Thinking ahead to a more responsible future
There is extensive literature on CSR, in both academic and business publications (Shutterstock/ Sorn340 Studio Images)
For much of history, business reporting has focused on financial reporting. For the past few decades, however, there has been a rising interest in sustainability reporting, often referred to as environmental, social and governance (ESG) reporting. That interest has grown substantially in recent years, punctuated by the formation of the International Sustainability Standards Board (ISSB) in 2021.
So far, much of the sustainability reporting that has been provided has varied widely among companies in terms of quality, content and reliability, including accusations of greenwashing. Generally, sustainability reports have been provided as separate, narrative-style reports with some key performance indicators included.
The audience for sustainability reporting, however, has been changing. Originally it was directed primarily to a range of corporate stakeholders, often in conformity with the guidance issued by the Global Reporting Initiative, which is still widely followed. More recently such reporting has been directed to shareholders as well as other stakeholders, primarily because of the direction taken by the ISSB. The advent of events such as extreme weather has convinced many investors that they need to be concerned about environmental impacts on the companies in which they invest as well as the impact of those companies on the environment.
The focus on reporting to shareholders led to the idea of integrated reporting, which involves bringing together financial and sustainability reporting in a single report. An Integrated Report is defined in the Integrated Reporting Framework as: “A concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation, preservation or erosion of value in the short, medium and long term.”
The key phrase here is “the creation, preservation or erosion of value.” The focus of value creation is defined in the Integrated Reporting Framework in relation to six types of capital that organizations employ to provide a foundation for their business: financial, manufactured, intellectual, human, social and relationship, and natural.
To clarify, financial capital is that represented by financial assets. Manufactured capital is represented by infrastructure, buildings, etc. Intellectual capital is the knowledge base of the organization. Human is the human resources. Social and relationship includes the relationships of the company with its stakeholders. And natural capital, of course, is represented by environmental elements, like land, water and air.
In integrated reporting, the success (or lack thereof) of the organization is measured by how it has added to or detracted from the value of these capitals. Clearly, therefore, the definition of success extends far beyond traditional financial measures.
A wide consensus has emerged that for an organization to take into account all the various capitals on an integrated basis, their thinking must become more integrated. In other words, decisions need to be made while including the impacts on financial, social, natural and all the other capitals together. An example would be embedding such thinking into procurement decisions; what are the principles that drive procurement decisions: cost, carbon footprint, governance, or something else?
Integrated thinking is introduced in the Integrated Reporting Framework and further explained in the “Integrated Thinking Principles” issued by the Value Reporting Foundation, now consolidated into the IFRS Foundation, a nonprofit that oversees financial reporting standard-setting. Full integrated thinking—in the sense of being incorporated into all the corporate operational and strategic decisions—is as a practical matter, a long-term goal. However, a measure of integrated thinking is necessary in order to properly develop an integrated report. A new mindset is needed.
The Integrated Thinking document sets out six principles of integrated thinking, categorized under:
- Purpose—the existence and unique contribution of the company to the needs of society and the environment.
- Governance—the role of those charged with governance in value creation.
- Culture—how corporate culture earns the trust of stakeholders and aligns with core values.
- Strategy—how organizational objectives are defined and met.
- Risks and opportunities—the impact of risks and opportunities on the business model.
- Performance—how to measure and communicate value creation.
Just as integrated reporting extends beyond financial reporting, integrated thinking extends beyond reporting to operational and strategic issues. That leads us into the field of Corporate Social Responsibility (CSR).
There is extensive literature on CSR, in both academic and business publications. Noteworthy are the writings of Peter Drucker’s Management (1974) and Archie B. Carroll’s article, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders” (1991). They placed an emphasis on what has been called strategic CSR, which means that CSR is incorporated within the corporate culture and strategy.
Yet, there is some confusion around whether there are differences between integrated thinking and CSR, and if there are, what those differences might be. Some say that integrated thinking is the same as CSR, or a form of it. There is some truth in the latter, since CSR exists in a wide range of activities, from using petty cash to buy Girl Guide Cookies, to corporate philanthropy, to developing broad ranging strategies that address all the various areas of interest or capitals. The broad range of CSR can easily embrace integrated thinking.
Nevertheless, there is much to be learned from examining the nature of strategic CSR in implementing integrated thinking.
According to David Chandler, in his book Strategic Corporate Social Responsibility, “In defining strategic CSR, five components are essential: (1) that firms incorporate a CSR perspective in their culture and strategic planning process, (2) that any actions taken are directly related to core operations, (3) that firms seek to understand and respond to the needs of their stakeholders, (4) that they aim to optimize value created, and (5) that they shift from a short-term perspective to managing relations with key stakeholders over the medium to long term.”
This analysis provides a good umbrella under which to develop an integrated thinking strategy, which can be viewed as a bridge to CSR, one having similar broad objectives but which is more specifically directed to the six capitals and designed primarily to provide a support for integrated reporting. But there are other benefits to adopting a CSR perspective, because it is based on the recognition of a responsibility for corporate behaviour as opposed to the more limited goal of providing effective integrated reports. Some, such as Larry Fink of BlackRock, say that a CSR mindset is actually more profitable. With the adoption of a CSR perspective, integrated thinking can still be developed, but is more likely to encompass the broad strategic and operational perspective that is needed for an effective result.