Sustainability reporting has yet to establish its presence but integrated reporting is trying to gain a foothold within the environmental, social and governance (ESG)
arena. Nina Röhrbein reports
According to the International Integrated Reporting Council (IIRC), “Integrated reporting brings together material information about an organisation’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. It provides a clear and concise representation of how an organisation demonstrates stewardship and how it sustains value.”
The information currently provided in corporate reports is voluminous, which makes it difficult to understand the key criteria of the business. “Companies at the moment are reporting on certain capital against which they are measured, which means it may not reflect the sustained value of the business, including financial information,” says Paul Druckman, CEO of the IIRC.
At present, silo reporting is the norm. Reporting on ESG factors is undertaken via a sustainability report separate from the financial statement in the annual report. Druckman laments the lack of connectivity between the two. If the ESG information is material and relevant for the performance of the business then it should be disclosed in the integrated report, he says.
“We are currently using several documents which are not necessarily interrelated or consistent with each other,” says Daniela Carosio, senior ESG researcher at ECPI Group. “Reliable and consistent information is important because it enables investors to compare and select the companies that are best-in-class.”
An integrated report shows that ESG issues have the full attention of the company board, believes Estelle Mironesco, director of SRI at corporate social responsibility (CSR) ratings agency Vigeo. “Including different issues in a single report avoids doubletalk too,” she adds.
“There is a difference between data and information, and reporting,” says Druckman. “Investors are looking for more data, which is why there needs to be transparency but this still does not give them the complete picture to enable them to understand what the business is trying to do and why it should be backed in the future. Integrated reporting is not the evolution of sustainability reporting - it is the evolution of corporate reporting.”
But if companies have yet to produce a sustainability report, it is going to be difficult for them to create a good integrated report.
The Global Reporting Initiative (GRI) provides guidelines on sustainability reporting, with a new generation set for release in May 2013. According to these, sustainability reports should contain information about the sustainability performance of an organisation in three main categories: economic, environmental and social. The guidelines offer three application levels, C (basic), B (intermediate) and A (advanced) and it is up to reporters to determine the level. GRI foresees that companies compiling integrated reports will continue to use its guidelines for disclosure of their sustainability data.
“Most investors want to know what the company believes are its key strategies,” says Druckman. “A big part of their investment strategy will be to make sure that the company has a strategy that is going to create value and the integrated report should help them tell that story. But the report does need verification by auditors to avoid just being glossy propaganda.”
Some concerns have emerged over integrated reporting. Mironesco warns that with the focus on the most critical sustainability issues in an integrated report only, companies and investors have to be careful to avoid oversimplification and poorer disclosure around sustainability issues.
“Some argue that the push to integrated reporting will reduce the information flow rather than improve it,” says Steve Waygood, head of sustainability research and engagement at Aviva Investors. “But that concern is misplaced. While investors will use the data in integrated reporting for valuation, they will want to know additional reporting is available to other stakeholders. This is simply good risk management.”
IIRC’s integrated reporting discussion document is about how the board integrates various different sources of capital into the company strategy. “Integrated reporting is the board’s thinking about the firm’s sustainability on financial, manufactured, intellectual, social, human and environmental capital,” says Waygood.
But does the inclusion of material ESG issues in an integrated report not lead to the age-old problem of how to quantify?
“It is not true that certain ESG factors cannot be measured,” says Druckman. “There is a difference between a monetised measurement in the traditional sense and measurement in terms of being able to quantify the value. We think along traditional lines and need innovation in the reporting process, as in many cases it is difficult to quantify certain factors.” Carosio says that ESG will become mainstream when everybody starts talking in numbers.
The IIRC is set to develop a framework on integrated reporting based on the consultation of its discussion paper and its pilot project with over 60 companies.
Meanwhile, Aviva Group is promoting a UN convention on corporate sustainability reporting at Rio+20, in June 2012. According to this convention, countries would require companies to produce an integrated report. If the convention fails to be agreed, Waygood expects member states to realise the financial microeconomic importance of integrated reporting and regulate for it. “They have three options,” says Waygood. “They could either require companies to do this voluntarily, they could change company law, which is a longer process or they could change the listing rules, which to me presents the best opportunity today.”