For companies to take integrated reporting seriously, these must deliver proper returns, as much as any other product or service. The new Sustainable Value Matrix is just one means of extracting genuine value from your integrated report, writes Clive Lotter
A regular gripe among those responsible for preparing integrated reports is that these waste management time and company money. They argue that their reports are seldom read and soon turfed into the recycling bin.
If an integrated report is grudgingly put together solely for JSE compliance, then yes, it will be quickly discarded.
Integrated reports should be evaluated just as products or services are. What return on investment (ROI) will this report provide and how can it create value for the company?
- Those companies taking integrated reporting seriously can extract real value by:
- Authentically identifying the company’s most material issues for the year. These issues are then fed into business strategy, planning, and risk management.
- Setting key performance indicators (KPIs) and reporting against these. This exercise should drive performance in the areas most fundamental to the business.
- Developing the report as a flagship marketing tool. It should be a key source of information for investors and analysts while also clearly positioning the firm in the marketplace.
- Providing a ready source of key information for companies that tender for business. In many cases, the report can be submitted as is to provide required information.
- Using the report to align employees and new inductees with company objectives.
The JSE-endorsed integrated reporting framework (<IR> framework) is much criticised for offering little on how its ambitious reporting principles can be applied in practice.
Professor Robert Eccles of Harvard University, whose ‘One Report’ published in 2010 brought integrated reporting into the corporate spotlight, has identified this shortfall. His recently launched Integrated Reporting Movement offers practical tools for making integrated reporting work. A major giveaway is his mooted Sustainable Value Matrix (SVM), which guides companies in balancing their business strategies against societal and environmental sustainability. The SVM can be used to reduce or even reverse the trade-offs that often exist between financial and nonfinancial performance. When companies grasp that the SVM can drive innovation, it will become an accelerator for integrated reporting.
THE SUSTAINABLE VALUE MATRIX
Creating an SVM commences with the company’s leadership determining what it regards as material to its investors, and which company-related issues it considers significant to society.
Try as it may, a company is unlikely to define the material issues of stakeholders objectively. Therefore, the X-axis of this matrix will be about’ materiality, with Eccles calling it the ‘Materiality to the Firm’ axis.
The stakeholder dimension (the Y-axis) is termed ‘Society’s Issue Significance’. While specific stakeholders will have their own opinions on materiality, society as a collective does not.
Eccles considers the most accurate label for the Y-axis to be ‘the firm’s perception of the significance of its chosen stakeholders’ interests, aggregated as society’.
The SVM is a matrix diagram with thresholds and defined quadrants, not necessarily of equal size.
The company’s board and executive must first decide on its threshold for material issues, and then the society’s issue significance boundary. Where to place each line is completely at the discretion of the company, though it must explain its rationale for doing so.
Each quadrant will include indicators for levels of reporting, stakeholder engagement, resource commitment, and innovation.
The ‘Material Societal Issues quadrant contains the issues that the company decides are most relevant to stakeholders, given the corporation’s objectives. These should be included in the integrated report as they will almost certainly involve high levels of stakeholder engagement and resource commitment. Where issues require trade-offs between shareholders and other stakeholder objectives, the issues in this quadrant may require real innovation in tackling them. Smart innovation in tandem with stakeholders can enable the company to improve financial and nonfinancial performance simultaneously. These innovations are typically high risk and may demand substantial capital and long time frames before paying off. In its integrated report, the company should explain how in terms of its objectives it intends managing stakeholder engagement, resource commitment and innovation regarding these issues.
Issues in the ‘Material Issues’ quadrant should also be included in the integrated report as these are highly important to sustainable value creation. While the company deems them less significant for stakeholders, some engagement is appropriate because of the opportunities they provide for moderate innovation regarding sustainability issues. In general, resource commitments will be less than in the above quadrant, but these can still be significant.
Those issues identified in the ‘Societal Significant Issues’ cell are not material for sustainable value creation. Nevertheless, a company cannot completely ignore civil society, even if it does not consider these identified issues as yet being significant to its strategy. Having acknowledged these issues, the company should engage stakeholders and report on these outside of its integrated report.
‘Potential/Developing Issues’ includes topics that should be largely ignored – at least for now. Reporting on these would only create clutter and distract report users from significant issues.
The company will establish its credibility by being transparent on what it assesses as material to its operations and significant to broader society. It can avoid the accusations of ‘greenwashing’ that arise when some companies claim that they ‘care about everything and everybody’.
The SVM helps establish a more realistic conversation between a company and all of its stakeholders, as its own perceived role in society is logically and transparently stated.
Author: Clive Lotter is an integrated and sustainability reporting consultant, GRI G4 certified