The emerging concept of combining financial and sustainability reporting into one report, embraced now by a number of major global companies including United Technologies, Southwest Airlines, and American Electric Power, got a boost from a U.S. pioneer in the importance of reporting non-financial factors.

Harvard Business School professor of management practices Robert Eccles recently advocated, in an interview with MITSloan Management Review, that a company “report on the resources it consumes, the wastes it creates, the human capital it uses, and the communities it helps or disrupts.” The reporting, he said, “has the potential to be a mechanism for not just articulating actions more clearly but for spurring them, too.”

Eccles goes a step further than most, however, by asking whether integrated reporting will work if it's not mandatory. Good companies, Eccles said, “will see integrated reporting as an opportunity to communicate on and implement a sustainability strategy, which I define as one that creates value for shareholders over the long term while contributing to a sustainable society.”

I began working with Eccles, who is also co-author of the 2010 book One Report: Integrated Reporting for a Sustainable Strategy, in 1995, when I assisted his HBS colleague Sarah Mavrinac as she developed her landmark study, “Measures that Matter,” for the Ernst & Young Center for Business Innovation.

In that research, Mavrinac selected four major companies in four industry groups—16 in all—and gave over 275 institutional portfolio managers a series of non-financial measures to use in making mock investment decisions. The participants then ranked these non-financial factors in order of their value in making their decisions for each company in the study. Except for the pharmaceutical companies where the study participants ranked quality of new product development as the most important factor, the portfolio managers placed quality of management at the top for food companies, oil and gas companies, and computer makers.

The Mavrinac study sent a strong message to companies on the importance of the CEO, CFO, and other top managers to make presentations to the investment community, so analysts and investors can evaluate their ability to lead the company and articulate a strategic vision going forward.

As a champion of integrated reporting, Eccles led the efforts by what he calls a “tiny network” of 10 to 20 advocates of standard setting for non-financial information. Yet, their advocacy has convinced only a small group of companies to publish “one report.” In addition to Southwest, UT, and AEP, they are Smithfield Foods, the Netherland's Phillips, Germany's BASF, Denmark's Novo Nordisk, Brazil's Natura, and Japan's Mazda. Numerous other major companies are publishing sustainability or corporate social responsibility reports in addition to their traditional financial annual reports.

While Eccles makes a strong case for the value and importance of combined reporting, I have found him over the past 20 years to be a pragmatist in addition to being a visionary. He acknowledges that many sustainability reports are no more than “window dressing,” and therefore are not effective at influencing resource allocation decisions in any considerable way.

Given the pace of the SEC's implementation of the two-year-old Dodd-Frank Act legislation ... I can't see the SEC moving on mandating integrating reporting.

“I've been studying corporate reporting and trying to change it for 20 years. I think reporting can be an enormously strong influence on corporate behavior. But it's the difference between CSR or sustainability reporting by itself and integrated reporting,” he said in the MIT interview.

So when, in Eccles' view, might we see mandatory integrated reporting in the United States? He believes it could happen within the next two to three years!  “The first step will be legislation.  You wouldn't want to legislate it too quickly in the  United States,” Eccles says, which could be difficult given the various approaches companies have adopted on sustainability reporting. The next step will be more leading companies will get out ahead of legislation because in their view intgegrated reporting is “the right thing to do.”

In the European Union, Eccles says that they will pass legislation between now and June next year mandating environment, social, and governance reporting but they may or may not call it integrated reporting. Already, the Johannesburg Stock Exchange requires companies to integrate their reporting or explain why they don't.

Globally, there's a pilot program sponsored by the International Integrated Reporting Committee that will work with 100 companies in different sectors on a draft framework for integrated reports. Supporting this approach will be leading companies that voluntarily adopt integrated reporting. Also, playing a role in creating standards for non-financial reporting is the recently formed Sustainability Accounting Standards Board, of which Eccles is the chairman.

Robert Massie, co-founder of the Global Reporting Initiative and Harvard University Houser Senior Visiting Fellow, said at a March 2011 talk, “As we rocket forward into the 21st century, questions have erupted around the world about whether the financial and economic information used by corporations, investors, and governments is guiding us toward—or away from— sustainable prosperity.” He goes on to say, “This debate in turn has raised fundamental questions about the purpose of the modern corporation, the relationship between shareholders and stakeholders, and the alignment of corporate actions with long-term public policy objectives.”

Years ago, former Nobel Prize winning economist and free market advocate Milton Friedman raised the issue about the purpose of today's corporation when he said the only social responsibility of a corporation is to increase profits to benefit its shareholders. He believed that public corporations were not the right vehicles for solving community and social issues. There are still some CEOs who are in that camp, but their number is dwindling as leading companies are voluntarily providing annual sustainability reports or even integrated financial and sustainability reports to make investors and the public aware of their commitment to sustainability efforts.

The literature in this area strongly suggests an increasingly popular view that corporations increase their long-term value to shareholders when they link efforts to produce profits for their shareholders with engaging in practices that focus on sustainability.

From my perspective in the nation's capital, the possibility of achieving mandatory integrated reporting still appears to be a long way off. If standards settingis an important component to achieve legislative action, getting agreement on standards related to concepts that are far more abstract than financial factors will not come quickly. And, until we know which administration occupies the White House and how Congressional leadership takes shape, I cannot see that this would be a near-term legislative issue. Given the pace of the SEC's implementation of the two-year-old Dodd-Frank Act legislation, not to mention its foot-dragging on the decision on whether to adopt International Financial Accounting Standards here in the United States, I can't see the SEC moving on mandating integrating reporting.

I do, however, see the SEC supporting voluntary combined reporting as more and more major corporations are adopting sustainability reporting along with leading companies that are now publishing combined financial and sustainability annual reports.