Update: Read Richard's response here.
Most followers and supporters of the integrated reporting movement will already know that Paul Druckman, CEO of the International Integrated Reporting Council (IIRC), left his position there at the end of October and was replaced by Richard Howitt. Inasmuch as we have been somewhat critical of the IIRC’s standard over the years, including in one or two articles posted on this site, we feel obliged to say two things in light of the passing of the baton now taking place.
First is to say how much we respect Druckman for what he was able to accomplish during his 5-year tenure at the IIRC. We know from having spoken and corresponded with him on many occasions that he shares some of the disappointments we feel about the virtual exclusion of sustainability from what was supposed to be an integrated reporting () standard. Indeed, he admitted as much in an exit interview he gave shortly after Howitt replaced him. When asked about his regrets or disappointments, he said:
“… we pushed away the sustainability community because we were determined to be focused on improving the financial system; and we probably pushed it away too much.”
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The second thing we want to say is that for all of its shortcomings, including the exclusion of sustainability reporting from its scope, the IIRC’s standard in 2013 unequivocally put the multiple capital interpretation of performance accounting on the map. Indeed, Druckman and now Howitt have both declared themselves to be “multi-capitalists,” openly committed to the need to address all six capital groups. The standard was shortly followed by an equivalent declaration of support for the same ideas by the Global Initiative for Sustainability Ratings (GISR) in early 2014.
Now, good people can disagree on what should be about, but when most agree that it should be about reporting impacts on all vital capitals, that’s a real accomplishment. The IIRC’s standard was, chronologically, the first reporting standard to establish impacts on all capitals as fundamental to reporting. And while even a cursory review of the sustainability literature over the past 300 years will reveal many of the same ideas in play, it wasn’t until the IIRC formally embraced and codified multicapitalism in the standard that it became an accepted concept for business and a wake-up call to the accounting world – all on Paul’s watch. Thank you, Paul!
Turning next to Howitt as he assumes leadership of the IIRC – here is what we would say to him in terms of advice.
Kudos to you and everyone else who has been involved with the development of to date; so far, so good. The fact remains, however, that the 2013 standard does not live up to the vision of as put forward in King III, and it has other shortcomings as well.
What is the standard lacking?
- There is no principle by which multicapital reporting can be meaningfully integrated. By excluding sustainability from the 2013 standard, one key principle for integrating financial and non-financial reporting has been passed over.
- Multicapital management is required of organizations of all sorts, addressing the needs of stakeholders of all sorts. Focusing primarily on quoted companies ignores the needs of the wider community and tends to perpetuate the primacy of shareholders over other stakeholders.
- A reporting focus tends to foster compliance and rigidity, whereas a multicapital thinking approach would provide meaningful information to leaders and directors to become more adaptive to the world around them. The vital question all need to ask is, “How much is enough to be sustainable?”
- Performance standards are needed if stakeholders are to interpret the adequacy of performance from impacts on multiple capitals. Norms can be developed across all capitals identifying threshold performance levels for sustainable impacts. Interim targets for reaching sustainability over multiple years can also be used to determine whether actual progression is in line with feasible trajectories or is falling short.
- Context-Based Sustainability principles are completely missing in the standard. These are the means of incorporating the stakeholder dialogue process into science- and ethics-based norms in the context of each organization. GRI, GISR, and the United Nations Environment Programme (UNEP) all recognize the importance of context in multicapital performance measurement.
- A practical methodology by which organizations may set about identifying multicapital norms, reporting on actual performance and addressing strategic resource needs and prioritization is absent. It needs to be principles-based.
- The 2013 standard adopts financial materiality as its only filter of importance. This falls short of the needs of a multicapital process in which no particular group of stakeholders has predefined primacy over any other. Context (global and local) is key and each organization has to set its own priorities in the light of its own unique set of stakeholders.
What specific steps should the IIRC take?
- Formally reverse the exclusion of sustainability from the scope of the standard. Add it back in where it belongs.
- Formally expand the target audience of the standard to include stakeholders of all kinds and with no predefined priority.
- Incorporate the Sustainability Context principle into the scope of the standard. This principle not only calls for assessment of impacts on vital capitals but requires reporting organizations to first set standards of performance for what such impacts would have to be in order to be sustainable. And all of that is done by reference to who an organization’s stakeholders are, and what its corresponding duties and obligations are to have impacts on vital capitals in ways that can affect their well-being.
Here we hasten to add that others, too, including UNEP as noted above, have already declared allegiance to the same idea (Sustainability Context as a foundation for reporting). In a 2015 report put out by UNEP entitled Raising the Bar – Advancing Environmental Disclosure in Sustainability Reporting, its authors proclaimed: “All companies should apply a context-based approach to sustainability reporting…” (p. 52). GRI and the GISR have also taken strong stands in support of the Sustainability Context principle as a foundational principle of reporting, but neither has provided a procedure or explanation for how to do so. The result? Few organizations actually do it, and very little in the way of bona fide or authentic sustainability reporting, therefore, has ever really been done.
To Howitt, we say, please don’t fall into that trap. The IIRC can demonstrate leadership in this area by not just calling for adherence to the principle, but by providing guidance for how to do so. We and many others would be only too happy to assist.
We believe that our book, The MultiCapital Scorecard, published in November 2016, provides many suggestions to improve the next edition of the framework, including addressing the remaining shortcomings summarized above.
We conclude by simply wishing Howitt all the best in his tenure as the IIRC’s new CEO. We also want to assure him that the sustainability community would be happy to help in any way it can to make more inclusive of sustainability and fulfill the original vision of integrated financial and non-financial performance, as put forward in King III and now King IV as well.