The International Integrated Reporting Council (IIRC) is circulating a draft for comment to define the principles of integrated reporting. The stakes are high for the sustainability community and its participation is urgent.
By Francesca Rheannon
Do you want to change the world? You now have the chance to add your opinion’s heft to the scale that measures how the global financial system weighs value. You could have a hand in changing the very DNA of financial accounting so that it promotes sustainability, instead of ignoring it.
The comment period for the “Consultation Draft of the International <IR> Framework” opened on April 15th and ends on July 15th. It is inviting comments from investors, companies and civil society, whether as individuals or organizations.
The Purpose of The IIRC Consultation Draft
The draft will result in a new integrated framework for reporting, going a step beyond the GRI by creating a bridge between financial and sustainability reporting. I spoke at length with Robert Massie, GRI cofounder, director of the New Economics Institute and member of the IIRC working group that produced the draft. He told CSRwire:
“By putting forward the idea that business creates value through the interaction, enhancement, or depletion of different forms of capital -- natural, social, financial, intellectual, and so forth -- the Consultation Draft opens the door to a fundamental and long overdue reinterpretation of the role of both business and accounting in society.”
Established as a project by the Prince of Wales in 2004, the IIRC brought some of the largest accounting firms and financial institutions on the planet together with major NGOs, stock exchanges and reinsurers, and such corporate titans as Microsoft, Nestlé, and the World Economic Forum. They were convened to answer the core question: what is the purpose business should serve and how should that purpose be measured?
Value and The Capitals
According to the draft, the purpose of business is the creation of value, which it accomplishes through the transformation of multiple forms of capital. But:
<IR> recognizes that value is not created by or within an organization alone, but is:
- Influenced by the external environment (including economic conditions, technological change, societal issues and environmental challenges), which creates the context within which the organization operates;
- Created through relationships with others (including employees, customers, suppliers, business partners, and local communities)
- Dependent on the availability, affordability, quality and management of various resources.
At the heart of the draft principles is an expanded definition of capital – or rather, of capitals. Affectionately referred to by the drafters as “The Octopus,” the image representing the concept positions multiple capitals on both sides of the value producing process: on the one side, as forms of capital businesses can tap and on the other, as forms that businesses enhance or deplete as a result of their operations.
As you can see from the above, the forms of capital go beyond the “single source” concept of financial capital to include also what has been manufactured, as well as intellectual, human, social and – last but not least – natural capital.
Natural Capital Is The Context
Natural capital is the container that embraces all the other forms, the one from which they all ultimately derive their sustenance.
Massie calls this a breakthrough. He says the concept gets away from the assumption that everything can be monetized. And, instead of placing the natural world inside the bubble of economy, it adopts a critical notion from ecological economics: that the activity of firms must be placed within the sphere of natural capital. In other words, Massie says, natural capital “is the context of everything; human, social and intellectual capital is the sub-context; and financial capital is contingent on the others. It’s a reversal.”
Whose Interest Is Primary?
This paradigmatic shift in the understanding of accounting has not gone unchallenged within the group convened to develop the IR principles. Massie is concerned that there are powerful currents of traditional financial thinking that have tried to water down the language of the document – even going so far as to question the inclusion of the terms “planetary limits” and “sustainability.”
(As if not mentioning planetary limits could make them disappear! At stake is whether we end up with an accounting system that recognizes science-based reality or with one that continues to wander in the wonderland of financial fantasy, edging ever closer to the cliff.)
A key issue is: who should be identified as the primary beneficiary of the capital process?
There is a struggle brewing in the IIRC between those whose primary goal is “to adjust financial accounting to serve the needs and limits of sustainability and social justice” and those whose main purpose is “to extract lessons from sustainability to make more money for shareholders,” according to Massie.
Massie is concerned that “by identifying investors as the primary beneficiaries of this capital process, they hold too tightly to the conventional view that the interests of shareholders should dominate in our economy.”
Nonetheless, he credits the working group with coming up with “a document whose model of capitalism holds the surprising potential to revolutionize business from the ground up.”
Despite the debate, the model clearly implies that, in the long run, the interest of shareholders is identical to the interests of all the other stakeholders, in the sense that business ultimately derives its value from the health of all the capitals – above all, the environment (or “natural capital.”) But unless the potential – and all too common -- divergence of short-term shareholder gain from long-term interest is spelled out, the document could end up undermining its core message.
Why The IIRC Draft Needs You
The forces of the past, those who wish to water it down, are powerful.
And their voices may end up being dominant; the IIRC has been most active in soliciting investors and companies, but civil society – not so much. (And Massie says few Americans, whether companies and investors in the sustainability field or civil society, know about the Consultation Draft.) That’s why it is so critical that the sustainability community weigh in during the comment period (again: it ends on July 15.)
There are real advocates on the IIRC steering committee who want and need the support of those who understand the stakes for sustainability.
“If we don’t comment, it will be taken as indifference, or even support of the existing format,” Massie says. “And I think this is a significant enough shift that that would be a mistake on our part.”
It shouldn’t take much of your time.
The Consultation Draft is a quick read at about 30 pages. Your comment doesn’t have to be a doctoral dissertation – a paragraph or two will suffice. Nor do you have to comment on the whole thing.
Read it through; find a place to support stronger language to respect “planetary boundaries” and “sustainability”; and weigh in to protect the future of humanity – and business.