South African companies line up to IR challenge
This year, the eyes of the corporate reporting world are focused on South Africa, the first country to mandate integrated reporting (IR).
Light-touch regulation and peer pressure are encouraging a healthy proportion of South African companies to produce integrated reports at the first time of asking, anecdotal evidence indicates. But while progress is promising, industry experts believe that work still needs to be done to improve the quality and consistency of IR.
South African companies are at various stages in their integrated reporting journeys. Some are planning to produce combined sustainability-annual reports, while companies with a more advanced approach are working on integrated reports that are the result of integrated thinking and planning.
Since March, companies listed on the Johannesburg Stock Exchange (JSE) have been required to file integrated reports on an “apply or explain” basis as part of requirements of the King III report on corporate governance. Companies have observed King III for several years as a necessary framework to maintain governance standards. While it is not a legislative requirement, the JSE has made King III a listing requirement, and part of the code is integrated reporting. The most common explanation for failing to produce an integrated report is that a company is planning or building processes to adopt it in future years.
The world is monitoring how South African companies embrace IR and the challenges and benefits it provides. Feedback from South African businesses will help the International Integrated Reporting Council (IIRC) shape a framework for IR, which is widely viewed to be the next evolution of corporate reporting.
There is no hard data yet on which organisations are planning to produce an integrated report, but anecdotal evidence suggests most companies are working on an integrated report of some kind.
“There’s been a massive increase in the JSE where just about all companies are applying it because of peer pressure. If you aren’t applying it, then you are seen to be behind the pack and not adhering to best practice in terms of reporting,” said Ian Jameson, the chief advisor of climate change and sustainable development for the sustainability division at energy company Eskom Holdings.
An Ernst & Young study of 16 JSE-listed companies, Integrated Reporting Survey Results, found universal support for IR, but companies are uncertain whether there should be a single integrated report or whether it should be one of several reports. Just over a third of respondents (36%) believe integrated reports should form a wider package, while 43% disagree and 21% are uncertain or neutral.
Eight out of ten companies said they have appropriate systems and processes in place to monitor and report on sustainability issues, which indicates companies have begun taking the first steps towards integrated reporting.
“In South Africa, the leading sectors are mining and financial services, and they are the two sectors that have taken the lead on driving integrated reporting and getting it embedded into their industry,” said Mark Hoffman, a KPMG South Africa partner of accounting advisory services and integrated reporting.
Mining companies, such as AngloGold, Gold Fields, Sasol and Impala Platinum, are ahead of the pack because they are required to produce non-financial information as part of Social and Labour Plans each year – a pre-requisite for companies to obtain or retain a mining permit. The plans are designed to ensure mining companies advance the social and economic welfare of employees and the communities in which they operate.
A pleasing trend for Hoffman is the take-up of integrated reporting by the public sector.
“I often say integrated reporting is probably better made for the public sector than the private sector because it appeals to a much bigger stakeholder group and they have an obligation to report back to a much wider audience than just investors,” he said.
A state-owned entity that is relatively advanced in its integrated reporting journey is Eskom Holdings, which generates about 95% of the electricity used in South Africa.
Eskom technical accounting and reporting manager Jacob Buys said that IR has already provided the company with several benefits, particularly in reducing the duplication of reporting, helping the company to save both time and cost.
“We are looking at some software so that different people can work on the same report at the same time,” Buys said.
Another benefit has been the “cross-pollination of resources” within corporate planning, which means a broader diversity of talent contributes to strategy.
Eskom has been producing a single combined annual-sustainability report since 2002, but in the past two years this has evolved into an integrated report. Eskom’s first integrated reporting was based on its business model, but the most recent incarnation had a stronger focus on the company’s value chain.
“We feel that it provides much better comparability and a more integrated outlook on our value chain,” said Eskom’s Jameson.
An important part of the process is responding to stakeholder feedback. For example, Eskom includes non-financial metrics on CO2 and sulphur dioxide emissions, and other environmental factors that may not be linked to its corporate plan, but that are important to stakeholders.
A challenge for Eskom has been data harmonisation. “We have 25 power stations, and we had to put processes in place to make sure that everybody calculates, for example, CO2 calculations on the same basis,” Buys said.
KPMG’s Hoffman said siloed reporting, in which companies staple together different reports into a single document, is a common mistake among those that are in the early stages of their IR journey. Integrated reports should be built on top of business strategy, rather than an attempt to weave together the strategies and performance of different business functions.
While industry experts believe that the number of South African companies producing integrated reports of some nature may seem impressive, it is widely accepted that without a gentle push from regulators the take-up would not have been as successful.
“Globally, there’s probably going to have to be just that little extra push from a regulatory perspective, but hopefully people see it as an opportunity and not as a stumbling block,” Jameson said.
While regulation and peer pressure have helped boost numbers in the inaugural reporting year, the real test for South Africa’s companies will be analysing the quality of IR.
IIRC chiefs will no doubt be encouraged if participation levels are as high as the anecdotal evidence suggests, but they will also know too well that the devil is in the details.
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