One reason for such add-ons is the changing business context. Factors that drive value creation have moved rapidly in recent times – such as a shift from the tangible to the intangible, from manufacturing to service industries. ESG reporting has gathered momentum over the past few decades, but has not yet been well integrated with financial reports. Simnett foresees a single integrated report being concise and material. Another guiding principle is a move from paper-based reports to versions leveraging new technology and online formats so that information can be up to date and relevant to business development, with interaction from stakeholders.
Testing time
In 2011 companies around the world were recruited for a pilot program to test proposals for an agreed international integrated reporting framework by the end of 2013. One member of the pilot group, CLP Holdings an investment holding company with subsidiaries engaged in the generation and supply of electricity in Hong Kong, Australia (TRUEnergy), and India – has found that integrated reporting changes the way the company operates by, among other things, increasing the focus of the board on sustainability, reports its environmental affairs manager Jeanne Ng.
There was support for integrated reporting at the United Nations Conference on Sustainable Development (Rio+20) in June attended by government delegates from 196 countries. IIRC chief executive Paul Druckman told delegates: “We are actually a breath of fresh air which brings sustainability reporting into a meaningful integrated picture so that investors and other stakeholders truly understand where a business is and how it is going to create and preserve value long term for the shareholders and the planet.”
There are still issues to be worked through. While the costs can be concentrated, the benefits can be more intangible and diverse. To gain widespread acceptance, companies need to see that the benefits outweigh the costs.
Simnett also asks how auditors, who verify statements in traditional annual reports, will handle forecasts and other future-orientated material in integrated reports. New standards, techniques, reporting mechanisms and liability considerations for auditors might be required. “If there is information to be provided that is not assurable, is there some form of assurance that can be provided, for example, that at least the process is reasonable? Report preparers are concerned about disclosures of strategic advantage, and [any] potential greater risks they are facing. There will need to be engagement with the regulators, and this should include what needs to change from the assurance profession’s perspective,” he says.
The Society for Knowledge Economics is co-ordinating the Australian effort. It established The Australian Business Reporting Leaders Forum as a multi-stakeholder group in late 2010 to collaborate with the IIRC and global initiatives to promote integrated reporting.
It aims to contribute an Australian perspective to international proposals and influence the Australian government, regulators, standards setters and industry bodies to endorse integrated reporting proposals and raise awareness of the issue. Diplock, who is leading the forum, told its April 2011 meeting that the lessons from the global financial crisis were that financial markets matter and regulating banks alone was not enough.
Markets are vitally interconnected and national borders cannot stop capital flows or the spread of contagion. It was sound governance that checked destructive behaviours. “[The global financial crisis] was a crisis of ethic proportions – sound governance is good for business and good reporting tells investors ESG is being practised,” Diplock outlined, concluding that the IIRC represents awareness that the financial crisis masks an imminent socio-ecological crisis.
