Integrated Reporting: Why it’s Important and Where to Begin
Companies pour significant resources into Corporate Responsibility (CR) reports to make them interesting and inspiring. They are widely distributed in print and on the web. But there's a major problem with CR reports—investment analysts don't read them.
Decision-makers at investment firms rate potential investments based on, put simply, a set of numbers in a spreadsheet. There is no widely established way for that spreadsheet to include non-financial factors such as Environment, Social and Governance-related (ESG) information that have very real but harder-to-quantify impacts on a company's true value and prospects for sustainable financial growth. As a result, ESG factors hardly ever influence stock ratings or investment decisions. Instead, these important decisions are made on the basis of an incomplete picture of value, composed of shorter-term and entirely financial factors.
So, how do you make CR "real" for investors? The answer may be a simple idea whose time has come—Integrated Reporting.
Integrated Reporting is the side-by-side reporting of financial and non-financial performance to paint a more comprehensive picture of a company's performance and long-term sustainability. In the years ahead, it could become an important driver in broadening an organisation's definition of good performance, long-term value, and risk. It also stands to become the first form of CR reporting capable of widely influencing institutional investors' decisions, thus steering capital toward more accountable organisations and—hopefully—accelerating sustainability in business.
Integrated Reporting isn't common practice yet, but there are many individuals and organisations pushing it forward. Most notably, the International Integrated Reporting Committee (IIRC)—a collaboration between Accounting for Sustainability (A4S) and the Global Reporting Initiative (GRI)—was founded this August to work for the creation of a global standard.
In the meantime, individual companies should endeavour to gather and present performance data in ways that reflect the interconnections between ESG and financial factors. Here are some starting points:
- Bring your finance and CR teams together. We frequently hear from our clients that their CR and finance teams don't interact. Urge the two functions co-champion the development of an approach to integrated reporting—between them, they "own" almost all of the required information and skills required.
- Work with risk. This can help draw out the connections between sustainability and economic value. What would be the financial impact of carbon legislation? Of reputational damage after an environmental accident? Of a new product line with more sustainable characteristics? Of operating complex supply chains across multiple geographies?
- Focus on Integrated Reporting—not combined reporting. A frequent shortfall is to simply present non-financial and financial information in sequence without exploring the connection between the two. Remember that this is substantively no different than continuing to publish two different volumes.
- Before an integrated report, push for an integrated strategy. A truly integrated report (as opposed to a combined report) will be difficult to assemble without a corporate strategy, vision and goals that reflect ESG risks and opportunities while emphasising financial, environmental and social sustainability.
Several leading companies—such as Novo Nordisk, Southwest Airlines, and BASF—are already coming up with innovative approaches to Integrated Reporting. For these and others, a head start will prove a massive advantage when greater pressure eventually comes, either from the proliferation of a voluntary standard or from new regulation.
What's your view?