Could integrated reporting be the way the world’s large corporations communicate with investors in the future?
Integrated reporting aims to take a more expansive approach to corporate reporting by combining social, environmental and economic context with a company’s typical disclosures on financial performance, strategy and governance. It sets out to show, in one report, linkages between financial and non-financial data to bring into full view how companies create value and just how sustainable their business models are.
But is such a shift away from traditional reporting achievable? We asked an investor, a preparer and an advocate for integrated reporting to give their views. First up is Farha-Joyce Haboucha, managing director and director for Socially Responsive Investments, Rockefeller & Co. Click here for details on the International Integrated Reporting Council’s two-year integrated reporting pilot programme and here to read about efforts by HSBC, one of the participants in the progamme, to reshape its corporate reporting and the challenges the company has faced along the way.
Farha-Joyce Haboucha: The investor’s view
Integrated reporting is not something we come across frequently among companies we evaluate as investment opportunities, though our expectation is that its use will increase. At the same time, we have a long history of integrating environmental, social and governance (ESG) issues into investment decisions.
We gather information from multiple sources, quite often including companies’ separate sustainability or corporate social responsibility (CSR) reports. But there are some companies that have produced what can be considered “integrated reports”. For example, while Schneider Electric separately produces a comprehensive sustainability report, its annual report includes a discussion of sustainability factors the company believes will affect or be affected by its businesses.
More generally, it would be extremely helpful for key performance indicators that connect business outcomes to environmental or social initiatives to be included in annual reports, along with identified risks from ESG issues and the steps companies are taking to address them. For example, it would be helpful to have metrics and discussions of productivity improvement that result from a high level of employee engagement, business won because of particular initiatives, patents awarded because of investments in R&D and in employee development, among others.
We would also like to have insight into future trends and how management is preparing to meet the challenges and benefit from potential opportunities. A discussion on the risks from potential legislation and the preparation to meet such risks, rather than just listing legislative changes as an overall risk factor, would be a valuable addition. Management’s efforts to prepare for an environment of resource constraints and for the consequences of climate risk would also be helpful.
Because we already incorporate ESG factors into our assessments, we do not believe that integrated reporting of these issues will change the way we assess investment opportunities. We do believe, however, that making this information available to the investment community will be invaluable in terms of highlighting risks and opportunities that they may currently be unaware of through traditional means.
Moreover, used properly, integrated reporting can also become an important management tool. To cite again a metric mentioned previously, the kind of strategic information companies can provide that would be useful to analysts might be the results of employee surveys, information relating to the increase or decrease in the company’s recommendation scores, or the number of employees who received special training, or the health and safety numbers would also be useful.
Discussion on ethics and anti-corruption programmes would be particularly important for companies where these risks are high and would help to highlight those companies that are better managed and, therefore, less likely to face troublesome issues down the road. Other good measures that might be beneficial include energy usage, water usage and other measures of scarce resources usage. These are just a few specific examples of non-financial information that illustrate how their disclosure can deepen the understanding of how a company is managed and its attractiveness as an investment opportunity.
However, at the moment in the United States, much of the information provided by companies is dictated by regulation, and much of it is, by necessity, historical. In addition, companies must respond to the short-term focus of many investors. Still, by focusing on the building blocks of long-term strategy, especially as they relate to the use of resources, a company can redirect the conversation onto the long-term drivers of value creation.
What would be welcomed is a discussion of how different internal initiatives connect through strategy to particular outcomes – for example, how employees are paid and incentivised along the chain.
Integrated reporting holds the promise of improving communication of a company’s long-term value to investors. For this to happen, the oversight of the reporting function needs to be seen as a key strategic function that gathers the different strands of the organisation and presents the components in a comprehensive and integrated manner rather than just as a staff function.
Many commentators have expressed concerns that integrated reporting would create shorter reports and might “short-change” the reporting issues of importance to them. The promise of integrated reporting is not less reporting, but more meaningful reporting.
Going beyond the “box-ticking” exercise of listing boilerplate risks and providing a meaningful discussion of how these risks are addressed within the organisations should create a more competitive landscape, where analysts are routinely identifying companies with better practices because they have been educated and sensitised to the issues by management teams who are, themselves, better informed.