Transparency is fast becoming the most important tool corporations can use. Not long ago, management determined what was relevant and stakeholders were notified on a need-to-know basis. Now the tables have turned and stakeholders have the ability to demand information of all types and if companies are not willing to provide it, those stakeholders now have the resources to discover (or in some cases, uncover) it for themselves.
Adding transparency to corporate reporting still seems to be a work in progress. As the SEC ruminates over IFRS and its impact on financial reporting, corporate sustainability and responsibility reporting is fast becoming one of the popular ways for companies to give stakeholders a snapshot of its social, environmental, risk, and governance performance.
The problem from a practical perspective is that it's difficult to consume all information in an efficient manner. That's where the idea of integrated reporting comes in. Simply, it combines the the traditional financial report along with the non-financial information presented in the corporate responsibility, social responsibilty or ESG report.
One Report, Integrated Reporting for a Sustainable Strategy is a book written by Robert G. Eccles, senior lecturer of Business Administration at Harvard University and Michael P. Krzus, a public policy and external affairs partner with Grant Thornton.
We had the pleasure of speaking with Mr Krzus recently about One Report, covering topics like what kind of data it consists of, how it will change corporate reporting, and what the future holds. This is part one of a two part interview. Check back for part two tomorrow.
Going Concern: How can you best summarize what integrated reporting is, how it will be different and how it will improve corporate reporting.
Michael Krzus: On it's face it's a very simple idea - the notion of an integrated report really involves the combination of the traditional financial or corporate report and combining it with corporate sustainability, responsibility or ESG report and combing them into a single package. However, that doesn't mean that companies will staple together two reports, each one about 150 pages long, that results in one report that's 300 pages long.
If you look at one of the companies we talk about in the book, United Technologies here in the U.S. and Danish company Novo Nordisk, each of their integrated reports perhaps have 115-120 pages and what both have a very robust website. Just because something may not be deemed material for the integrated report, there is still a lot of information that both of those companies, as well as others, present in very easy-to-navigate websites. So one of the things that we're seeing is that integrated reporting is really helping develop very advanced websites.
Similarly, I was working on a couple of presentations on the German chemical company BASF has a page on their website that will allow you to link to 200 different global social media outlets including the likes of Facebook and Twitter. So we're really starting to see that kind of engagement develop from companies that are embracing integrated reporting as well.
Companies are using the idea of an integrated report to better understand their own internal concepts of materiality and by engaging with their stakeholders and understanding what they think is material or what their material risk exposures are. It's a disservice to the broad stakeholder community that some mainstream analysts don't give consideration to some of the environmental or social risks that exist.
From the perspective of the socially responsible investor or perhaps a non-governmental organization that follows a very narrow or very critical mission, they may not understand the trade-offs that these company have made. We think that the idea of a single integrated report will help broaden the perspective and help them make an informed decision.
GC: Considering a traditional corporate responsibility report, how will the data change? Similarly, will the data change from the two separate reports combining into a single report?
MK: There are relationships between financial and non-financial performers and vice versa. Companies need to better explain what those relationships are.
One example is BMW. On one hand, water is a relatively small cost that goes into an automobile but in terms of water as a resource, it is an increasingly scarce resource in certain parts of the world. BMW has decided to make huge investments in reusing water and they actually have a plant in Austria that doesn't bring fresh water to the plant, they just continually reuse it. The benefit, as it turns out, is because of their focus and because they're a few steps ahead of other automobile manufacturers, they've got a cost advantage. Making that kind of discussion clear, it's not just about cutting CO2 emissions, but also process improvements that enable companies to produce more at a lesser cost.
Read more at Going Concern.