By Ralph Thurm & Bill Baue
Existing reporting frameworks and standards have made significant strides forward in the past several decades. However, they all still fall short of providing the guidance needed to paint a clear enough picture of an organization’s overall impact in the world. How and where and for whom is the organization creating — and destroying — value? And how does this value creation and destruction impact the systems within which it operates? Does its share of impacts (rolled up with others’ impacts) put those systems at risk — and by extension the wellbeing of those who rely on those systems? In other words, does the organization create systemic risk to the economy (or to society or the environment)? Or does it create system value?
What’s the issue?
As we have mentioned in previous articles in this series, existing reporting frameworks and standards (and their underlying management systems) fall short in two primary ways:
1. Current reports (following existing frameworks and standards) tend to paint fragmented pictures instead of holistic views: elephant toes and tails, instead of elephants. The International Integrated Reporting Council (IIRC) is addressing this through its multicapital approach. But…
2. Current reports tend to focus on performance and progress untethered from real-world benchmarks and thresholds.
In other words, reports tend to provide numerators without denominators. For example, when addressing climate change, reports include carbon footprints (numerator), but not in the context of the carbon budget (denominator), as discussed in Part 8 of this series. That article cites the Danish study finding less than 5% of reports mention the denominator perspective. This is why we say that “ESG Progress Report” is a more accurate label than “Sustainability Report.” And unfortunately, sustainability ratings and rankings ask companies only for numerator data — we are unaware of any of the 650 ratings and rankings worldwide applying denominators, so they are best characterized as ESG progress ratings and rankings.
Or, traditional reporting focusing on short-term financial performance without mention of future value creation processes (as covered in the “Elephants in the Room” piece addressed in our 10thArticle in this series that makes the case for shifting from ESG Push to GSE Pull).
To illustrate these shortcomings with an analogy, this would be akin to a sports reporter mentioning the improvement rate of a star player’s first-half goal scoring, while neglecting to mention her teammates’ worsening rates dragging the overall team rate down; or the team’s statistical underperformance in the second half, and hence its overall losing streak.
Why it’s important?
We at Reporting 3.0 have distilled what’s needed for reporting to play its proper role in catalyzing a Green, Inclusive, and Open Economy that’s regenerative and distributive. We see three primary components:
- Purpose: Organizations need to articulate why they exist. How is the world a better place because of their existence? What’s their beneficial legacy? How are they enhancing wellbeing?
- Success: Organizations need to decide how they determine success of fulfilling their purpose. How do they create value for themselves? For their stakeholders and rightsholders? For the systems within which they operate? In the present and into the future? In other words, how do they account for their total contribution to wellbeing — and thriving?
- Scalability: Companies are not isolated islands, so they must augment sustainability pursuits at the micro level with broader efforts to scale up transformation at the meso and macro levels.
The Reporting Blueprint visualizes these interconnected components in its New Impetus graphic:
As suggested graphically, the New Impetus identifies how these components lead to the desired outcomes on the triangle sides:
- Trust: Combining a clear corporate Purpose with Success measurements tied to actual outcomes, impacts, and system value creation creates Trust, demonstrating a specific commitment to beneficial impact that is demonstrable. Such measures are particularly important in this era of eroding trust in companies, as revealed in the just-released 2018 Edelman Trust Barometer. As the old saying goes, “trust but verify.”
- Resilience: Combining a beneficial Purpose with measures to accelerate its Scalability beyond the organization creates Resilience, as organizations can only be sustainable when the broader systems they operate within are sustainable.
- Innovation: Scaling up Success measures requires Innovation when operating in today’s unsustainable systems. The True Future Value Equation established by the ThriveAbility Foundation includes innovation mechanisms in the denominator that synergize both natural capital and manufactured capital in ways that optimize performance within the “safe and just operating space” between ecological ceilings and social foundations. The Equation also calls for innovation in the numerator through synergies amongst the Anthro Capitals (Human, Intellectual, Social & Relationship) that have no upper limit!
How can you tackle it?
The Reporting Blueprint outlines three primary mechanisms to achieve the desired outcomes (Trust, Resilience, Innovation) in each area of the New Impetus (Purpose, Success, Scalability), as outlined in the below figure:
The Reporting Blueprint includes long lists of specific questions associated with each mechanism, where the answers point to actions and interventions. Below are selections from these lists (distilled to fit this context) and drawn from elsewhere in the Reporting 3.0 body of knowledge:
- Contextualization: To clarify if you are part of the problem or part of the solution (or potentially both), does your organization cure symptoms or tackle root causes?
- Leadership: Does your organization’s leadership address economic system dysfunction? How so?
- Ambition: How does your organization prioritize growth, and how do you differentiate sustainable from unsustainable growth? Is growth even necessary for your organization, or can it thrive in a steady state or de-growth economy?
- Measurement: Does your organization measure its impacts across and amongst the multiple capitals? And does it measure (and pursue) the internalization of negative externalities that compromise the carrying capacities of natural capital? And the externalization of positive internalities that enhance the carrying capacities of anthro-capitals (human, social, etc…)
- Target-Setting: Does your organization set science-based or context-based goals and targets that assess thresholds and allocations of vital capital resources that rightsholders rely on for their wellbeing?
- Incentives: How does your organization incentivize sustainable performance, and disincentivize unsustainable performance? And how does your organization incentivize transformation?
- Education: To what degree does your organization promote and support internal (employee) and external (across its value cycle) education on the need for transcending incrementalism to achieve transformative change in light of emerging megatrends and systemic existential risk?
- Collaboration: How does your company differentiate between competitive advantage and collaborative impact? To what degree does your organization participate in pre-competitive collaboration on joint innovation for collective advantage?
- Advocation: How does your organization advocate for transcending incremental change to achieve necessary transformative change?
What will you have achieved?
The New Impetus enables a holistic assessment of your organization’s Purpose, Success, and Scalability to position you best for creating Trust, Resilience, and Innovation to benefit yourselves while simultaneously catalyzing a Green, Inclusive and Open Economy.
What question will we discuss next time?
How can integral information systems create a seamless data architecture that measures thriving? Please find part 14 here.
[Context of this series: This is part 13 of the Reporting 3.0 series that forms the basis of an Implementation Guide that summarizes the total value of Reporting 3.0 in implementing a future-ready sustainability strategy and disclosure approach, in line with the idea of a Green, Inclusive and Open Economy. By posting these articles here Reporting 3.0 seeks feedback in the writing process of the final document, to be released as Blueprint 5 at the 5th International Reporting 3.0 Conference in Amsterdam, The Netherlands, on June 12/13, hosted by KPMG, see www.2018.reporting.org]