Integrated reporting: Time to start
Following a definitive green light for the Corporate Sustainability Reporting Directive (CSRD) from the European Council in November, the number of integrated reports is set to increase further, and so is their size.
While there have already been considerable developments in integrated reporting over the past few years, the requirement for integration will continue to increase, ultimately being raised to another level. So what’s our message? Start now, because it’s never going to get any less complex...
An integrated report is one that includes all the elements of an annual financial report, along with non-financial information focused on the environment, social aspects, and governance.
“THE CURRENT FOCUS IS FIRMLY ON CARBON EMISSIONS, BUT THE SUSTAINABILITY CONTEXT IS ALSO INCREASINGLY LOOKING AT BIODIVERSITY AND HUMAN RIGHTS.” Reinout De Clercq
Combining those elements is often tricky, since it is a complex process to capture all the data in a wider-ranging value chain. Moreover, the knowledge and resources required to highlight the right non-financial information are often lacking, partly because companies do not always have a clear insight into the financial value that sustainability adds.
Strategy
Integrated reporting is therefore only possible once a company has incorporated sustainability into its business strategy, implemented it, and got it up and running. In addition, clear governance structures must be set up and robust management systems are needed for data and performance management. Hence, integrated reporting follows the cycle of strategy, implementation, operationalisation and reporting, culminating in the auditor’s review of the report.
Today, however, we still see a very varied picture. A select group of companies, mainly large and listed ones, have made considerable progress in developing an integrated report. Then there are a number of companies that have got off to a good start, but still need to take further steps. Lastly, there is a large group that still needs to get out of the starting blocks. The number of Belgian best practices is still limited at present.
“The CSRD will force companies that haven’t got that far yet to think in integrated terms from the outset.”
Reinout De Clercq
Although, in practice, many companies see this as a next step for the sustainability report, they should ideally start thinking in integrated terms right away, directly connecting sustainability to the corporate strategy. For example, reporting will immediately show how sustainability interacts with strategy and what connections can be made. The CSRD will force companies that haven’t got that far yet to think in integrated terms from the outset, and immediately make the connection with the non-financial areas that can both destroy and create value.
Creating value
Integrated thinking and compliant reporting will enable companies to focus on non-financial areas that are important for their corporate strategy, business model, and different groups of stakeholders. By focusing on these domains and formalising the processes associated with them, companies will be improving their business management by definition, and this will ultimately translate into added financial value. It is only once the topics have been identified from a strategic point of view that opportunities will arise for you to narrow down. Ultimately, more resources can flow to these areas in order to create the added value you envisage. For example, if you don’t track the company’s carbon footprint, you’re left in the dark, unaware of the opportunities and risks it presents. Setting up, measuring, and structuring a process helps you to anticipate the challenges surrounding CO2 that lie ahead of us.
These will come from a competitive and financing perspective, but the customers themselves will demand action too. If you already have a process and structure in place, have already mapped out your carbon footprint, and considered how to connect it to your strategy, you will be ready to respond better to future challenges, such as upcoming tax obligations related to CO2.
Those who manage, adjust or adapt better already have access to intrinsic added value. Furthermore, this will also help companies seize the opportunities that arise, such as tax incentives for decarbonisation or improving their competitive position.
Key role of finance
Finance has a key role to play in integrated thinking and final reporting, since it is what connects risk management, reporting systems, the ERP system, and so on. The link between strategy and financing is also very strong, so there is an important role for the CFO and their team to play. This role that will become increasingly important in the future.
While sustainability often mainly tends to be the preserve of a small sustainability team today, it will expand systematically in the future. The existing finance team will need to include ESG experts, or at least this expertise will have to be incorporated into existing roles. For example, controllers will be needed to deal with the non-financial data. Otherwise future audits will be very complex. The management processes will also need an ESG component. At the moment, there is no balance at all between the number of people in finance teams involved in ESG and the increasing requirements being introduced at ESG level.
Although the whole transition has yet to begin—the first steps are only just being taken—complexity will continue to increase. The current focus is firmly on carbon emissions, but the sustainability context is also increasingly looking at biodiversity, human rights, and many other non-financial areas. So the focus is getting broader and broader. It is important to get the structures and systems sorted out and to think about digitisation, because capturing the right data is essential. Much of this data has not yet been automated and coherence and control are completely lacking. This is no longer tenable. Our advice, therefore, is to take the first steps right now, because it will take increasing effort to catch up as time goes by.
