Why We Need a Common Standard for Sustainable Reporting with Conor Kehoe
Having spent the majority of his career at McKinsey & Co, Conor Kehoe lived the intergenerational, integrated thinking that is so desperately needed in public companies. Now, as Chair of the International Integrated Reporting Council (IIRC), Conor is championing for integrated reporting and accounting practices to become mainstream.
Episode 9
So what advice does he have for leaders of corporations? How should they best react to pressure from Millennials and the top down pressure from investment institutions, who are demanding that corporations have a positive purpose?
“They definitely need to think about the long term prosperity of their corporations. They need to pay attention to how they attract the next generation of employees and the next generation of consumers.”
Business is not going to succeed in a society that fails, says Conor. Corporations need that context to make themselves attractive to future generations. And yet, while many corporate executives absolutely agree that longer time horizons for business decisions would improve performance, half of them say they would delay any kind of value creating projects, if it meant missing the quarterly earnings targets.
So how do you change that type of thinking?
Public company boards, says Conor, need to talk about the long term, and act in the long term, which then reduces the pressure on the company to act in the short term. Plus, by thinking long term, you end up selecting long term investors. If you behave in a short term manner, you’ll end up attracting short term investors.
Lessons learned from McKinsey & Co
McKinsey & Co helps corporations with strategy, organization, and operations, says Conor.
“On strategy, what I’ve learned over the years is the importance of collective action, while at the same time having tolerance of Mavericks.”
The second thing on strategy, says Conor, is the importance of good decision making. And good decision making comes from having good processes in place.
On organization, purpose and culture are key, Conor says, and shareholder value is the happy outcome of good purpose, culture and strategy. Finally, on operations, bottom up ideas have been hugely beneficial in improving processes.
“These are the main lessons: have a collective action, tolerate Mavericks, make decisions through process, even if it feels less satisfying, be very clear on purpose and culture, and combine bottom up ideas [and] a lot of trial and error as you develop new products.”
Impact investing and sustainability reporting
More recently, Conor has been involved in trying to rationalize the very confusing sector of voluntary sustainability reporting.
Having merged the International Integrated Reporting Council (IIRC) with the Sustainability Accounting Standards Board (SASB), and then merged both of them into the International Financial Reporting System (IFRS) to become their sustainability reporting arm, called the International Sustainability Standards Boards (ISSB). Conor’s next task is to try and rationalize the impact accounting world.
“This is important because the world of sustainability is a world of KPIs. And if you talk to LPs [very big investors], they say things to you like I’m in the middle right now of trying to report to my beneficiaries on sustainability. How do I add a percentage point of diversity with a tonne of carbon?”
And the truth is, says Conor, you can’t add it up, nor can you compare it in monetary terms either. At present, you can’t easily put a price on the benefit of the sustainability work your organization is doing.
Which is why you need impact reporting.
Impact reporting
Impact reporting, says Conor, allows you to translate KPIs into dollars (or euros). So you have a common metric that allows you to add things up, and allows you to compare the cost of achieving them with the value of the outputs in a common currency.
“It’s only when you get into impact accounting or impact investing, that you start to think about this other dimension, which is not just how sustainably am I producing the product, but how sustainable is this product for the population and the planet that it’s being delivered?”
Because the fact is you can have a ‘sustainable oil company’ e.g. one that produces oil while burning less oil to produce oil. And this clearly highlights the problem with our current focus on sustainability reporting – because it doesn’t solve the bigger problem which is the impact that oil has once it’s out there in the marketplace.
“The big challenge is that most of these standards require something new from corporations; they require them to reach back into their supply chain and get metrics out of their supply chain.”
Creating a global set of standards
The investor community and the corporate community are pretty clear on what they want, says Conor, and that is, they would love one global set of standards that are mandatory and assured.
“When we were going through the process of merging IIRC, and SASB, we would put out feelers to New Delhi, Beijing, Tokyo, just to make sure that we weren’t heading off in some strange direction. And the message was pretty consistent: if you Westerners can sort this out, within reason, we will follow.”
Adopting a sustainable agenda
At McKinsey & Co, an organization with 33,000 employees advising many of the worlds’ most influential businesses and institutions, they have intergenerational, integrated thinking at their core. And if they can do it, so can anyone. But how?
“Most large corporations need to be shown how sustainability aligns with long term economic value for it to really take off, because they don’t see themselves as moral and social leaders. They see themselves as good corporations, as people who need to align with the social norms and the laws that prevail, rather than lead them.”
Most organizations feel a strong responsibility, says Conor, to use shareholder’s money wisely. Which means, if they’re investing millions of dollars into a project to increase diversity or reduce greenhouse gases in their production process, They need to be able to explain the benefits of those efforts to the shareholders, or at the very least the benefits to society of doing that.
Which is where impact accounting comes in, says Conor, because this is one way to showcase the value to society, and to the company, of a particular investment along a dimension of sustainability.
And the key to change, says Conor, is to change mindsets. Because you change behavior by changing mindsets. And you change mindsets by showing people data they haven’t seen before.
“You will see, over time, more firms emerging [applying impact accounting], but they need to build up a track record to be convincing to these large LPs. A large amount of money will move gradually towards this new space, if the LPs are increasingly convinced it’s attractive.”
What the world needs most right now
The effects of the Industrial Revolution, says Conor, look to have finally caught up with us. Our climate system, like any system, has limits, and we appear to have reached those limits.
“[My] worries are worries about climate change, but also worries about large disaffected parts of the population that aren’t on board, even perhaps with believing in [climate change], nevermind doing something about it.”
Young people need to get more politically involved, advises Conor. Too many of the next generations rely on corporations to agitate for change or to react to change, but ultimately, changing laws and societal norms lies in the realm of elected politicians.
If the talk resonates with you, we’d recommend you listen to this episode too.
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