NAB, one of Australia’s Big Four banks, and mining giant BHP Billiton are among the Australian company trendsetters earning kudos for leading the way. Hundreds of other companies worldwide, particularly in Europe, are starting to file integrated reports. In South Africa, the Johannesburg stock exchange is asking companies to comply with requests to submit integrated reporting or explain why they have not done so in place of traditional annual reports. And this year, France has enacted the Grenelle II legislation, requiring large companies to embed social and environmental consequences of their actions in their annual reports. Denmark and Sweden also encourage voluntary reporting on non-financial performance.
In 2010 the European Commission engaged in public consultation over the disclosure of non-financial information by companies, including social, environmental, human rights and sustainable development issues. The European Union also has a report modernisation directive. The UK Department for Business Innovation & Skills found a low level of satisfaction with the quality of corporate reporting, with disclosures lacking in relevance and coherence. “Good narrative reporting should tell the company’s story effectively and in a balanced way that puts financial information into context,” it said. “The statutory reporting framework is intended to help boards consider material issues facing the business so they can determine the right strategy for long-term company success in the interests of company members. Social and environmental issues should be central to these discussions.”
Capital inclusions
IR may add five other types of capital to the current financial reporting of a business.
1. Manufactured capital accounts for physical objects such as machines available to the organisation to produce goods or services.
2. Natural capital includes air, water, land, biodiversity, eco-system health and energy.
3. Human capital involves people’s skills and experience, and their motivations or rewards to innovate.
4. Intellectual capital takes in the intangibles that provide competitive advantage.
5. And, social capital is defined as the institutions and relationships that exist in a community, group of stakeholders and other networks to enhance individual and collective wellbeing, which support the business model.
The aim of integrated reporting would be to chart the levels of the various capitals held by a company at the beginning of a year, and how these capitals are built up or depleted over a particular period. At the same time, the integrated report would tell a company’s value proposition – why an investor should invest in the company in the short, medium and long term. It would also integrate the information in the financial and the sustainability reports to allow the reader to understand the company’s broader performance. As currently reported, for example, information on strategy (if disclosed) is not well tied to identified risks, which is also not well tied to disclosures of governance structures and remuneration strategies – as such, a company’s value proposition is not clearly communicated.
Traditional reporting has become more compliance-oriented and detailed, but the collection of data for reporting on the many components, as currently required, is “siloed” within companies and commonly not integrated with other related activities.
