CSR: How Will the New Integrated Reporting Apply to Financial Firms?

Well known environmentalist Lester Brown once said that, "Socialism failed because it couldn't tell the economic truth; capitalism may fail because it doesn't tell the ecological truth." The recent announcement of the establishment of an International Integrated Reporting Committee (IIRC) promises to make great strides in the direction of more inclusive metrics which move toward greater truth telling regarding social and environmental factors.  It will be no small task determining how to develop relevant and coherent standards which will better integrate qualitative criteria into companies' quantitative reports.

At a panel discussion on the Future of Integrated Reporting, Doug Kangos, of Pricewaterhouse Coopers acknowledged the importance of context along with the need for careful discernment regarding which key performance indicators would be most beneficial for investors and the companies themselves.  Too much data can readily turn into noise.  As Kangos noted, it is not helpful to any stakeholder to make annual reports more encumbering.

Mike Wallace of the Global Reporting Initiative observed that there had been substantial representation from the finance industry at GRI's recent conference in Amsterdam.  Wallace thought the recent reputational blow to the industry might have been responsible for this heightened sectoral concern about how social indicators will factor into the new integrated reports.  Kangos then followed up noting that in the aftermath of the financial crisis greater scrutiny is likely to be given to compensation schemes, corporate culture and values, governance, transparency, along with performance and risk management issues. It would behoove financial firms to proactively incorporate these factors to strengthen the credibility of their commitment to a more vigorous reporting methodology.

The failure of the former Soviet bloc economies was in large part due to a top down enforced rigidity which distorted feedback loops. Supply and demand were not meeting at a point of equilibrium and measurements were not generally reflective of cost vs. profit; rather targets were sometimes measured in volume or tonnage.  Well functioning markets require that the information flows are reflective of actual economic exchange fundamentals.  The lopsided nature of today's financial sector promotes its own brand of top down distortions in the feedback loops, as values are manipulated and misdirected.

Back in 1987, prominent investment banker Felix Rohatyn lamented: "The movements of capital and the paper economy related to it used to be the result of industrial and commercial activity; now they are the cause."  Banking expert Martin Mayer echoed this concern stating that: "the market becomes a consumer, not a supplier, of information, and the point of the exercise is no longer the allocation of resources, but the income of participants, which has become a very large number." Kevin Philips has been writing for years about the implications of what it means to have an economy focused on "moving and managing money" rather than on actual value creation.

While the field of CSR reporting is attempting to encourage corporations to tell a better ecological and social truth, the hyper-speculative top heavy signals still emanating from the financial markets revealed themselves as not even telling the truth about economic values. If financial markets as they are currently designed tell a completely false story about what activities should be rewarded, where do we stand in this process of integrative reporting?  Will there be a way to account for how the financial firms operate relative to the risk they impose on the broader society?  Whether we're talking toxic waste or toxic securities, it still a contaminant.

Photo Credit by Americans4financialreforms