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The global tide is turning in favour of integrated reporting, says Robert Bruce, and accountants equipped with new skills will help steer it properly

‘Very soon,’ says Ernst Ligteringen, chief executive of the Global Reporting Initiative, (GRI), ‘non-financial reporting will become mainstream.’ His logic is impeccable and easily understandable. The direction in which corporate reporting has been heading for a long time is that of a narrative, describing the business model, providing specific and material information for an ever widening circle of users and stakeholders. What the world is now focused on is how reporting gets there.

‘Ten years ago,’ says Ligteringen, ‘sustainability reporting was a way for a business to stand out. They were demonstrating they were doing better.’ While non-financial reporting was a relatively straightforward way to differentiate a business, it also struck a deeper chord. And as the world plunged into financial crisis and sought solutions in the aftermath, more people took note. ‘Investors,’ says Ligteringen, ‘were interested in the long term.’ But sustainability reporting must evolve to give markets systematic, reliable information on companies’ risks and opportunities, linked to their overall business strategy.

And there is a growing interest around the world in the possibilities and benefits that such non-financial reporting could provide.

In June 2012, the UN Conference on Sustainable Development in Rio de Janeiro produced what has become known as ‘Paragraph 47’. This recognised the importance of corporate sustainability reporting and the need to ‘encourage companies, where appropriate, especially publicly listed and large companies, to consider integrating sustainability information into their reporting cycle’. Several countries immediately formed themselves into a Friends of Paragraph 47 alliance to push for this to become universally accepted.

At the same time, the International Integrated Reporting Council (IIRC) has developed real momentum in its efforts to create a framework which could reflect the integrated thinking ‘through which’, as the IIRC puts it, ‘management applies a collective understanding of the full complexity of value creation to investors and other stakeholders’.

Accountants are now at the heart of a worldwide effort to bring all the elements which affect the strategy of companies into one space. It is small wonder that Peter Bakker, president of the World Business Council for Sustainable Development and now deputy chair of the IIRC, has taken to telling people that it will be the accountants who will save the planet. It is simply a matter of connecting information and then taking action based on what that information tells you.

‘If you tell the story coherently and precisely,’ says Ligteringen, ‘then there is a chance people will use your report and act upon it.’ Or as Paul Druckman, chief executive of the IIRC, puts it: ‘Corporate reporting is more than a good communications tool. It influences behaviour within organisations and by investors, and it underpins the efficiency and productivity of our capital markets. So when governments, regulators and policymakers talk about creating the conditions for a more responsible and responsive capitalism, rooted in activity that creates and sustains value, that is the business we are in.’

The enthusiasm behind the concept of non-financial reporting is tangible. Where the uncertainty remains is among the many different views of how it could be brought about. ‘The investor community can be convinced of the importance of sustainability issues,’ says Roger Adams, director, special assignments, at ACCA, ‘provided that reporters address material issues, take a forward-looking approach and seek to draw a clear link between sustainability drivers on the one hand and the business model, value creation and corporate strategy on the other.’

 

Definitions and actions

It comes down to arguments over definitions and then actions. GRI training partner Lodestar, working with Deloitte, GRI and ACCA, organised the first Non-Financial Reporting Conference in London in autumn 2012. At the conference, Richard Scurr, head of group finance operations at global bank HSBC, defined non-financial information very simply. ‘It is data not covered by accounting standards,’ he said.

And that underlines a central point – the definitions need to be kept simple and, preferably, away from the technically minded. There is a danger here of not seeing the wood for the trees. ‘There are risks that the integrated reporting movement could become over-theoretical,’ says Jenny Harrison, director, sustainability services, with Deloitte. ‘It needs to be about people having a go at better performance management in practice.’

It will be far more important to focus on what the outcomes could be. In the view of David Pitt-Watson, chair of Hermes Focus Asset Management, it is a question of: ‘How do we get ownership back into investment?’ His point is that it is very easy to gather information about short-term performance. The problem arrives when you try to seek out the information which will tell you about where a company is going in the long term. The information which provides that is a long way from being simply the financials.

 

What Pitt-Watson and many other global investors would like is something closer to the integrated reporting model where the routine and discipline of reporting non-financial information will have an effect on the long-term performance of companies. And, as he points out, this can already be tracked. ‘Observation changes behaviours,’ he says. ‘Companies performing well on sustainability also have better performance on the financials. Companies that understand this are simply better companies.’

This is probably the most important change being seen around the world, and much of it is down to straightforward principles. ‘It is all about good business sense,’ says Sallie Pilot, director of corporate reporting at consultancy Black Sun. And that broad principle is backed up by people’s experience in the field. There are real practical benefits.

Another speaker at the London conference was David Stubbs, head of sustainability for the London 2012 Olympic Games. ‘Corporate sponsors were struck by the sustainability story,’ he said. ‘It was not just a way of reporting; it was a way of bringing people in.’

And in the long term, if non-financial reporting is going to succeed in creating the benefits it promises, it is the accountants – the people who Bakker says are going to save the planet – who will have to work the hardest. ‘The accounting profession will have to change,’ says Ligteringen. ‘It will need to bring in different competencies and change its training. It has a fundamental role to play.’

 

Robert Bruce is a UK-based financial journalist who writes regularly for the IAS Plus website as well as Accounting and Business. From 2007, he was writer to the Accounting for Sustainability Project and subsequently a member of its executive board.

This article first appeared in Accountancy Futures, Edition 6, 2013

 

 

Published: 16 Sep 2014