Integrated reporting sets out to provide an answer to the increasingly complex and fragmented state of corporate reporting, by promoting a more decision-relevant approach to communicating value creation. But are investors jumping onboard?
Corporate reporting has never before been so complex, with increased mandated content and listing rule provisions, resulting in increased length and complexity of annual reports.
Push and pull
Because integrated reporting is a market-driven initiative, providers of financial capital play a central role in driving the widespread adoption of <IR>. Few studies examine integrated reporting from a demand perspective. We draw on rare access to senior level investors, to gain that view.
Familiarity with, and demand for, <IR> among investors are mixed. Buy-side fund managers involved in ESG funds are the most knowledgeable and on-board; sell-side equity analysts remain uniformly cynical, reflecting perhaps the shorter-term horizons and incentive structures on the sell-side.
However, consensus does emerge, all would welcome a form a corporate reporting that is more closely linked to business strategy, and focused on long-term value.
Challenges and recommendations
|Lack of critical mass in <IR> adoption among preparers||Further research to examine investor demand for granulated KPIs, links with business strategy and metrics into market benefits|
Lack of familiarity with <IR> among investors
|1) Build <IR> awareness among investors at senior levels|
2) Increase coverage of <IR> at capital market presentations
Capital market culture and prevalence of short termism
|1) Use influence from the <IR> Investor|
2) Network to push for long-term outlook in investment decision-making
Misunderstanding around the capitals model
|1) Present the capitals model in a practical, jargon-free way|
2) Inclusion of <IR> in financial services staff training programmes
"Across the interviews, there was an appetite for more relevant, focused and material reporting with a recognised need for more relevant and concise narrative reporting and greater alignment with corporate strategy, key risks and key performance indicators (KPIs). "
Tensions in capital markets
Integrated reports focus on strategy, capitals and value creation.
The slow uptake of investor demand for integrated reporting partly reflects the tensions in the capital markets between short-term and long-term orientation, culture and incentive structures.
The International Integrated Reporting Framework (IR Framework), published in December 2013 aims to:
1) improve the quality of information available to providers of financial capital
2) promote a more cohesive approach to corporate reporting
3) enhance accountability for the broad base of resources that companies use and affect
4) support value creation over time.