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People and Planet in the Accounts: integrated thinking - governance, controls and accountability

30 November 2020: Integrated thinking requires a company to incorporate consideration of the core capitals it uses to create value into its governance, strategy, performance management and everyday decisions.

So says Veronica Poole, a Women in Finance winner 2020 for her commitment to aligning corporate purpose and reporting to the climate change agenda. She is a partner in Deloitte, and global IFRS and corporate reporting leader. 

Poole spearheaded Deloitte’s partnership with The Prince's Accounting for Sustainability Project (A4S) Finance for the Future Awards. She has been a judge for the communicating integrated thinking category for a number of years and is chairing the Authentic Integrated Thinking virtual event taking place in December 2020. It is a masterclass with Alan Stewart, CFO of Tesco and Joe Allanson, EVP, Chief Accountant and Controller of Salesforce.

So what does integrated thinking mean in practice? “It means integrating thinking about broader capitals into the DNA of the business,” Poole responds. “The system has traditionally focused on financial risks. The integration of sustainability factors means looking at a broader range of risks, including environmental, social and governance topics. But we are not just talking about risks – there are also commercial opportunities. For example, Mark Carney has said ‘Achieving net zero will require a whole-economy transition – every company, every bank, every insurer and investor will have to adjust their business models. This could turn an existential risk into the greatest commercial opportunity of our time.’”

Poole explains: “The strategy that is set by the company therefore needs to respond to those risks and opportunities. This requires appropriate KPIs, including non-financial metrics, to align what is being measured to what the company intends to achieve.” As part of this process, companies need to set targets. In response to climate change, for example, companies are increasingly making commitments to achieve net zero. KPIs therefore need to measure progress towards achieving these objectives. 

Management information and reporting are an essential component of integrated thinking. Key environmental, social and governance information should be formally on the board’s agenda, not as a separate sustainability reporting item but as an integrated component of oversight of performance. “What is the management information that is regularly monitored by those charged with governance? Is it limited to financial factors or is it broader?” Poole asks. “How often does that information reach key decision-makers within a business? The CEO, the CFO or the board itself? Frequent reviews by the board is a good sign that the company is really applying integrated thinking in practice.”

Integrated thinking requires breaking down the different silos in an organisation and creating a coherent and comprehensive management and governance approach. “Sustainability still too often sits in a separate silo, and that information is not really connected to the company’s main enterprise risk management (ERM) systems,” she says. “That is where the core challenge of applying integrated thinking to sustainability factors effectively lies.”

Greenhouse gas (GHG) emissions, water usage and accident rates are all cases in point. More often than not, they are managed by a separate sustainability team, with information that sits in separate spreadsheets and is not part of the main corporate reporting process. It is often produced for submission for statutory compliance, or because the company wanted to report its impacts in a separate sustainability report or be part of a specific index.

How does a company ensure it has information of the right quality to support integrated thinking? Formal governance and controls over the information are essential. There needs to be a process for collection, processing, controlling, accountability for, and reporting of the data, and this process needs to be of the same rigour as it is for financial information. With sustainability information, there are further challenges - the necessary data points often lie outside the boundaries of traditional financial reporting – for example, in the supply chain. “The board needs to have confidence in the quality and integrity of the information, as well as its ability to withstand external scrutiny,” says Poole. 

In addition, there needs to be agreement within the business on scope and definitions. A good example is GHG emissions, where a decision needs to be made by the company which emissions are reported (covering Scopes 1, 2 and 3?) – and where the measurement boundaries are. “We need to have common definitions and agreed methodologies. We take it for granted with financial measures,” says Poole. “We need to achieve the same for sustainability information to be decision-useful.”

Efforts are now underway to create that outcome. “The move towards global sustainability standards that we are now seeing is an essential step,” says Poole. “We urgently need standards that would allow companies to report consistently on their GHG emissions and other relevant climate metrics as well as on other sustainability topics.”

The flow of high-quality sustainability information into the marketplace will allow investors to factor that more effectively into their investment decisions. It will also help to drive more consistency in the wider ecosystem that includes data aggregators, analytics providers, ratings and indices.

Poole welcomes the IFRS Foundation’s consultation on a global approach to sustainability reporting standards, including the proposal to set up a sustainability standards board that would sit alongside the IASB. “The IFRS Foundation is extremely well-positioned to take on the global sustainability standard-setting role. It has already demonstrated a successful track record with financial reporting by operating an effective model of independent private sector standard-setting, overseen by public authorities,” she says. “By building on the work of the leading international sustainability standards and frameworks, I believe we can make quick progress towards a global standards solution. This is essential not just to achieve better-integrated thinking but to ensure capital is directed to long-term, resilient business in the low-carbon economy.”

Find out more about the Finance for the Future Awards here.

Article series: People and Planet in the Accounts

Convergence of non-financial frameworks and standards is gaining momentum and we are beginning to see how nature and society might be included in the financial statements. But can these frameworks tolerate such change? In these articles we explore this from the perspectives of different actors in the debate.

See the series