Investors need sustainable development thinking

by Carol A Adams

What is ‘integrated thinking’ and does it really benefit investors?  

The Value Reporting Foundation would like us to think so.  The VRF plans to follow last year’s publication of its prototype ‘integrated thinking principles’ with a ‘detailed’ methodology for their implementation.

But could it all be a waste of effort leading companies down a (costly) path to incremental changes that will leave them behind in a rapidly changing world? I think we need ‘sustainable development thinking’.

Seemingly at odds with the 2021 update of the integrated reporting framework, the ‘integrated thinking principles’ are explicit about: a purpose aligned with the needs of society; and governance oversight of value creation for the organisation and key stakeholders. The reporting framework instead doubled down on single materiality (“enterprise value”) perhaps in preparation for being absorbed under the VRF (and later this year by the IFRS Foundation).

The best integrated reporters were those that already followed GRI Standards. In those organisations, integrated thinking influenced board thinking on the need for a wider range of resources (capitals) being incorporated into strategy. Organisations following GRI Standards already measured their impact on human capital, natural and social and relationship capital so this was not such a big step.  Many talked about creating value for the enterprise and their stakeholders from the start. The revised integrated reporting framework is thus behind best practice.

The ‘integrated thinking principles’ mention the importance of trust, but lasting trust cannot be built without integrating sustainable development into strategy, the business model and the products and services companies develop. (Investors are thinking about the well-being of future generations and future returns.) It also requires accountability for impacts on sustainable development.

Fixing climate change and other sustainable development issues requires a transformation – not business as usual.

So here are my ‘sustainable development thinking’ principles where sustainable development is front and centre of strategic thinking and board oversight. Sustainable development is central to, and explicit, in all of them – it must be to achieve the transformation needed. Unlike the VRF’s ‘integrated thinking principles’ (in the middle column), stakeholder engagement and building trust are not enough.  Stakeholder engagement is an essential step to aligning with sustainable development and building trust is an outcome of doing so.

The Value Reporting Foundation’s ‘integrated thinking principles’ versus ‘sustainable development thinking’ principles

 The Value Reporting Foundation’s ‘integrated thinking principles’Alternative aligned with ‘sustainable development thinking’
PurposeHow do we make a unique contribution to the needs of society and why do we exist?How do we make a unique contribution to sustainable development?
StrategyHow does our organization seize opportunities, mitigate risks and maximize the resources available to us to meet the needs of our customers through the products we make and the services we provide, whilst generating a financial surplus?How does our organisation integrate sustainable development issues into strategy and the business model to develop new products and services that contribute to sustainable development?
Risks and opportunitiesHow do we assess the impact of the external environment on our business model, operations and strategy, and vice-versa?How do we identify and assess our impact on sustainable development and the opportunities and risks posed by sustainable development issues?
CultureHow do we identify our key stakeholders, and how do we embed a culture that earns their trust and aligns with our core values?How do we shift our culture and values to make contributing to sustainable development and the SDGs front and centre of everything we do?
GovernanceHow does our Board make a distinctive contribution to value creation for the enterprise and its key stakeholders? How is our strategy execution enabled by our organizational structure, cross-functional teaming, decision making processes, and risk and opportunity management processes?How does our Board provide oversight to ensure that our strategy contributes to sustainable development? What sustainable development skills do Board members bring?
PerformanceHow do we measure and communicate the enterprise value we have created for our investors and the value we have created for our other key stakeholders?How do we measure and communicate our long-term impact on sustainable development and the value we create for the organisation, the economy, society and the environment?

Let’s start 2022 with the ambition of transformation to address sustainable development including climate change. The Sustainable Development Goals Disclosure (SDGD) Recommendations provide insights into how to get there and the evidence investors, boards and assurance providers can seek concerning the extent to which sustainable development is integrated into an organisation’s mission, values, processes and systems. It can be done. The GRI Standards help organisations measure their impact on the economy, society and the environment.

This article was first published in ESG Investor here on 28th January 2022.

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Comments

  1. Thank you Carol. I am fully in agreement with starting with the GRI for disclosure, as a benchmark for developing initiatives and a means for disclosing achievement.
    I am increasingly concerned about the lack of urgency expressed by the Value Reporting Framework. It will take several years for the ISSB (or I?SB) to develop their reporting standards, several more years to get the national IFRS to accept those standards for disclosure and several more years for the national jurisdictions to make them mandatory. WE will still wait for the SEC in the US to take a position on all this. Well beyond 2030 I would think.
    The GRI and the WBCSD/WRI Greenhous Gas Protocol are available now.
    Why wait?

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