Sustainability and integrated reporting: opportunities and strategies for small and midsize companies.

Author:James, Marianne L.
 
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INTRODUCTION

Companies of all sizes continue to expand their efforts to achieve sustainability and to preserve resources for future generations. Many of these efforts are geared towards reducing a company's environmental foot print, efficiently utilizing and preserving resources, and interacting responsibly with stakeholders. For example, many organizations practice and encourage recycling, voluntarily reduce packaging, invest in renewable energy sources; invest in green technology; encourage their employees, suppliers, and customers to embrace responsible practices; and support sustainability-oriented community projects. Some organizations even require that their vendors adhere to minimum sustainability practices. For example, Apple Computer Company requires that its suppliers adhere to a code of conduct that not only addresses employee safety, but also requires adherence to environmentally responsible manufacturing processes (Apple, 2012).

Most companies communicate information about their sustainability efforts to stakeholders, as part of advertisements, product packaging, public relations announcements, and promotion on company websites; some may even publicize them on business vehicles. In addition, formal reporting has increased significantly, especially among larger organizations. However, a new trend toward integrated reporting, which incorporates information about a company's financial, social, and environmental performance, is emerging. This may lead to long-term advantages not only for large, but especially for small and midsize companies, many of which issue annual financial reports to their stakeholders.

Integrated reporting will help small and midsize companies consider the joint impact of their actions on the economic, natural, and social environment. This will help managers develop strategies and business models that support sustainability efforts and focus on the long-term creation of value. Integrated reporting will provide useful information for company executives to assist them in planning, budgeting, and implementing strategies that lead to the efficient and effective utilization of resources, which will tend to help control or reduce costs. Integrated reporting will also improve a company's ability to effectively communicate with external stakeholders (especially customers, investors, lenders, and vendors), who increasingly expect companies to implement and enhance sustainable and overall responsible actions; it will enhance customer and employee loyalty; and potentially lead to additional financing opportunities. Furthermore, integrated reporting may improve a company's ability to take advantage of sustainability-oriented incentives, such as grants and tax incentives, by providing the necessary reporting support.

BACKGROUND

In 1987, the World Commission on Environment and Development (the Brundtland Commission), defined sustainability development as a "development that meets the needs of the present without compromising the ability of future generations to meet their own needs." (United Nations, 1987). Thus, sustainability is a broad term that incorporates many aspects and includes the responsible utilization and preservation of natural resource, such as air, water, minerals, oil, gas, etc. Many companies also interpret the term to include the effect of a company's actions on its stakeholders; and especially its employees, customers, and the community in which the company operates. Many companies' sustainability reports address all or most of these aspects.

Sustainability--A Growing Trend and Its Causes

During the past few decades, individuals, business organizations, and governments have increasingly recognized that sustainable practices are extremely important to the wellbeing of current and future generations. Examples of sustainable practices are numerous, from reducing packaging and recycling to reduce waste; to manufacturing and purchasing products that preserve natural resources such as water, air, and minerals; to carpooling to reduce harmful emissions; to product design that incorporates efficient use of resources and minimizes the impact on the environment.

Many companies continually strive to reduce the overall environmental impact of their business activities and to use scarce resources in a continually more efficient manner. For example, NextEra Energy Company, a large U.S. utility company, has continually decreased its harmful emission during the last two decades, while significantly increasing its power generation. Specifically, between 1990 and 2010, the company increased its power generation by 249%, while decreasing is CO2 emission rate by 34% (NextEra, 2011).

The scarcity of resources will continue to affect companies of all sizes, their business strategies, and their stakeholders. A recent article in Fortune entitled "What will the global 500 look like in 2021?" refers to the scarcity of natural resources as the "new normal" and envisions opportunities for companies that know how to utilize natural recourses efficiently (Fortune, 2012). While the article focused on global entities, this is also true for domestic companies of all sizes.

Demand for socially responsible and sustainable business practices has increased significantly during the past few decades. Complementing this trend, demand for corporate responsibility investing also has risen steadily. The US SIF (also referred to as the Forum of Sustainable and Responsible Investment) reports that more than $3 trillion dollars are currently invested in sustainability and corporate responsibility funds (US SIF, 2012). This trend is closely related to stakeholder expectations. Investors tend to expect, support, and reward responsible corporate behavior. To illustrate, in 2012, an estimated 45% of shareholder-initiated proposals is expected to involve environmental and social issues (Ernst & Young, 2012).

Shareholders appear to react positively to news about responsible corporate behavior. A recent article in Forbes summarizes the finding of research that tracked the performance of hundreds of companies receiving press coverage for responsible environmental actions and companies receiving press coverage for irresponsible environmental behavior. The research findings linked abnormal increases in the stock prices with reports of environmentally responsible behavior and abnormal decreases in stock prices with reports of environmentally irresponsible behavior (Flammer, 2011).

The reasons why companies implement sustainability projects vary from company to company. Multiple factors likely will inspire a company to adopt, continue, or expand sustainable practices. A desire to preserve precious resources and to act responsibly and ethically may certainly motivate an organization's behavior. In addition, managers tend to consider the effects of sustainable practices on profitability, as well as shareholder expectations...

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