Since the global financial crisis in 2008, there has been a growing emphasis on the role of the investor as a steward or custodian of beneficiaries’ capital, which in turn has meant investors placing greater emphasis on companies sharing more about their long-term strategies.

Creating value – value to investors International Integrated Reporting Council (IIRC)

Investors increasingly want to ensure that the companies they invest in are financially stable and developing sustainably; they want a better understanding of a company’s decision-making process to see how the strategy being pursued creates value over time.

Integrated reporting, or integrating non-financial information into traditional corporate reporting, is at the forefront of that vision, as more and better quality information could prevent a similar economic meltdown in the future. An integrated report concisely communicates how an organisation’s strategy, governance, performance and prospects can create value in the short, medium and longterm.

Issue two of the International Integrated Reporting Council’s (IIRC) Creating Value series, produced in collaboration with the PRI, outlines the move towards greater transparency and the arguments for implementing integrated reporting from major asset owners, auditors, regulators and academics.

“Integrated reporting aims to present nonfinancial information in ways that help understanding of performance potential.”

Paul Druckman, CEO of the International Integrated Reporting Council (IIRC)

The case for integrated reporting

PwC research of investment professionals from around the world found strong demand for operational as well as financial KPIs, and 87% of those surveyed said clear links between a company’s strategic goals, risks, KPIs and financial statements help their analysis.

Colonial First State Global Asset Management (CFSGAM), one of the largest fund managers in Australia, says that integrated reporting helps it encourage better corporate performance, through proxy voting and engagement, on a range of ESG topics and on issues that could affect a company’s social license to operate.

“More scrutiny from our key clients and stakeholders will flow through the investment chain and we may ask companies that we’re putting those beneficiaries’ capital into more about their activities than perhaps we’ve ever done before,” says Pablo Berrutti, Head of Responsible Investment Asia Pacific at CFSGAM.

As scrutiny increases around their role, investors are also looking for new ways to report on their own activities and impact.

The Australian Institute of Superannuation Trustees (AIST) and the Australia Council of Superannuation Investors launched the IR Pension Fund Network in 2014 (in conjunction with the IIRC), which helps Australian super and pension funds enhance their reporting by sharing experiences with their international peers. The funds see integrated reporting as a tool to help them compete for privatised government assets and look for new infrastructure investment opportunities across the world.

Eva Scheerlinck, Executive Manager for Governance at AIST, told The Australian: “[The IR Pension Fund Network] provides funds with an opportunity to build a picture of their infrastructure investments – to highlight, for example, their environmental footprint, labour outcomes, social impact, etc. There are jurisdictions all over the world looking for Australian super fund involvement in their infrastructure projects. Integrated reporting allows firms to talk about the real value they bring, and not just about the dollars.”

In 2013, the Association of Chartered Certified Accountants (ACCA) published a report that revealed a strong appetite for integrated reporting. More than 90% of investors polled for the report thought it would be “valuable for companies to combine financial and non-financial information into an integrated reporting model”.

Investors identified the main benefit as being an “enhanced understanding of the long-term outlook of a company”. More than two out of five investors believed that integrated reporting would provide a better explanation of the link between sustainability and long-term corporate performance, and a similar number thought it would provide greater information on how long-term risks, such as climate change, could affect a company’s business model.

Guy Jubb from Standard Life Investments, says in ACCA’s report: “A company’s social responsibility and sustainability efforts are integral to the longer-term wealth and health of the company and reputation. Integrated reporting would be a big help here – identifying asset categories that are not captured in current reporting and the value aspects of the company, and providing a degree of accountability as well.”

The link to long-termism was examined in a report from Harvard Business School, which found that, based on a sample of 1,066 US companies practicing degrees of integrated reporting, “more IR is associated with a more longterm investor base, defined as the difference in the percentage of shares held by dedicated and transient investors”.

Amongst the regulators to have supported the effort is Japan’s Financial Services Authority, which published a draft of Principles for Responsible Institutional Investors – Japan’s Stewardship Code in 2013, setting out seven principles on a comply or explain basis “to promote sustainable growth of companies through investment and dialogue”.

In Singapore, developments are closely linked with the ambitions of the Ministry of Finance to, in the words of Singapore Accountancy Commission Chairman Michael Lim, “transform Singapore into a leading global accounting hub for the Asia Pacific region by 2020”. Dr Ernest Kan, Chairman of the Institute of Singapore Chartered Accountants IR Steering Committee, has stated that “integrated reporting is the future of corporate reporting”.

The role of stock exchanges

Stock exchanges play a unique role in capital allocation, and have a mandate to promote good corporate governance and market stability to encourage investor participation. Good corporate reporting is central to that.

The Sustainable Stock Exchanges (SSE) initiative, co-convened by the PRI, UN Global Compact, UNEP-FI and UNCTAD in 2009, works with twenty exchanges committed to promoting long-term, sustainable investment and improving ESG disclosure and performance among companies listed on their exchanges.

To bring this commitment to action, the SSE is creating a Model guidance for companies on reporting ESG information to investors that exchanges globally can use as a baseline to create their own guide on reporting. It is doing this in collaboration with an advisory group (chaired by the London Stock Exchange), which counts 10 exchanges, as well as a number of investors, companies, academics and other experts, including the IIRC, as participants.

The SSE initiative believes that if all stock exchanges globally issued guidance to their issuers on reporting ESG issues, there would be a major shift toward greater transparency. As well as through collaboration with the SSE initiative, individual stock exchanges are finding ways to support the need for improved communication of ESG information between companies and investors.

Germany’s Deutsche Börse was the first stock exchange to sign up to the IIRC’s Pilot Programme to trial their IR Framework, citing the need to enhance trust between companies and investors. In Malaysia, the Securities Commission, together with professional bodies and other stakeholders, is exploring avenues to enhance the quality of information available to the capital markets, while in the US, NASDAQ’s Vice Chairman, Meyer S Frucher says “the philosophies underpinning integrated reporting are very much aligned with our own”.

In South Africa, a requirement to produce an integrated report formed part of the “King III” Corporate Governance Code, and was incorporated into the Johannesburg Stock Exchange listing rules in 2010. South Africa’s Integrated Reporting Committee has expressed support for the IIRC’s IR Framework and said it will converge practice in South Africa with the principles the framework sets out.

Research by PwC looking at the impact of integrated reporting in South Africa found that investors were benefiting from clearer understanding of the risks companies faced. Value Creation; The journey continues – A survey of JSE Top 40 companies’ integrated reports, found that: “Investors have specifically identified clear reporting of the connection between the business strategy, performance and prospects as a benefit. In addition, investors focus on the disclosures provided around key risks and opportunities faced by the business and how its governance processes address these. Ultimately, better reporting leads to a reduction in the cost of capital.”

Reaching the mainstream

The Creating Value report concedes that not all investors follow investment philosophies that incline them to a long-term, value creation investment approach. Nevertheless, given the global debate about the dangers of short-termism in financial markets and the importance of investor stewardship, it suggests that integrated reporting is relevant to all investors – even if it may be more immediately relevant to some than others.

As integrated reporting becomes more widely adopted around the world, its impact may change the landscape in which investors of all types operate.

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    RI Quarterly vol. 7: Unleashing performance through reporting and disclosure

    May 2015