Co-authored by Paul Druckman
In an age of disclosure overload the term "integrated report" may be met with hesitation. Countless corporate reports with numerous data points on varying issues sit stacked on shelves in offices around the world. No doubt, these publications are the result of much time and expense. But are companies communicating their strategy, performance and impacts in a way that's clear and meaningful?
In many cases, the answer is no. But if adopted and embedded within mainstream business practices, Integrated Reporting can change this.
Nowadays, there is a recognition that value creation relies on more than just financials. In the past, the stocks of value reported on by an organization would have included, principally, the land, buildings, equipment and inventory owned by the business. For many companies, the foundation of their value creation potential lies in their ability to attract talent, generate ideas and build strong brands that sustain customer loyalty and trust.
To ensure their business model is viable in the long term, organizations are widening their horizons on value creation. There are internal and external benefits attached with doing so. In a survey from the South African Institute of Chartered Accountants (SAICA) on integrated thinking, 93% of those questioned said Integrated Reporting had improved decision-making at management level and 86% said it improved decision-making at board level.
More than 1,000 companies are already realizing the benefits of an integrated approach to reporting. For others, however, the perceived burden of producing an additional report holds them back. For these companies, there are ways of exploring Integrated Reporting within the reporting structures that already exist, for example through the SEC's Form 10-K and Form 20-F.
Following the catastrophic crash of 1929 and the Great Depression, the preeminent legal minds of that era worked together to draft what would become the Securities Act of 1933 and the Securities Exchange Act of 1934. The general repository of disclosure requirements under the Securities Act and the Exchange Act is contained in Regulation S-K. Of particular interest is Item 303, which sets forth the purpose and requirements of the "Management's Discussion & Analysis" or "MD&A". A relatively new feature of the Form 10-K (having been instituted in the 1980s), the MD&A is meant to provide investors with "information that the registrant believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations." This information is called "material."
The MD&A provides a narrative of the company's historical and prospective performance, opportunities and risks, and any known trends, events, or uncertainties that it anticipates will substantively impact the company's financial condition. Having studied the reporting landscape in the US, SASB has concluded that when executed fully and in the spirit of the regulation - and devoid of boilerplate and legalese - the MD&A provides an insider's perspective on the health of the company and how management views the company's future prospects. In short, it should provide an integrated view of performance to investors and showcase, in an interconnected way, how companies manage financial and other value drivers. Seen in this light, the MD&A can embody the concepts of Integrated Reporting and offer a potential alternative to standalone integrated reports.
In the U.S., only a small percentage of the approximately 12,500 publicly-traded companies use metrics to describe material environmental, social, governance and other information on resources used and affected in the Form 10-K or 20-F filings. Numerous studies indicate that investors use an increasing range of information when making investment decisions, information that has not typically appeared in traditional annual reports. Good reports enable investors to make decisions with greater confidence and over longer time horizons.
So how can we leverage existing reports in a way that maximizes their value to both companies and investors? The solution lies in first understanding some of the problems in the corporate reporting landscape, such as information disconnect. Information traditionally seen as 'non-financial' often lies outside the core investor document, despite its relevance to the company's financial position and its potential influence on future value creation. According to a recent survey by the CFA Institute, 36% of investors that do not take wider factors into consideration do not do so because of challenges in understanding how to integrate the information into their decision-making.
Companies and investors are turning to Integrated Reporting to present and understand the whole picture - how information affects the ability of the organization to create value. Integrated Reporting introduces a multi-capital approach, one that acknowledges the fuller range of resources and relationships that substantively influence value creation.
This approach illuminates how different forms of capital are material to specific industries. Social and relationship capital, such as alignment with societal needs, and natural capital, such as resource intensity and emissions, may impact industries across the board - but to what extent? One issue may pose a great risk to one industry, while it may mean an opportunity for another. Performance on these factors, where material, provides a more complete view of the risks and opportunities to which both the company and its investors are exposed.
Organizations such as the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) exist to help usher Integrated Reporting into the mainstream.
Many investors request standardized metrics and complete data sets in order to benchmark companies-to fill this need, SASB issues industry-specific accounting standards that help companies disclose material sustainability information in SEC filings. Its work builds on that of the International Integrated Reporting Council (IIRC), whose long-term goal is to have integrated thinking embedded within mainstream business practice in the public and private sectors.
This is not about adding to the heaps of existing data contained in today's corporate reports. This is about enabling companies and investors to communicate effectively about material risks and opportunities in the 21st century.
It's not about making reporting more difficult - it's about making it simpler, more relevant and much more impactful.
Dr. Jean Rogers is Founder and CEO of the Sustainability Accounting Standards Board. Paul Druckman is CEO of the International Integrated Reporting Council.