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Connecting the dots — integrated reporting

Connecting the dots — integrated reporting

Recently, an investor-led coalition called on UN member states to require both listed and large unlisted companies to integrate sustainability information in their annual reports — or explain why not.

The group, known as the Corporate Sustainability Reporting Coalition, comprises investors with $1.6 trillion in assets as well as financial institutions, professional bodies and NGOs. Led by Aviva Investors, members include the Association of Chartered Certified Accountants, Al Gore’s Generation Investment Management, the Global Reporting Initiative and Hermes, the funds management firm owned by the BT Pension scheme.

They want UN members to adopt a global policy framework at the United Nations Conference on Sustainable Development – the Earth Summit – in Rio de Janeiro next year.

“Progressive companies around the world have come to understand that long term-value is enhanced by embedding long-term sustainability into their business strategy and by fully disclosing their progress to investors,” says Paul Abberley, chief executive of Aviva Investors London. “As a long-term investor we also recognise the positive impact that embedding long-term sustainability into a business strategy can have on shareholder value.

“We believe that all corporate boards should be required to consider the future sustainability of the firm they govern. This should not only enhance long-term profitability and returns to investors, but also improve the quality of stock markets, increase macro financial stability and make a material contribution to the lives of those impacted by corporate activity.

“This is why we are calling on the United Nations member states to commit to develop policy on Corporate Sustainability Reporting. Markets are driven by information. If the information they receive is short term and thin, then these characteristics will define our markets.”

According to the International Integrated Reporting Committee (IIRC), the development of integrated reporting is designed to enhance and consolidate existing reporting practices to move towards a reporting framework that provides the information needed to develop the global economic model to meet the challenges of the 21st century.

According to its recently released discussion paper, Towards Integrated Reporting – Communicating Value in the 21st Century, such reporting should provide a clear, comprehensive, meaningful assessment of the long term viability of an organisation, meeting the information needs of investors and other stakeholders and supporting the effective allocation of financial, manufactured, human, intellectual, natural and social capital.

“The range of issues – economic, environmental and social – which determine an organisation’s success has never been broader or more pressing,” says Sir Michael Peat, Chairman of the IIRC. “It is for this reason that we need an approach to reporting that is fit-for-purpose in the 21st century. The world has changed – reporting must too.

“All matters which are important in assessing an organisation’s performance and position, past and prospective, need to be reported but not by making annual reports ever longer and more complex; they are too long already.

“The information needs to be provided clearly and concisely with the connections between financial, environmental and social impacts demonstrated and the clutter removed. This is what Integrated Reporting seeks to achieve.”

Clear vision

“Integrated reporting is best regarded as something that is evolutionary, but also revolutionary,” says John Purcell, CPA Australia’s policy adviser on corporate regulation and the organisation’s representative on the Accounting Bodies Network under the Accounting for Sustainability Project.

“It will transform the manner in which different forms of corporate disclosure are presented to users, and will draw the key components of current annual reporting and sustainability reporting practices into a single conceptual framework and system of reporting.”

It is no longer just about being seen to do the right thing.

“Reporting using an integrated framework allows the cause and effect interdependencies of different components in each stream of reporting to be mapped,” Purcell continues.

“For example, particular OHS measures are communicated to stakeholders in sustainability reports, such as discussions about how a company performed in terms of industrial accidents, their strategy to mitigate risk and how they have performed over the long-term, but there is no dialogue about how OHS decisions affect the bottom line.

“Integrated reporting makes this connection.”

Other benefits include better risk management and better communication with key stakeholders, breaking down the disconnect between internal information and what is distributed to external stakeholders. It also gives investors a better understanding of the medium to long-term prospects of a business.

“A lot of current reporting is built around past events, however integrated reporting is future-focused in terms of how the business model will generate wealth,” he adds.

“It reflects the changing nature of business operations and will unclutter and give greater clarity to corporate reporting, while driving business growth.”

Early days

The move towards integrated reporting is being led by South Africa. As part of its listing requirements, the Johannesburg Stock Exchange (JSE) adopted the King Code of Governance for South Africa 2009 (known as the King III code), which recognised that a “key challenge for leadership is to make sustainability issues mainstream. Strategy, risk, performance and sustainability have become inseparable”.

The JSE now requires all listed companies to create an integrated report for financial years starting after March 2010–or explain why they are not.

Multinationals like United Technologies, Pepsico, and Atlas Copco have also made the transition to integrated reporting, while in Australia the move is being led by National Australia Bank. The bank released its first integrated report in 2010 and has been invited to participate in the IIRC integrated reporting pilot program, which will contribute to the development of an international integrated reporting framework.

“We felt it was a great opportunity to bring our reporting together and talk about who we are as a company and how culture and corporate responsibility are a fundamental part of how we do business,” says Janette O’Neill, head of Corporate Responsibility Strategy at NAB.

“It gives us a clearer, broader picture of the company and its performance, and helps us make long-term decisions. Holding information in separate documents, each containing slightly different information means that you may never understand the true impact of sustainability activities on the business.

“By bringing together material information about our operating environment, business strategy, governance, financial and non-financial performance, we can better articulate how we create and sustain value for our stakeholders,” she continues. “Our integrated annual review has become our single source of truth. This helps shareholders and our broader stakeholders find the information they require to meaningfully assess our performance and understand our business model and strategy moving forward.

“[It] is supported by a series of ‘Dig Deeper’ papers as part of our online reporting - these provide further corporate responsibility performance information related to customer, people, environment, community and supply chain,” she says, adding that this approach to reporting has led not only to more effective reporting but also more efficient use of resources.

Best practice

Greg Chipman, director of the Responsible Investment Association Australasia and RI Academy, sees real alignment between what integrated reportingis seeking to achieve and what information investors need and want.

“Ensuring material environmental, social and governance [ESG] factors are properly factored into the investment decision-making process is critical to all players operating in wholesale and retail markets, whether these are superannuation funds, asset managers, financial advisors or other key stakeholders.

“Taking account of key value drivers that are not typically captured in annual reports and financial statements – things like strategy, innovation, human capital, risk management, stakeholder and customer relations – is vital in today’s economy and must be used to enhance traditional financial analysis.

“Together, this provides a much better picture of what’s going to drive company performance and shareholder value, and as such, integrated reporting and ESG integration as concepts are wholly aligned.

“From an investment perspective if you’re not pursuing ESG integration then you’re compromising on fiduciary, best interest and quality of advice objectives. In the same way, integrated reporting will become synonymous with best practice corporate decision making and reporting and will be demanded by investors.

“Integrated reporting and ESG integration are being addressed by leading players now and will be pursued by corporations and investors concerned with best practice and effective risk management going forward.”

Chipman believes the implementation of ESG integration and integrated reporting across investment and capital markets should be a key focus of global policymakers concerned about the sustainability and stability of financial markets.

He does not believe the issues have been dealt with well in Australia as yet, notwithstanding the once in a generation opportunity provided by the Future of Financial Advice (FoFA) and Cooper superannuation reviews, but is encouraged by recent discussions at senior levels.

“There is increasing understanding of the issues. The key is ensuring workable policy outcomes are delivered that recognise where we need to go and how to best get there with appropriate time for adjustment.”

However, he says it is important to note that integrated reporting is a work in progress, and is not yet legislatively mandated. Different jurisdictions also have different corporations law and listing requirements that may impact on its global uptake.

“The integrated reporting agenda is gathering pace, but also in the context of what each jurisdiction is currently doing,” he explains.

“Australia, for example, has been heavily focused on corporate governance principle #7, which incorporates disclosure and reporting by companies on ESG risks and opportunities. In this way, the policy intent underpinning integrated reporting and ESG integration is currently being considered through the lens of existing corporate governance principles and applications.”

He expects that there will be a number of iterations along the journey to producing a final integrated reporting framework, but says that’s not an issue, so long as current progress continues and the underlying policy of better disclosure of key information to investors remains.

“It’s all about where a company is going, how it’s going to get there and having this information better considered and priced in by investors”.

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