Written By: Susan Smithfield – Corporate Finance
The concept of integrated reporting originates from the idea that enterprises, especially multinationals, should not just continue disclosing financial statements to secure the trust and confidence of the markets, their shareholders and investors. But they should also explain the impact of their businesses in creating the conditions for broad-based prosperity.
For Paul Druckman, chief executive officer of the International Integrated Reporting Council (IICR), companies need to write their intentions with a long-term perspective. “How our capital markets system creates and distributes wealth and resources is a critical question that must be addressed with urgency…. If economies, businesses and investors broaden their capital base, investment in their people, ideas and the protection of society and the environment will be prioritized alongside, and be consistent with sustained financial performance,” Druckman stated in a 2016 speech.
The IICR promotes writing an integrated report that no longer dissociates financial statements from the long-term strategy and impact of the company on environmental and social concerns. This report puts historical financial performance back into context and presents the company’s future risks, opportunities and prospects to help investors and stakeholders understand its strategic objectives and the progress it has made.
Today, 1,750 multinational enterprises are participating and promoting this concept all over the world. Countries such as South Africa, Australia and Great Britain are in the forefront. In the financial industry, big names such as the World Bank, HSBC, Prudential, Deutsche Bank, Deutsche Börse Group, BNP Paribas are among the current participants. The number of companies convinced of the power of publishing such reports is growing exponentially since the first tests of integrated reporting were launched three years ago. In fact, more and more professionals today are defending this new mode of reflection and presentation of the strategies of their companies. Participants view the integrated-reporting initiative as interesting because it allows the board to clearly express its long-term vision and contributes to the quality of the dialogue with investors, as well as stakeholders.
“If companies adopt integrated reporting, we will have made a tremendous progress in the coherent synthetic communication of the trajectory they wish to carry out according to their strategy,” said Hélène Ploix, company director and chairman of the French working group.
“Integrated Reporting can bring additional information, in particular about the longer-term costs of climate change, to feed into markets and inform decision-making and policy-formulation by institutions. If achieved, it will lead to better-informed and more sustainable long-term investment, for the benefit of society,” stated Mark Carney, governor of the Bank of England.
Investor expectations on companies’ futures.
According to the IIRC, the information currently disseminated by companies does not “meet the expectations of investors…as it is essentially historical”, while “the investor must form an opinion on the strategic trajectory, the ability of the company to build and maintain competitive advantages, its ability to overcome the risks associated with its business and environment, and on how it will use its financial resources”.
What would be missing?
“The strategic narrative,” explains Jean-Florent Rérolle, a partner at KPMG. “Beyond the numbers, it takes words to explain the future of the company. Investors need a global vision that allows them to find the overall logic to better evaluate the company.”
As expressed in the International IR (Integrated Reporting) Framework, an integrated report should provide insight into the organization’s strategy, and how it relates to the organization’s ability to create value in the short-, medium- and long-term and to its use of and effect on capital.
“It is not about adding information, but about connecting it to give it meaning, relevance and coherence that investors do not have when they are simply juxtaposed,” according to the IFA (French Association of Board Members).
Investors are not the only recipients; stakeholders should also find interesting material and answers to their questions. This will encourage the boards and managing directors of companies to shed light on decision-making that focuses on creating value in the short-, medium- and long-term—by expressing the company’s strategy in terms of value creation for the shareholder and formalizing its long-term vision by clearly identifying competitive advantages, business-model characteristics and appetite for risks.
A concept still to be promoted and clarified.
Despite these strengths, and its growing support, the battle for integrated reporting has not yet been won. “A large number of professionals—issuers and investors—have not yet heard about integrated reporting or confused the issue with social and environmental responsibility, which in fact has very little to do with it. Indeed, the integrated report is not a Corporate Social Responsibility (CSR) report: it should only include CSR initiatives that contribute directly and clearly to the creation of long-term shareholder value. The integrated report is much more ambitious than a CSR report. It has a strategic content,” claims Jean-Florent Rérolle.
Hence the difficulty of the exercise: it requires a different effort from each division of the company. Building useful information on value creation and risks, and revealing long-term strategies and impacts, requires skills and transparency working together. Confidentiality, cost, time are just some of the obstacles to the constitution of the integrated report.
The implementation of integrated reports will take time but will participate toward building or re-building trust between companies and their stakeholders.