Coming Soon: Integrated Reporting

Readers of this blog understand the importance of ESG matters for corporations around the world. Investors, employees, customers and others want to know how issues such as climate risk and workplace diversity affect the decisions companies make every day. Now that companies have largely accepted the need to inform stakeholders about ESG performance, governance experts are pondering the best ways to do it.

Alex Gold, CEO of sustainable business consulting firm BWD Americas, argues in an essay published this month that the time has come for an integrated approach to reporting. Publicly traded companies already communicate regularly with the market at large about their financial and operating performance via Form 10-Q and 10-K filings with the Securities and Exchange Commission. The demand for more ESG disclosure raises an obvious question: Why not combine the two?

In fact, integrated reporting is already becoming close to the norm for most major companies based in Europe and Australia. As Gold notes, however, such a shift would mean more for U.S. companies than just creating new templates for corporate disclosures: “Getting started with integrated reporting involves understanding how your business depends on its economic, environmental and social context to create value.”

In other words, integrated reporting forces companies to adopt a mindset that doesn’t treat ESG as something tangential to their businesses. ESG issues aren’t landmines in companies’ paths, waiting to blow them up or move them off course. They’re not separate platforms to tack onto executive compensation plans. They’re fundamental to how companies create value. It’s the difference between monitoring your environmental impact for a PR boost versus realizing your carbon footprint will help determine how long your company remains viable.

It bears mentioning that corporations may not have a choice soon when it comes to integrated reporting. Since the Biden administration took office in January, the SEC has embraced the prospect of embedding ESG into its framework for reporting. Meanwhile, the booming demand for ESG specialists in sectors such as banking suggests companies are keen to broaden their ESG expertise in preparation for the future.

Most observers view SEC-mandated ESG disclosures as a matter of “when,” not “if.” Some companies, therefore, may wait to hear from the commission before developing their own best practices for integrated reporting. That could save them some frustration should the SEC’s views on ESG standards diverge from what they come up with on their own.

But companies that take a proactive stance on integrated reporting do stand to gain significant influence over how the SEC shapes the forthcoming ESG reporting standards. It’s not at all clear what even makes for appropriate ESG measuring sticks.

By essentially serving as test cases for regulators, first movers can provide insight on what works and what doesn’t when it comes to ESG disclosures in the U.S. market. In doing so, these companies can ensure they are not only prepared for the future of financial reporting, but that they have a hand in creating it.

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