In late February, the International Integrated Reporting Council (IIRC) kicked off a month-long public consultation as a first step in a broader assessment of the need for revision of its 2013 International <IR> Framework. During the Public Comment Period for this original release, the Sustainability Context Group (SCG — co-founded by r3.0 Senior Director Bill Baue and Advocation Partner Mark McElroy) submitted a Public Comment commending IIRC for taking a multi-capital approach, and encouraged the Council to integrate guidance in the Framework to address the carrying capacities of the capitals.
SCG members who signed the Comment include Morningstar Head of Sustainability Libby Bernick; Embedding Project Executive Director Stephanie Bertels; John Hancock Director of Corporate Responsibility Kyle Cahill; Ecological Economics Co-Founder Bob Costanza; Capital Institute Founder John Fullerton, B Lab Co-Founder Bart Houlahan; Corporate Responsibility Code Book Author Deborah Leipziger, Sustainable Brands CEO KoAnn Skrzyniarz, and The Big Pivot Author Andrew Winston. The IIRC did not extend the Framework’s embrace of the capitals to include assessing their carrying capacities, so now is an opportune moment to address this vitally important issue.
In this first phase of its revision consultation, the IIRC pursued a “topic-focused engagement” with includes a questionnaire-based response opportunity embedded in three brief topic papers:
While r3.0 is currently working directly with the IIRC on a White Paper to describe how to get From Monocapitalism To Multicapitalism, we also submitted Public Comments on Topic Paper Two and Three. Here’s the summary of our submission to the IIRC
r3.0 Response to Topic Paper Two — Business model considerations
Question: Should the <IR> Framework explore illustrative examples and visual techniques to elevate the significance of outcomes?
Why focus on outcomes (or impacts for that matter) in the first place? Because we want to achieve overarching outcomes and impacts that create value in toto — for the organization, and for society. In other words, the reason to focus on outcomes is to promote the sustainable creation of system value. In order to be sustainable, outcomes must not adversely impact any of the capitals beyond the thresholds of their carrying capacities. This concept is nowhere to be seen in the IIRC materials, and yet it is absolutely fundamental to the concepts you are asking us to weigh in on.
The only thing that matters about an outcome is that is sustainable. And the only way to discern sustainability is to assess whether the outcome falls within the carrying capacities of all of the capitals impacted by a business model. This is the essential definition of System Value: value that is created for the organization that also creates value for the system — or, stated in the inverse, does not destroy value beyond the carrying capacities of the capitals.
What is carrying capacity? In the age of COVID-19, think of #FlattenTheCurve. What’s the threshold we need to achieve in this flattening? We need to stick within the capacity of the health care system. Within its *carrying capacity*. The number of beds, doctors, nurses, expertise, respirators, medicines, etc. that enable us to contain the spread of the virus without being overwhelmed.
So, to understand carrying capacity, simply apply this concept to all the other capitals. On climate, it’s 1.5C, so all companies need to keep their own emissions within their proportionate share of the carbon budget. Within the carrying capacity of the earth’s carbon cycle.
Ultimately, I believe that “outcome” is a synthesis of “impact” — in the “counterfactual” sense (Hearn and Buffardi, p 10) of that part of the outcome is attributable to the organization — and “system value” (i.e. the overall outcome). And I believe that System Value is *destroyed* when the trajectory points toward transgression of the carrying capacities of any of the capitals, and System Value is conserved when *all* impacts (i.e. impacts attributable to all organizations operating in a system) are assimilable by the system within its carrying capacities, and System Value is created when impacts fall FULLY within the carrying capacities of the capitals, and ideally, capitals are enhanced overall, not diminished.
In terms of graphical representation, we would recommend that you leave “outcomes” where it is, on the cusp between the organization’s business model and the external operating environment. What we would suggest additionally, is that the graphic add a “microscope” view that hones in on outcomes, and shows how it entails both impacts (in the “counterfactual” attribution sense) *and* System Value.
Question: Should the <IR> Framework further explain the link between outcomes and value creation by including an illustrative example?
As explained in our previous answer, it’s not just the relationship between outcomes and value creation, but between outcomes and System Value creation. And System Value can only be created when the outcomes of a business model maintain capital stocks and flows within the thresholds of their carrying capacities.
Question: Should Sections 4C and 4F of the <IR> Framework further reinforce: That the term ‘value creation’ also reflects cases in which value is preserved or eroded? The importance of providing evidence to support claims and conclusions made in the integrated report?
To reiterate, your formulation continues to miss the essential point of System Value creation. Yes, you must focus on value preservation and erosion / diminution, but you continue to neglect to frame this at the System Value level, and to take carrying capacities of the capital into account. Ultimately, what really matters is whether the organization creates value across all the capitals in ways that create / preserve System Value, ie preserve capitals stocks and flows within the thresholds of the carrying capacities of *all* the capitals affected by the organization’s business model.
Question: Should the <IR> Framework clarify its coverage of longer-term impacts on society and nature, under its existing ‘outcomes’ definition?
Outcomes = System Value. IIRC discusses System Value in its recent Integrated Thinking report, yet none of its 5 bullet points on System Value mention the need to respect the carrying capacities of the capitals. If IIRC’s thinking were applied to COVID-19, we would lack discernment around flattening the curve within the (carrying) capacity of the health care system. We hope this makes it *crystal clear* why IIRC MUST add the carrying capacities of the capitals to its framework. In other words, it is woefully insufficient to say something as vague as “outcomes includes broader effects on society and nature.” IIRC must place a finer point on its definitional clarity than this. Those “effects on society and nature” must fall within society and nature’s carrying capacities.
r3.0 Response to Topic Paper Three — Charting a path forward
Do you agree with the proposed change to Paragraph 1.7?
Yes, we agree in principle with the shift from a prioritization of “Shareholder Primacy,” but we would be derelict if we did not point out the obvious — that the primary “provider of capital” is Gaia, who provides natural capital, and doesn’t give a sh*t about organizations “explaining” how they “create value over time.” What matters to Gaia is how an organization *performs* in terms of preserving natural capital within its carrying capacities. In other words, Gaia needs organizations to create System Value over time — value that accrues not only to the organization (at the expense of the system), but also value that accrues to the system in ways that enable the system to continue functioning in good health.
The original formulation was a fatal flaw in IIRC’s formulation, a capitulation to shareholder primacy, so it’s abundantly welcome that IIRC is shifting its stance to one that respects all stakeholders — including the ultimate stakeholder, Gaia.
Question: Do you agree with the proposed change to Paragraph 1.8?
Yes, it makes sense to put providers of financial capital on par with all other named stakeholders.
Question: What considerations should inform the IIRC’s strategic deliberations on the role of technology in future corporate reporting?
Technology now enables the aggregation and integration of internal data sources (management accounting on financial & sustainability data) with external data sources (satellites, sensors, IPCC scenarios, national accounts, localized data sources, etc…) to track organizational-level effects across all the capitals. So the concept of integrated reporting can be implemented on data platforms that assess internal performance data against external thresholds (carbon budget, living wage, gender and race parity, respect for human rights, etc…), allocated to organizations’ proportionate share of responsibility. And blockchain (digital ledger technology) enables secure (non-corruptible) tracking of this data across transaction chains, enabling in-depth stakeholder assessment of organizational performance.
Question: Are there further ways in which the <IR> Framework can enhance the assurance-readiness of integrated reports?
Right now, companies are constrained from practicing integrated reporting in some instances due to lagging auditing standards. IIRC would be well-served to engage the auditing community to encourage reformation of auditing standards to embrace, enable, and *encourage* integrated reporting.
Question: Consider the following statement: The matter of mandatory assurance rests with regulators rather than a voluntary framework.
Yes, ultimately, mandatory assurance must be mandated (was this a trick question to test our intelligence?) But that does not mean that voluntary initiatives (namely, IIRC) are relegated to sitting on their hands. IIRC is beholden to engage with regulators to encourage mandating of integrated reporting assurance and auditing.
Question: Are there further matters that the IIRC should consider: a) In the modernization of the <IR> Framework? b) As part of its strategic agenda?
Consolidation is a red herring. On this front, harmonization is the real issue, as the various different frameworks fulfill different functions, so the key is that they don’t counteract one another.
But the more fundamental issue is what the frameworks and standards would need to harmonize around. As of now, the frameworks and standards are inconsistent on their stance around the fundamental question of sustainability, as in the ability of human civilization to sustain itself. All other matters pale in comparison, we hope we all are beginning to see this, as the coronavirus starts to illuminate this reality for us. How does one discern sustainability? Through thresholds & allocations, or in other words, managing the multiple capitals within their carrying capacities. So, any talk of consolidation is an utter distraction unless it centers on the need to harmonize around enacting sustainability by enforcing the carrying capacities of the capitals to enable the creation of System Value. If the <IR> Framework does not address this fundamental issue, then it is conferring itself to irrelevance. IIRC’s strategic agenda *must* focus on integrating the carrying capacities of the capitals into the <IR> Framework, lest the framework become meaningless.
These responses were submitted to the IIRC by r3.0 Senior Director Bill Baue on March 20, 2020.
