Part One of this 10-part series ended with a quick introduction of how Reporting 3.0 (R3) applies Integral Theory in our thinking. So we pick up this strand as our starting point for Part Two, which is devoted to introducing the Reporting Blueprint that was released at the 4th International Reporting 3.0 Conference earlier this year. Exploring the differences between the terms integral and integrated helps distinguish between R3’s more holistic approach – what we call a “new impetus” for reporting that truly serves a regenerative, inclusive and open economy (powered by regenerative and distributive capitalism) – and the more reductionist approaches pursued in the name of sustainability and integrated thinking.
Reductionistic understanding of ‘sustainability’
Have you ever read a sustainability report that tells you whether the company is, indeed, sustainable? Neither have we. So, let’s first of all be clear that what currently passes for “sustainability reports” typically amount to ESG (environmental, social & governance) reports on incremental progress in the right direction – but fall short of assessing the degree and rate of progress needed to achieve sustainability. In other words, a reductionist (not holistic) interpretation of sustainability. As we write this article – 20 years into the development of the Global Reporting Initiative (GRI), 25 years after the first Rio Conference, and 45 years after Rachel Carson’s Silent Spring – we watch tweets scroll past about Earth Overshoot Day arriving earlier each year as testament to the increasing systemic unsustainability.
Of course, systems consist of parts (in this case, companies), so the collective impacts of companies contribute to systemic sustainability – and unsustainability. We at R3 call this connection between parts and wholes the “micro-macro link” – or more accurately, the “micro-macro gap.” The current economic system design exacerbates Earth Overshoot; so, if we’re to escape this pernicious feedback loop, we need change at the company level that scales up to change at the economic system design level. And this needs to also scale down to the level of SMEs (small and medium enterprises), which represent more than 40 percent of GDP in emerging economies, according to the World Bank.
Reductionistic understanding of ‘integrated thinking’
Integrated thinking – the concept advanced by the International Integrated Reporting Council (IIRC, which is represented on the Reporting 3.0 Steering Board) – advocates for assessing interlinkages between the multiple capitals (financial, natural, social, human, etc) and cross-pollination between business disciplines (first and foremost, financial disclosure and sustainability reporting). While we certainly laud this integration, it takes a reductionist approach that falls short of truly integral thinking that takes a holistic approach. Specifically, integral thinking calls for closing the micro-macro gap by assessing company (micro-level) impacts in the context of the carrying capacities of the capitals (at the macro-level), which in turn triggers the economic system design transformation necessary for bona fide sustainability to emerge. In other words, an integral approach not only includes value creation (as advocated by IIRC), but it also transcends this by integrating both shared value (which builds social capital in the service of growing financial capital) and what the Future Fit Business Benchmark calls “system value” (which enhances all capitals).
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This is where Chapter 3 in the Reporting Blueprint – “A green, inclusive & open economy” – contributes understanding. It looks at both macro-based and micro-based initiatives that strengthen this micro-macro link and help close the gap, while also showing how disclosure can spur the emergence of a ‘green,’ inclusive and open economy. Here are three main areas that we’ll cover in the rest of this second part:
- Connecting the multicapital approach to the ideation of a green, inclusive and open economy
- Consequences for an ‘integral materiality’ process including ‘rightsholders’
- Defining a strategy and positioning it in the Reporting 3.0 Strategy Continuum
Connecting the multicapital approach to the ideation of a green, inclusive and open economy
We propose the goal of a green, inclusive and open economy as an ‘ideation’ – we call it our ‘North Star’. It’s an economy in which regenerative and distributive capitalism is embedded into a system logic where:
- cost accounting is reformed through the internalization of external effects (depreciating stocks and flows create a deficit);
- a corresponding benefit accounting complements the profit & loss statement (appreciating stocks and flows create a surplus);
- a pricing mechanism rewards sustainable products (and punishes unsustainable products); and
- production taxes fall (i.e. on human labor) and taxes on destruction rise (i.e use of non-renewable resources).
The Six Desiderata we describe in Chapter 3 connect the ideation with its effects on multiple capitals:
The above 9 Principles provide a frame where disclosure can truly serve a regenerative, inclusive and open economy. In this post, we focus exclusively on the ‘relevance’ principle.
Relevance builds on the micro-macro link articulated in GRI’s “Sustainability Context” Principle and its necessary interconnection with the Materiality Principle – resulting in what R3 calls Integral Materiality. This approach calls for integrating fiduciary and ‘rightsholder’ duties through a clearer, context-based and multicapital impact assessment and description, adding the perspective of cumulative impacts and scalability towards a new broader focus. This context-based materiality process would comprise three major steps:
Step 1: Identify impacts on capitals vital to stakeholder wellbeing:
The first step in context-based materiality is to identify positive and negative company impacts on capitals (ecological, social and economic resources) that are vital to the wellbeing of rightsholders – who have rights to enjoy benefits of our shared resources and be free from harm (including deprivation of their rightful share of resources). Companies have duties and obligations (or more broadly, accountability) to uphold the wellbeing of their direct rightsholders, by managing their impacts on resources these rightsholders rely on.
Step 2: Determine if impacts compromise carrying capacities of capitals:
The second step in context-based materiality is to determine if company impacts compromise the carrying capacity of capitals. If company impacts are far removed from this risk, then the impact can be deemed immaterial; if the impact is reasonably proximate to overshooting the carrying capacity of a capital, then it is, by definition, material.
Step 3: Ascertain strategic innovation opportunities to enhance capitals:
The final step in context-based materiality is to ascertain if the impact lends itself to innovation opportunities with the potential to enhance or even regenerate capitals to achieve net positive impact.
The relevance process is inherently connected to the usual plan-do-check-act process of management, often called the ‘Deming-Wheel’ in quality management approaches. The below figure shows an ideal process of implementing ‘integral materiality’ through the relevance principle – which expands upon these three basic steps outlined above.
Defining a strategy and positioning it in the Reporting 3.0 Strategy Continuum
Ideating a regenerative, inclusive and open economy at the macro (systems) level requires a context-based, multicapital approach at the micro (company) level that triggers a relevance assessment from a rightsholder perspective to discern beneficial from detrimental impacts. Of course, all this points to the need for strategies that produce sustainable, regenerative, indeed thriving companies that spur economic system transformation. This is where Chapter 3 of the Reporting Blueprint introduces the Strategy Continuum. It clarifies how existing and future strategy approaches truly contribute to transformation of a) business models at the micro level, and b) economic system design at the macro level. The lower right quadrant has the potential to support both, but is hardest to achieve.
Table of Contents: Reporting 3.0 10-Part Series on the Reporting Blueprint & Data Blueprint
- Reporting 3.0: Global Common Good R&D Market Maker for a Regenerative & Distributive Economy
- Reporting 3.0’s Reporting Blueprint: Triggering a Regenerative, Inclusive & Open Economy
- How to Transform Today’s ‘Senseless’ ESG Data into Tomorrow’s Actionable Knowledge
- Purpose + Context = Connectedness
- Beyond Integrated Reporting: Multicapital Accounting of Integral Data
- Integral Success Measurement for True Future Value Creation
- Closing the Context Gap – or How Companies Can Transform Degeneration to Regeneration
- Scalability: Upshifting from Micro- to Macro-Level Sustainability
- Activation & Acceleration: Catalyzing Context-Driven Stakeholders
- Mapping Maturation Pathways & Building Bridges to an Integral Economy