Progress towards the adoption of integrated reporting around the world may be mixed, but momentum continues to build, says ACCA’s Rachel Jackson.
Integrated reporting remains a key goal for stakeholders interested in understanding an entity’s performance and future sustainability prospects. Momentum behind fulfilling this goal continues to build, as indicated by the 214 responses received to the International Integrated Reporting Council’s (IIRC) September 2011 discussion paper, Towards Integrated Reporting – Communicating value in the 21st century, which offered initial proposals for the development of an International Integrated Reporting Framework (IIRF).
Early analysis of the responses reveals overwhelming support for the concept, but also numerous questions, issues and concerns. For example, some big issues to be addressed include whether the proposed investor focus is appropriate, and the need for clarification about ‘value to whom’ – whether investors, stakeholders or society at large. There is also much debate about whether one concise report can meet different needs, and whether an integrated report should be the primary report. The IIRC is currently running a pilot programme underpinning the development of the IIRF, in which ACCA is participating.
Integrated reporting is fundamentally different to sustainability reporting in its focus on issues that are material to the business. ‘Integrated reporting should be the pinnacle of a company’s articulation of its approach to long-term value generation and not a response to a list of externally generated indicators,’ comments Chris Tuppen, a partner in Fronesys, an environmental, social, governance and sustainability consultancy. ‘It will be essential to focus on the key issues that combine long-term societal trends with business-related risks and opportunities. Achieving this will require an extended interpretation of the traditional accounting concept of materiality.’
The importance of materiality is reflected in recent developments such as the establishment of the Sustainability Accounting Standards Board in the US to develop sector-specific KPIs for material environmental, social, governance (ESG) issues relevant to financial performance. This follows on from the work of the DVFA, the Society of Investment Professionals in Germany, which in autumn 2010 published KPIs for ESG, identifying for each of 114 industry sub-sectors the key ESG data it believes companies should report.
A second fundamental difference between integrated and sustainability reporting concerns their audiences. Investors currently form the primary audience for integrated reports, whereas sustainability reports are read by many other stakeholders. The IIRC is setting up an investor network, involving investor entities from around the world, to help ensure that integrated reporting meets investors’ content and presentation needs.
Communications consultancy Black Sun’s 2011 research report, Towards Global Sustainability, found that, overall, reports in the G20 region were meeting less than 50% of what Black Sun defined as integrated reporting good practice. South African companies were most successful at integrating and demonstrating the strategic importance to the business of non-financial impacts, actions and goals, meeting on average 73% of Black Sun’s criteria. European G20 countries came next, meeting 54%, followed by Brazilian companies (48%), companies in the Republic of Korea (41%) and US corporates (19%).
South Africa is often identified as a leader in integrated reporting developments, not least because, in 2010, the Johannesburg stock exchange mandated integrated reporting in its listing requirements. ACCA-commissioned research by Jill Solomon of King’s College London and Warren Maroun of the University of the Witwatersrand, Johannesburg, looked at the impact this has had on the corporate reports of 10 major South African companies. They found a significant increase in the quantity of social, environmental and ethical information reported in their annual reports.
In Australia, research by ACCA and Net Balance Foundation in 2011 looked at the extent to which companies within the ASX 50 had moved towards integrated reporting. Nine were found to be performing very well, and starting to recognise and communicate the importance of ESG matters to their core business, but 30 had reporting that was less than 50% integrated.
However, integrated reporting in Australia has been boosted by the formation of the Australian Business Reporting Leaders Forum, bringing together stakeholders to help develop integrated reporting nationally and participate in international developments.
Developments are somewhat slower in Asia, however. ‘There are only a handful of companies in Asia that could really integrate their reporting,’ says Richard Welford, chairman of consultancy CSR Asia. ‘The majority of large listed companies in every single Asian country do not report on their social responsibility or sustainability. Nevertheless, there is an upwards trend and, therefore, we need to find ways of encouraging accountability and transparency. We need to walk before we can run, however. Unless, we can get companies reporting on social and environmental issues in the first place, there is very little hope that we will even get as far as integrated reports.’
Progress is also generally slow in North America. ‘In Canada the level of uptake of integrated reporting, outside a small group of innovators, is currently low,’ says Matt Loose, director of consultancy Stratos Inc and member of ACCA’s Global Forum for Sustainability. ‘There are, however, signs that expectations of reporters are evolving to encourage greater ESG integration. In particular, the Ontario Securities Commission requirement to disclose information on risks that might materially affect business performance provides a basis for targeting enhanced disclosure of environmental and social risks and performance.’
The Black Sun research shows European G20 countries come second only to South Africa in their integrated reporting performance. Vernon Jennings, managing director of Sustainable Development Consultants and member of ACCA’s Global Forum for Sustainability, notes: ‘Denmark was the first country in the world to require its largest companies to report on non-financial information in annual financial reports in the belief that, by working strategically with corporate social responsibility, companies could become more competitive. A number of other European countries are also considering requiring companies to report on non-financial information. In the wake of the economic downturn, the limitations of financial reporting have become more obvious. Demand for integrated reporting is therefore likely to increase.’
This is without doubt an exciting time in the development of integrated reporting. All interested parties need to participate fully so that the international framework that finally emerges really does deliver valuable and comprehensive information reflecting an organisation’s true accountability.
Rachel Jackson, Head of Sustainability, ACCA.
This article first appeared in ACCA's Accountancy Futures journal, issue 5, June 2013.