We asked an investor, a preparer and an advocate for their takes on integrated reporting. What follows are comments from Jeremy Osborn, ACMA, CGMA (above), former project manager, International Integrated Reporting Council:
I see integrated reporting as one solution to the significant challenges companies face.
There are major pressures in societies across the world, such as climate change, population growth, demographic change, the depletion of scarce resources and the rapid growth of middle classes in developing countries. All of these are forcing companies to manage more strategically and more efficiently. They need to find ways to do more with less. Our view is that the current reporting framework doesn’t necessarily lead to optimal resource allocation. I believe integrated reporting can improve that.
Financial reporting has become increasingly complex and lengthy, and doesn’t necessarily provide users of reports with the information they need. The way we currently present profit and loss accounts, and balance sheets, has changed in detail, but not much in substance, since Victorian times. But we now need a reporting framework for the digital rather than the industrial age. I believe that integrated reporting may help to “see the woods for the trees” by focusing on the information that really matters to assess the value of a business, both now and in the future.
At the moment, most sustainability or CSR reports probably don’t link to the financial reports in a very coherent way. But if a company is integrating information from the different reports it currently produces – such as governance, remuneration, sustainability and so on – into an integrated report, it should lead to meaningful connections being made between, for example, a company’s sustainability strategy and its financial performance.
That’s a very significant link to make because sustainability is about the long-term creation of value, how a business interacts with the environment and society, and how that affects its profitability and survival.
I see reporting as the end of a long chain of decisions that companies make and the operations that they run. But what a company reports affects the way it thinks and the way it makes decisions, and vice versa. If companies adopt integrated reporting as their primary reporting method, it will lead by default and necessity to more integrated thinking within the business.
By integrated thinking, we mean making decisions in the knowledge that everything is connected, so that a decision made now affects the company for years to come, as well as having an impact through business partners in the value chain on society at large, and on the efficiency with which resources are allocated and subsequently consumed.
Integrated reporting reveals the interdependencies of the different activities a business undertakes, while at the same time providing a long-term perspective on the business’s projected performance. It would have provided an important strand of information during the economic crisis of 2008, which may have helped governments and regulators shape their responses to this.
We’ve launched a two-year pilot programme for integrated reporting. More than 60 organisations are engaging in this programme, hoping to produce two integrated reports each over that period. In 2012, we plan to produce an exposure draft of the integrated reporting framework, and that will be used iteratively with the pilot programme in order to support the development of an integrated reporting framework, which we hope will be adopted across different jurisdictions. The framework will provide an outline of what we think integrated reporting should be – and it will be developed with feedback from the pilot programme.
Business and society at large should both benefit from integrated reporting. Reporting should become more concise and material, and improved transparency should promote greater trust in business. Because companies will make clear the link between the use of natural capital and financial results, investors will be better able to provide capital to companies that will create value, not only in the short term, but also sustain this in the medium and long term.
Making the links should provide more confidence to governments and investors that the companies that are at the heart of their economies will survive into the future – and where there are risks within them, those risks are being identified by transparent reporting. Then there’s time to act and mitigate whatever those risks might be.
If companies are conscious that they will be reporting in that way, we hope it will help to sharpen their business thinking and decision-making and ensure that decisions, which are made, support not just the company’s bottom line in the short term, but will also promote value creation in the medium and long term. And we hope that companies working collectively in this way will help to contribute to a sustainable and stable economy and society.
Photo by Howard Simmons