New Guidelines to Help Companies Report on Sustainability Issues

Photographer: Michelly Rall/Getty Images

An exhibit by Greenpeace, featuring alternative energy resources, outside the UN's 2011 Climate Change Conference in Durban, South Africa. Close

An exhibit by Greenpeace, featuring alternative energy resources, outside the UN's 2011... Read More

Photographer: Michelly Rall/Getty Images

An exhibit by Greenpeace, featuring alternative energy resources, outside the UN's 2011 Climate Change Conference in Durban, South Africa.

Sustainability initiatives assuage the conscience of executives and honor the appeals of NGOs. It's no wonder that feel-good business improvements are plentiful in most large companies.

The trouble is, as these programs mature, managers are finding that the easiest projects have already been identified. What's more, first-generation initiatives might not address unsustainable practices at the core of a business. A financial institution can reduce its carbon emissions by renting space in a green building, for example, or encourage employees to recycle, or compost cafeteria leftovers, but it's all still irrelevant to the managing market risk faced by investors.

Improving performance on so-called non-financial metrics (think environmental and social issues) increasingly involves tradeoffs to financial performance, sometimes very large ones. In a new Harvard Business Review "Big Idea" essay published yesterday, we argue that, however difficult, it’s possible to simultaneously improve all-around performance. We lay out a four-step process in the article.

Institutional help is on the way for executives struggling with how environmental, social, and governance (ESG) risks and opportunities apply to their companies. In fact, yesterday was a very exciting day in the world of corporate reporting (though we recognize that such a thing might strike non-specialists as an oxymoron).

First, companies will soon have available a kind of paint-by-numbers framework to help them produce reports that enmesh financial and non-financial performance metrics. A draft of the framework was released yesterday by the International Integrated Reporting Council (IIRC), which is a coalition of companies, investors, accountants and NGOs.

"Integrated reports" are designed to provide investors, governments, NGOs and communities with a deeper understanding of how things that financial executives know how to count -- such as revenue, and profits and losses -- are helped or hindered by things whose monetary value isn't immediately obvious -- such as annual employee turnover, water efficiency, or community relations.

The IIRC introduces a more nuanced notion of value than you'll find in traditional corporate reports. Financial data remains a main pillar, naturally. But joining it are:

• Manufactured value, or physical capital, such as buildings, equipment and infrastructure.
• Natural value, which includes air, water, land, minerals, forests, biodiversity and ecosystem health.
• Intellectual value, such as intellectual property, branding and reputation.
• Human value, or people, and how well their own goals and behavior align with the organization.
• Social and relationship value, or the company’s relationships with communities, NGOs, and other interest groups.

This information can be material to investors who are assessing a company's prospects, but they'll vary quite a bit by industry. (In a related announcement yesterday, we are working with NASDAQ OMX Group Inc. to develop an online training program in integrated reporting)

The second news item concerns ongoing efforts to help industries figure out which non-financial metrics they should pay the most attention to. The Sustainability Accounting Standards Board (SASB), a nonprofit, is developing industry-specific standards for publicly held corporations to include sustainability issues in their annual filings. This guidance is designed to help executives disclose the metrics most likely to affect their companies’ performance and long-term outlook.

The organization just finished its first cut of guidelines for the financial sector, yesterday releasing a list of material issues and key performance indicators (KPIs) most relevant to seven industries: commercial banks, investment banking and brokerage, asset management and custody activities, consumer finance mortgage finance security and commodity exchanges, and insurance.

The public comment period for the IIRC's draft framework for integrated reporting will be open to commentators for three months from April 16 to July 15. SASB's results for the financial sector will be open for public comment from May 1 – May 30. The standards will then be revised, finalized, and released in August.

In an economy where intangible assets and sustainability performance are of increasing importance, both the IIRC and SASB are probing ways to make corporate reporting more relevant to companies and investors.

Serafeim is assistant professor of business administration at Harvard Business School and a member of the Standards Council of SASB. Eccles, professor of management practice at Harvard Business School, is a member of the International Integrated Reporting Council and is the chairman of SASB.

SASB is funded by, among others, Bloomberg Philanthropies, which was set up by New York Mayor Michael Bloomberg, the founder and majority owner of parent Bloomberg LP.

Analysis and commentary on The Grid are the views of the author and don't necessarily reflect the views of Bloomberg News.

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