Mervyn King, the champion of corporate governance in South Africa, spoke at a sustainability seminar in St James’s Place, London recently. The language amongst politicians and business leaders in 2010 is becoming one of sustainability; Of the 100 largest economies in the world by gross revenue, 51 are multi-national companies and only 49 are governments according to King who emphasized that “the strategic long-term direction of a company operating in hundreds of countries has a huge impact on society and the environment”.
Whilst financial reporting is “backward looking” and necessarily limited in scope, King argues for an international integrated reporting model which can capture alternative dimensions of corporate performance. The Global Reporting Initiative (GRI) has put forward a framework (G3) which requires companies to report on the economic, environmental and social impacts, the so-called “triple bottom line”. Business leaders embrace the concept because not to do so would cause a public relations problem. Critics have argued that measuring and understanding performance is impossible outside the framework of financial accounting where the yardstick is sales revenue less expenses.
To an extent they are correct. Weighing the positive and negative impacts to arrive at a “net” position on environmental and social reduces these stakeholder would require these complex dimensions to be reduced to single measures of performance. There is some progress though; whilst still under development, the Greenhouse Gas Protocol’s initiative seeks to define an organization’s impact on the environment by quantifying their carbon footprint, expressed in equivalent tonnes of CO2 emissions. Results can be audited, improvement initiatives monitored and money exchanged for carbon credits or offsets.
The system is far from perfect. Standards require further development, the definition of operational boundaries is open to interpretation and further clarity is required for assessment of the organization’s environmental impact in the context of an end-to-end value chain.
Financial reporting has been developed over centuries, yet there remain multiple definitions for Earnings or Earnings per share. Many organisations prepare accounting statements under both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). King reminds us that we do not have the luxury of time in developing the new standards for reporting sustainability:
“We are in a state of emergency. Emergency does not call for the right thing to do. It calls for essential things to be done. What is essential now is that we all collaborate and contribute to establish an international integrated reporting entity which can achieve the goal of an international model.”
The views expressed here are the author’s own and all postings are based on publically-available information