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The Bruce Column – You can only manage what you recognise

14 Mar 2011

There is only one thing which anyone needs to understand about the arguments over the place of sustainability in financial reporting.

And that is the sheer scale of what is currently left out of financial reporting. As one of the worlds' leading regulators said to me the other day: 'If you had to show the cost of carbon in the financial reporting then the arguments would be over'. In other words if the true costs and effects involved in sustainability issues could be seen in an entity's mainstream reporting all the arguments would evaporate. But the issues of sustainability have struggled to gain full acceptance. Partly this is because of the way it was associated in many people's minds with corporate social responsibility, another area which grew into something worthwhile but was seen as very separate from the central strands of reporting. And partly it is because long-term issues of risk tend not to receive the same attention from a board of directors as something which could bite them firmly on the nose before the next quarters' figures have to be released.

This is why the arguments have changed. At a high level it has to be seen in the context of the enormous crises around us and ahead of us: global financial crises, climate change and ecological overshoot. At an individual corporate level it has to be seen as meaning that companies cannot continue under a 'business as usual' approach. They need to make more with less and secure their supply chains for a sustainable future. And that, as well as positioning the organisation in the right place to strengthen its own sustainability, reduces costs. It is that link which has always been the hardest part to get across and it is that link that is the key to companies acting faster. When the Prince of Wales Accounting for Sustainability Project recently produced a short film to dramatise the issues it opened with a pair of hairy hippies at a music festival. 'How are we going to save the planet today', says one. 'Accountancy', says the other. The twist in the tale is then revealed. The hippies are being played by two of the stars of Dragon's Den, the UK television show in which budding young entrepreneurs pitch for investment in their business ideas. One of the stars, Theo Paphitis, then goes on to interview a series of well-known UK business figures: outgoing Chairman of UK retailer Marks & Spencer, Sir Stuart Rose; Justin King, Chief Executive of supermarket chain Sainsbury; and the ubiquitous symbol of UK enterprise, Sir Richard Branson, all extolling the efficiency and value that pursuing a sustainability agenda across their businesses had brought them. The message was a simple one: eco-warriors and businessmen face the same challenges and should be on the same side. Or as one of the hippies in the film concludes: 'Business people can now become the most effective eco-warriors'.

That might seem a bit of a wild concept compared to the sedentary image of financial reporting but the effectiveness of connecting sustainability reporting with the traditional financial reporting is gaining traction. For a year now the Johannesburg Stock Exchange, for example, has made it compulsory, under a comply or explain principle, that listed companies should produce an integrated report which shows how sustainability issues, social, governance and economic, and financial issues have impacted on strategy so that the user can understand how far the company can create and sustain value. The requirement is enforced for financial years starting on or after March 2010 so the early results should soon be with us.

That is one example. But it shows a direction. The traditional bolt-on corporate greenwash is deemed to be no longer acceptable. For a start it was always seen as separate. The fundamental point is that reporting should be connected. It is not so much that you can only manage what you can measure. It is more that you can only manage what you recognise. And this was the genesis of the Prince's Accounting for Sustainability Project, (A4S). This is how he described it at the Project's Forum at the end of last year. It was a global system for integrated reporting which would provide 'reporting that provides information about an organisation's financial, governance, social and environmental performance. Not, though, in disparate, disconnected sections, but in an integrated form, so that it reflects the way these elements work and interact in the real world. Financial considerations, corporate governance, and social and environmental concerns are all closely related and inter-dependent. And they all flow from the organisation's overall strategy'.

Or as the UK Chancellor of the Exchequer, George Osborne, put it at the same event: 'The work of A4S is so impressive precisely because it recognises and encourages the link between the pro-sustainability decisions of top management and their detailed financial and non-financial consequences within organisations'. And he promptly announced that from April this year he intended to implement sustainability reporting across Government with a mandatory requirement for all central government departments and the NHS to publish a sustainability report in their annual reports and accounts. These reports would include details of departments' carbon emissions, waste management and use of finite resources and would include, for example, data on direct and indirect greenhouse gas emissions, the absolute cost of waste disposal, data on water consumption, as well as the related financial information, like gross expenditure on greenhouse gas emissions, for example.

Meanwhile the A4S project has spread its wings. Last year it set up the International Integrated Reporting Committee in partnership with the Global Reporting Initiative, the International Federation of Accountants and the project's own Accounting Bodies Network along with other partners. In January it met in Beijing amidst great enthusiasm amongst the Chinese accounting profession. 'There was real engagement and support from the Chinese Government', says Paul Druckman, the IIRC working group Co-Chairman and Chairman of the Executive Board of the A4S project, 'and the Chinese accounting profession was really engaged and involved'. Building on this enthusiasm the next meeting will be in New York in mid-May. In the meantime the concepts need to be fleshed out.

The early days of the project established the need for connection as the catalyst for real change. This continues on the international stage. 'This reporting framework', as the IIRC puts it, 'creates a new form of annual reporting by showing how financial, environmental, social and governance matters are connected and can help to understand and assess the sustainability of business performance'.

'What we want to do as a first step is set out the key concepts of integrated reporting', says Jessica Fries, Director of the A4S project, 'what the components of an integrated reporting framework would be and a roadmap for further development'. All this will draw on the huge amount of discussions which are in the process of taking place. 'We will put out a discussion paper in the summer and building on the responses we receive we will put forward key proposals on integrated reporting and the rationale for it to the G20 meeting at the end of the year', she says. But this is only one step. 'The focus is on the G20 but it is not the be-all and end-all', says Paul Druckman. 'The aim of the G20 focus is to look for support in general. This will help to build momentum towards the goal of integrated reporting and empower those involved to act'. 'It is one step', Jessica Fries emphasises, 'but not the only one. We need a period of companies experimenting in this area and we need to draw upon the different experiences'.

Meanwhile, as the eco-warriors in the film suggested the pressures are coming from within business. Eventually a form of integrated reporting, connecting the financial and the non-financial, and revealing the underlying strategic pressures, will come about. Whether it will be via a practice statement from the International Accounting Standards Board similar to the forthcoming one on management commentary, or whether it will take the form of a 'comply or explain' requirement from stock exchanges around the world, or some other implementation entirely, is up in the air. For Alan Teixeira, Director of Technical Activities at the IASB and a member of the IIRC working group, it makes sense. 'Lots of people think it would fit with the management commentary practice statement', he says. 'It is all about the long-term investor and it is a longer term strategic direction for the IASB. If the G20 go with it they will look for a host and some may look to us. I think it is much more mainstream than many realise'.

What businesses are concerned about are the pressures they are under from issues which tended in the past not to rise as high as a board room agenda in priority. In the words of George Osborne at last December's event: 'The promotion of sustainability is a constant struggle against the forces of short-termism'. People in business are recognising that sustainability issues are all wrapped up with reputation and risk. These are business issues and not purely sustainability issues. There has been a dramatic change in attitude to energy efficiency and carbon management and the importance of sustainable buildings. Raw material prices are escalating. The reliability of supply chains has become a central part of business continuity. People are finally realising that competitive advantage and cost reduction are at the heart of these arguments, as they are with everything else.

Robert Bruce March 2011

Links: You can view the film referred to above and read the various speeches from the Prince's Accounting for Sustainability Project's Forum at www.accountingforsustainability.org and follow the latest progress of the International Integrated Reporting Committee at www.integratedreporting.org.

The author, as all good journalists should, has to declare an interest here. He has been involved in the Prince's Accounting For Sustainability Project almost from the outset as an early architect of the proposals. He was writer to the original report on Connected Reporting in 2007, subsequently was a member of the Project's Executive Board for several years and is now a member of the Project's communications committee.

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