The IIRC Integrated Reporting Framework & Context-Based Sustainability: A Conversation with Bill Baue

Submitted by Francesca Rheannon

By Francesca Rheannon

Back in May, I reported on the IIRC’s draft initiative to redefine how the global financial system weighs value by creating an International Integrated Reporting <IR> Framework. 

I said then that the document could revolutionize business by “changing the very DNA of financial accounting so that it promotes sustainability.”

But if it were to have any chance of doing that, the consultation draft would need to receive robust comment from the sustainability community at large: investors, companies, advocates from NGOs and other thought leaders. Otherwise, the document was at risk of being watered down by dominant players in global business who think they have a stake on keeping business more or less as usual. (Actually, they have the same stake in a liveable, sustainable planet that the rest of us have, but, since the bean counters can’t account for it, it goes unseen.)

Sustainability Context Group Comments on the IIRC Draft

I am happy to report that at least some in that community heeded the call (the comment period closed on July 15.) Among them is the Sustainability Context Group, set up by Mark McElroy of the Center for Sustainable Organizations and sustainability consultant Bill Baue in early 2012. The group submitted a comment that was signed by an impressive roster of its members, including John Fullerton of the Capital Institute, journalist Marc Gunther, and Gil Friend of Natural Logic.

The Group praised the Consultation Draft’s embrace of the “multiple Capitals model” – in addition to financial and manufactured Capitals, the model includes natural, social, human and intellectual Capitals -- for its framework. But it also urged the IIRC to strengthen its commitment to the multiple Capitals model by better clarifying “the causal connections between impacts on vital Capitals, stakeholder wellbeing, and the performance of organizations.”

This commitment is grounded, according to the Group’s comment, in a:

“Co-commitment to the principle of carrying capacity, since it is precisely the fact that Capitals are limited in their scope and supply that makes them so relevant.” 

I spoke with Bill Baue about the Group’s comment, what carrying capacity means within the context of the multi-Capitals model, and why the frame of “context-based sustainability” is the means for strengthening integrated reporting.

Context is Key

First, briefly remind us what context-based sustainability is.

Context-based sustainability means measuring corporate impacts on the multiple Capitals so that the carrying capacity remains viable for those Capitals. It means staying within the threshold limits – for example, not using more water than a watershed has available to it.

What’s different about the context-based approach to the multi-capital frame from the way the IIRC draft document’s approach?

At this point they are just asking companies to measure their impacts on those Capitals.

Essentially, that’s where the corporate sustainability world is right now – they’re just looking at the impacts and they're not comparing those impacts to what they need to be in order to remain sustainable. Currently, corporate sustainability isn't actually sustainability. Companies are asking, “Are we heading in the right direction? Are we minimizing our impacts?” But there are no goal posts.

In other words, they're not measuring impacts to thresholds.

There’s some indication that [the IIRC consultation draft] has language about the availability and quality of the capital stocks, which goes in the general direction of managing for sustainability. And also the core model is financial management. Financial management absolutely looks at the sustainability of stock because you want to build the capital base in order to create profits. And that’s a sustainability measure: is the carrying capacity of your original capital growing or diminishing? [The document] is essentially applying that same thinking to natural capital.

Concerns About Stakeholders

You received some feedback for your comment from members of the Sustainability Context Group. Can you elaborate?

Some within the Group were concerned because the IIRC takes a simply investor-centric approach. Their primary audience is what they call “providers of financial capital,” like investors and debt holders. Some people were concerned that the framework would fail to adequately take into account the right and needs of all the stakeholders. By not framing them as [part of] the audience, it is excluding them from comprehensive consideration. 

Many of the Capitals that companies rely on to create value are not exclusively owned. They are shared with stakeholders -- are from the Commons – therefore, the impacts on those Capitals create the need to be accountable to those other stakeholders who rely on that capital as well. You actually have to take accountability for keeping those impacts in a sustainable place.

But there’s a difference between who the audience is and whether the framework itself takes stakeholders into account. The stakeholders are not the primary audience but, at its core, the framework does take stakeholders and their legitimate claims to capital into account.

The wellbeing of stakeholders is the ultimate goal here, but the intermediary step is the impact on Capitals, because we all rely on these Capitals for our wellbeing. A Capitals-based approach implicitly recognizes that companies have to manage your contribution to carrying capacity -- which is complex and I don't think most companies are going to get this right away -- but logically speaking, you can't embrace multi-Capitals theory as a model and not also embrace the notion of carrying capacity.

Governance, The Commons & Capitals

You mentioned the Commons. There’s some work being done on developing a governance framework around the Commons, especially the Ecological Commons. For example, there’s the work by David Bollier and Burns Weston on Green Governance. 

I’ve engaged with David Bollier around this issue. He views the Capitals-based approach as inherently reductionist, as an attempt to monetize the Capitals. Bollier's concern here is that a multi-capital approach in the capital markets isn’t sufficient to address the need for community governance.

I agree with him, but we're not there yet.

Where I disagree with him is that I think we're going to get there better if we get the corporate community thinking in terms of using Capitals borrowed from the Commons. Because you are having impacts on Capitals that are shared with stakeholders, the companies have an ethical obligation to measure those impacts and make sure they are sustainable. It's a self-accountability mechanism. The next step would be to then engage with stakeholders and see if they agree.

But nobody shares power unless they have to.

That’s true, but companies are recognizing that these resources are limited and that their social license to operate is also limited. Bollier is working on the notion of revoking the corporate license to operate -- that can be effective, because it brings the issue into the risk management [concerns] of companies.

But ultimately change happens more effectively when organizations recognize that they have to take accountability themselves, rather than having it imposed from without. Actually, the external imposition of accountability works hand-in-hand with the internal embracing of accountability.

Engaging With Stakeholders

How would the context-based approach improve the IIRC framework’s ability to engage with stakeholders?

By focusing on a threshold, context-Based sustainability provides an objective criterion for engagement to find out if the stakeholders agree with the threshold that the company has identified. Without that, stakeholder engagement is just a negotiation, a power-play based negotiation, instead of an objective-based negotiation. What ends up happening is that the company will appease the loudest stakeholder, regardless of whether that stakeholder makes sense or not and regardless of whether the least powerful stakeholders are actually the most important. 

Oxfam has addressed the stakeholder issue with its concept of “The Doughnut” as a “safe and just space.”

Yes, and that comes from the “safe operating space” in the original Rockstrom report. Rockstrom was the lead author of the 2009 Planetary Boundaries paper. The idea is essentially threshold-based, saying we’ve got a limited supply of fresh water, a limited capacity of climate to regulate itself, a limited supply of phosphorous [for agriculture] -- that's a safe operating space from an ecological perspective.

Oxfam added the idea of social floors – social justice -- to this notion of ecological ceilings, where the safe operating space is in the middle between the two. That's completely consistent with context-based sustainability, because the latter looks at all the Capitals and across the entire Triple Bottom Line.

Business leaders interested in finding out more about the IIRC International Integrated Reporting Framework can follow this link.