The boring revolution

At the beginning of my studies, I had a lively discussion with friends at AIESEC - the world's largest sustainability-focused youth-led organization, which I highly recommend, for you and your kids (not only because of the dancing). We talked about how to keep your values when ascending the corporate ladder. Would you be more successful in changing the world as an outside activist? Or would it be possible to navigate the paradox of (1) succeeding in a culture that rewards profit above else, while (2) implementing meaningful sustainability initiatives, often at odds with profit-making??

The consensus was clear: by the time of reaching an influential position in a corporation, one would have been compromised by corporate greed, so that it would be impossible to create positive impact. Therefore, it would be more effective to be an activist or social entrepreneur which allowed you to play by your own rules of creating a more responsible business landscape.

Looking at the history of the corporate world since the time of this discussion, all indications are that we were right. Even well-meaning, and personally inspirational figures like Paul Polman at Unilever have failed to transform their organizations sustainably (in the long-term effect sense of the word). In 2018, shortly before he stepped down as CEO, the company pledged to ensure 100% of its packaging is reusable, recyclable or compostable. In 2018, this ratio stood at 50%, and in the 3 years after Polman's departure, the company advanced an 'impressive' (European sarcasm here) 3%.

But looking at these numbers with a Germanic (although I'm Austrian) pragmatic perspective, they simply show how difficult it is to create lasting change, even if the guy on the top really, really wants it. It’s not only that staying true to your values in a corporate environment is incredibly challenging, but also the massive size of corporations that make implementation of sustainability initiatives at all levels a monumental task.

However, there is change on the horizon, showing itself in a fairly boring, but effective aspect of the corporate world: reporting requirements. While sustainability reporting has until now been mostly voluntary, more and more governments, authorities and, most importantly, investors are making it mandatory. Especially the EU Corporate Sustainability Disclosure Regulation and the IFRS Sustainability Disclosure Standards (which have already been adopted as disclosure requirements by 14 stock exchanges) are changing the game. The EU is known for imposing its will on the world, but the IFRS is a somewhat more unexpected and much more significant actor. The organization that has become the consensus for financial accounting practices is now creating a consensus for connecting financial and sustainability reporting. Connecting financials (that as well know are the main purpose of large corporations) with sustainability information is an immense step towards making companies accountable for their environmental and social impact. That this connection is now driven by the organization that accomplished standardization of how companies report their financials to governments and investors indicates a significant cultural shift in how the corporate world operates.

Creating mandatory integrated reporting standards will eventually drive the alignment of all levels of organizations towards more sustainable practices. Consider that a simple worker is primarily interested in earning a living, while many executives focus on advancing their careers and salaries. In a setting where sustainability reporting is voluntary, responsible business practices have little chance of adoption among these groups. However, when integrated reporting becomes mandatory, sustainability suddenly has to become everyone's business. Particularly finance and sustainability professionals will need to understand each others' work much more intensively, which will create innovation in sustainable, yet profitable operations.

While I am very hopeful for the future, there is still a long way to go, and integrated reporting concepts still have to proof their effectiveness. One of the main criticisms is that these concepts create a large amount of additional data collection and reporting requirements, therefore increasing costs of doing business. It remains to be seen if effective technology solutions for integrated reporting will be developed, and/or if investors and other capital providers follow through with their promises of allocating capital preferably to companies that can demonstrate sustainability and financial value. In most other jurisdictions outside the EU, integrated reporting standards also still need to be implemented into national laws. Yet, the 14 stock exchanges (representing more than 50% of market capitalization, outside the US) have already started the process of adopting IFRS Sustainability Reporting Standards, and will require companies to report as early as 2025. Finally, as with any regulation, effective implementation, and, in the case of reporting, verification (assurance) mechanisms need to be followed to ensure the rules are actually applied in the way they are meant to be used.

Despite these concerns, I believe that we are seeing the end of corporations that are primarily profit-driven. Integrated reporting standards, as well as other, more industry-specific sustainability standards, are receiving strong support from not only government and financial institutions, but also from the non-profit sector. This is a strong indication that the time of entirely profit-driven corporations might be ending.

My university friends and I were right in our assessment 15 years ago. However, now is time for the activists and social entrepreneurs to partner more strongly with, or even join large corporations to be part of this exciting development towards more responsible companies.