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First published in The Business Times on 12 August 2013
|With the emergence of Integrated Reporting (IR), the adequacy of corporate reporting and disclosure has once again been thrust under the spotlight. When the topic of non-financial disclosure is raised, I have noticed a great deal of confusion among various stakeholders relating to the different reporting frameworks, most notably between IR and Sustainability Reporting (SR).
These two frameworks appear to be misinterpreted with great regularity, with many viewing IR as a complete replacement for SR. This is not an interpretation I agree with. IR and SR are not in competition with each other. They are interconnected, each with a distinct purpose serving specific target audiences, and covering a different breadth and depth of content.
Corporate reporting should be seen as a suite of disclosures that meet the needs of a diverse group of users, or stakeholders. If organisations do not understand and recognise the value that each component of reporting offers, the value of the different frameworks, including IR and SR, will be diminished. If any of the key information elements are missing, stakeholders will not be able to fully grasp how a company performs, manages risks, identifies opportunities, sets targets and creates stakeholder value over the long term.
How IR and SR relate to each other
IR is an emerging concept, which aims to reshape the direction and focus of corporate reporting. The target audience of such reports are primarily investors and other providers of capital. IR seeks to provide them with a more complete picture of business value by extending reporting beyond historical financial performance.
IR preparers need to recognise their ongoing reporting disclosure as a platform to explain what drives the underlying value of the business, and how management has protected and developed that value. They need to ask themselves what their target audience needs to know, rather than what they are required to tell them.
In IRs, greater emphasis is placed on strategy, the business model and a more future-orientated narrative that will provide investors with information they need to better assess an organisation’s ability to generate future cash flows. The framework is likely to interest companies looking to improve the quality of their narrative reporting as a basis for a better dialogue with their investors.
The IR framework is based on six capitals; financial, manufactured, intellectual, social and relationship, human and natural. As SR focuses more on the social, human and natural capitals of an organisation, it is easy to see the overlaps between the two reporting frameworks and their shared information potential. However, IR is not intended to be a synopsis of the current annual report, nor is it an extension or substitute for the SR.
A SR is the communication outcome of a process that companies use to identify and manage both financial and non-financial risks and opportunities present in their operations and supply chain. These can include, for example, environmental performance, recruitment and retention, energy, health and safety, and ethics and governance.
SR covers a broader range of issues and serves a larger group of stakeholders – regulators, non-governmental organisations and employees for instance - who are interested in more in-depth coverage of sustainability issues and richer data not covered in the IR.
Improving the current state of corporate reporting
Where SR and IR strongly concur is that each unique organisation should provide concise and relevant information that is material to their business. In addition to reporting on past performance, common features in each look to de-cluttering the entire reporting process and providing a more future-orientated narrative.
If we take the example of health and safety as a key indicator for a business, an IR may discuss how this area is strategically important, perhaps a main board agenda item. It could comment on overall performance and governance, and demonstrate how a focus on health and safety has created value for the organisation over time, and will continue to do so.
The IR may then refer to the SR, which will contain a more in-depth level of information on health and safety. Such information can include policy developments, future targets, ongoing adherence to international best practice and past performance that has been externally verified by a third party auditor.
The issues around health and safety are material in both reports, because they are material to the ongoing success of the organisation. However, the format and purpose of communication will differ to address the needs of the target users. Each forms an essential element of the corporate reporting suite.
The future of corporate reporting
To reflect the changing nature and expectations of SR, the Global Reporting Initiative (GRI) released its fourth version of its SR reporting guidelines, known as G4, in May 2013. Whilst G4 recognises the links between IR and SR, it also emphasises the fact that SR responds to a wider group of stakeholders, and their expectations and interests.
G4 is the product of an intensive, two-year multi-stakeholder process and has highlighted a number of areas that reporting organisations need to understand and follow. Below are four key areas that KPMG has identified in the G4 guidelines:
- Materiality takes centre stage – the report process should identify the most material issues and maintain this focus throughout the reporting process, developing systems, structures and communication around such issues.
- Stakeholder engagement – taking account of internal and external views from relevant stakeholders will help to ensure the right material issues are addressed and reporting systems are as efficient as possible.
- De-cluttering the report – the reporting process, and the report itself, requires careful planning and development to ensure concise and informative disclosure and information systems that deliver across the entire organisation.
- Define reporting boundaries and include supply chain – the SR needs to define the extent of its reporting boundary and take account of how it influences supply chains. This forms part of the concept that risk cannot simply be passed on to others and business has to understand its broader impact.
In Singapore, SR is still lagging behind other countries in terms of the number of companies which are disclosing good quality sustainability information. The Singapore Exchange issued guidelines on SR – which included a recommendation to use GRI – in June 2010. According to KPMG analysis in 2013, only around 20 percent of the Top 100 companies by market capitalisation in Singapore are providing a reasonable public disclosure of sustainability information.
With regard to IR, there is currently only one company in Singapore which is part of the pilot IR project being co-ordinated by the International Integrated Reporting Council (IIRC). IR is still a draft framework, and we can expect further developments in this space later this year.
As companies gear up for the changes in the future of corporate reporting, it is tempting for them to dive straight into the detail of the G4 guidelines and the IIRC framework.
However, companies need to take a step back and resist any temptation to develop reporting systems based on someone else’s assumed set of criteria. IR and SR both aim to put materiality at the heart of corporate disclosure. Therefore, organisations should start by planning and enhancing their materiality assessment process, considering the impact of various elements on the business, and build upon the results of this exercise to ensure that the reporting process serves the needs of their interactive reporting suite and disclosure requirements.
This approach will ensure that the financial and non-financial information needed in the interconnected reporting process is as valuable as possible to the organisation and its array of stakeholders.
This article is contributed by Graham Owens, Director, Climate Change and Sustainability at KPMG in Singapore. The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG in Singapore.