The recent Financing for Development Conference in Addis Ababa has brought into sharp focus the question of what it will take to build and sustain long-term investment to support poverty alleviation and meet the World Bank’s twin goals to reduce to 3% the number of people living on less than $1.25 a day, and achieve income growth for the bottom 40 percent of the population in developing countries by 2030. For many years, industrialisation, economic growth and prosperity were perceived to be the preserve of developed nations, while developing economies were said to require “aid” in the form of financial transfers from rich to poor nations. Today’s interconnected world has challenged this orthodoxy to destruction. The mainstream consensus is that this approach treated the symptoms, rather than the causes, of under-development and, in turn, was unsustainable. It excluded developing economies from the transformational benefits of long-term investment in infrastructure and building the skills capacity that would sustain a growing and prosperous economy into the future.
In 2015, a new inclusive philosophy of development is being rolled out and an exhaustive multi-lateral process will lead to a set of Sustainable Development Goals being agreed, which will be applied universally – to developed and developing nations alike. It will require the commitment of the private and public sectors, not working in isolation, but together. And because the world’s population is increasing, and putting pressure on the availability of natural resources, these goals must lead to sustainable outcomes – a principle of sustainability that will be embedded in capital allocation decisions and processes from the start.
The universality of the Sustainable Development Goals (or SDGs as they are known) is further evidence of the interconnectedness of the global economy and the need to provide solutions that apply to all nations, rich and poor. Poverty lies within nations and regions, and is around all of us. And it needs to be tackled by adopting a different mind-set, fusing the expertise, knowledge and values of the private and public sectors to achieve these clear goals. As Jim Yong Kim, President of the World Bank, said in the margins of the Addis conference, “Industrialisation, when done sustainably and inclusively – can be a driver of job creation, technology transfer and sustainable economic growth.” He went on, “Promoting inclusive and sustainable industrial development calls for a broader range of resources than any single development institution can provide on its own.”
Dr Kim’s challenge is consistent with the conclusions of detailed studies conducted by both the International Monetary Fund and Bank of International Settlements into the effects of “financial deepening” in developing economies. Christine Lagarde, Managing Director of the IMF, made an important speech on 17 June entitled, “Lifting the Small Boats”, in which she argued that inequality is harming economic growth. She identified one of the causes of inequality as “the over-reliance [within economic decision-making] on finance”. Mme Lagarde highlighted, “…growing evidence – including from the IMF – that too much finance can distort the distribution of income, corrode the political process and undermine economic stability and growth”.
Increasingly, the need to take a more inclusive approach to understanding and allocating resources is gaining ground within the mainstream global policy community. It is the basis for understanding a broader range of risks, seizing opportunities, and managing and building value over a longer time horizon. Long-term investors, like development banks, have liability horizons that often run to several decades, yet disclosure horizons rarely give that longer-term perspective. This, along with system-wide incentives, needs to change. Today, the deck is too often stacked against long-term investment. It is why the “multi-capital”-focused International <IR> Framework is having such a powerful effect in resetting our understanding of value creation. This is at the heart of the IIRC’s rationale for working so closely over the last two years within the G20 and B20 processes to introduce as mainstream a more inclusive and meaningful framework for understanding and managing value creation to unlock investment and close the $500 billion a year infrastructure gap that is vital to achieving the World Bank’s twin development goals.
Restacking the deck is at the heart of the World Bank’s mission and it is a great privilege for the IIRC to have access to the thinking and decision-making that is helping to shape the next generation of development finance, building the capacity and systems that many millions of people will benefit from in the years ahead.
The World Bank Group – leading by example
Abolishing the silos is the first major step in taking forward the World Bank’s new strategy, announced in 2013. It envisages all of its institutions working together as one World Bank Group to provide a package of customized solutions for clients. Their idea is to work with all of its partners to mobilize private investment and develop effective public institutions, while at the same time ensuring that development progress is environmentally, socially and economically sustainable.
As Betrand Badré, Managing Director and World Bank Group Global Chief Financial Officer said, “Integrated Reporting does more for an organization than just facilitate the creation of a holistic report of overall performance. It fosters and embeds integrated thinking – everyone has a common understanding and speaks the same language. At the World Bank Group, in addition to being a global development institution we are also a financial institution, and see the International <IR> Framework as a tremendous tool to help us align our performance with our strategic developmental objectives.”
This reasoning is also why we launched the <IR> Public Sector Pioneer Network, which the World Bank is helping to spearhead as a development bank and financial institution in its own right. In a recent article for French publication, Finance and Gestion, the World Bank’s Zinga Venner and Giorgio Saavedra acknowledge that the pillars of the International <IR> Framework resonate very well with what the World Bank Group is aiming to achieve internally through the implementation of its new strategy –Integrated Thinking and Integrated Management. They also see significant benefits in promoting the adoption of <IR> by their partners and clients.
What has the World Bank learnt so far?
Internally, it has reinforced the importance of socializing the concept of <IR> from the perspective of how it could help to facilitate integrated thinking, the importance of senior management support for the initiative, that information asymmetry is extensive and if not dealt with effectively, could hinder the World Bank Group’s ability to achieve its strategy. A key challenge in implementing the framework is dealing with the perception that it is just another reporting exercise.
Externally, <IR> can play a positive role in facilitating improved governance, transparency and accountability in the public and private sectors of developing countries, and thereby facilitate the in-flow of resources. By enabling and encouraging public and private sector organizations in these countries to be more transparent to stakeholders about risks, and how these risks are being managed, <IR> could reduce information asymmetry and enable investors to make more effective investment decisions.
Are the twin aims achievable?
The momentum behind the World Bank’s twin aims is growing, along with the evidence base, to support its overall rationale. But there is no hiding the fact that achieving these ambitious goals will be tough. The World Bank still believes, however, that they are achievable and they are marshalling resources from across the public and private sectors. For example, it is estimated that development countries will need to invest an estimated $1 trillion per year through 2020 to overcome the lack of adequate infrastructure. Official development assistance through institutions like the World Bank Group and other public sector oriented bilateral arrangements will not be sufficient and additional resources will need to be sought from the private sector.
Through its global policy engagement, including through the B20 process, the IIRC is committed to supporting this agenda. If corporate reporting can be reformed to refocus capital on the long-term, this will be a tangible contribution to the World Bank’s agenda.
The World Bank’s hypothesis is that better information can help to improve governance, accountability, and rebuild trust in a post-crisis global economy, where raising capital and promoting sustainable growth are essential. In addition, as a result of information asymmetry, private investors’ perception of risk in developing countries tends to be overstated, thereby limiting the appetite to invest. By enabling and encouraging public and private sector organizations to be more transparent to stakeholders about risks and how these risks are being managed, <IR> could reduce information asymmetry and enable investors to make more effective investment decisions and hopefully facilitate the crowding in of resources.
We agree with the World Bank that change will not happen “overnight”, as it requires a shift in behaviour and culture through integrated management and thinking. This is one of the reasons why we established the Pioneer Network so that participants could not only learn from each other on their journeys but also provide encouragement and mutual support. With World Bank Group support we will also be producing an introductory guide to <IR> with a public sector focus.
The World Bank Group, through its convening power and influence on global agendas, such as its role in the Financial Stability Board, is creating opportunities to increase awareness of <IR> and the benefits it brings. We welcome the World Bank Group’s commitment to play an important role in shaping the corporate reporting landscape by promoting the use of <IR> and we look forward to continuing to work closely with them on their journey, the journeys of their clients and partners and hopefully your journey. Times have changed, and reporting must also change to remain relevant.
Integrated Reporting is not “another reporting initiative”: it is part of an evolution in the mind-set of policymakers, investment institutions and capital markets. Its effect, as the evidence is starting to show, will be to refocus decision-making on value creation over the long-term; it is less about financial transactions and more about managing the complex interconnections between people, ideas, finance and the natural environment. It delivers transparency with a purpose. Nowhere today is that interplay more important than in developing nations. It is time to restack the deck. It is why we are proud to lend our ideas, expertise and passion to this vital mission.