Is the jury still out on integrated reporting?

Is the jury still out on integrated reporting?

While IR offers a more complete picture, it’s also costly and time-consuming.

By Elizabeth Fry

Integrated reporting puts a big reporting burden on business in terms of cost, resources and information overload, and directors have the right to be concerned, says Jeanne Ng, Director of Group Environmental Affairs at Hong Kong-based China Light & Power.

Still, according to Ng, there are big benefits.

“Integrated reporting throws up exactly the sort of information they [directors] weren't necessarily privy to in the past. And directors should have access to it, since that data reveals risks that are currently not being divulged to them.”

CLP, the Chinese energy supplier, is one of 90 companies that participated in a pilot program that adopted the Integrated Reporting Framework to produce an integrated annual report. The company first produced an integrated annual report in 2012, effectively combining its financial and sustainability reports.

Ng empathises with the challenges. “On the one hand, directors’ agendas are so full, throwing even more information at them is a cause for concern. But it is pertinent to managing environmental, social and governance [ESG] risk, so it has a huge bearing on the company’s business.”

CLP has produced sustainability reports for more than ten years. So when it decided to issue its first integrated annual report two years ago, it already had a suite of data. Importantly, its data systems were very robust.

The next step, says Ng, was sorting out how much of the sustainability data should be part of the annual accounts. “It was a matter of materiality. What was material for the sustainability report was not what was material for the annual report.”

CLP’s integrated annual report provides more detailed coverage of CLP’s strategy, business performance, assets and financial information. “It also includes a summary of ESG issues pertinent to the running of our business, demonstrating the value we create over time. In contrast, our sustainability report provides an executive summary of our financial performance but much more detailed coverage of our ESG-related performance,” she says.

It’s a systems thing

Explains Ng: “For the board to carry out its duties, management needs to ensure there is a proper governance structure of system and process in place, which covers the ‘chain of custody’ of information.”

This is to ensure ESG data collected is checked, managed, analysed and prioritised, and that there is accountability for that information being both accurate and material. “So when senior management signs off on a report that will include non-financial information, there is a chain of custody that can be documented and evidence that the right systems are in place, the right people are in place, and doing the right job,” she says.

CLP is halfway through a systems overhaul that will strengthen governance as well the chain of custody of information all the way to top management. Ng believes having those systems in place will help alleviate part of the burden directors are feeling. “I think it’s great that we’re improving our system further to make sure we are able to accomplish an even larger amount of risk management.”

In Ng’s view, making sure the capture and disclosure of non-financial information follow the same discipline that is applied to financial data is key. This is especially important since there are no international standards or rules as there are for financial accounting. In a relatively new field, the lack of experts in conducting quality control and auditing this information poses a problem.

Producing the two reports is clearly a multi-departmental collaboration. Therefore, it is important that there are clear processes and that relevant internal and external controls are mapped out. For example, companies need to make sure there is an understanding as to who is the gatekeeper of what data (particularly since there is information that both documents will share) and that all relevant reviews and sign-offs have been completed.

Burden or blessing?

Integrated reporting will require a considerable investment of time and money. Whether or not it is a burden ultimately depends on how much value the regime delivers to companies and investors, according to Professor Nonna Martinov-Bennie, Director of the International Governance and Performance Research Centre at Macquarie University.

Professor Martinov-Bennie says while the International Integrated Reporting Council (IIRC) ultimately sees integrated reporting as a company’s primary reporting vehicle, it has released little guidance to date on exactly how the new regime will interact with local statutory requirements.

“The IIRC is calling for greater legislative support for integrated reporting. However, the Council is clear that integrated reporting should be voluntary. It says integrated reports will add value to existing reports by providing a more thorough and forward looking picture of a company’s operations. Further, its adoption will be market led. What remains to be seen is whether there is sufficient investor interest to drive this change forward.”

According to John Purcell, CPA Australia’s ESG policy adviser, the solution is not to say integrated reporting will always be voluntary. “History shows that purely voluntary approaches do not drive change in corporate reporting and corporate behaviour.”

And while companies that embrace this type of reporting claim they benefit from a lower cost of capital, the evidence is inconclusive.

In Australia, the number of companies that publish non-financial information is fairly small; you’d struggle to find any under the top 50 listed companies. They might point to the fact that Australia hasn’t had significant market failure — the kind that would demand that corporate reporting be pushed down new roads of increased complexity.

“If we don’t have any massive indications of market misalignment, failure, or significant endemic corporate collapse, why should we start producing a different style of reporting?” asks Purcell.

October 2021
October 2021

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