Moving Forward – A Better Reporting Framework?

Published July 2012

Climate change, environmental concerns, ‘greenhouse’ gas emissions, commodity constraints – these major challenges and many others are facing the global community. None of us are removed or immune from having to cope with the consequences. How are we responding, is there a focused level of awareness?

Large corporate groups – many of them with widespread multi-national interests – have a major influential role to play in managing these challenges.  While regulators and other government agencies have an authoritative and supervisory role to play, it is the corporations that are operating at the coalface of industrial and commercial activity.  In making our business decisions - investment, purchasing, choice of business partner,. - does responsiveness to global concerns and longer-term sustainability play a sufficiently important part in our decision-making?

Financial Reporting - Adequate?
A genuine question is whether we have access to relevant, reliable and understandable information to assist us in making such decisions? Responding to this question calls into play the adequacy of corporate reporting to provide such information, and whether the major communication by corporates – the annual report - fulfills that need. There is much to suggest that the current form of reporting does not, and that the best efforts of standard-setters may address specific recognition, measurement and disclosure needs but in overall terms have led to a burdensome level of length and complexity in annual reports. There is no doubt but that inconsistencies and general shortcomings in the application of reporting requirements have not helped.  So much so that even well informed investors and analysts are turning more and more to presentations by financial directors, and similar, to gain an understanding of a company’s performance, financial position and future prospects. Regulators, standard-setters, preparers, auditors may all need to ask themselves the question of whether the key objective of corporate reporting is being met, to deliver fundamental and balanced messages to investors and other stakeholders.

Do we have the ability to stand back, take stock, and come up with a way forward to ensure the key objective is being achieved? A new approach is needed, one which should be driven by what information investors and others need to make informed decisions about a company.

Steps being taken
Thankfully, there are a number of initiatives being taken to address the needs of investors and other market participants. The International Integrated Reporting Committee (IIRC), The Global Reporting Initiative (GRI) and, indeed, the United Nations are just some of the major global organisations that are committed to making a difference to creating a culture and framework for improved information. Underlying improved information must be a heightened awareness and more focused efforts by management to build environmental and social considerations into their strategies and policies, to support corporate sustainability and translate commitments into tangible action.

UN Global Compact and the GRI
The UN Global Compact’s recently published 2011 Implementation Survey, the most comprehensive global survey on business policies and actions to advance sustainability, was completed by more than 1,300 companies worldwide. Some of the major finding are:

• Corporate disclosures on sustainability issues is on the rise, with Global Compact participants submitting 4,150 reports in 2011 contributing to the world’s most extensive collection of such reports – almost 14,000
• Among the four main areas covered by Global Compact principles, companies are taking action on the environment and on labour standards at the highest rates, anti-corruption and human rights actions lag behind
• While environmental risk assessments are becoming a standard feature of sustainability management, less than 25% of companies report conducting risk assessments in the other areas; and
• While 63% of respondents say their companies consider supplier adherence to sustainability principles, most are only taking limited action to support and incentivise such adherence.

The Global Reporting Initiative (GRI) continues to work with hundreds of experts around the world to generate the next generation of Sustainability Reporting Guidelines. Nine topics have currently been universally agreed as being of global priority and relevance and working groups are being immediately formed on four of these – anti-corruption, biodiversity, occupational health and safety and greenhouse gas emissions. Investigations will continue on the other five in order to access the international knowledge and agreement on reporting metrics around them – these are life cycle analysis, chemicals of concern, water, disabled persons rights and children’s rights.

Integrated Reporting
The International Integrated Reporting Council (IIRC) published a Discussion Paper in September  2011 ‘Towards Integrated Reporting – Community Value in the 21 Century”. The IIRC is committed to publishing its ‘Integrated Reporting Framework’ by the end of 2013.

The Framework will address:

• The basic concepts underlying integrated reporting – including how it should relate to existing reporting strands (financial, management, commentary, corporate governance, sustainability and remuneration)
• Target audience for integrated reporting
• From whose perspective “value” should be considered – to the organisation, to investors, to other stakeholders, or to society at large?

There has been a very high level of stakeholder support for the IIRC to continue its work on framework involvement, following the publication of the initial discussion in September 2011. Specific work streams will include several topics including materiality, the concept of value and the business model.

There is a growing belief that a fresh approach is required to corporate reporting to deliver the messages that stakeholder need for investment and economic decision-making. Many of the strands may already be there or work in progress – financial, corporate governance, sustainability. The corporate annual report is the right place for reporting integration, but a fundamental principle is that integrated reporting is not two or more reports in the same document - it must be truly integrated.

Optionality in reporting must be avoided and a consistent approach must be achieved, a balanced view giving the good news with the bad news, with stakeholders properly informed.  

There is some way to go to achieve an improved consistent and reliable framework. The momentum that is growing should be supported.

First published in Finance Dublin Online.