My good friend Bob Eccles, professor of management practice at Harvard Business School, wrote an article (The Performance Frontier) that just appeared in the Harvard Business Review. Here is a PDF. I’ve been extremely interested in his work on integrated reporting for awhile now. What is integrated reporting? Essentially it is One Report that combines financial and non-financial information interactively into one document. A good example of a company that has done this is Natura. Although integrated reporting is voluntary today, it is required of all companies on the Johannesburg Stock Exchange. But integrated reporting is much more than an online CSR showcase. When it is done right, it is an authentic and innovative two way conversation where a company convenes its stakeholders to discuss its progress meeting its financial and nonfinancial goals. For example, Natura does this through Natura Conecta where the public is invited to have a discussion on environmental and social issues related to the company. It is a living exchange, not a static one that is one-way and more push than pull.
Bob’s article has an interesting slant which he points out in the introductory sentence . . .”But a mishmash of sustainability tactics does not add up to a sustainable strategy.” He argues, along with his co-author George Serafeim also at Harvard Business School, that we need a solid framework for simultaneously boosting financial performance as well as doing good. Tactics alone won’t do the trick. They provide a model for identifying the most environmental, social and governance (ESG) factors that drive shareholder value so that both financial and ESG performance are enhanced, not just one. A company that focuses on sustainability without paying attention to the financial costs is not going to have a genuine sustainability strategy that meets everyone’s interests. Similarly, a company that focuses solely on financial performance to the exclusion of good ESG performance will lose out as well in terms of public opinion and support. A major component of reaching this perfect balance, according to them, is by identifying major innovations in products, processess and business models that achieve these improvements and accomplishes superior financial and sustainability performance. A good example is the one with Natura mentioned above. They also cite innovative business models from Dow and Hong Kong-based CLP Group. And then, of course, Bob argues that these activities are ideally communicated through integrated reporting.
What fired me up was the SASB (Sustainability Accouting Standards Board) Materiality Maps that have been created for 88 industries in 10 sectors. Each industry has its own map that prioritizes 43 ESG issues and ranks them in terms of materiality. Not all the maps are complete but take a good look at this one for the health care sector. It shows which ESG factors impact financial performance so that a company knows what to prioritize. It’s a great contribution to understanding ESG factors as well as what drives strong corporate reputation. Don’t miss it.
And congrats to Bob and George for raising an important question about how to better balance financial costs and sustainability costs so that they complement one another instead of taking away.