Blog 23.06.21

Towards integrated reporting

You’re thinking of including more sustainability information in your annual report. Given that universal standards for fully integrated reporting are some way off, what do you do? 

It’s a good time to make a start, for three reasons:

  1. Integrated reporting will be the norm within a few years
  2. Work on reporting standards is advancing fast and you can make reasonably accurate assumptions of what investors and regulators will want in the near future
  3. Starting early – as early adopters have shown – keeps you in control as you voluntarily broaden your disclosures, learning as you go.

But where and how do you start? And can you abandon your sustainability reporting?

Other than disclosures legally required by some countries and stock exchanges, you’re still free to choose your own reporting path. Your choice should be influenced by the needs of your audiences (those you are reporting to) and what’s important to them and your business (materiality).

Audience

With the dramatic increase in demand for environmental, social and governance (ESG) information, your reporting audience is now made up of two distinct groups:

  • Financial community (investors and other players in the capital markets)
  • A broad group of stakeholders that include employees, potential recruits, policy makers, sustainability professionals, engaged consumers, NGOs and other influencers.

This marks a change from the early days of reporting where it was difficult to decide on the relative importance of different stakeholder groups. Targeting priority audiences has become a little easier with investors clearly in the crosshairs.   

Investors want clarity on ESG risks and how the business plans to deliver robust ESG performance, with data to back up assertions. The remaining stakeholders are primarily interested in understanding corporate purpose, tone and approach (stories). Of course, there is an overlap of needs, but the data/story difference is helpful in planning how and what to report to the different audiences. And where to locate the information.

Most of the work underway in developing ESG reporting standards is to satisfy the needs of investors. Given that it has taken well over a century to produce standards on financial reporting, it’s not surprising that investors, regulators and companies are taking a while to agree on the detail.

Standalone no more?

As integrated reporting progresses, we see the standalone sustainability report morphing into story telling on the company website. This means the performance data will be consolidated in the integrated report and what used to be the standalone sustainability performance report will become an evergreen section on the website. The level of detail on the site will be defined by the sector and the company’s impact. For example, companies in the extractive industries will have to provide a lot more detail compared with, say, those in software services.

It’s this sectoral difference that makes materiality so crucial. An honest analysis of what’s important to whom will define the level of sustainability information demanded by the two audiences. It is the materiality analysis that will determine what goes into the integrated report and how much detail is needed on the evergreen web pages.

Of course, the urge to gild the corporate message will prevail. There is a danger that those evergreen pages will be awash with green assertions and images of happy, diverse faces. If the forthcoming reporting standards are any good, they will ensure that integrated reports avoid greenwashing.    

Standards landscape

It’s certainly a busy time for standard setters. After early, sleepy years with only the GRI doing anything significant, the standards landscape is now a frenzy of activity. Here is a quick updated summary of the current mix of existing and expected standards that apply to integrated reporting, and the organisations working on them (alphabetical).

  • Carbon Disclosure Standards Board (CDSB), which has produced a framework used to disclose environmental and natural capital information in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). 
  • CDP (formerly known as Carbon Disclosure Project), which against all expectations has been highly successful in getting companies to disclose their carbon emissions voluntarily.
  • EU’s Corporate Sustainability Reporting Directive (CSRD). The EU wants to make sustainability reporting by large companies more consistent and comparable. It says it will work with existing standard setters to ensure corporate reporting supports the European Green Deal and the flow of capital bolsters sustainability. The CSRD is part of a package of sustainable finance initiatives, defined by the EU’s Taxonomy, a classification system of environmentally sustainable economic activities. 
  • Global Reporting Initiative (GRI). The grandaddy of the pack which produces standards to satisfy multi-stakeholders and which investors find woolly. The GRI will publish its “universal” standards this year. It has promised greater cooperation with the different standard-setting groups, although its promises to do so in the past have not come to much.
  • International Financial Reporting Standards (IFRS) Foundation is working towards the creation of an international sustainability standards board and will decide if this is feasible by November, 2021. This is potentially the most significant standards initiative because IFRS rules on financial disclosure are required in 140 jurisdictions around the world. This includes the EU but not the USA, which follows the US Generally Accepted Accountancy Principles (GAAP). If the IFRS goes ahead with its plans, it will split the ESG reporting standards world in two: USA – probably using the SASB standards (below); and the rest of the world, using IFRS. 
  • Task Force on Nature-related Financial Disclosures (TCFN) is hoping to do for biodiversity what the TCFD (above) has done for climate change reporting. It was founded by Global Canopy, the United Nations Development Programme (UNDP), the United Nations Environment Programme Finance Initiative (UNEP FI), and the WWF. It’s at the very beginning of its work.    
  • Value Reporting Foundation. This is the name of the recently merged Sustainable Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC). The Foundation’s standards are known as the SASB standards. It remains to be seen how the IIRC’s standards will be integrated by the Foundation, if at all.   
  • World Economic Forum’s (WEF) efforts to set ESG standards, instigated by the big four accountancy firms, is underway. WEF has emphasised the need for collaboration and endorses the efforts of the IFRS.

Another significant push for ESG reporting standards is coming from the US Securities and Exchange Commission (SEC) which is preparing tougher disclosure rules on carbon emissions. This is supported by the Biden administration and is creating the inevitable political resistance from Republicans who complain that the metrics are not yet mature enough to avoid misinterpretation by investors.

Next steps

While it will take a few years for integrated reporting standards to become the norm, it’s rewarding to see the positive impact of early initiatives to engage the financial community, such as the UN-supported Principles for Responsible Investment.

Many companies have been experimenting with integrated reporting for some time. They are about to be joined by many more. Soon, we hope, you will have a clear roadmap to follow.

Sales pitch: hear more about how we can help you build a future-proof sustainability reporting eco-system. (peter.knight@contexteurope.com).

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Author:
Peter Knight

Chairman and co-founder

Clients:
IKEA, A Global packaging company, A leading global food company




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Congratulations to @Michelin, @Pirelli, @Bridgestone who scored highest in our #rubber #sustainability story assess… https://t.co/IBlAYxtW5W
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