The Future Direction - Integrated Reporting?
The demands on corporate reporting are growing rapidly as stakeholder expectations of a greater in-depth understanding of the entities they are investing in or participating with become ever greater. In this continuous evolution numerous factors add to the demands on corporates and their stakeholders including globalisation, growing policy activity around the world in response to financial, governance and other global issues, heightened expectation of corporate transparency and accountability, actual and prospective resource scarcity, population growth and environmental concerns.
Regulators have taken various initiatives to maintain order over corporate reporting and governance but no one regulator has the full global view - jurisdictional limitations and lack of international treaties preclude this. The explosion of networking sites, social and otherwise - Facebook, Twitter, LinkedIn and others - have given substantial scope to political and other activitists to take up issues and create havoc for companies with major reputations at stake. All of this puts more and more pressure on companies to tell the full story in as clear and concise a manner as possible.
Stakeholders are demanding to be informed as to whether companies they have an involvement with are 'good corporate citizens'. These companies must operate, and be perceived to operate, in a manner that minimises negative impacts on the environment, that takes into consideration the varied needs of a spectrum of stakeholders, and that positively contributes to the communities in which they operate and the planet generally. Global companies may well be in the best position to assess and manage global resources, and, indeed, may be increasingly expected to do so.
The relevance of this new direction which many seek in corporate reporting was given added impetus by developments in recent weeks. These developments included:-
- The International Integrated Reporting Committee (IIRC) published its Discussion Paper (DP) 'Towards Integrated Reporting - Communicating Value in the 21st Century'
- The Global Reporting Initiative (GRI) has called for comments on the proposal 'fourth generation' of its Sustainability Reporting Guidelines
- The GRI and the International Organisation for Standardisation (ISO) have signed a memorandum of understanding (MOU) to increase their co-operation on sustainability matters
Towards Integrated Reporting
The IIRC was formed in 2010 by a number of leading organisations, including the GRI and the International Federation of Accountants (IFAC). The objective is to bring together a cross section of representatives from the corporate, investment, accounting, securities, regulatory, academic, civil society and standard-setting sectors. The purpose is to create a globally accepted integrated reporting framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format. The DP is the first step in achieving this mission.
The DP is seeking to establish a framework within which an organisation would provide material information about an organisation's strategy, business model, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. Integrated reporting, when executed with the requisite rigour, has the ability to enable both the organisation and its stakeholders to make better informed decisions.
The DP identifies five guiding principles to underpin the preparation of an integrated report - (1) strategic focus, (2) connectivity of information, (3) future orientation, (4) responsiveness and stakeholder inclusiveness, and (5) conciseness, reliability and materiality.
The DP presents views on the main benefits and challenges of integrated reporting, with some of the more significant and pervasive being:-
- Benefits - (1) better alignment of externally reported information with information management uses for decision making, (2) a broader information set, (3) improved transparency, (4) enhanced risk management, (5) higher levels of trust with key stakeholders, (6) harmonisation of reporting approaches, and (7) lower cost of, and better access to, capital because of improved disclosure
- Challenges - (1) the variety of existing local regulations across jurisdictions, (2) inconsistent fiduciary duties of directors across jurisdictions, (3) concerns about directors' liability if the reports are to include greater focus on the future, and (4) knowledge building and experience essential to long-term success.
Achieving a balance between the apparent benefits and the considerable challenges is a daunting task to undertake, particularly when any potential solution needs to provide for the differing needs of the various stakeholder groups. The Bodies who have produced the DP are now looking towards the creation of a framework as the foundation of an integrated corporate reporting model in the future. This is a major undertaking which will need to be championed by stakeholders, and their representative bodies, at all levels and driven forward. Will the overall benefits of greatly enhanced transparency and comparability, with all the consequent benefits, be sufficient to gather the momentum needed to achieve the ultimate objective?
A Sustainable Environment
The GRI drives sustainability reporting by all organisations. Its Sustainability Reporting Framework is widely used around the world to enable greater organisational transparency. The Framework, including the Reporting Guidelines, sets out the principles and indicators organisations can use to report their economic, environmental and social performance. GRI's overall mission is to make sustainability reporting standard practice, and it is committed to continuously improving and increasing the use of the Guidelines with a fourth generation framework currently in development.
The GRI are currently seeking comment on their proposals in the fourth generation of the sustainability reporting framework, on issues including:
- the principal reasons for sustainability reporting
- report formats
- the minimum content of a GRI sustainability report
- report topics - including views on the proposals from the public 'Call for sustainability reporting topics' in May
- general experiences with sustainability reporting
Despite best efforts, standardisation of sustainability reporting remains elusive. With more than 77,000 multinational corporations around the world, only a fraction produce sustainability reports with fewer than 2,000 reports using the GRI Guidelines registered in 2010. However, there is a growth in numbers on an annual basis over recent years and this is encouraging in a world where many companies are under increasing financial and resource pressure.
The reverberations of the global economic and financial crisis, the increasing rigour of the approach being taken by policy-makers and regulators, and the substantial movement towards new and substantially revised financial reporting standards all add to the challenges confronting organisations.
The call for 'joined-up' thinking and reporting gets louder and forward-thinking organisations are putting integrated reporting on their agendas now. Being ahead of the curve gives them a clear advantage in the market place and organisations that report on the full spectrum of issues may be seen as more advanced than those that restrict their corporate reporting to traditional financial information.
Integrated reporting has the potential to favourably sway investors, influence customers and attract partners. Deploying and organising the resources to meet the challenge of this forward-looking approach may yield substantial benefit.