. The hidden role of chance in life and in the markets. 2nd ed., updated. New York: Random House.  
(17) Ibid:215; emphasis his.  
(18) Nelson, Mark W.; Tayler, William B. (2007): Information Pursuit in Financial-Statement Analysis: Effects of Choice, Effort, and Disaggregation. In: The Accounting Review, Vol. 82, No. 3, first published at: DOI:10.2308/accr.2007.82.3.731.; Hutton, Amy P.; Miller, Gregory S.; Skinner, Douglas J. (2003): The Role of Supplementary Statements with Management Earnings Forecasts. In: Journal of Accounting Research, Vol. 41, No. 5.  
(19) Chambers, Dennis; Linsmeier, Thomas J.; Shakespeare, Catherine; Sougiannis, Theodore (2007): An Evaluation of SFAS No. 130 Comprehensive Income Disclosures. In: Review of Accouting Studies, Vol. 12, No. 4, pp. 557–593. Availaible online at 10.1007/s11142-007-9043-2.; Hirst, Eric D.; Hopkins, Patrick E.; Wahlen, James M. (2001): Fair Values, Comprehensive Income Reporting, and Bank Analysts' Risk and Valuation Judgments. Available online at http://ssrn.com/abstract=273350 or doi:10.2139/ssrn.273350.; Maines, Laureen A.; McDaniel, Linda S. (2000): Effects of Comprehensive-Income Characteristics on Non-Professional Investors' Judgments: The Role of Financial-Statement Presentation Format. In: The Accounting Review, Vol. 75, No. 2, pp. 179–207.; Hirst, Eric; Hopkins, Patrick E. (1998): Comprehensive Income Disclosures and Analysts' Valuation Judgments. In: Journal of Accounting Research, Vol. 36, pp. 47–75.  
(20) Dietrich, Richard J.; Kachelmeier, Steven J.; Kleinmuntz, Don N.; Linsmeier, Thomas J. (1997): An Experimental Investigation of Forward-Looking Non-Financial Performance Disclosures. Available online at http://ssrn.com/abstract=56240 or doi:10.2139/ssrn.56240.  
(21) Dilla, Willam N.; Janvrin, Diane J.; Jeffrey, Cynthia (2010): The Impact of Graphical Displays of Pro Forma Earnings Information on Professional and Nonprofessional Investors' Earnings Judgement. Available online at http://ssrn.com/abstract=1646607.; Pennington, Robin; Tuttle, Brad (2009): Managing impressions using distorted graphs of income and earnings per share: The role of memory. In: International Journal of Accounting Information Systems, Vol. 10, pp. 25–45.; Desanctis, Gerardine; Jarvenpaa, Sirkka L. (1989): GRAPHICAL PRESENTATION OF ACCOUNTING DATA FOR FINANCIAL FORECASTING: AN EXPERIMENTAL INVESTIGATION. In: Accounting, Organizations and Society, Vol. 14, No. 5/6, pp. 509–525.  
(22) Hirshleifer, David; Hong Teoh, Siew (2003): Limited Attention, Information Disclosure, and Financial Reporting. In: Journal of Accounting and Economics, Vol. 36, No. 1-3, pp. 337–386.

# PART IX

Action Strategy Tactics

#### Integrated Reporting: Impact of Small Issuer Challenges on Framework Development and Implementation Strategies

Lisa French

Canadian Institute of Chartered Accountants

In October 2010, Harvard Business School hosted its inaugural Workshop on Integrated Reporting, which assembled corporations, investors, analysts, standards setters, regulators, NGOs, and technology providers. The Workshop covered significant ground, including potential steps for the development of a global integrated reporting framework. Participants contemplated two broad approaches to framework development. The first would capitalize on the strengths of existing frameworks, many of which have already undergone extensive consultation and road-testing. The second, more drastic, alternative would wipe the slate clean and approach our new business reporting paradigm with fresh eyes. Though generally opposed to reinventing the wheel, I could appreciate the compelling arguments in favor of the latter approach. After all, the content, audience, and reporting channels for today's corporate reports differ from those of the past and may warrant _reinvention_ over _gradual evolution_. Then again, I suspect it would just be a matter of time before the "clean slate" became populated with fragments of existing frameworks.

During the Workshop, participants explored ways to encourage the adoption of an integrated reporting framework, however that framework may look. The exercise challenged groups to identify interdependencies and consider a range of implementation scenarios, including voluntary versus mandatory adoption. This paper follows a similar tack, while maintaining an eye on a specific user group. In order to achieve widespread adoption—and by _adoption_ , I mean transcending a tenuous veneer of compliance—the International Integrated Reporting Committee's (IIRC's) product must be workable for all public companies, including _small issuers_. This will prove especially true in countries like Canada, where small business forms the backbone of the national economy. All too often, these organizations' efforts to improve reporting against even _today's_ standards are thwarted by budgetary and personnel constraints. One can only imagine, therefore, the influence that additional layers of reporting, namely disclosing the impacts of social and environmental performance on risks, strategies, and profitability, will have on the quality of these companies' reports.

Overcoming this obstacle will require the collective efforts of many, including the IIRC, securities regulators, and service companies, such as consulting firms and software providers. The IIRC can do its part by, for example, focusing on the clarity of reporting requirements and ensuring that small entities have a voice in the framework development process. The framework, whatever form it may take, will need to be scalable to smaller issuers.

To the extent that the framework is mandated, securities commissions might institute a phase-in strategy based on company size or perhaps stagger the introduction of certain framework elements, particularly those that would require significant investment, financial or otherwise, in data management systems and internal control processes. Moreover, regulators can ease reporting burden in other areas by identifying, and eliminating where possible, overlap between the integrated reporting framework and jurisdictional rules governing other continuous disclosure documents.

Consulting firms will, no doubt, play an important role in readying smaller entities for this new era of corporate reporting. For example, issuers may seek guidance on preferred accounting methodologies for certain non-financial information, including airborne emissions, where it may be difficult or cost prohibitive to measure that information directly. As well, the adequacy of internal control processes, including the effectiveness of audit committees, could be in dire need of attention. Software providers and IT specialists will also play an important role in equipping companies with data management systems that aggregate non-financial information and create a virtual paper trail for assurance purposes. In the coming years, as more governments and exchanges transition to XBRL, compatibility with this reporting language will almost certainly grow in importance.

Though the preceding software and consulting considerations apply to large and small businesses alike, the latter group may be more inclined to cling to rudimentary practices should prices prove too costly. Inadequate systems, processes, and capabilities could compromise the veracity of collected data and cloud the true impact of a company's social and environmental performance on its risk profile and bottom line. And, though it may be tempting to brush aside the individual contributions of these small players as inconsequential, arguments of the _tragedy of the commons_ variety would caution us against trivializing their collective impact.

This paper provides only a glimpse into the difficulties faced by small public enterprises. Challenges such as constraints on financial and human capital, potential knowledge gaps in Boards or audit committees on social and environmental issues, and information systems and control processes that do not support verifiable non-financial data are likely to be compounded under the demands of a more comprehensive reporting framework. These vulnerabilities may translate into substandard disclosures and undermine the very intent of the integrated reporting framework.

Fortunately, safeguards can be built into the framework's development and implementation strategies. At a minimum, the IIRC can engage with small business representatives to detect problem areas in the proposed rules or guidelines early on. To the extent that the framework may be mandated, the IIRC can liaise with the bodies responsible for overseeing its implementation to support the formation of deployment strategies in tandem. Where framework elements duplicate or differ from national standards, regulators can work to clarify the rules and eliminate reporting redundancy, measures that benefit all companies, large and small. Regulators can also design a staged transition based either on company size or the underlying complexity of the reported element. Though many would endorse a more holistic approach to reporting sooner rather than later, the timeline ought not to jeopardize the integrity of the reported information. Lastly, the consulting firms and software providers that facilitate the reporting process will play a critical role in reducing barriers to adoption for small preparers. Catering to this niche may demand affordability, flexibility, and a more modular approach to product and service delivery than ever before. Clearly, successful implementation of an integrated reporting framework, particularly where small public entities are concerned, will demand a truly integrated approach.

The opinions expressed are those of the author and do not necessarily state or reflect the views of the Canadian Institute of Chartered Accountants.

#### Beware of Greeks Bearing Gifts

Partha Bose, Partner and Chief Marketing Officer

Oliver Wyman Group

The greatest risk for the Integrated Reporting movement, and it is a movement and not an initiative, a great idea, or a new framework for solving the world's ills, _is_ that it gets positioned as a cure-all for all the malevolence, hypocritical, and bad behaviors unleashed on society by a few corporations recently. To be fair, corporate malfeasance and skullduggery isn't just a recent phenomenon—it has existed for as long as the notion of modern day corporation has going all the way back to the founding of the East India Company.

So let's be careful about throwing the baby out with the bathwater. The Integrated Reporting movement should begin with us—as employees, shareholders, and customers—examining what we do and the way we interact with other stakeholders around us. The power of the Southwest One Report wasn't because it tried to solve all of the airlines industry's ills, but because it took a narrow, focused approach to providing financial information to shareholders, while also broadening the context of the report to include areas of interest to employees primarily and customers secondarily as its audiences.

Big change happens in small doses, and the Integrated Reporting movement needs to move forward in small bits. While the accounting and financial communities work with shareholders, there will be a premium placed on companies that are able to create the "equivalent" of Harvard Business School Dean Nitin Nohria's "At a Glance" one-pagers laying out (besides the shareholder profits they had managed to deliver) the on-the-ground changes they had managed to make in the lives of their employees and of their customers. Were there, for example, better retention of employees over the past year, and could the firm provide metrics related to these? Had the firm improved on its diversity programs—leading to better retention, and importantly, promotion and reward of people of diverse backgrounds and need? These would be more meaningful metrics because they are tangible and observable than, say, what an airline had done to reduce its carbon emissions.

Regulators pay attention when consumers, who are also employees and shareholders, begin to discuss the importance of these. So while the lobbying of Congress and other bodies should not abate, our focus ought to be on lighting the sparks that ignite the powder keg. This would require us to identify pressure points in the ecosystem surrounding the movement where a lit powder keg does not only light the fire but can set alight other important pieces of the ecosystem in such a way that the regulators have to pay attention.

Take the quality movement for example. No matter what Juran and Deming said over 80 years ago, it wasn't until consumers began to ask questions about quality that got companies to pay attention to its merits. The world is at a pivotal point in applying new forms of pressure on our economic system. Social media, talk radio, and cable news have democratized the creation of content and the distribution of compelling content through many new and different channels. We need to think of ourselves as the foot soldiers and as the leaders of this movement. We need to reward companies that do this well and punish those that only pay lip service. Our voices together can rise to a crescendo of demand for change. Imagine it's the night of July 14, 1789. All of Parisian royalty and vested interests are blissfully asleep while a small group of common men and women assembled, and made the preparations for successfully storming the Bastille in a few hours—a shining and symbolic event that was to change the course of the French Revolution.

We are at the cusp of a similar movement. It will only happen when we get the common consumer, employee, and stakeholder ready and willing to march on the vested interests. It won't happen overnight, and not unless we have made all the small steps necessary to arrive at that point here together we are able to make big difference.

Partha Bose is a partner and chief marketing officer of Oliver Wyman Group, a 3,000-professional international strategy consulting firm. He was previously a partner at McKinsey and a senior partner at Monitor Group. Partha holds a bachelor degree in mechanical engineering from Baroda, India, a master's in journalism from Columbia University, and an MBA from MIT Sloan. He lives in Boston and London.

#### The Role of Lawyers in Integrated Reporting

Galit A. Sarfaty, Assistant Professor of Legal Studies and Business Ethics

The Wharton School of Business, University of Pennsylvania

As the recent workshop at Harvard Business School clearly demonstrated, there is an emerging interest in integrated reporting as the next step for companies. In May 2010, the Global Reporting Initiative (GRI, which is the leading global standard for sustainability reporting) announced a goal of creating a standard for integrated reporting by 2020. With the recent formation of the International Integrated Reporting Committee, this process is currently underway. There are a number of challenges that lie ahead in the mainstreaming of integrated reporting across companies worldwide. In this brief article, I'm going to highlight a challenge that has been underemphasized, yet which I argue, is important to address in the coming years—the role of lawyers in integrated reporting.

As sustainability is becoming a critical concern for companies and subject to growing regulation, inside counsel are increasingly being called upon to respond to issues of corporate social responsibility. The support of the Legal Department is essential before a company issues an integrated report and discloses disc information based on corporate sustainability reporting standards like the GRI. This means that reluctance by corporate counsel to engage in these issues can serve as a significant obstacle. In order to mainstream integrated reporting, one must first understand the roots of this reluctance.

Given the risk-averse tendencies of lawyers, they are frequently hesitant to publicly disclose their companies' social and environmental impacts for fear of future litigation. This is particularly true in the United States after a 2003 case, _Kasky v. Nike_ , where Nike was sued for allegedly deceptive public statements about its labor practices. In this case, the U.S. Supreme Court let stand a lower court decision that the company's "commercial speech" was entitled to only minimal free speech protection under the U.S. Constitution's First Amendment. Fearing similar lawsuits, many inside counsel are very cautious about public communications such as sustainability reporting.

Another possible litigation concern involves a company disclosing "material" information in a voluntary sustainability report that has not been included in a regulatory filing under federal securities law. Materiality is the standard that determines what information should be included in financial statements. For instance, according to the U.S. Securities and Exchange Commission's (SEC) 2010 Interpretive Guidance on Disclosure Related to Climate Change, companies must disclose material information on the effect of climate change regulation and physical changes on business operations. It is therefore critical that climate change information in sustainability reports be consistent with that included in regulatory filings to the SEC.

Integrated reporting is an opportunity to address this concern by demonstrating the relationship between sustainability issues, financial performance, and business strategy. Within companies, the process of drafting an integrated report could promote better communication between employees working on corporate social responsibility and members of the investor relations and legal departments. It is also important for lawyers and law firms to become more involved in the development of reporting standards. For instance, lawyers have largely been absent in the development of GRI guidelines or the verification of GRI reports. There are no legal experts on the GRI's Technical Advisory Committee even though the GRI involves law-related issues (like the application of international human rights and environmental standards) that would benefit from participation by lawyers. By involving lawyers in sustainability efforts within companies and in the promotion of global standards for integrated reporting, one can identify possible legal risks early on that need to be addressed and thereby enhance the overall quality of the corporate sustainability endeavor.

#### The Role of Stock Exchanges in Expediting Global Adoption of Integrated Reporting

Christina Zimmermann, Manager, Public Policy and UN Engagements

Principles for Responsible Investment (PRI)

One of the most important issues discussed at the Harvard Business School Workshop on Integrated Reporting begged the question: Who can drive the widespread, and expeditious, adoption of integrated reporting? While the creation of the newly launched, multi-stakeholder, International Integrated Reporting Committee (IIRC) focuses on the collective action approach, the potential role of stock exchanges in promoting the integrated reporting (IR) agenda deserves specific attention, especially given the rise of the Sustainable Stock Exchanges initiative.

In the aftermath of the global financial crisis, a growing number of policy makers and quasi-regulators, including stock exchanges, see a need to promote better risk management, good governance, and enhanced transparency, in order to protect long-term returns. These reforms include addressing emerging environmental, social and corporate governance (ESG) issues, which are increasingly being seen as drivers of long-term performance and stability, both on the micro and macro levels. A number of exchanges are already implementing ESG strategies, such as enhancing listing rules and disclosure requirements, setting up ESG indices and launching new exchanges for ESG-related asset classes (carbon representing one such example).

In order to promote the undertaking of ESG issues by exchanges, the UN-backed Principles for Responsible Investment (PRI) (1), the UN Global Compact, and the United Nations Conference on Trade and Development (UNCTAD) co-convened the Sustainable Stock Exchanges, a global initiative set up to explore how the world's exchanges can work together with investors, regulators, and companies to address corporate transparency and promote longer-term investment. This initiative is an important step in encouraging more stock exchanges to embrace a leadership role in enhanced corporate ESG disclosure.

A recent report by Responsible Research, commissioned for the Sustainable Stock Exchanges 2010 dialogue (2), found that the majority of exchanges surveyed believe they have a responsibility to promote corporate ESG transparency (3). However, barely twenty per cent of those exchanges would consider changing listing rules to include ESG or sustainability reporting. As the report outlines, stock exchanges are reluctant because, among other reasons, they fear conflicts of interest between investors and companies, and they claim an absence of visible demand from mainstream investors. To address at least the latter objection, a number of PRI signatories have joined the Sustainable Stock Exchanges initiative in order to demonstrate a clear demand from major institutional investors for change.

A few exchanges have begun to build the business case to their member companies for sustainability through enhanced ESG disclosure. By changing listing requirements or establishing voluntary initiatives and guidelines, exchanges can catalyze corporate ESG reporting and in turn enhance the attraction of the listed companies. For example, the Johannesburg Stock Exchange now requires all listed companies to adopt integrated reporting through a comply-or-explain basis enforced by the King Code on Governance (King III). The JSE enforces the King III, not merely because it's a good idea, but because it makes sound business sense.

Although there is no internationally accepted standard for integrated reporting, the JSE's comply-or-explain approach is building momentum for integrated reporting, while showcasing a best practice as an example for other exchanges around the world. With organizations such as the World Federation of Exchanges (WFE), representing 52 exchanges that together list over 45,000 companies, exploring the Sustainable Stock Exchanges initiative, the potential impact for other exchanges to adopt and accelerate IR is greater than ever before (4).

The recent Responsible Research report for Sustainable Stock Exchanges also recommends exchanges establish sustainability committees which should report directly to the Board of Directors. Those committees should have a mandate to undertake initiatives in three areas: listing requirements, ESG data and reporting standards (including assisting with the development of IR), and stakeholder engagements. As suggested by Robert G. Eccles and Mervyn King in the WFE article, "Integrated Reports Voluntary Filing," stock exchanges could also take on the responsibility of compiling reports and convening workshops that could feed into the IIRC's work and the eventual development of an IR framework (5).

In sum, there is now momentum for integrated reporting and a platform for stock exchanges to get involved, just in time for the IIRC to take advantage.

Endnote: (1) The UN-backed Principles for Responsible Investment (PRI) is an investor initiative in partnership with the UN Global Compact and UNEP Finance Initiative focused on mainstreaming the integration of environmental, social and governance (ESG) issues into investment decision-making and ownership practices, and thereby improving long-term returns to beneficiaries. The Initiative has 830 signatories who together represent over US$22trillion in assets under management. For more information: www.unpri.org  
(2) On 8 Septemeber 2010, the PRI, UN Global Compact, and UNCTAD co-convened the second Sustainable Stock Exchanges dialogue. The first dialogue was held on 2 November 2009 at UN Headquarters. More information about the conferences and the initiative itself can be found here: <http://www.unpri.org/sustainablestockexchanges>  
(3) Responsible Research (September 2010). _Sustainable Stock Exchanges: Real Obstacles and Real Opportunities. A Discussion paper prepared for the Sustainable Stock Exchanges 2010 Dialogue._  http://www.responsibleresearch.com/Responsible_Research___Sustainable_Stock_Exchanges_2010.pdf _  
(4)_ WFE (2009). Statistics and Key Market figures.  http://www.world-exchanges.org/statistics/annual/2009/equity-markets/number-listed-companies  
(5) Robert G. Eccles and Mervyn King. (June 2010)."Integrated Reports Voluntary Filing." World Federation of Exchanges. Focus.

#### Integrated Reporting and Key Performance Indicators (1)

Steve Lydenberg and Jean Rogers

The number of companies issuing corporate social responsibility (CSR) reports has seen remarkable growth since the early 1990s. According to the CorporateRegister.com, only 26 companies published CSR reports in 1992, but by 2008 that number had risen to over 3,000.

This worldwide momentum for increase disclosure of data relating to corporate sustainability records and impacts—data relating to the environmental, societal, and governance (ESG) policies and performance of these companies—raises two important questions:

1. Should ESG reporting be mandatory and integrated into financial reporting?  
2. How are users of ESG data best able to identify the most meaningful ESG data for specific companies and industries?

In this paper we argue that _mandatory, integrated reporting is desirable_ and then turn our attention to the question of _how key performance indicators (KPIs) can be used to identify sustainability data points that can be most usefully disclosed industry by industry._ This paper proposes a _process_ for identifying these KPIs, and leaves to future research identification and agreement on specific industry KPIs.

Need for Mandatory, Integrated Reporting

Currently voluntary sustainability reporting has a number of shortcomings. Companies often report on different sustainability indicators, use different formats and metrics for these indicators, and choose different time periods for their reporting. Standardized mandatory ESG reporting can address these shortcomings. Mandatory integrated reporting is desirable because it:

-Allows investors and others to make apples-to-apples comparisons  
-Creates a level playing field on which corporations can base their disclosure  
-Enables the full range of stakeholders to assess and debate corporate performance  
-Helps companies internalize the costs of their activities that they currently externalize

With comprehensive, mandatory reporting, third parties—including investors, regulators, employees, and community and environmental groups—can fairly judge companies' sustainability policies and practices; compare them to those of their corporate peers; assess their progress or lack thereof; and understand the relationship of companies' social and environmental initiatives to governments' efforts to create just and sustainable societies.

Integrated reporting means two things—combining ESG reporting with financial reporting so that investors can make better buy/sell decisions, and integrating considerations of corporations' societal and environmental sustainability with considerations of the economic value these companies bring to society. Ultimately, it is crucial that these various parties be able to integrate evaluations of corporations' societal and environmental policies and practices into financial decisions, the day-to-day management of these firms, and the regulation of their interactions with their stakeholders.

Voluntary ESG disclosure will not be sufficient to provide systematic, comparable data or to integrate diverse societal and environmental considerations into the evaluation of corporations' relationships with all its stakeholders. Mandatory, integrated ESG reporting will therefore be necessary.

In the U.S., the SEC recently issued interpretive guidance on the materiality of climate change, stating that it is already a requirement to report on issues of material significance in the Form 10-K (thereby in effect defining the Form 10-K as a mechanism for integrated reporting). Therefore, one might argue that reporting on material sustainability issues is already mandatory for listed companies—what is more urgent, therefore, is reaching agreement on what issues are material, by sector, and providing clear guidance to reporters.

Challenges of Integrated Reporting

If one accepts that reporting on the risks and opportunities associated with material, sustainability issues is already required (at least for listed companies in the U.S.), then why isn't it happening with more frequency and consistency? Currently, there is a lack of understanding regarding how to determine the materiality of sustainability issues by CFOs and those responsible for financial disclosure to the SEC, and there is no clear guidance on how to translate these issues into performance indicators. This frustrates reporters and stakeholders alike:

Companies struggle with interpreting the concept of materiality as applied to sustainability issues.  
Companies can expend substantial time and expense gathering data irrelevant to their primary societal and environmental impacts.  
CSR reports can contain extraneous information, confusing to stakeholders and detracting from the most fundamental challenges faced by the firm.  
Companies can be at the mercy of ever-increasing requests for information from and ever-increasing number of interested parties.  
Companies with prominent brands can be subject to disproportionate pressures to increase their reporting.

KPIs Can Address These Challenges

By focusing corporate CSR reporting on sustainability Key Performance Indicators (KPIs), these challenges can be addressed. Properly conceived and identified, sustainability KPIs focus the attention of investors, managers, and other stakeholders on the issues most material to the business model and financial prospects of the corporation, as well as on its most important impacts on society and the environment. A focus on material KPIs frees corporate executives' time for the management of these issues; allows investors to assess management's effectiveness in addressing these issues, which are often complicated and long-term in their implications; and helps employees, customers, communities, and civil society organizations to better understand how companies can minimize their negative externalities on society and maximize their positive externalities, while simultaneously remaining profitable. If material KPIs are agreed within a sector, then reporting becomes comparable and benchmarkable for all companies within a sector. This encourages analysts to interpret sustainability performance with respect to inherent challenges faced by the sector, and enables companies to understand how to drive competitive advantage by improving sustainability performance.

Process for Identifying Material KPIs

A properly conceived process will identify material KPIs that produce comparable data for firms in comparable industries; data that highlights the key challenges and opportunities when it comes to issues of substantial societal and environmental relevance for the particular subsector in which a company operates. We have identified a six-step process that we believe can successfully identify these sector-specific sustainability KPIs.

The following describes this process. (We have not dealt with the complicated issue of who would have the authority to impose mandatory reporting, by sector, of the most material KPIs.) The process of determining the material KPIs, however, can be undertaken by any organization wishing to provide more substantial guidance to corporations regarding how to best meet disclosure requirements relative to material sustainability issues facing their industry. Material KPIs can be determined industry by industry, however, there is value in looking at the entire set of industries and mapping the relative materiality of sustainability issues. Understanding the relative significance of sustainability issues by sector points to implications for governments and industry groups: policy initiatives, funding, and R&D to address global and regional issues such as water scarcity or climate change can be directed in the most impactful way according to the sectors that are most affected.

_Step One: Assemble a broad universe of sustainability risk and opportunity factors that could apply to all industries._ The existing body of work on enhanced corporate sustainability reporting offers an excellent pool of issues from which to work.

For example, the Global Reporting Initiative has developed a particularly rich set of issues from which one can work. These include issues most relevant to the full range of stakeholders including customers, communities, employees, the environment, investors concerned with governance, and supply chain.

_Step Two: Select an industry classification system._ A number of industry classification systems already exist. One of the best known is the Industry Classification Benchmark, jointly developed by Dow Jones Indexes and FTSE. The ICB Universe Database identifies 114 industry subsectors into which it categorizes 60,000 companies worldwide.

For example, the Basic Materials industry is divided into two Supersectors (Chemicals and Basic Resources). Basic Resources is then divided into three Sectors (Forestry & Paper, Industrial Metals & Mining, and Mining), each of which is further subdivided. Mining, for example is divided into five subsectors: Coal; Diamond & Gemstones, General Mining, Gold Mining, and Platinum & Precious Metals. It is at this subsector level that KPIs must ultimately be developed and applied.

_Step Three: Establish a definition of materiality for non-financial issues._ The next step is to extract from the universe of sustainability indictors those that are most material to assessing the performance of each of the 114 subsectors. This materiality test should include five factors:

1. Financial impacts and risks—societal and environmental factors that may have financial implications  
2. Legal, regulatory, and policy factors—emerging government policy or regulatory issues (e.g., carbon emissions regulations)  
3. Peer-based norms—sustainability issues generally recognized and reported by companies within the subsector (e.g., safety in the airline industry)  
4. Stakeholder concerns and societal trends—issues of high importance to stakeholders (e.g., genetically modified ingredients for consumers of food products)  
5. Opportunities for innovation—issues where companies can demonstrate industry leadership in finding innovative solutions to environmental, customer, or other stakeholder challenges.

_Step Four: Apply the materiality test to the sustainability issues potentially applicable to each subsector of each industry._ For each subsector of each industry, score the full range of sustainability issues according to their relevance for each of the five aspects of materiality.

For example, for the airline industry the issue of energy efficiency in fuel usage has substantial financial implications, may soon become subject to regulatory mandates, is widely reported on by specific airlines, is of substantial concern to environmentalists, and presents major opportunities for innovation in the identification of alternatives to conventional jet fuel. It therefore scores high on the materiality test.

_Step Five: Rank the materiality scores of these issues within each industry and establish a threshold that defines those issues that are most key._ Once the materiality test has been applied to the broad set of sustainability issues, draw a line that establishes an acceptable threshold for key materiality.

For example, within the airline industry, fuel efficiency, climate change management, safety, impact on communities, customer satisfaction, and labor relations would in all likelihood be among the highest scoring sustainability KPIs.

_Step Six. Create a tailored set of metrics for each of the KPIs that are most material for each subsector of each industry._ Finally, it is necessary to determine for each of the sustainability KPIs what the appropriate unit of comparative measurement would be.

Again for the airline subsector of the transportation industry, the most appropriate metrics might be customer miles flown per gallon of fuel consumed for fuel efficiency; total annual carbon emissions in metric tons for climate change management; fatal and non-fatal airplane crashes per miles flown over the past decade for safety; jet engine noise levels for impact on communities; rankings in customer satisfaction surveys for customer satisfaction; and percentage of workforce unionized and number and length of strikes for labor relations.

Results of KPI Selection Process

The KPI selection process described above will result in metrics for the measurement of somewhere between 10 and 20 sustainability KPIs for each of the 114 subsectors. Companies in these subsectors can then be required to report on their performance according to the metrics established for the KPIs in each subsector, as a minimum basis for disclosure of material sustainability issues.

These KPIs will differ from one subsector to another, but they will be a manageable number for each subsector, both from the point of view of corporations gathering and reporting on the KPIs and from the point of view of stakeholders seeking to evaluate overall company performance on the basis of these KPIs.

Importantly, they will reflect the most material issues faced by the sector, allowing benchmarking of companies within a sector, and—ultimately—performance improvement on the things that really matter.

Some of the KPIs will repeat across multiple, and possibly even all, subsectors, while other KPIs will be relevant for a limited number of subsectors, or possibly even a single subsector.

Next Steps

The definition of a process for establishing KPIs will inevitably be a part of the larger debate about integrated reporting and how most efficiently and effectively the goal of widespread disclosure on material sustainability issues can be reached.

Our report left for further exploration the challenging question of what organizations or regulatory bodies are best qualified to establish material KPIs by sector, and maintain them over time. In an appendix to the report we suggest that three types of organizations logically suited for the task are accounting bodies such as the International Accounting Standards Board or the Financial Accounting Standards Board; governmental and trade-association regulatory bodies such as the Securities and Exchange Commission and the Financial Industry Regulatory Authority in the United States; and national or regional stock exchanges, which could establish the disclosure of sustainability KPIs as a listing requirement, much as the JSE (Johannesburg Stock Exchange) has already done.

In addition, we noted that the Global Reporting Initiative has already taken important steps toward the identification of KPIs for sectors and subsectors through its sector supplement series of guidelines.

As the reach and scope of corporations around the world continues to grow and their influence continues to extend into many sectors of our lives, it is only natural that increased disclosure of their impacts upon society and the environment, as well as the risks and opportunities that global sustainability challenges present to the corporation will be addressed as part of mandated disclosure requirements. That disclosure must be rigorous and comprehensive in order to assure an accurate assessment of these impacts and drivers of change. At the same time, it must be balanced and focused, to assure that corporations, their stakeholders, and regulators can appropriately focus on the most important of these sustainability impacts. Balancing these two important requirements will be among the challenging next steps to be taken in the development of mandatory, integrated ESG disclosure regimes.

Steve Lydenberg is the Chief Investment Officer at Domini Social Investment LLC. He has been active in social research since 1975 and was a founder of KLD Research & Analytics, Inc. He has written numerous publications on issues of corporate social responsibility and responsible investing, including "Corporations and the Public Interest."

Jean Rogers PhD is a Principal at Arup in San Francisco. She leads the management consulting practice in the Americas Region and works with global clients in a broad array of industries to integrate sustainability into their projects and operations. She is a registered professional engineer and a former Loeb Fellow at Harvard University.

Endnote: (1) This article is based on the white paper _From Transparency to Performance: Industry-Based Sustainability Reporting on Key Issues_ by Steve Lydenberg, Jean Rogers, and David Wood

#### Developing Key Performance Indicators to Support Integrated Reporting

Yoshiko Shibasaka, Associate Partner

KPMG AZSA

Integrated reporting is the most effective way to evolve communication and has much to contribute to accomplish the most appropriate resource allocation on a global basis. The most appropriate resource allocation is a very critical and challenging issue in order to advance business sustainability.

We understand that we have many tasks at hand to realize such a change in the economy through business reporting initiatives. One is the shared comprehensive framework for effective and efficient communication to be adaptable for various business dimensions. A more important one is Key Performance Indicators (KPIs). We should make efforts to develop KPIs with various stakeholders such as report preparers (especially listed companies), investors (institutional and retail), customers/consumers, accounting professionals, analysts, regulation setters, academia and so on. We expect that sophisticated KPIs shall support information, especially non-financial information, because that information is of such substance for narrative description.

Financial information is the results and facts of past activities. These are measurable, comparable and highly-usable among stakeholders. On the other hand, integrated reporting should include information on intangibles. It should be required that management communicate various estimated attributes. It is necessary to describe linkages to future (reasonably expected) financial results and/or authorized reasons; moreover it is better to provide quantitative perspectives, to establish understanding and avoid misunderstanding. In addition, since intangibles are resources to accomplish companies' business strategies, appropriate KPIs would contribute to the decision making of stakeholders both internal and external.

We all hope to implement integrated reporting in order to realize a good economic society. For that, we have to make many efforts for non-financial information to acquire accountable, transparent, relevant, credible and informative attributes. The development of KPIs is one of the most effective tools for doing that.

I know that there are many KPI libraries throughout the world. Many companies have already started to control internal facts and resources based on processes like the balanced-scorecard methodology. I think it is better to recommend that managers utilize existing initiatives in their organizations if they have had success with them. However, in order to improve and enhance qualities of (integrated) business reporting, we have to implement new KPI ideas, and re-consider using a more effective focus on the enterprise's own material resources and indicators. Companies should select and disclose their own KPIs to fit their business strategies and risks.

In addition, I think most importantly, which we have to handle very carefully, is not to use KPIs only. KPIs should be used for supporting contexts of narrative information, and should be used with relative, narrative described non-financial information that has evolved from the comprehensive framework. In this context, KPIs may be a mixture of figures based on internal information and disclosed public information.

WICI (World Intellectual Capital/Assets Initiatives Network) released a paper entitled  "Concept Paper on WICI KPI in Business Reporting" in June 2010. This paper was authored mainly based on discussion held by members of WICI Japan. WICI Japan has already released its own draft of KPIs libraries for three industries (Pharmaceutical, Automotive, Electric devices/parts) to meet KPI concepts, and to fit the purpose of the integrated business reporting.

In this paper, WICI sets the definition of KPIs for business reporting. As the most important one, it suggests that "KPIs are provided as numerical figures (metrics) related to critical factors of value creation, and they support the explanation of business strategy linking it to future financial or economic performance."

If too many numbers of KPIs are required from various external people, especially and unfortunately, if implementation would be conducted on a mandatory rule basis, I am afraid that KPIs may have a negative impact to companies' management, their business results, and understandable communications. Too much information becomes just "noise" for users. External stakeholders want to get more material and essential information related to future value creation.

WICI mentions the following as its challenges for KPI development in the same report:  
\- Specific interest initiatives require company disclosure of certain indicators based on their own needs (lack of common uses/definitions) and may not reflect any shared interests (and thereby understanding) among relevant producers and consumers;  
\- The real implication of disclosed indicators cannot be easily understood due to the lack of adequate explanation of their context (lack of contextualization);  
\- Most initiatives mandatorily require companies to disclose indicators as if one-size-fits-all;  
\- Most initiatives focused on non-financial information do not tie the disclosure of such information to the value creation processes and corporate performance, thereby simply raising disclosure cost without adding value;  
\- The above elements and considerations have generally required companies to respond in a defensive manner, just by "ticking the box," resulting in boilerplate disclosures that do not communicate relevant information related to company strategy.

Our challenge for integrated reporting is our tasks with innovation (e.g., New Combination) for our human beings' sustainability. It is necessary to gather our wisdom in order to overcome "high walls." We have to share the same vision and mission for the blueprint for the future. So, we are just in the starting point to have a significant discussion from various points of views. Involving all persons gives each a task and responsibility. We do not much time. But, we have many possibilities.

Yoshiko Shibasaka is an Associate Partner at KPMG AZSA. She is responsible for coordination of KPMG's activities and projects related to intangibles (intellectual property, intellectual assets, intellectual capital), and collaboration with various external professionals (e.g., regulation setters, policy makers, institutional investors, analysts, academia, IR persons, management executives) in order to promote business reporting in a knowledge economy, focused on companies' value creation and competitive advantage. Yoshiko graduated from Meiji University with a Bachelor of Arts in Economics, and earned a Master of Arts in International Economics from the school of International Politics, Economics and Business, Aoyoma Gakuin University.

# PART X

Lessons from Experience

#### Some Thoughts on Advancing the Vision and Reality of International Integrated Reporting

Robert H. Herz, Former Chairman

Financial Accounting Standards Board

I participated in the initial meeting of the International Integrated Reporting Committee (IIRC) in London in July 2010 and in the two-day Workshop on Integrated Reporting at Harvard Business School (HBS) in October 2010. Both of these events clearly generated excitement over the vision of integrated reporting, excitement that provides a good start in translating the vision into reality. But these are clearly only first steps in what will need to be a well thought out, organized and sustained effort, less integrated reporting suffer the same fate as the many other well intentioned and promising initiatives aimed at broadening and enhancing corporate reporting that have come and gone over the past twenty years.

As someone who has devoted a good part of my professional career to improving global financial reporting as Chairman of the U.S. Financial Accounting Standards Board (FASB) and the Transnational Auditors Committee and as a member of the International Accounting Standards Board (IASB), and to supporting and participating in prior efforts to improve the content and organization of corporate reports, I have experienced firsthand both the challenges and the opportunities in trying to effect change in the world of corporate reporting. The challenges can be formidable, but there are also significant opportunities. It is from this vantage point that I offer some suggestions for improving the chances of the vision of international integrated reporting becoming a reality.

My first suggestion is to continue to broaden the IIRC. The initial roster of members is impressive and includes, among others, senior representatives of the Prince of Wales' Accounting for Sustainability Project, GRI, major global accounting firms and the International Federation of Accountants, the International Organization of Securities Commissions, the IASB and the FASB, and international NGOs. But let's always remember that corporate reporting is an exercise in communication between companies and their investors and other key stakeholders. Accordingly, greater representation from and active participation in the IIRC by the issuer and investor communities will improve both the chances of these groups supporting rather than opposing the vision of integrated reporting and will help ensure that the framework the IIRC develops actually represents something investors want and that companies are capable of following and implementing.

In that regard, I believe the IIRC needs to take a leaf from the world of strategic planning. At the HBS conference, we split into various working groups that each developed a symbolic vision for integrated reporting a decade from now in the form of a mock cover of _The Economist_ in the year 2020, along with the beginnings of some action steps to get to the vision. The exercise was stimulating and fun. The IIRC needs to do something similar, but in a more extensive, intensive and disciplined way, employing classic strategic planning techniques in order to more clearly flush out the vision, to carefully compare it against the current state of the world in order to delineate and describe all the major gaps between the desired end state and current reality, to identify the obstacles and opportunities in moving toward the vision, and to develop a strategy and supporting action plan with appropriate milestones for addressing the obstacles and capitalizing on the opportunities in moving from the current state to the vision.

A key question in developing the vision and the strategy and supporting action plan is whether getting widespread adoption of integrated reporting is best achieved and depends primarily on obtaining general marketplace acceptance on a voluntary basis or whether it will ultimately require governmental and regulatory support and action. My experience suggests both may be needed for success, particularly on an international basis. For absent a clear crisis, regulators are understandably hesitant to require significant changes that lack sufficient visible support in the marketplace, preferring instead to encourage voluntary "best practices." But once such practices begin to take root and spread, regulators are more prone to begin to regulate the space, particularly where they perceive there is an unacceptable level of diversity in practice.

So obtaining sufficient marketplace support for the vision, the framework, and broad adoption of integrated reporting is essential. And in turn that requires the development of a clear "business case" on the benefits and overall cost/benefit to companies and their stakeholders of integrated reporting. While the business case needs to be convincing, it must also be realistic, neither overstating and overselling the potential benefits nor understating the costs and challenges in moving to the new reporting practices.

That leads me to one final piece of advice to the IIRC and others involved in developing and promoting integrated reporting. Please try to get a more consistent "story" amongst the group. At both the initial IIRC meeting and at the HBS conference it seemed clear to me that different people have latched on to this effort for very different reasons. For example, some seem to view integrated reporting primarily as a path to reforming what they term a "broken" financial reporting system. In contrast, others seem to view it as way of grafting the relatively nascent reporting of environmental, social, and governance data and sustainability reporting on to a well developed and generally accepted financial reporting system. While there is nothing wrong with people coming at a subject from differing perspectives, interests and motives, these disparate views need to be reconciled in order to develop and articulate a clear vision, the business case for it, and the strategy and action plan to get there.

In summary, a very promising and important effort. But lots of work to do to translate it into reality. In that regard, I believe we can take heart from and be inspired by John F. Kennedy's remarks in 1962 about putting a man on the moon by the end of that decade: "We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because the challenge is one we are willing to accept, one that we are unwilling to postpone, and one that we intend to win..."

#### The French Grenelle II Act: Enacting Integrated Reporting and Further Developments

**Patrick d'Humières and Nicolas Jandot**

Institut RSE

The Grenelle II Act, passed in July 2010, makes integrated reporting mandatory for about 2,500 businesses and for a few hundred state-owned companies. Is it enough to embody the _vision_ of integrated reporting and enable better decision-making by taking the environmental and social record into account? Probably not, because it is not sufficient, but there are many lessons to draw from the 9-year experience of integrated reporting in France.

The Grenelle II Act is already the second milestone in mainstreaming integrated reporting among French businesses. The first one, the NRE Act, kicked off integrated reporting among French listed companies almost a decade ago (2001) but has shown its limits. Nine years later, it was high time to broaden integrated reporting and enable better decision-making thanks to CSR and non-financial data. The decree to the Grenelle II Act—which specifies the size of the companies and organizations (most likely over 500 employees) that have to abide by the Act and specifically which information to disclose—is being written and is due by the end of 2010. We will know more by then. However, the Act makes mandatory two major progresses: an independent third-party verification (1) and the comparability of the data (2). It means that statutory auditors will verify (and not certify, which possibly leaves room for other actors). This will enhance the reliability of non-financial data and help businesses design better reporting processes and protocols. Regarding the comparability of the data, CSR reporting is also on the agenda of the European Commission (EC) as a corporate governance issue (and that is actually what it is). The EC plans to publish a Green Paper in 2011 on CSR reporting and is discussing with the stakeholders. The EU officially states that " _These consultations could lead to legislative initiatives_ (3)." The French initiative is likely to be a basis to debate on legislative initiatives.

What did the French initiative lack? What is next to go further in integrated reporting? First, a strong political push is highly needed. Governments have to explain why integrated reporting helps and what is the "carrot" for businesses. The G20 summit in France offers a great opportunity to call for integrated reporting worldwide.

Second, accounting authorities have to keep on working on it and take action. Businesses and investors often blame CSR reporting for lacking comparability, which is true. That is a key point, and the debates on valuing intangible assets make sense when it comes to explaining CSR performance. Their contribution could help bringing convergence among the many—although interesting—reporting frameworks. Sometimes the rookies feel lost between GRI, ISO 26000, Global Compact, etc. It is confusing for them and this might even deter them from stepping in. Adapting accounting standards and integrating non-financial data would lead to a very material financial evaluation of the environmental and social impacts brought by a business. We often hear _"as long as there is not financial impact it has nothing to do with performance, so my shareholders and my managers do not care that much about it."_ Among the wide business community there is an emerging consensus on the fact that CSR performance may impact the financial performance, but doubts would remain without an official accounting standard integrating the environmental and social impacts. Yet one can notice businesses rarely say they regret implementing CSR when they have.

Third, it is crucial to engage with the financial market authorities. Engagement is ongoing and they are showing growing interest as it is proven in the very interesting study "Sustainable Stock Exchanges: Real Obstacles, Real Opportunities (4)." Aviva's call to action, among many other initiatives, demonstrates investors back and are ready for integrated reporting. Now financial market authorities have to walk the talk. Recommendations or not-so-much used ESG indices are very interesting steps forward, but the context is rather favorable for more ambitious actions. What if, for instance, the AMF—the French SEC—would only approve a listed company's annual report if and only if it integrates the mandatory environmental and social data? The first step might be to publish a manual for investors (the CFA Institute did so more than 2 years ago) explaining how to do use the CSR data and how this performance contributes to the financial performance, in the short run and in the long run.

Yet legislative initiatives or actions from accounting and financial market authorities are not enough. It does not help actors reach a consensus. The calls for integrated reporting and improved CSR reporting coming from academics, investors or analysts support the legislator's case. More important, it helps actors convince businesses that they can achieve performance by seeking compliance. CSR is nothing but good management because it adapts (and anticipates) core economic and social trends. To quote former GE CEO Jack Welch, "An _organization that is changing more slowly than its environment will not be around very long_." Environmental, Social and Governance (ESG) analysis is nothing but a more accurate, deeper and wider picture of a business' activities. Brokers, rating agencies, investment consultants, buy-side teams, index and data providers are developing ESG analysis services, which is mainstreaming it among the financial community. For instance, Enel estimates that Socially Responsible Investment (SRI) funds account for about 19 % of its free-float (roughly 5.5% of its market cap) (5). SRI—as difficult as it is to measure—is becoming significant. So too is ESG mainstream analysis, whose point is about getting to know more about the business and seek value. This vision needs to be promoted by the accounting and financial market authorities. They have a major role in designing global metrics to take environmental and social impacts into account. Integrated reporting answers to the growing demands and concerns coming from the investors regarding non-financial data because it applies the principles of financial reporting to non-financial reporting. It makes it more relevant to them.

The success of the integrated reporting initiative relies on convincing governments, accounting and financial market authorities to take action. Those are the key three players to engage: they can spur the initiative, achieve the comparability of the data and promote CSR as part of the competitive advantage.

Academics increasingly publish research on CSR and it helps in making the case for CSR. The business community will not split into two parts with the sustainable businesses failing to achieve good financial returns on one side and unsustainable businesses with high financial returns but high environmental and social negative impacts. Winning businesses will be more sustainable and will perform better than others, possibly edging them out of the innovative markets.

Publishing only a stand-alone CSR report is a way to let CSR be apart from the business activities and take it off the agenda of the boards. That is why integrated reporting can contribute much to CSR. The purpose of integrated reporting is not so much about the data itself—as important as it is to measure the impacts, manage it and improve. To quote the EC about ESG reporting, it is about " _ways to enhance corporate functioning, with the specific goal of increasing employee involvement, improving relations with shareholders and facilitating more accurate valuation of businesses by the financial markets_." That is the point, and this is where we have to head for. It is a 10-year agenda, starting now!

Endnote: (1)"The social and environmental information with regard to legal and regulatory information is subject to verification by an independent third-party body, according to terms set by Conseil d'Etat decree. This verification gives rise to a recommendation which is sent to the shareholders' or members' meeting at the same time as the report of the board of directors or executive board."  
(2) [...] the list of this information in line with European and international texts, as well as the terms of their format so that they allow data to be compared."  
(3)  http://ec.europa.eu/internal_market/smact/docs/single-market-act_en.pdf  
(4)  http://www.responsibleresearch.com/Responsible_Research___Sustainable_Stock_Exchanges_2010.pdf  
(5)  http://www.enel.com/en-GB/media/press_releases/release.aspx?iddoc=1635967

#### Sustainability Reporting: Where Does Australia Stand?

Terence L. Jeyaretnam and Kate Niblock-Siddle

In terms of sustainability reporting, Australian companies were slower off the starting block than their European and North American counterparts. In 2005, only 23 per cent of the top 100 companies in Australia had published sustainability reports, compared to 71 per cent in the UK (1).

This situation has changed rapidly in recent times and Australia is now the world's fifth largest producer of sustainability reports (2). By 2008, 68 per cent of the top 100 companies published information on their sustainability performance (3).

Indeed, many global best practice examples of sustainability reporting come from Australian companies. This article examines how sustainability reporting has evolved in Australia and looks at some trends and examples from the region.

The origins of sustainability reporting in Australia

The origins of sustainability reporting in Australia are very much tied in to the natural landscape of the country. As a resource-rich country, Australia's first statements on sustainability performance came from mining companies. These companies began issuing Health, Safety and Environment Reports which addressed the very immediate concerns of the health and safety of workers and the impacts on the local community and environment of large mining operations.

WMC Limited, an Australian diversified mining company which is now part of BHP Billiton, published an environment progress report in 1995, which was a first for the Australian resources sector (4). The company said "Our early environmental reporting encouraged us to make some very frank and open assessments of our performance. While we believed we did many things well, we acknowledge that we had much room for improvement in managing our environmental performance (5)." This approach can be seen as being fairly advanced for its day. Today, best practice reporting should reflect "positive and negative aspects of the organization's performance to enable a reasoned assessment of overall performance," according to the Global Reporting Initiative's (GRI) Reporting Principle on Balance (6).

A study by the Centre for Australian Ethical Research in 2003 (7) which set out to identify the number of Australia's largest companies that had undertaken a Public Environmental Report or were planning to launch a report that year, found that 70 per cent were in the mining or manufacturing sector.

In the past decade, mining companies in Australia have played a crucial role in the development of sustainability reporting guidelines, such as the GRI's Mining and Minerals Sector Supplement and the International Council of Mining and Metals' Sustainable Development Framework (8).

Today, sustainability reporting in Australia is common practice not only in the mining sector but across many sectors. In the 2008 ACCA Australia and New Zealand Sustainability Reporting Awards (9), for example, winners were from the retail, telecommunications, property, water, transportation, materials, professional services, public sector, financial services, consumer and business services and energy and utility sectors.

The factors that have helped drive the increased public disclosure on sustainability issues in Australia include "climate change...the introduction of the National Greenhouse and Energy Reporting System (NGERS) and the Carbon Pollution Reduction Scheme (CPRS) by the Australian government and the revision of the Australian Securities Exchange (ASX) Principle 7, which now includes the consideration of sustainability-related issues as a material business risk (10)."

It could be argued that being later off the starting block has enabled Australian companies to bypass some of the hurdles that early European and North American sustainability reporters faced. For example, much of the debate on reporting in these regions in the late 1990s centered on developing a business case for a sustainability strategy and its consequent reporting. The business case for managing and reporting on sustainability performance in Australia has been driven by the tangible costs involved in managing natural resources, reducing greenhouse gas emissions, as well as investor and consumer pressure to manage environmental, social and economic impacts.

Use of standards, memberships and inclusion in sustainability indices

The use of international sustainability reporting standards such as the Global Reporting Initiative G3 guidelines and AccountAbility's AA1000 Assurance Standard is popular among Australian reporters.

Approximately 49 Australian companies used the Global Reporting Initiative G3 guidelines in 2010 (as of the end of October 2010), according to CorporateRegister.com, the global online sustainability resources website. CorporateRegister.com statistics also show that use of AA1000AS is high, with Australasian users of AA1000AS representing a high proportion of global users at 37 per cent, compared to 47 per cent in Europe in 2009.

Being geographically remote from international sustainability initiatives which are headquartered in Europe and the United States, like the GRI and the UN Global Compact, has perhaps provided impetus for Australian organizations to ensure they are included in global sustainability reporting discussions and agenda-setting. For example, Australia is one of only five countries around the world (the others are Brazil, China, the United States and India) to have a Global Reporting Initiative Focal Point.

In terms of the UN Global Compact, more than 60 companies in Australia are currently members of the Compact, a business membership organization where members commit to aligning their operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption (11).

Australian companies are relatively well-represented in sustainability indices. For example, 18 Australian companies are listed on the Dow Jones Sustainability World Index, which is made up of companies which represent the top 10 per cent of the leading sustainability companies out of the biggest 2,500 companies in the Dow Jones Global Total Stock Market Index. This compares to 52 UK companies.

Case studies from Australia

Many of the key issues that sustainability reporters are facing globally are also being addressed by Australian companies. These include issues related to materiality, integrated reporting and interactive reporting, examples of which are provided below.

Materiality

Materiality is one of the three principles of the AA1000AS (2008) standard, which it defines as "determining the relevance and significance of an issue to an organization and its stakeholders...An organization develops a comprehensive understanding of its sustainability context and what its material issues are, as well as those issues that, while not material to the organization, still require a response, and a balanced and robust understanding of who they are material to and why (12)." Materiality is also one of the GRI's Reporting Principles.

BHP Billiton, a natural resources company listed on the stock exchange in both Australia and the UK, has developed a process to determine material issues and asks its stakeholders to comment on the issues it reports against. The process is based on three steps:  
1) Identifying issues – A review process is undertaken based on AccountAbility's five-part materiality test which includes examining policy, peer-based norms, stakeholder concerns, societal norms and direct short-term financial impacts.  
2) Prioritizing issues – Issues are rated by significance to stakeholders and the potential impact on the company's business.  
3) Reviewing issues – This involves a common sense check of the process outcomes.

This process led to the identification of a number of highly material issues, which it reports in its 2009 Sustainability Summary Report. These include sustainability governance, safety performance, occupational health exposures, access to resources such as water and land, greenhouse gas emissions and energy use and sustainable community development, including site closure (13).

Integrated reporting

Integrating sustainability strategy into core business strategy is one of the challenges that companies both in Australia, and globally, are facing. The next stage in this process is reporting on economic, social and environmental issues in an integrated way.

Globally, companies such as Novo Nordisk, BASF, Veolia Environnement and Philips have produced integrated reports. In Australia, some organizations have also been producing integrated reports for some years now. For example, Australian superannuation fund, VicSuper has produced an annual Sustainability Report on its economic, environmental and social performance for the past six years. Barbra Norris, Chairperson, and Bob Welsh, CEO of VicSuper, say in the organization's latest report that "VicSuper has recognised for some time the inter-connectedness of the environment, society and corporate governance (ESG) structures of our system of economic production, distribution and exchange. We have observed that when ESG factors are integrated into business strategy, risk and opportunity assessment, organizational structure and culture, and measurement of results, delivery of optimal long-term performance is enhanced (14)."

For this reason, in 2010 VicSuper renamed its Sustainability Report to the VicSuper Performance Report and combined it with its annual Member Report.

Interactive and dynamic reports

In response to stakeholders asking for reports to be more easily accessible, many companies are using innovative ways to communicate the information in a targeted and more meaningful way to audiences. This is also the case in Australia. For example, Stockland, Australia's largest diversified property company, recently produced its 2010 Corporate Responsibility and Sustainability (CR&S) Report (www.stocklandsustainability.com.au). The website has been designed to quickly communicate to areas of key performance including moving boxes with sustainability performance data, which the reader can click for more information and a video by the CR&S Committee providing a brief, balanced overview of Stockland's sustainability performance and future areas of focus. Siobhan Toohill, General Manager of CR&S at Stockland said that "the online version of our report has been developed to engage a wide audience on issues that are of real interest to our stakeholders—such as housing affordability and energy efficiency—supported by compelling case studies."

Reporting on specific issues

In terms of how Australian companies are disclosing information on specific areas of non-financial performance, a research trilogy series produced by ACCA Australia and New Zealand, in collaboration with the Net Balance Foundation, analyzes disclosures by Australian Securities Exchange (ASX) top 50 companies. This series has included reports on disclosures on water, social investment, corporate governance, anti-bribery, climate change, stakeholder engagement and human capital management.

The reports demonstrate that there is much variation on reporting on specific issues among Australia's top 50 companies. For example, in the most recent report on water disclosures (15), the average score for all companies was just 28 per cent. For disclosures on anti-bribery and corruption the average score for all companies was higher at 41 per cent, whereas for climate change disclosures it was just 21 per cent. This indicates that there is still much to be done to raise the overall standard of non-financial disclosures throughout Australian organisations.

The next steps

Australia has made substantial progress in sustainability reporting, after being slower off the starting block, which has led to the emergence of Australian-specific best practice in managing sustainability-related material risks and public disclosure of sustainability issues. So where will Australian reporters go from here?

Over the next few years we will continue to see more ASX companies publicly disclosing information on their sustainability performance. By 2015 we would expect to see 100 per cent of ASX 100 companies and 50 per cent of ASX 200 companies reporting on their sustainability issues and performance. The ASX needs to encourage increased disclosure and transparency by for example, including guidance on non-financial reporting in its good reporting guidelines. This will also mean that there will be a greater uptake of assurance of reports as organizations look to ensure credibility and relevance to stakeholders.

In this time period, the rigor of carbon disclosures will also be strengthened and we believe 100 per cent of ASX 200 companies will be reporting to the Carbon Disclosure Project.

Like the rest of the world, we are likely to see an increasing trend towards integrated reporting, with several companies experimenting with how best to do this. We will also see more companies experimenting with interactive online formats to make the information more accessible to specific stakeholder groups.

These emerging trends mean that Australian companies will continue to be innovative in their approach and will continue to contribute to global best practice in sustainability reporting.

Terence L. Jeyaretnam is the Executive Director and Kate Niblock-Siddle is a Senior Associate at Net Balance, one of the world's leading dedicated sustainability advisory firms with over 40 specialists based in Melbourne, Sydney, Brisbane and London. Net Balance works with clients on environmental, social and governance issues to build organizational resilience and long-term value for stakeholders.

Endnote: (1) KPMG International Survey of Corporate Responsibility Reporting 2005  
(2) Corporate Register (2008) Assure View: The CSR Assurance Statement Report  
(3) KPMG International Survey of Corporate Responsibility Reporting 2008  
(4) <http://hsecreport.bhpbilliton.com/wmc/2004/approach/journey.htm>  
(5) <http://hsecreport.bhpbilliton.com/wmc/2004/approach/journey.htm>  
(6) Global Reporting Initiative Sustainability Reporting Guidelines (G3)  
(7) The State of Public Environmental Reporting in Corporate Australia 2003  
(8) <http://www.icmm.com/our-work/sustainable-development-framework>  
(9) ACCA Australia and New Zealand Sustainability Reporting Awards 2008, Report of the Judges.  
(10) KPMG International Survey of Corporate Responsibility Reporting 2008  
(11) www.unglobalcompact.org  
(12)  http://www.accountability21.net/uploadedFiles/publications/AA1000APS%202008.pdf  
(13)  http://www.bhpbilliton.com/bbContentRepository/docs/sustainabilitySummaryReport2009.pdf  
(14)  http://www.report2010.vicsuper.com.au/chairman-and-chief-executives-introduction/  
(15) <http://www.netbalance.com/research/Water_Report.pdf>

#### Integrated Annual Report Survey - New Zealand's Top 200 Companies: Exploring Responses from Chief Financial Officers on Emerging Reporting Issues

Wendy McGuinness and Nicola Bradshaw

Background

This report presents the initial results of a survey designed to provide a snapshot of the current practices and views on integrated reporting of the top revenue-earning companies operating in New Zealand, as shown by responses from the Chief Financial Officers (CFOs) of these companies. CFOs are key players in the development of integrated reporting. They must provide timely and accurate data to the management team and board to inform their decisions and monitor strategy, and also to stakeholders, who have increasing expectations around the company's footprint, its treatment of staff, and the management of material risks. This all puts pressure on the quality of the company's publicly available information system.

In our ever more complex and connected world there is a need for risks to be better articulated in the public domain—whether they are site-specific, national or global. In particular, the public wants to know which companies it can trust and, more importantly, which it cannot. Professional bodies need to work hard to develop a framework that improves trust, not only between the public and private sectors, but also within the private sector—insurers, suppliers and bankers also need integrated information. A significant factor in developing this trust is communication. One of the notable findings of this survey was that a significant majority (83.1%) of the companies that responded had not asked stakeholders in the past five years whether they would like to receive more information on the company's environmental and social performance.

Our survey, and this report, provides insights into how accounting practitioners regard integrated reporting, exploring the challenges and opportunities of integrated reports, the nature of filing programmes, the optimal length of the reports and the extent to which companies are consulting with stakeholders.

In addition, it is hoped the survey could be used as a template to benchmark New Zealand against other countries, to assess progress over time, and to shape further research. This would assist in enabling policy to be based on evidence and informed debate, and that the accounting profession continues to build trust and add value to integrated reporting in the future.

Integrated reporting in New Zealand today

Integrated reporting and, in the broader context, reporting environmental and social performance alongside financial information, is not currently a significant focus of the New Zealand government. This is evident in our inability to find regulations or guidelines which require public agencies to report under an integrated framework. Despite these limitations some agencies have undertaken to provide information through integrated reporting and to monitor sustainable development in New Zealand.

The Ministry for the Environment (MfE) provides information on sustainability reporting through a list of case studies, guides, relevant organizations and other resources on its website. In particular, the three guides that are listed provide information: (i) to assess and improve businesses' environmental, social and economic performance; (ii) to help corporations to voluntarily monitor and report greenhouse gas emissions, and (iii) covering the main aspects of sustainable development reporting (1).

 Statistics New Zealand, a government department, monitors sustainable development and has published two reports on national sustainable development indicators: _Monitoring Progress Towards a Sustainable New Zealand_ (2002), and  Measuring New Zealand's Progress Using a Sustainable Development Approach: 2008. The 2002 report was "the first time indicators covering economic, social, environmental and cultural spheres had been brought together and reported on in New Zealand." The 2008 report was based on a new set of indicators that adhere to international best practice. The publication measured 85 indicators along 15 themes, which included: population; biodiversity; air and atmosphere; water; land use; energy; transport; waste; innovation; work, knowledge and skills; economic resilience; living conditions; health; social connection and governance, and culture and identity (2).

In 2005, the Australian Centre for Public Agency Sustainability Reporting (CPASS) undertook an investigation of sustainability reporting in the public sector, with the aim of providing a snapshot of reporting practices internationally. The findings cited the New Zealand Ministry for the Environment as among the first public agencies internationally to produce sustainability reports using the Global Reporting Initiative (GRI) framework. The report concluded by stating the continuing need to clarify the scope and practice of sustainability reporting by public organizations, and described success in this area as partly dependent on "building the capacity of agencies to engage in the reporting field and continue to expand on the international best practice frameworks (3)."  
Within the private sector, the New Zealand Business Council for Sustainable Development (NZBCSD), in its 2009 report _Corporate Reporting on Sustainable Development_ , stated that integrated sustainability reporting is not yet occurring in New Zealand, but that there are examples of environmental reporting. The paper highlighted the five companies best known in New Zealand for their environmental reports, of which two, Watercare Services and the New Zealand Refining Company, were respondents to this survey (4).

In 2003, New Zealand's main professional accounting body, the New Zealand Institute of Chartered Accountants (NZICA), established a Sustainability Development Reporting Committee (SDRC) with the objective of contributing to improvements in this area, and providing continuing leadership and guidance. However, the NZICA's 2010 review of its governance and operations, _Fit for the Future_ , proposed organizational changes that included disbanding the SDRC. The review was aimed at ensuring the organization has the most effective and efficient structure to align with its strategic direction and future challenges. The NZICA's justification for discontinuing the SDRC is as follows: "While recognizing the importance of [sustainable development reporting] in today's environment, NZICA's limited resources have been prioritized to other sector groups for this year. Focus will be on strengthening linkages with Special Interest Groups and industry, re-visiting the priority of these areas in the 2011 strategic review (5)."

The proposed disestablishment of the SDRC signals to the Sustainable Future Institute (the Institute) that the New Zealand accounting profession may be pulling out of this emerging area of study and business practice. As a result, there is the risk of New Zealand falling behind while standards are being developed internationally. Further, there is a lost opportunity to show strategic leadership that aligns with New Zealand's clean and green national brand.

Survey methodology

The Integrated Annual Report Survey was designed to produce a snapshot of current practices and views with respect to integrated reporting in New Zealand, with an additional emphasis on greenhouse gas emissions. The survey has enabled the Institute to gather information on how New Zealand companies view the challenges and opportunities presented by integrated reporting, as well as to gauge the level of interest in developing a voluntary filing program.

The primary purpose of this survey is to learn more about integrated reporting practices and the views of New Zealand's Top 200 companies. To this end, we developed four objectives to help us achieve the broader purpose of this report:  
1. To investigate the thoughts of the CFOs of the Top 200 companies on the emerging practice of integrated reporting, and in particular the challenges and opportunities it presents.  
2. To find out if the CFOs believe integrated reporting should be voluntary (a market-driven initiative) or regulatory (a mandated initiative).  
3. To learn more about the strategies and practices being used by Top 200 companies to account for greenhouse gas emissions and obtain emission credits.  
4. To understand the extent to which companies have consulted with stakeholders on non-financial aspects of their performance.

Why the Deloitte/ _Management_ magazine Top 200 companies?

It is inevitable that the Top 200 companies (6) operating in New Zealand will have a significant impact on our economy, our people and our environment.

The economies of small countries can be strongly influenced by overseas-controlled companies, and New Zealand is no exception. 57.5% of the Top 200 companies are "50% or more controlled by overseas interests." and only 26.5% are listed on the New Zealand Stock Exchange (NZSX). In other words, almost three-quarters of our Top 200 companies are not traded publicly on the New Zealand stock exchange (see Figure 1). Therefore it is in our interests to ensure that the more invisible companies—those that are owned and traded elsewhere—treat our citizens and country well. Thus, like other small countries, New Zealand has a significant interest in the development of international standards that improve the quality of integrated reporting. For this reason, we have much to celebrate with the establishment of the International Integrated Reporting Committee (IIRC) earlier this year.

Survey design

The survey was designed to meet the four objectives outlined above, and to be quick and simple for CFOs to complete (taking about 15 minutes), yet sufficiently open to enable respondents to add more information if they so desired (7,8). Meeting these goals required a fine balance, and we are very grateful for the assistance of a number of experts in the field. To this end, we acknowledge the invaluable feedback we received from the following people:  
-Professor Robert G. Eccles (Harvard Business School);  
-The Sustainability Development Reporting Committee (NZICA SDRC): Gary Swift (Chair), Amanda Ball, Judy Brown, Peter Casey, Raechel Cummins, Leah Murphy, Jamie Sinclair and Tony Uttley;  
-Mark Hucklesby (Grant Thornton, Auckland);  
-Dr Eva Collins (University of Waikato);  
-Ken Warren (The Treasury, Wellington), and  
-Mark Leadbetter (BDO Spicers, Auckland).

Data collection process

Chief Financial Officers were initially given four weeks to complete the survey; it was sent out on September 24, 2010, with a closing date for replies of October 22, 2010. Follow-up telephone calls were made a week before this date in an attempt to increase the number of responses, and the deadline was extended by a further two weeks to allow for late respondents to register their results. A total of 59 responses were received out of a possible 200 (29.5%). The survey was able to be completed online or in hard copy.

Limitations and boundaries

This report outlines the Institute's preliminary findings. Further analysis of the responses is still to be completed, and will be reported on at a later date. The Institute is aware of three main limitations to this research:  
1. 70.5% of survey recipients did not respond. In addition, we consider that those who did respond were more likely to have an interest and/or expertise in integrated reporting.  
2. While we were aware of the importance of defining the term "integrated report," we acknowledge that there exists some uncertainty over this definition (to this end it is gratifying to learn that the IIRC is planning to develop a working definition).  
3. CFOs are restricted by time limitations, and as a result some may have delegated the undertaking of the survey to a colleague within their company. This could have an effect on the responses, particularly if the respondent has less oversight and/or understanding of the company's reporting practices than the CFO.

In addition, we acknowledge that by focusing solely on the CFOs of the Top 200 companies we have excluded the large number of small to medium-sized New Zealand companies that could have made valuable contributions to the survey. Further, we have only obtained one perspective on integrated reporting; we have not gathered responses from board members, chief executive officers, investors, employees, bankers, consumers, regulators, non-government organizations, insurers or other stakeholders. A research program that integrates the views of a range of stakeholders would be a constructive way of clearly identifying problems to be solved and solutions to be implemented.

While we acknowledge the existence of these boundaries and limitations, we do not consider they have a significant adverse effect on this report and our subsequent findings. We have gathered and analyzed a range of data, allowing us to learn and report valuable lessons which can be considered in the context of our objectives of exploring the current situation of integrated reporting in New Zealand.

Responses

Fifty-nine companies responded to the survey. Thirty-four advised the Institute that they would not be completing the survey, with the reasons given generally falling into one of three groups: (i) the company was in receivership; (ii) time constraints, or (iii) it was company policy not to complete surveys. Some of the companies decided not to proceed when they learnt the survey was not mandatory. Others wanted to know if completing the survey was required in order to stay on the Deloitte/ _Management_ Top 200 list; once they were advised that this was not the case, they made the decision not to complete the survey. The remaining 107 companies did not respond to the Institute by the closing date.

It is with this context, we acknowledge the efforts of the 59 companies that did respond, without their efforts the results obtained from this research would simply not exist. Further details of the survey participants, such as annual revenues, NZSX listings, extent of overseas control and ownership type can be seen on the Sustainable Future Institute's website (9).  
Before reading the results it is important to understand the logic that underlies the survey. This effectively steers respondents through the questions to minimize the time investment required (particularly for those with little interest in integrated reporting) while allowing those with more knowledge and experience, or simply more interest in adding their thoughts to the debate, the space and time to do so. The Institute hoped that this approach would make completing the survey an easy straightforward experience and improve response rates. Hence, the survey was designed to take 15 minutes or less. Figure 2 sets out the survey logic.

The boxed text below sets out the key findings, which are followed by a brief discussion of the possible implications for integrated reporting, both in New Zealand and globally. The specific responses for each question are available on the Institute's website (10).

Discussion

It is heartening to learn that more integrated reports have been prepared than we initially expected and that Chief Financial Officers are working hard to produce best practice reports. However this interest was not shared across all companies; some from "agriculture, forestry and fishing," "manufacturing," "retail" and "wholesale trade," arguably industries with large footprints, appear less interested in progressing this type of reporting. The fact that the majority of respondents who had prepared integrated reports were more likely to be companies operating in the "electricity, gas, water and waste services" and "transport, postal and warehousing" sectors, indicates that these service industries see greater value from reporting non-financial information to stakeholders.

Half of the respondents who had published an integrated report in the past 12 months had "relied" on guidance from chartered accountancy firms; in contrast respondents had only "considered" seeking guidance from the NZICA. This implies that best practice is being led by practitioners in the field (what is referred to as a pull strategy), rather than by standards developed by regulators and professional bodies (a push strategy). This, combined with the fact that challenges to integrated reporting tend to stem from time constraints and a lack of adequate guidance from standard setters, suggests CFOs committed to this type of reporting are not well supported by their professional bodies. Further, the perceived challenges of presenting information in a useful format, generating new information in-house, and obtaining independent assurance over information, indicate that to progress integrated reporting, effective guidance is imperative.

One notable finding was that 44.1% of the respondents had calculated their company's greenhouse gas emissions. The requirement for companies to calculate and mitigate their greenhouse gas emissions for legal compliance under the recently introduced New Zealand Emissions Trading Scheme can be assumed to be the catalyst and driver for this result. A reasonable conclusion from this finding is that regulation is an effective mechanism for enforcing change in internal reporting systems and improving public reporting practices.

A possible way forward would be the establishment of a national filing program for integrated reports. South Africa is the first country to introduce a mandatory filing regime for all listed companies, and a number of other countries seem set to follow. In New Zealand this initiative has not been widely discussed (over half of respondents indicated they had not discussed this possibility); however, of those who had, opinions on its form were mixed. Like most policy initiatives, it comes down to alternatives, costs and benefits; in particular who pays what costs and who gets the benefit. New Zealand has the opportunity to look more deeply at the option of a mandatory filing program as part of the current review of our Securities law, which includes the proposal for a new Financial Markets Authority (FMA). Respondents showed a preference for the proposed FMA as the holder of any filing register (rather than the NZSX).

Notably, a significant majority (83.1%) of the companies that responded to the survey had not asked stakeholders in the past five years whether they would like to receive more information on the company's environmental and social performance. This figure increased to 91.1% when the publishers of recent integrated reports were removed from the sample. This might be explained by the decisions of some international companies not to consult with New Zealand stakeholders because of our relatively small market size. In support of this, one respondent stated "we are [a minute percentage] of the world wide group," implying that consulting with stakeholders on their New Zealand operations was immaterial to their company's overall reporting practices. This is a problem that could be addressed by a filing regime for large companies and/or the development of a set of international reporting standards for integrated reports.

The underlying purpose of integrated reporting is the notion that a licence to operate exists between a company and the public. Ideally, stakeholders and the general public can develop ways to learn more about the activities of companies and appreciate some of the complex trade-offs that are necessary to remain commercially viable. Further, as companies increasingly appreciate the nature of emerging social and environmental goals, business practices may change before regulation is necessary. However, it remains unclear how companies that have not shown an interest in reporting beyond their financial information will ever report such information voluntarily. While acknowledging that companies and society need each other, most importantly society needs well-governed companies more.

Wendy McGuinness is the Chief Executive and Nicola Bradshaw is a Project Manager at the Sustainable Future Institute in Wellington, New Zealand.

Endnote: (1) See the _Reporting_ section of the Ministry for the Environment website:  http://www.mfe.govt.nz/issues/sustainable-industry/tools-services/subjects.php?id=2  
(2) See _The Sustainable Development Reporting Programme_ section of the Ministry for the Environment website:  http://www.mfe.govt.nz/environmental-reporting/about/sus-dev.html  
(3) Global Reporting Initiative, _Sustainability Reporting by the Public Sector: Practice, uptake and form._ Research: A snapshot of sustainability reporting in the public sector. GRI G3:  http://www.globalreporting.org/NR/rdonlyres/FAFD9A06-702A-4AA8-988C-979DBCCBC948/0/LeesonEtAlSustReortingByPublicSector.pdf  
(4) New Zealand Business Council for Sustainable Development (1999), _Corporate Reporting on Sustainable Development,_ page 4. See: www.nzbcsd.org.nz/_attachments/CRS_.doc _  
(5)_ NZICA, _Fit for the Future: Phase 2 - Review of committees and boards_.  http://www.nzica.com/AM/Template.cfm?Section=NZICA_news&Template=/CM/ContentDisplay.cfm&ContentID=22144  
(6) For the criteria used to define the Top 200 companies, see _Deloitte/Management Magazine, Top 200 A-Z Listing 2009_ : <http://www.management.co.nz/top200/200list09.pdf>  
(7) See the Sustainable Future Institute website for a copy of the final survey:  http://www.sustainablefuture.info/Site/Project/One_Integrated_Report/Top_200_Companies_Integrated_Annual_Report_Survey.aspx  
(8) The online survey provider was http://www.SurveyMonkey.com  
(9) See analysis of the Top 200 companies, including lists of the 59 respondents, the 34 companies that advised they would not be completing the survey and the remaining 107 companies on the Sustainable Future Institute website at  http://www.sustainablefuture.info/Site/Project/One_Integrated_Report/Top_200_Companies_Integrated_Annual_Report_Survey.aspx  
(10) See the survey results for each question on the Sustainable Future Institute website:  
 http://www.sustainablefuture.info/Site/Project/One_Integrated_Report/Top_200_Companies_Integrated_Annual_Report_Survey.aspx  
(11) Note, the export option was excluded from this ranking as it was only relevant to a few of the participants.

#### The Climate Disclosure Standards Board – Setting a Standard for Realism and Resilience

Lois Guthrie, Secretary to the Climate Disclosure Standards Board

Responding to crises after the event

Crises in financial compliance, environmental stewardship, healthcare and social services are inevitably followed by demands for change. In response, the causes of crises are investigated, policies are devised to avert further crises and enabling architecture is put in place to monitor progress and enforce compliance. Society seems to revolve around a perpetual cycle of crisis, investigation, policy and review—a cycle of control lost and regained.

Predicting and preventing crises before the event

Much has been written about why we fail to predict crises, including the recent financial crisis. Some have explained it as part of a recurrent pattern of financial crises that have taken place over centuries (1). Others point to the complacency that comes from belief in the self-equilibrating properties of the financial markets (2). Similarly, climate change is sometimes explained as part of the recurrent pattern of environmental change to which the planet has always adjusted. However, with the prospect of tipping points, irreversible damage and our very survival at stake, decision and policy makers are not waiting for the crisis to happen. All over the world, they are attempting to take pre-emptive action to avert disasters associated with climate change and there has been an explosion of national and international policy activity designed to stabilize atmospheric concentrations of greenhouse gases. This article examines what is needed to make those policies successful, focusing particularly on the complementary information architecture that will accelerate and support policy activity on climate change and the work of the Climate Disclosure Standards Board in helping to create that architecture.

New paradigms

Achieving stabilization of atmospheric greenhouse gases and making climate policies work depends on complex factors including political consensus, development of an investment in new technologies and new private and public investment practices that are focused on the long-term. The changes necessary to shift to the low carbon economy represent what has been described as "a new paradigm in world financial markets (3)." This article argues that the new paradigm must have resilience at its heart. A full analysis of the resilience perspective is beyond the scope of this article, but briefly, resilience focuses on the capacity of systems not only to absorb shocks and continue to function but also to respond to shocks through renewal, re-organization, innovation and development (4). This type of resilience depends on policies that recognize an unpredictable future and that prepare for adaptation and change, rather than those designed to control and to maintain equilibrium.

New paradigms – from equilibrium to complex, adaptive systems

The resilience perspective is supported by Eric Beinhocker's work (5) on complexity economics in which he argues that, by definition, an economic equilibrium state cannot grow explosively, create novelty, spontaneously self organize or spontaneously crash—all of the things that have actually happened to the world economy. Rather than the equilibrium system that it was traditionally assumed to be, he claims that the economy is a complex adaptive system that is dynamic and never in balance, involving many interactive agents and organizations of agents, designs and strategies that evolve over time and macro patterns that evolve from micro behavior. Beinhocker claims that this new economic thinking is crucial for dealing with climate change, which is also characterized by non-linear effects, tipping points and deep interconnections between the physical and economic worlds.

Unlocking the inertia as we shift to the new paradigm

At the moment, policy makers and markets seem frozen by the shock and uncertainty that the financial crisis brought. A 2009 report by Barclay's Wealth and the Economist Intelligence Unit claims that unpredictability and uncertainty causes inertia, pessimism and a retreat to the familiar. What can policy makers and complementary support structures do to unlock markets from that apparently inert state whilst recognizing the dynamism and complexity of both the economy and the environment? Beinhocker suggests various things including:  
-New modelling techniques that recognize complex interactions between individuals, the economy and physical systems;  
-An assessment of climate risk that takes account of and builds into pricing and discounting the effects of non linearity, time and irreversibility;  
-A view of the low carbon future as an evolving one dependent on constant innovations;  
-A new view of institutions as an "evolving set of nested collective action (6)."  
This article examines how these principles can be applied to the development of the information architecture that will complement, accelerate and support policy activity on climate change and build resilience. That architecture is designed to ensure that climate change-related information reaches decision-makers so as to support robust policy action, enable risk to be understood and capital deployed to new innovations.

Climate change-related information includes:  
-analysis of the impact that climate change has or is expected to have on the financial and operating condition of companies and their ability to satisfy strategic objectives;  
-the way in which companies manage and govern risks and opportunities associated with climate change;  
-greenhouse gas emissions reporting.

The need for new information models

The financial crisis indicates that the existing model for the provision of financial information by corporations to their shareholders and regulators is not working.

" _Shareholders, board members, regulators, employees, customers, journalists and other stakeholders have had a very limited view of the corporation. The irresistible force of transparency has met the immovable object of an outdated and even dangerous model of reporting. Exhibit A? The world could not foresee the impending collapse of the financial services industry..._ (7) _"_

The model is not working for the provision of climate change-related information either. Deficiencies in the provision of information about climate change have been compared to the hidden risks embedded in packages of subprime mortgages and credit default swaps. In contravention of the securities legislation of many jurisdictions, mainstream financial statements currently fail to warn investors and others of material corporate risks associated with climate change.

" _..analyses of the financial filings investors depend on to warn them of material corporate risks have repeatedly revealed widespread deficiencies when it comes to climate-related risk disclosure..._ " Mindy Lubber, CERES

The fact that there are deficiencies by no means detracts from the significant achievements of the Carbon Disclosure Project in creating the de-facto standard for information about climate change that is useful to institutional investors. Nor are the deficiencies attributable to lack of policy activity. From research conducted in 109 countries, Deutsche Bank (8) has identified 270 policies that set targets to reduce GHG emissions and Appendix 1 to this article lists examples of policy activity at national and regional level to require or encourage disclosure of climate risk, greenhouse gas emissions and other CSR related information. With all of this activity, it is hard to diagnose why information apparently continues to be deficient and to fail the needs of users. The author offers two possible diagnoses. First, a confused disclosure landscape and secondly the absence of language for the expression of some of the risks associated with climate change.

The confused disclosure landscape

"... _today, business is presented with a constantly evolving labyrinth of local and purportedly global voluntary and mandatory protocols, methodologies, standards, initiatives, guidelines as well as local and point solution based regulations..._ (9) _"_

It is precisely the extent and scale of activity that has led to what many call "a confused disclosure landscape" in which the number and type of voluntary and regulatory schemes designed to collect information about mitigation of climate risks and greenhouse gas emissions is at variance with the global and shared nature of climate change and produces variation in the quality, quantity and relevance of disclosures.

In practical terms, the confused disclosure landscape means that companies:  
-Receive multiple requests for information from nongovernmental and governmental organizations, this leads to duplication of effort and increased administrative burdens;  
-Are uncertain about what they should report and how to comply with users needs for information.

For users of information, including investors, the variation in the quality, quantity and type of disclosure caused by the confused disclosure landscape manifests itself in a number of ways, including:

1. Fragmentation - In the absence of a single standard prescribing where information about climate change should be disclosed, information about a company's climate risks and GHG emissions can be found in a variety of places. Although CDP is recognized as a central repository, information about climate change can also appear in corporate social responsibility reports, on company websites, in companies' annual reports, in individual country reports, in reports to regulators and in sustainability reports. Whereas investors know where to find a Group's consolidated annual financial statements, climate change information is more fragmented.

2. Calculation – Various approaches can be used for calculating GHG emissions and it is often not clear how quantitative results have been calculated. Although individual organizations, particularly the World Resources Institute through the development of the Greenhouse Gas Protocol, are doing much to resolve the issue, there is no globally prescribed method of calculating GHG emissions, no central database of emission factors or other coefficients, no agreed approach to the units in which results should be expressed and so on. This makes comparisons difficult.

3. Organizational boundaries - Differences in the way that businesses and corporate structures are owned and organized mean that groups of companies can take different approaches to the way in which they define the boundaries of their organization. In the absence of a single prescribed approach, it is possible for a Group to provide complete greenhouse gas emissions information for entities over which it has financial control or to provide information based on its equity share of the controlled entity or to provide information only for operationally controlled companies or to use a hybrid approach. The variety of approaches that can be taken to organizational boundary setting mean that investors and other stakeholders have difficulty comparing information across companies and sectors.

A language for expressing climate risk

" _Despite the existing legal requirements, corporate disclosure of climate change-related risks has so far remained limited. In a review of 6,000 filings by S &P 500 companies to the U.S. Securities and Exchange Commission (SEC) between 1995 and 2008, CERES and Environmental Defense Fund (2009) found that 75% of annual reports filed in 2008 failed to mention climate change and only 5% articulated a strategy for managing climate-related risk. In other countries, disclosure requirements have also elicited limited response from companies..._ (10) _"_

As the legislative examples listed in Appendix 1 show, annual reports are designed to alert investors and other stakeholders to corporate risks, factors that enhance or threaten the company's ability to meet its corporate objectives and matters that affect the business's operational condition and financial performance. However, Eurosif and others claim that financial statements alone capture only a small percentage, some say less than 20% of the information needed to assess the condition of the company. The balance of information comes from intangible factors, such as climate change.

While there is consensus about the type of information that companies should provide about climate change, there is no universally agreed language or approach for expressing the degree of economic value and operational efficiency at risk from intangible factors or for expressing uncertainty about the measurement, timing and impact of climate change in future or for determining the extent to which that information should be identified as relevant and material. The absence of language, guidance and tools for providing this information has led to poor compliance with existing law.

"... _carbon abatement efforts will put dramatically different levels of stress on the cash flows and valuations of different industries...Companies will need to focus on how and when to signal the value of their climate change bets so that investors can assess them...However, very few public companies have succeeded in explaining the more deeply hidden effects of climate change on their cash flows and competitive strategies..._ (11) _"_

The Climate Disclosure Standards Board - routes to solutions

The next part of this article looks at how the Climate Disclosure Standards Board seeks to address these issues through:

-Collaboration with all participants involved in climate change disclosure;  
-Efforts to standardize climate change related disclosure in mainstream reporting;  
-A focus on the needs of investors as the main users of mainstream reports;  
-Innovation.

Background to the Climate Disclosure Standards Board

Origins

At its 2007 annual meeting in Davos, the World Economic Forum convened a group of seven organizations working on climate change to form the Climate Disclosure Standards Board.

Mission

CDSB's mission is to promote and advance more standardized disclosure of climate change-related information in mainstream reports (meaning the annual reporting packages in which companies deliver their financial statements), through the development of a reporting framework designed to integrate climate change into mainstream filings.

Operation

The CDSB Board appointed the Carbon Disclosure Project as its Secretariat, responsible for conducting the day-to-day activities of the Board in advancing its mission. In order to supplement the experience of Board members, a Technical Working Group was established comprising large accounting firms and their professional bodies together with academics. An Advisory Committee of leading industrial and financial services companies, governmental and non-governmental bodies provides advice and guidance to the Board and Technical Working Group.

Convergence and coalescence

As it embarked on its work, the Technical Working Group found that, although sometimes described as a labyrinth or patchwork of rules, the legislation, standards, industry and program protocols and guidelines that have developed to assist corporations to report on climate change share many fundamental characteristics. Using as its model the International Accounting Standards Board's work on the convergence of accounting rules into International Financial Reporting Standards, CDSB seeks to enhance and encourage coalescence around those shared characteristics through the development of a global Climate Change Reporting Framework, the first edition of which was published in September 2010.

CDSB's Climate Change Reporting Framework

The objective of the Framework is to set out requirements that clarify for preparers of information what and to what extent they should make disclosures on climate change, thereby reducing the variation in the quality, quantity and relevance of disclosures. Achievement of this objective should, over time elicit for investors increasingly decision-useful information that complements and supplements financial statements. The requirements of the Framework are also designed to represent suitable criteria for conducting assurance activities and to support the International Auditing and Assurance Standards Board's work to develop a new International Standard on Assurance Engagements for Carbon Statements.

Challenges

CDSB experiences a number of challenges in its work, many of which are also encountered by financial accounting and supervision standard setters. Some of those challenges are summarized below.

Rules versus principles, materiality, uncertainty and forward looking statements

The concept of standard setting is suggestive of rules, finality, certainty and prescription; whereas CDSB seeks to develop a standard and elicit disclosures that can continually develop against a background of dynamic and interconnected systems and circumstances. Similar issues have prompted debate about the right balance between principles and rules in devising or reforming approaches to accounting and financial supervision.

Demand for standardization of climate change-related information is strong. In common with others, the UN Conference on Trade and Development's 2010 World Investment Report calls for "internationally harmonized reporting [as this would be] useful for further climate change work at the global level, as well as providing investors and other stakeholders a clear, comparable view of emissions around the world...". Comparability of financial and other types of information, that is the ability to analyze, understand and compare results amongst various companies, is the Holy Grail of disclosure for investors and many others. CDSB knows that some level of standardization must emerge to bring order to the perception of a confused climate change-related disclosure landscape.

For some aspects of climate change-related disclosure, particularly volumetric information, the route to standardization is clearer than others. What is less clear is how to standardize or bring some order to determining "what information is enough." Scientists say that our survival depends on a "Goldilocks planet" that is neither too hot nor to cold. Similarly, disclosures should find the balance between too much and too little information. This ubiquitous issue means that every discussion about climate change-related disclosure will eventually turn to materiality and uncertainty—but what is material and how can it be determined against a background of uncertainty about the time, place, extent and effects of climate change? How can companies respond to investors' demand for disclosures to be oriented to the future when the future is unknown? How can the type and volume of disclosures be focused so as to enable investors and other stakeholders to distinguish the most crucial impacts of climate change on the disclosing organization's financial and operational performance from what some professionals have called "immaterial clutter (12)?"  
These questions are daunting, but progress is being made. In particular, the U.S. SEC's interpretive guidance on disclosure of climate change issues published in February 2010 has been helpful in response to the questions posed above. The guidance was issued in response to petitioning from investor groups about the application of existing S-K Regulations under the Securities Act to climate change-related disclosure. The guidance recognizes that existing disclosure requirements (see Appendix 1) place particular importance on a registrant's materiality determinations and that "the effectiveness of [disclosure]...decreases with the accumulation of unnecessary detail or duplicative or uninformative disclosure that obscures material information..."

The SEC does not set quantitative thresholds for determining what is material, but advises management to report on known trends, demands, commitments or events that are reasonable likely to occur or, where management cannot make that decision, it should make disclosures on the assumption that the trend, demand, commitment etc., will come to fruition, provided also that a material effect on the registrant's financial condition or results of operations is reasonably likely to occur.

In line with the SEC's guidance, CDSB does not set quantitative thresholds for identifying material issues and it advises companies to err on the side of materiality where it is difficult to draw final conclusions and to disclose difficulties involved in assessing the situation. CDSB's Climate Change Reporting Framework also incorporates traditional accounting remedies for focusing attention on wanted, and filtering out unwanted, information. In particular, it adopts relevant principles from the International Accounting Standards Board's "qualitative characteristics of decision-useful information" to provide focus on what is most relevant, reliable, complete and understandable. CDSB's stakeholder engagement programmes seek to define further what is most relevant from the combined perspectives of preparers and users of information.

Further progress is reflected in the response by some large companies to the demand for material information by using and including in disclosures what some call "materiality matrices" as a means of showing stakeholders how management has identified what is most important to the company. CDSB plans to issue application guidance to complement its CCRF by using such examples to illustrate how companies are tackling issues such as the determination of materiality.

This progress is encouraging, but the difficulty remains that financial reporting models do not adequately cater for the expression of uncertainty. We lack a language to convey uncertainty and its meaning. We fear that expressions of uncertainty might impair confidence and jeopardize investment streams. CDSB is seeking to learn from ISO's guide to the expression of uncertainty in measurement and IPIECA and the American Petroleum Industry's technical guidance on addressing uncertainty in greenhouse gas inventories for the oil and natural gas industry. The fact that the latter document runs to 186 pages indicates the nature of the some of the difficulties!

Organizational boundary setting

Even if the most robust standard for disclosure of climate change-related information existed, investors would struggle to compare results across companies and sectors if the standard did not include rules on how organizational reporting boundaries should be set.

The achievements of the WRI's GHG Protocol team in establishing a standard for the preparation of corporate inventories are laudable and are adopted in CDSB's Climate Change Reporting Framework. However, one observation about the Protocol is that it allows too much flexibility in the way that companies may set their organizational boundaries, according to financial control, operational control or equity share. CDSB seeks to address this by recommending that information for groups of companies should be reported according to financial consolidation rules.

While this establishes conformity of approach, CDSB recognizes that disclosures would not include GHG emissions information relating to indirect upstream impacts, downstream impacts from products after sale and emissions from operationally controlled entities, activities and facilities.

CDSB addresses this by requiring disclosure of GHG emissions:  
-That are not within the financial consolidation boundary but which must be reported under regulatory requirements by the disclosing organization in its capacity as operating licensee or in any other capacity; or  
-Where, due to the nature of the contract for the operation of the entity, activity or facility, the reporting entity is exposed to risk, opportunity or financial impacts or has sufficient authority to influence the extent to which GHGs are emitted.

CDSB recognizes that this approach needs testing and refining. Initial reactions to it suggest that whilst implementation might be difficult to achieve in the short term, the overall aim of the approach makes sense and is the right direction for climate change-related reporting to be heading in the long-term.

Interactive data standards and formats

The SEC has mandated the use of interactive data formats using extensible Business Reporting Language (XBRL) for securities filings. The SEC's stated objective is to improve the usefulness of information for investors by requiring it to be provided in a format that can be downloaded "directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software, and used within investment models in other software formats." The SEC notes that "interactive data has the potential to increase the speed, accuracy and usability of financial disclosure, and eventually reduce costs." As exactly the same conclusions could be drawn for any reporting, some say that developing such formats for climate change-related reporting eclipses the importance of defining materiality and makes the concept of "a report" (integrated or otherwise) outdated. Properly used, XBRL would enable users of information to view and analyze data according to their own preferences, across companies, time and subject matter. A recent report in the Murningham Post says that "XBRL portends the death of the traditional _report_ defined by clear boundaries of time and space—and the resurrection of a transcendent form of _reporting_ , where data interacts independent of reports (13)." CDSB is looking closely at the development of interactive data standards for climate change-related disclosure.

Collaboration

The matters summarized above are certainly not the only challenges with which CDSB is grappling. We know that there is work to be done on establishing a set of standardized performance indicators or metrics to facilitate more immediate assessment and benchmarking of corporate performance on climate change across time and sectors. We know that there is more work to be done on the practicalities of integrating climate change related information with financial and strategic information and so on.

Describing CDSB's Climate Change Reporting Framework as "Edition 1.0" acknowledges that addressing these and other challenges is a journey that is just beginning. It is one that CDSB cannot and does not wish to travel alone. Rather, CDSB's aim is to act as a focal point around which, as Beinhocker would put it, "non-linear interactions can create emergent patterns (14)."

There can be few disciplines that necessitate meetings of astrophysicists with accountants. However, any conference about climate change disclosure will often attract both, together with engineers, scientists, metrologists, meteorologists, sustainability practitioners, activists, investors, pension fund managers, supply chain managers, assurance professionals and even tax advisers. This is understandable given that climate change threatens to impact on every aspect of our life.

CDSB seeks to advance its work by drawing on the experience of all of these disciplines as well as on the work of its Board members, on regulatory developments and on the work of the International Accounting Standards Board. Through this collaboration, the requirements of the CCRF aim to be as consistent as possible with the common features of voluntary and mandatory reporting, with the established financial reporting model and with other areas of sustainability reporting, such as water and waste as well as advancing disclosure to recognise the uncertain, dynamic background against which information is prepared.

Inevitably, this involves negotiation to align the sometimes divergent perspectives of the collaborators. For example, the proper and necessary efforts of scientists and engineers to agree the most accurate emission factor for converting a measure of a given fuel source into carbon dioxide equivalent metric tons is vital for some purposes. However, it is a lengthy process that can delay or discourage the preparation of GHG emission results where factors are absent or uncertain. Depending on the fuel source and the degree to which its cost exposes a corporation to financial risk, it might not be necessary in all cases for a reporting entity or an investor to use or understand that emission factor. In some cases, we would argue that a proxy value would ease reporting burdens for corporations without diluting meaning for investors. Similarly, in the characterization of carbon trading permits, what activists might regard as a liability or an impaired asset, others will treat as a valuable asset. How is an investor to understand the cost/revenue implications of carbon trading permits against the background of such polarized views and what is their characterization of the permits? In short, there are important discussions to be had about the roles that each essential stakeholder in the development of climate change disclosure rules must play and how their roles and requirements intersect. CDSB, the International Integrated Reporting Committee and the Finance Innovation Laboratory established by the ICAEW and WWF provide a vital forum for these discussions to take place.

The ends

Thus far this article has examined the reason for and means of CDSB's standard setting activities. However, it is the ends that will justify the means. The standard we aspire to set is designed to support public policies to mitigate climate change, which in turn depend on harnessing private sector investment in energy efficiency and low carbon technology and investment in minimizing or adapting to risks from climate change. However, research and analysis suggests that capital is not currently being deployed to technologies and measures that will reduce GHG emissions. For example, the World Bank Group's finance for fossil fuels was $4.7 billion in the first ten months of 2010 represents an increase in investment in fossil fuels compared to renewable or energy efficiency. The Bank anticipates that "fossil fuels will remain an important part of the energy mix in both developed and developing countries for some time (15)." CDSB's work is designed to propel the so called "virtuous circle" whereby investors would reward stock prices of companies that integrate sustainability to their business and companies would respond by further improving their sustainability performance. Whether we are successful remains to be seen.

Conclusion

The privilege of writing an article for this illustrious publication has been cathartic. It leaves the sense that any contribution to what Thomas Friedman calls "the biggest industrial project mankind has undertaken since the Tower of Babel" is too small. However, Friedman also sees a role for we "revolutionary bureaucrats" that "help to decipher our crises" and have the potential to bring change with "the flick of a pen (17)." It will surely take more than a mere flick of the pen but the first tentative marks have been made on the map that sets the direction for our journey.

Lois Guthrie spent twenty years as a taxation practitioner before joining the Carbon Disclosure Project in 2004. At CDP, Lois has led the work of the Climate Disclosure Standards Board. The views expressed in this article are those of the author and do not necessarily represent the views of the Climate Disclosure Standards Board or its members.

Endnote: (1) Carmen Reinhart and Ken Rogoff examined eight centuries of financial crises and showed this to be a recurrent pattern in history (This Time is Different: Eight Centuries of Financial Folly).  
(2) Joseph Stiglitz, letter to the _Financial Times_ , 19 August 2010  
(3) Global Climate Change Policy Tracker: The Green Economy, the Race is on. DB Climate Change Advisors, March 2010.  
(4) Resilience: The emergence of a perspective for social-ecological systems analyses. Carl Folke – Global Environmental Change 16 (2006) 253 – 267  
(5) The Origins of Wealth. Eric Beinhocker, 2006.  
(6) Ibid.  
(7) One Report – Integrated Reporting for a Sustainable Strategy, Robert G Eccles and Michael P Krzus  
(8) Global Climate Change Policy Tracker: The Green Economy, the Race is on. DB Climate Change Advisors, March 2010.  
(9) Reuters Market Intelligence Series – Sustainable Banking: Risk, Reward and the Future of Finance  
(10) Transition to a low-carbon economy: public goals and corporate practices by Céline Kauffmann and Cristina Tébar Less - OECD Directorate for Financial and Enterprise Affairs, Investment Division  
(11) McKinsey & Company – How climate change could affect corporate valuations: Autumn 2008  
(12) From the Accounting Standards Board's Review of 2008/2009 narrative reporting by UK listed companies.  
(13) Commentary by Bill Baue, Editor in Chief, Murninghan Post, 17 August 2010: Cutting in line –GRI and integrated reporting.  
(14) The Origins of Wealth. Eric Beinhocker, 2006.  
(15) Kseniya Lvovsky, Climate Change Team Manager, World Bank, <http://discuss.worldbank.org/content/interview/detail/10375/>  
(16) Thomas L. Friedman, Hot, Flat, and Crowded: Why We Need a Green Revolution (New York: Farrar, Straus, Giroux, 2008).

Appendix 1 – Examples of policy activity affecting disclosure of climate risk and/or greenhouse gas emissions

Australia – Under the Australian Corporations Act 2001, the financial report must disclose environmental information to the extent that it affects financial performance, the directors report must disclose significant environmental regulation that affects the company's performance and the ASX listing rules require disclosure of information that a reasonable person would expect materially to affect the price or value of an entity's securities.

Canada – National Instrument 51-102 Continuous Disclosure Obligations requires disclosures in management's discussion and analysis that accompany financial statements about important trends, risks commitments and uncertainties that would be material to investor decision-making. Companies listed on the Toronto Stock Exchange are required to disclose the financial and operational effects of environmental protection requirements in the current and future years, steps taken to implement environmental policies fundamental to operations and details of any risk factors and regulatory constraints likely to affect investor decision-making.

Denmark – From 2009, over 1,000 of the largest companies in Denmark have a statutory responsibility (according to the Act amending the Danish Financial Statements Act) to account for their corporate social responsibility activities in their annual reports. (http://www.csrgov.dk/sw51190.asp)

European Union at EU level – the Modernisation of Accounting Directive (EUAMD) 2003/51/EC requires certain companies to include a balanced and comprehensive analysis of the development and performance of their business in the Director's Report including both financial and, where appropriate, non-financial key performance indicators relevant to the business and information on environmental matters. As at 2008, twenty-one member states had implemented EUAMD requirements on environmental reporting into national law and/or guidance.

France – The Nouvelles Regulations Economiques law passed in 2001, through article 116 makes reporting on social and environmental impacts mandatory for listed companies. (A guide to CSR Europe – Country Insights by CSR Europe's National Partner Organisations – October 2009)

Japan – the Financial Instruments and Exchange Act potentially requires listed companies and the equivalent o issue annual filings including sections on business risk and analysis of financial condition and performance.

Singapore – The Singapore Stock Exchange has issued a policy statement on sustainability reporting and is consulting on proposals for mandatory sustainability disclosure.

Spain – Although there is no provision for mandatory CSR disclosure, a State Council is working to develop common standards and characteristics of CSR reports (Report of European Workshop on disclosure of environmental, social and governance information on 18 September 2009).

USA – Securities and Exchange Commission Regulation S-K Items 101 (Description of Business), 103 (Legal Proceedings) and 303 (MD&A) require disclosures in the material effect of compliance with environmental laws as well as information necessary for an understanding of a company's financial condition, changes in financial condition and results of operations including any known trends, demands, commitments, events or uncertainties materially affecting liquidity, capital resources or results of operations.

Examples of existing or impending legislation that directly or indirectly affects the way in which GHG emissions are monitored and measured  
\- The USA Mandatory Reporting of Greenhouse Gases Rule  
Administered by the US Environment Protection Agency, made under the Clean Air Act section 307(d) and amending the Code of Federal Regulations (esp 40 CFR Part 98).  
- The Australian National Greenhouse and Energy Reporting System  
Administered by the Australian Climate Change Regulatory Authority, made under the National Greenhouse and Energy Reporting Act 2007 & associated reporting and determination regulations.  
\- The Japanese Mandatory Greenhouse Gas Accounting and Reporting System  
Administered by the Japanese Ministry of the Environment, based on Article 21 of Act No 117 of 1998 – Act on Promotion of Global Warming Countermeasures.  
\- UK DEFRA Guidance on how to measure your greenhouse gas emissions  
The guidance was issued in September 2009 under requirements in the Climate Change Act 2008. In December 2010, the Secretary of State must conduct a review to evaluate the contribution that reporting on GHG emissions is making to the achievement of the UK Government's climate change objectives. The results of the review will inform the UK Government's decision-making on whether and when to introduce mandatory reporting of GHG emissions.  
\- The UK Carbon Reduction Commitment Energy Efficiency Scheme  
Introduced in April 2010, the scheme requires participants to buy allowances based on their expected energy use. GHG emissions associated with energy use must be reported to the scheme administrator in July each year at which point participants determine whether to cancel or hold allocates equal to their emissions in that year.  
\- The European Emissions Trading Scheme In 2007  
The European Commission established guidelines for monitoring and reporting GHG emissions pursuant to the EU Emissions Trading Scheme.

#### CDP's Lessons from Ten Years of Climate Disclosure

Nigel Topping, Chief Innovation Officer

Carbon Disclosure Project

How to use the authority of 534 investors and $64 trillion, the experience of 3,000 companies, and the power of mass collaboration to accelerate progress on integrated reporting.
Introduction

The global system of capitalism, provided with appropriate information on hidden risks, is capable of a rapid transformation which will generate the solutions to such challenges as climate change, water stress, deforestation, systemic hunger and poverty. I am talking about the global system in the same sense that Anatole Kaletsky does in his recent book _Capitalism 4.0_ , that is as the whole system of businesses, regulators and democratic civil society, seen as a complex adaptive system which evolves over time. If my assertion is true, the key to transformational change becomes the definition of appropriate non-financial reporting standards and their effective enforcement. How will such information lead to transformational change? In three ways. Firstly it will help managers and shareholders understand true costs of items currently not internalised in their economic models—if you don't know the risk of flooding in a potential location for a new plant, you will make a bad decision. Secondly, it will help regulators understand these same issues and lead them to regulate in one way or another to internalise these costs into the economic system—when regulators realise the scale of the burden on taxpayers, they are more likely to introduce laws which place the burden on business to eliminate problems at source. And thirdly consumers, both BtoB and BtoC will start factoring such data into their procurement decisions. Money talks and, whether it is the trillions of dollars of global investment capital or the billions of consumer purchasing decisions each year, the transformative power is hard to deny.

CDP was delighted to be involved in the HBS Workshop on Integrated Reporting in October 2010. Given the scale of the systemic problems faced by humanity today and the fact that they are still getting worse, the rapid creation of a standardised framework for non-financial disclosure is to be welcomed. It is a daunting but crucial challenge. At CDP we have 10 years of experience of this kind of work in the domain of climate change. We offer our experience of both successes and setbacks to the broad community of experts from all sectors who have come together to take up the challenge.

In this article I explain briefly the work of the Carbon Disclosure Project and its sister organization, the Climate Disclosure Standards Board, before outlining some of the lessons learned and traps to avoid in the creation of standards and systems for non-financial disclosure. I end with some thoughts on how to accelerate the creation and adoption at scale of standards for integrated reporting of non-financial data.

The Carbon Disclosure Project

The Carbon Disclosure Project (CDP) is an independent not-for-profit organization, holding the largest database of primary corporate climate change information in the world. CDP was launched in 2000 and operates the only global climate change reporting system. In 2010, CDP worked on behalf of 534 institutional investors with $64 trillion of assets under management. Over 3,000 organizations in some 60 countries around the world measured and disclosed their greenhouse gas emissions and climate change strategies through CDP. Also in 2010, in response to investor and corporate interest, CDP launched the CDP Water Disclosure program. CDP anticipates that this initiative will follow the lead of the core work on climate change and help to accelerate the creation and adoption of meaningful standards on water disclosure.

Data collected by CDP is used by institutional investors such as Goldman Sachs, Morgan Stanley, Deutsche Bank and Schroders, asset owners such as CalPERS and CalSTRS and by many of the leading data and index providers, such as Bloomberg, FTSE, Markit, Trucost and EIRIS. For more information see http://www.cdproject.net.

The Climate Disclosure Standards Board

The Climate Disclosure Standards Board (CDSB) is an international organization committed to the integration of climate change-related information into mainstream corporate reporting. It was launched by WEF at Davos in 2007. CDP acts as the secretariat, coordinating the work of the Technical Working Group which includes expert representatives from the major accounting firms, national and international accounting bodies. In support of its objectives, CDSB has developed a Climate Change Reporting Framework (published October 2010) by drawing on the work of its Board members, on international developments in climate change regulation and on the work of the International Accounting Standards Board.

By drawing on these sources, as well as on ten years of good practice in climate change-related disclosure to CDP by thousands of companies worldwide, CDSB's Framework prescribes reporting requirements that are as consistent as possible with the most common features of voluntary and mandatory climate change disclosure and with the established financial reporting model. For more information see http://www.cdsb-global.org.

Lessons learned

Lesson 1 - It's not just about numbers

What gets measured gets managed. We all know this is true—in the case of climate change, what gets measured is GHG emissions. The first time a company measures its emissions it always learns. Sometimes it is surprised to find that an unexpected part of its business is a major source of emissions—such as refrigerators at Walmart or asthma inhaler gas propellants at GSK. In many sectors companies have only realized the extent of climate change risks and opportunities up and down the value chain after completing a study of emissions. This is important information to ensure best ROI for emissions reduction activities.

However, qualitative data plays an important part in non-financial disclosure for two main reasons. Firstly it is what investors want—at CDP we collect data on risks and opportunities, governance and strategy as well as emissions numbers. Investors have consistently told us how they value this information to get a richer picture of company activities, as a proxy for understanding quality of management and to check the sophistication of disclosure. For example if a company discloses a certain risk associated with climate change but then fails to address this risk in its strategy alarm bells should ring. The second reason is that qualitative questions must be addressed by senior managers—they cannot be delegated to the young green engineer. This leads to rich learning conversation around the boardroom table as executives get to grips with the range of issues climate change represents to their business. They soon learn that there are not only cost implications because of fiscal regulations regarding emissions but a whole host of product regulations, physical issues in the supply chain and reputational banana skins to avoid. Once leaders understand the risk landscape, they are well placed to figure out how to turn competitors' risks into their own opportunities, a growing trend we see as disclosures mature over the years.

Lesson 2 - It's complicated so – Focus!

At CDP we have benefited tremendously from sticking to one topic only—climate change. This helps drive quality and scale, ensuring the whole team are working towards one goal. We have recently extended our work into Water Disclosure but only after a long internal process to ensure we were not diluting our mission or embarking on something that others were better placed to undertake. Of course the victim of focus is breadth—any initiatives to create broader ESG reporting standards will need to carefully consider how to manage these two dimensions. The IIRC's plans to create an overarching framework in a very short time are welcome—key to their success will be to limit the level of detail and to specify how more focused standards will slot into the broad architecture

Lesson 3 - It's complicated – Maintain low barriers to learning

In order to transform whole economies, high standards of non-financial disclosure will soon have to be mandatory. This should not be taken to imply that rapid introduction of sophisticated transparency regimes is to be welcomed however. This is complicated stuff—even large multi-national corporations take time to learn and to embed new practices across hundreds of sites with different languages and cultures. At CDP we have found that a low barrier to entry is extremely helpful in getting people to take the first step on their journey. We often hear first time disclosers saying "now that I know investors are taking this seriously I will put in place resources and systems to be able to disclose much more thoroughly next year." People generally want to make a good job of disclosure. If the bar is set too high to start they are often reluctant to begin.

Lesson 4 - Keep score – The C-suite is competitive

Bill Clinton once described the power of CDP's work by saying "you've got to keep score." At one level this score-keeping is accomplished by the reporting of quantitative indicators but given the above remarks on the importance of qualitative data, in practice we have found two more powerful ways to keep score. Firstly CDP has developed Carbon Disclosure and Carbon Performance scores with our global advisor PwC helping ensure an accountant's rigorous eye was on the process. We publish both scores annually and find that C-level execs are particularly keen to know where they stand. Bragging rights are reserved for those top-performing companies who are listed in our Carbon Disclosure Leadership Index and Carbon Performance Leadership Index each year. Individual execs sometimes have part of their annual bonus linked to an improvement in these scores. A more powerful way of keeping score is to incorporate this data into investable indices—in the last year CDP's partners Markit and FTSE have launched new climate change indices based on the data disclosed to investors via CDP. In both cases high performers are over-weighted against their sector peers. This is a good way of catching CFO attention—a direct link between non-financial disclosure and share price!

Lesson 5 - It's complicated so - Collaborate

Non-financial disclosure is very complicated. It requires deep understanding of various investment processes, the reality of how corporations work in the world, complex scientific and technical areas of knowledge, the standards and regulations setting processes and the ecosystem of technology and knowledge service providers in the data value chain. At CDP we took a decision a long time ago to concentrate on just one piece of this puzzle and to collaborate with experts in all other areas. Running the global climate change disclosure machine in 25 countries and partnering in all the other areas listed keeps our staff very busy. This is a corollary of focus of course but there are two other reasons for adopting a collaborative style. Firstly, as a mission driven not-for-profit, we don't need to maximize revenue. This allows us to focus on impact. It is harder for a private sector organization to remember that revenue is a result of pursuing the mission; it is not the mission itself. Secondly, extending the mission can lead to competition with organizations that can do more to help your mission as partners. We decided that if we extended our services into training for example, that we would be competing with organizations who a) have more expertise than us and b) are our natural partners in the value chain from data to decision.

Lesson 6 - Tell people where you are going

The field of non-financial disclosure is rapidly changing. As a leading organization in the area of climate change disclosure, regulators, investors and corporations naturally look to us for expert guidance on future developments. Historically we have often been so involved in running a growing disclosure machine that we have spent little time communicating future direction. Recently we have realized just how much demand there is for a "roadmap" and how powerful such a tool could be for accelerating change. This will allow early adopters to plan innovation with less risk and encourage the service sector to develop new offerings earlier. In Q1 2011 we will publish our first such roadmap. See below for more ideas on how we are approaching this.

Lesson 7 - Use the accountants

For years CDP has developed a framework for climate disclosure by defining the data architecture of our annual information request. We have done this by consulting annually with the many investors and corporations who use our platform. As we move towards regulatory disclosure, this consultative process needs tightening up to reflect the language, standards and rigor of the accountancy profession. This is where the Climate Disclosure Standards Board comes in. Their recently published Climate Change Reporting Framework builds on the work of the GHG Protocol in emissions reporting and international financial reporting standards for risk, governance and strategy disclosure to create a rigorous disclosure framework which companies can follow. Only the accountancy profession has the expertise to create such frameworks. Only through the application of such rigor will the worlds' investors, stock exchanges and governments be able to have faith that the capital markets are being adequately served with their non-financial information needs.

Lesson 8 - Ensure sustainable resourcing

The first priority of organizational sustainability has to be an economic one—without sufficient resources no mission can be adequately pursued whether it is profit, regulation or public good. Hence companies have pricing policies, governments have tax regimes and NGOs survive somehow! As much of the work of standards creation is performed by not-for-profit organizations this issue needs to be addressed early on in the building of new organizations. At CDP we started with a purely philanthropic funding base but have gradually diversified to include fee-for-service, sponsorship, membership and licensing streams of revenue. This doesn't change our charitable status but it has allowed us to extend our impact faster than if we had maintained a philanthropic-only model. Most of the organizations involved in setting global non-financial reporting standards are small and under-resourced. If the provision of adequate resources to carry out this complex work is not addressed, lead-times from concept to impact will be significantly extended.

Traps to avoid

Trap 1 – Too many masters

Trying to be all things to all men can be exhausting and is very difficult to manage. Disclosure requirements for investors may well be very different from those for customers, employees or local community. I believe that a clear focus on the audience of a particular disclosure statement will be helpful in many ways. It will reduce the number of parties who need to be involved in consultation, reduce the time to create a standard, reduce the complexity of any such standard and make any such disclosure much easier to interpret. For integrated non-financial reporting to investors this is already taken care of by definition but work to create broader standards for multi stakeholder reporting should be wary of this trap.

Trap 2 - Clumsy governance

The failure of the UNFCCC to produce substantive regulatory results at Copenhagen can be seen as one due to excessive governance. Too many bodies with too broad a remit and vague consensus decision-making mechanisms is an unlikely recipe for success. As an issue becomes more political such structural deficiencies are exacerbated so that a policy debate on climate change somehow morphs into one on biodiversity, water, scientific due process, global trade and much more. As one esteemed attendee commented to me in Copenhagen, "we've over-cooked it." Non-financial disclosure standards need to be created in a compressed timescale, adopted broadly and then iterated rapidly in the light of experience. If we are to avoid a 30 year project to create integrated standards, I believe that a simple governance structure along the following lines will be most effective;  
\- Relatively small governance boards with fair representation of the main stakeholder groups.  
\- Much broader "Ambassadorial Boards" of the great and the good, influencers with access to institutional power who can advocate for engagement and adoption of new standards as they emerge.  
\- Focused expert Technical Working Groups staffed by lean secretariats and leading practitioners from around the world who can actually create the standards.  
\- Broad advisory/consultative groups, open to all interested stakeholders from those sectors directly implicated by the standards.

Trap 3 – Institutional fragmentation

Everyone gets confused when multiple approaches to the same problem vie for attention. This potentially dilutes focus, credibility and impact of all initiatives. For this reason CDP has always referred disclosing companies to the GHG Protocol as the de facto starting point for corporate emissions reporting. Also CDP has always worked closely with the GRI to explain to stakeholders how the two organizations' information requests complement each other. When CDP started its water disclosure work, it referred disclosing companies to the GRI metrics as well as broader water disclosure issues. Early research had led us to believe that other metrics might better serve the investor community but a desire to avoid confusing fragmentation let us to decide to use the well know and supported GRI metrics at least in the early phases of the project before CDP, GRI and others are able to collaborate on next generation metrics.

Trap 4 – In-fighting amongst the experts

As far as possible stakeholders in the standards setting world should collaborate early to agree on roles. Such organizations often compete for the same small funding pot which can lead to competition for resources which distracts from mission and portrays a poor image. To avoid such a trap when CDP was considering starting up a water disclosure initiative, we convened a joint meeting with UNEP, GRI and the UN CEO Water Mandate, inviting the major bodies and the leading thinkers involved in related work to a workshop so that we could map out the landscape and ensure as far as possible that our various initiatives were complementary. This helped build trust and avoid conflict.

Trap 5 - Quality v speed 1 – The Betamax trap

There are two possible traps to fall into when trying to establish new disclosure standards in a hurry. The first is a risk of moving too fast—that a superficial standard which does not truly meet the needs of investors might be adopted in a hurry with no mechanism to upgrade as better standards are developed. This could lead to weak regulation and a false sense of accomplishment. For example, we believe that CDSB's Climate Change Reporting Framework is an appropriate framework to meet investors' needs regarding climate change. If a government or stock exchange were to mandate emissions reporting alone and on that basis it were to communicate "mission accomplished" on climate change disclosure, the business and regulatory community might relax but the investors' needs would not be best served.

Trap 6 - Quality v speed 2 – Take the evolutionary route to perfection

The second such risk is of moving too slowly—for example, by waiting to produce the perfect global, holistic, integrated reporting standard before starting to implement. All such standards are likely to be modular and will necessarily evolve over time. For this reason a phased and iterative approach along the following lines should be adopted.  
\- Define top level framework  
\- Clarify mechanism for module creation and adoption  
\- Publish timetable and responsibilities for module creation  
\- Implement modules when ready (CCRF now for instance)  
\- Iterate modules based on stakeholder experience at regular intervals

Routes to scale

The above thoughts are based on CDP's learning to date, in ten years engaging with investors, corporations, governments and standard setters on the issue of corporate disclosure of climate change data to investors. As we look to the future, the major challenges facing CDP and the broader integrated reporting community are how to scale up massively and how to achieve the necessary levels of rigor in disclosed data. I believe the two key capabilities which all those involved need to develop are the ability to collaborate on a massive scale and the ability to draw maps showing the way into the future. Below are some early thoughts on how CDP is thinking about these two issues which are easily extensible to many other organizations/initiatives to do with integrated reporting.

Mass collaboration

CDP has always been a collaborative organization but as we progress on our mission, the complexity of our collaborative landscape is growing. Figure 1 represents a simplified view of how we now see this landscape which has developed over time. At its simplest, CDP provides an intermediary service between listed corporations and institutional investors, indicated by the broad arrow. Our mission points to these two key stakeholder groups and our early operating model simply provided this service. In order to carry this out we had to learn how to collaborate on a large scale to cope with the geographical reach of our first global disclosure request (we started with the global 500 largest listed companies in 2002) and to attain the scale of participation needed. Thus in our first phase of collaboration we learned how to engage with investors to help them understand the ways in which climate change affected them so that they would lend their name and authority to the information request. We collaborated with corporations to the extent needed to help them understand the reasons why investors were asking for this information and we collaborated with partner NGOs around the world with something like a franchise model which allowed us to grow quickly to the point where today we have operations in 25 countries.

As well as these two stakeholder groups, CDP now sees and works with four other broad categories shown in Figure 1.

1. Standards collaborators

These are the organizations we work with to adopt, link, evolve or co-create disclosure standards. Since CDP's inception we have pointed corporations to the GHG Protocol, itself the result of a collaboration between WRI and WBCSD. Recently we have contributed to the GHG Protocol team's work on corporate supply chain and product emissions reporting standards as a member of the steering group and contributor to technical working groups. We work with the GRI to help corporations understand how our two disclosure protocols support each other. Mass collaboration is most apparent in the standards work of the CDSB –the institutions who are involved in one way or another in this work include; WEF, IETA, The Climate Registry, Ceres, UNCTAD, OECD, IFAC, IASB, WRI, WBCSD, The Climate Group, AICPA, CICA, JICPA, DEFRA, ICAEW and many more!

2. Investor Service Providers

As investors have become more interested in climate change data disclosed via CDP, so we have developed closer working relationships with professional services providers. We work with many of the firms providing data services such as Bloomberg, Trucost and RiskMetrics. Recently we have seen an increase in the levels of interest in using standardized disclosure data in investable indices which has led to partnerships with Markit and FTSE for example. Finally, as stock exchanges around the world start to take an interest in sustainability disclosure, we expect to partner with the leading exchanges by providing data for their own indices either directly or via one of our data partners.

3. Corporate service providers

As investors make more use of disclosure data the importance of getting disclosure right increases. CDP has three partnership programs in place in this area. Firstly we started partnering with the software vendors who are providing carbon accounting solutions to large corporations. In the next twelve months we will be working with our major software partners SAP, IHS, PE International, CA and Credit360 to develop the API which will allow automated upload of disclosure data from these vendor applications. Over time we expect all disclosure to happen like this. Next year we will start to work with the broader community of technology experts to create the XBRL taxonomy for climate disclosure which will allow the machine-to-machine communication essential for the early creation of a network effect within this ecosystem. Our next partnership program in this area is with the verification and assurance service providers as we work to increase the level of third party assurance. And finally we have just started a program partnering with the consultants who help companies disclose as part of their climate change services. With these three programs we expect to grow the scale of disclosure, improve the quality of data and to help accelerate the development of the service sector.

4. Regulators and "enforcers"

This group is becoming more and more important for CDP as we continue to push the necessary development from voluntary to mandatory disclosure. Historically we have often provided input to governments considering regulation. This will continue but additional players are becoming active tin this area. For example, the UNPRI has become an important partner for CDP—through their clearing house mechanism, more active investors can engage with specific companies to challenge them to disclose if they haven't or to set targets if they are missing. Another interesting group of enforcers is the world's stock exchanges. Depending on jurisdiction they have varying powers to determine listing criteria and we expect this to be an important area for partnering. As well as existing sustainability reporting requirements in Johannesburg, the recent consultation from the Singapore Stock Exchange on sustainability reporting is a good indicator of things to come.

5. Core partners

Finally, CDP relies on a small group of core global partners for expertise and technology support. These include PwC, Bank of America, SAP, Microsoft and Accenture who all provide significant input in various ways according to their expertise. As well as these global partners, we have further partners at a country or program level. These partners work closely with CDP to develop the expertise, technology and capabilities to enable us to deliver a global disclosure program at scale. Without their support none of our work would be possible. For example, a recent collaboration with SAP now allows CDP stakeholders to do sophisticated benchmarking by creating bespoke reports based on the entire set of CDP data.

As you can see from this quick overview, I am not joking when I talk about mass collaboration! One caveat though—collaboration requires resources. We are learning to temper our enthusiasm for partnerships with a more strategic approach to planning—in particular ensuring that all partnerships align with core mission, do not violate any of our operating principles and, most importantly, that we are able to make the necessary investment to ensure success.

Maps to the future

As mentioned above, the idea of such maps is to help all stakeholders understand the direction of travel, thus allowing them to prepare appropriately. This is relatively new development at CDP and one which we are finding really helpful in communicating both internally and with partners. Partners are able to give us feedback from their perspective so that over time these roadmaps will be co-developed by CDP's broader ecosystem of stakeholders and partners.

Figure 2 shows a simple example of such a map to help plot the journey to the highest quality of disclosure program—one that is mandated by regulation and that requires companies to disclose according to a rigorous accounting standard and to have disclosures assured by a third party.

This matrix could be used by an individual company to plan their improvements or by a stock exchange regulator to communicate the timetable for the introduction of mandatory disclosure.

The first example (a-c) shows an ambitious stock exchange seeking to position itself as the leading "Climate Resilient Exchange" by introducing a listing requirement to disclose according to CCRF and have this disclosure assured by 2016 with two intermediary steps, starting with an encouragement to disclose according to CCRF in 2012. This trajectory makes it clear to listed companies what they will be expected to do by 2016 and gives them plenty of time to prepare. The stock exchange would likely use 2011 to run extensive awareness training for listed companies and the service sector would plan R+D and marketing activities with a good understanding of expected market for their services in 2016 and likelihood of early adoption of some beforehand. A-F shows an individual company planning to meet the exchange requirement a year early—it shows more detailed intermediary steps allowing the company to measure progress and to phase learning and investment in software, internal and external capabilities.

Conclusions

In ten years CDP has learned a lot about how to run a global non-financial disclosure program. This has been a combination of accident, good advice, clear strategy, good luck and quickly adjusting after mistakes. At every stage partners have been key. Although to those who work at CDP, climate change disclosure can sometimes become the whole world, we have worked hard to constantly listen to the experiences of partners to ensure our work retains its relevance.

I haven't really addressed the issue of integration in the above—I fear this is too complicated to address up front and expect it to happen as a result of getting "modules" of non-financial disclosure right and the use of XBRL tagging to allow creative mash-ups of data to serve the needs of different stakeholder groups.

I am excited by the formation of the IIRC, by the broader moves towards integrated reporting and by the level of interest and expertise brought into one room at the HBS One Report workshop in October 2010. There is a palpable sense of the imminent transition to a more intelligently designed basis of corporate reporting.

The timetable set out by the IIRC is aggressive—this is a good thing provided governance arrangements are agile and the top-level framework focuses on structure and principle, rather than getting lost in detail. Climate change disclosure has come further than any other area of ESG—let's work together to build on that to make sure we all benefit from the lessons learned and avoid the traps we have seen along the way.

Nigel Topping spent nearly 20 years in industry, initially as a lean manufacturing and process redesign consultant before running plants and businesses. Before moving to CDP he was a member of the MBO team at a global component manufacturer where he held positions of VP Operations and CPO. At CDP Nigel has been the driving force behind the creation of new disclosure programs in the areas of Supply Chain, Public Procurement, Water and Cities. Nigel leads CDPs major technology partnerships and is always looking for new ways to make a big difference.

Appendix A- Definition of terms used in Figure 2

Note this is a generic table but for climate change disclosure, terms in table could take on the following meaning

Level of rigor

None - No disclosure

Simple framework - Disclose scope 1 and 2 emissions and material risks

Structured framework - Disclose via CDP's annual information request

Rigorous framework - Disclose according to CDSB's CCRF (note this can be done via CDP)

Assurance - Have your CCRF disclosure assured

Level of enforcement

None - No stakeholder expectation (eg small private sector company not expected to disclose by investors, regulators or customers

Voluntary Disclosure - Voluntary program exists but not encouraged (eg small listed company not yet requested via CDP

Encouraged Disclosure - Stakeholders encourage disclosure (eg 534 investors via CDP)

Disclosure data in index - Disclosure data is built into an index which affects reputation and/or directly influences share price

Required disclosure - Disclosure has become a compliance issue

# PART XI

Final Reflections

#### Integrated Reporting and the MBA Education

Daniela Saltzman

Harvard Business School MBA Class of 2011

Education in business leadership is constantly evolving. Theories are developed, taught, implemented, and refined, linking business school classrooms to the realities of a changing world. Integrated reporting—the combined measurement of an organization's performance through both financial and environmental, social, and governance (ESG) metrics—is a critical element of sustainable capitalism. Business schools, take note.

Sustainable capitalism, a term that entered my lexicon while I was a Summer Associate at Generation Investment Management this year, "challenges us to generate financial return in a long-term and responsible manner (1)" by integrating ESG factors "into strategy, the measurement of outputs, and the assessment of both risks and opportunities (2)." From the recent financial crisis to ongoing environmental disasters, it is clear that businesses need to change the way they view their long-term positioning and impact. Specifically, reporting ESG factors, in addition to traditional financial metrics, is an important component of this effort as it provides deeper insight into the long-term viability of an organization.

As it currently stands in its nascent stages, integrated reporting is messy, ambiguous, and challenging. Discerning which ESG factors are most relevant, accurately measuring these metrics, and integrating them into traditional financial reporting practices requires significant additional effort, coordination, and investment by management teams. Initiating and maintaining an integrated report might require drastic changes within organizations, forcing managers and executives to cross previously siloed areas and adopt new performance measurements. As demonstrated by early adopters, overcoming the challenges of producing an integrated report demands resourcefulness and creativity by leaders as they depart from common practices and push towards a new method of communicating company performance.

The skills needed to successfully advance these efforts must be cultivated in business schools, where leadership skills are developed for many individuals. MBA programs need to adopt a broader view on leadership by embedding the topic of sustainability into the curriculum. Incorporating this topic into the classroom should be cross-disciplinary, replicating the actual practice of integrated reporting. This could take shape in a variety of ways. An accounting professor could teach reporting of ESG metrics in conjunction with traditional financial analysis. In finance, students could study opportunities and threats arising from ESG issues and quantify their potential impact on a company's valuation. Courses on operations could add sustainability issues to the study of efficient supply chain management. Political economy classes could include modules on individuals' collective responsibility as global citizens and ways in which businesses should partner with governments to advance sustainability.

Students will become more effective champions of sustainability if they understand its application within each function. There are key technical skills necessary to produce an integrated report, but of paramount importance is a redefinition of _business_ _leadership_ that looks beyond short-term financial results. After all, real progress towards a sustainable future will require innovation by bold and imaginative thinkers who accept that shareholder returns are impacted not just by quarterly financial results, but by a broader understanding of a company's positioning and health.

The convergence of functional practice areas and sustainability remains on the horizon for most business schools. Harvard Business School continues to make strides in this direction. In administrative operations, Dean Nitin Nohria has stated his commitment to adopt an integrated report for the school's annual report. In the MBA curriculum, professors are increasingly including cases and offering courses that link ESG issues with conventional business analysis.

But we have only begun. Business schools can play a critical role in shaping our world and can have a profound impact on creating a more sustainable future. As academic institutions often have latitude for experimentation, I urge business schools to assimilate these concepts in their operations and classrooms, thereby exemplifying the same innovation and boldness they aspire to instill in the next generation of leaders.

Daniela Saltzman is currently a second-year MBA student at Harvard Business School. Prior to business school, Daniela spent two years at Goldman Sachs in the Investment Banking Legal Group in New York. Most recently, she was a summer associate at Generation Investment Management in London, where she wrote the business plan to launch the Generation Foundation. Ms. Saltzman received her B.A. from Brown University in the study of public and private sector organizations. As an undergraduate student, she helped develop and teach a course on Social Entrepreneurship, leading to her senior honors thesis on corporate social responsibility on Wall Street.

Endnote: (1) Al Gore and David Blood, "Toward Sustainable Capitalism," _The Wall Street Journal_ , June 24 2010.  
(2) Ibid.

#### A Proposed Research Agenda on Integrated Reporting

Beiting Cheng

The first annual integrated reporting workshop was officially entitled "Workshop on Integrated Reporting: Frameworks and Action Plan." The purpose was to bring together a group of experts with diverse backgrounds, all of whom are devoted to promoting sustainability, to share thoughts and generate ideas on spreading the practice of integrated reporting.

During the two-day workshop, participants identified potential obstacles to adoption and support in companies, in the investors' community, etc. As a doctoral student who seeks to conduct academic research to answer practitioners' questions, one of my takeaways is people's concern that a large amount of relevant data, still growing at an explosive pace, are sitting somewhere with few people analyzing them or motivating a good theory to enhance our understanding of how ESG (environmental, social and governance) information relates to the financial performance and sustainability of corporations. Without a careful examination of these problems, it is hard to guide companies to report the most relevant metrics and ill-grounded to ask for more responsible investing behavior.

Pulling together the resources available today, I would like to outline some research ideas that address the fundamental question: why ESG information, sustainability reporting and integrated reporting matter. My outline focuses on laying out a stepwise research agenda instead of doing comprehensive accounting or reporting literature review.

The first step is for us to understand the status quo of the use of ESG data. Potential cooperation with data vendors, such as Bloomberg and Thomson Reuters, would allow researchers to count and analyze online hits of each ESG-related data field by different professions (buy-side or sell-side analysts, portfolio managers, etc.), from different countries and for different asset classes over time. This descriptive study will give us the big picture of whether and how the investor community uses ESG information.

And in dealing with the problem, we also need to broaden our definition of the "users" of financial and nonfinancial information. Accounting literature has traditionally focused on stockholders alone as the information users outside the firm and we make inference about how investors use information from stock price changes in response to certain news or number release. This is understandable in a time when we could not observe people's decision making process directly. Although this limitation remains a challenge today, advanced technology could at least allow us to conduct a more direct study on user behavior.

It is easy now to track the entire history of each visit to a website. This allows the firms to analyze what site visitors actually read and what they care about, by looking at how long the users stay on a particular page, what words they search for, what comments they leave and when during browsing the site they leave the comments. It would be even more informative if each visitor is asked to identify himself/herself as a regulator, scholar, investor, or analyst, etc., upon first visiting the website, which a few companies have already started doing. Then researchers can be able to work out a unique browsing pattern and information set for each group of information users.

It is true that investors in general acquire company information from data vendors and newspapers, but corporate websites capture a more diverse group of stakeholders other than professional investors, such as employees, consumers and NGOs. Several trends may also bring about more online users. First, the emergence of integrated reporting motivates the firms adopting this new framework to make their annual reports more interactive, so people will prefer reading an interesting web report instead of downloading a non-responsive pdf file. Integrated reporting plays a crucial role here in making the online reading of annual reports a more valuable and informative experience than just looking at a set of key metrics from databases or newspapers. Second, with the increasing popularity of cloud computing, I see in the future that documents will be produced, processed and read at online platforms, leaving every change, view and comment trackable, thus generating a huge amount of data that contain valuable information to researchers.

From the analysis of such data, we can achieve at least two objectives. First, we will be able to study directly what information matters to the users, and the findings can in turn enlighten the companies about the best way to present such information. Second, if we are able to identify website visitors or data vendor clients by their user group, we can produce a unique browsing pattern and information set for each group, based on which a firm could customize and have distinctive versions of the annual report ready for different stakeholders.

The second step of my research agenda is to establish the link between nonfinancial information and financial information. Proponents for integrated reporting or sustainability reporting believe that more sustainable firms generate higher returns to investors. And academics need to go further to explore the underlying mechanisms that give the advantages (or disadvantages) to firms that score high on sustainability. Are more sustainable firms less financially constrained? Do they acquire capital at a lower cost and allocate capital more efficiently? Does better disclosure on ESG information help them manage risk better and also reduce the risk that investors perceive about them?

Answers to these questions not only tell companies why they should (or should not) devote time to certain ESG metrics, but also provide guidance to investors on how to incorporate ESG data in their portfolios. The difficulty lies in the heterogeneity of ESG practices and metrics across countries, sectors and industries, so cross-sectional comparison studies are required to study local, sectoral and issue-based differences, which can help investors, in particular socially responsible investors, refine their investing strategies. These socially responsible investors recognize that societal concerns are significant parts of investment decisions, and their success will signify the real value of corporate responsibility and offers another powerful incentive for companies to adopt better management and disclosure of ESG information.

So far, my proposed research centers around the value of ESG data, with no mention of integrated reporting yet, but this patience is essential because for integrated reporting, financial and nonfinancial information are two pillars, for which we have to develop a deep understanding first before studying the additional value brought by combining the two. Once we have that, the next step is to extract the "synergy" from "merging" the two sets of information.

Public firms usually issue separate reports on their financial performance (annual reports) and environmental, social, governance issues (Corporate Social Responsibility reports), which a lot of times tell inconsistent stories. More than simply putting the financial report and CSR report together, integrated reporting requires a variety of functions within a firm to coordinate closely, so the adoption and practice of integrated reporting is likely to foster change in corporate strategies and bring about improvement in reporting efficiency. It may also lead to structural governance changes that enhance other decision making processes. In order to identify and document such changes, field research is called for to make qualitative and quantitative analysis within firms that are undergoing the transition to integrated reporting.

In addition to field studies, South Africa, the first country to mandate integrated reporting for companies listed on its main stock exchange, provides a great setting for researchers to conduct large-sample cross-sectional research on what various integrated reports look like, then come up with a framework for what they _should_ look like, and identify which companies are more likely to produce better integrated reports as well as how investors respond to the change.

For proponents of integrated reporting, there is a further piece to consider regarding how effective different groups of stakeholders are in promoting the global adoption of integrated reporting. Customers' preference for products from more sustainable, more environmentally friendly companies can motivate companies to adjust to the customers' taste; firms tied to each other by their supply chains are likely to influence each other's reporting framework as well; shareholders have become more and more active in bringing about changes in the target companies; and countries like South Africa resort to regulation to mandate integrated reporting. Each of these action strategies has its pros and cons from the economic perspective and the implementation perspective, so careful studies of the influence of each strategy and the interaction of multiple strategies are prerequisites for an effective coordination among all stakeholders, which is key to take the world today to the next equilibrium of corporate reporting.

Therefore, scholars and researchers also have their roles in this move towards a better, healthier and more sustainable reporting landscape. I have laid out my brief thoughts on potential research projects that address what integrated reporting could bring us and what we want to achieve with it. The HBS workshop was a great success in bringing key practitioners together to brainstorm action plans, and I see it is also essential in the future to bring together scholars interested in the topic to share resources and exchange feedback, especially because this is a field that has attracted limited attention so far but is witnessing increasingly faster growth and greater impact.

Beiting Cheng is a second-year doctoral student in the Accounting and Management Unit at Harvard Business School. She graduated from Harvard College with an A.B. in philosophy in 2009. Her research interests are environmental and social performance of companies, corporate governance and stakeholder influence.

