The tricky road to integrated reporting
Sustainability reporting has been in the spotlight for the past decade. It started out as a few dedicated pages inside companies’ annual reports, some positive storytelling about one or two carefully selected issues.
But as corporations built an understanding of what sustainability and transparency meant for their business, adding more and more relevant information over the years, they ended up publishing annual reports that looked more like encyclopedias.
Now things are evolving again, and integrated reporting is part of that evolution. Companies realize they need to view their business in a more holistic way.
They are also under increasing pressure from investors, stakeholders and regulators not only to disclose their non-financial data, but also to connect their strategy, performance and the social, environmental and economic context within which they operate.
According to a recent study by the Global Reporting Initiative (GRI), the Prince’s Accounting for Sustainability Project and UK communications consultancy Radley Yeldar, more than 80 percent of investors surveyed believe integrated reporting will help in the assessment of company performance.
A quick glance at the statistics, however, reveals that only a small – albeit growing – percentage of the world’s 250 largest companies actually produce an integrated report.
Although 95 percent of those firms report on their ESG performance in some way, a review of their annual reports shows that, in most cases, sustainability is typically a discrete chapter that doesn’t concretely weave into the corporate narrative or link to other information in the report.
‘Properly integrated reporting requires companies to understand how their non-financial performance contributes to business value, how it’s embedded in their strategy, and what the most material issues are that they need to be managing,’ explains Heather Rankin, vice president for Europe at Context, a corporate sustainability consultancy.
‘We create sustainability content for the reports of a number of clients but we wouldn’t necessarily describe them as integrated reports – they’re annual reports with some sustainability information slotted in.’
A lot of companies are still at the beginning of this process, which requires them to have fully absorbed the idea of sustainability into the business strategy and be able to articulate it in a credible and compelling way.
At Swiss pharmaceutical company Roche, integrated thinking has been a natural process, driven by the long-term nature of pharmaceutical product development, which has made sustainability inherent in the way the company conducts business.
‘We produced our first separate sustainability report in 2003, then put a sustainability chapter in the annual report in 2006, making it a ‘combined report’, and produced a proper integrated report last year,’ points out Dianne Young, the company’s IR officer for sustainability.
And the gold medal goes to...
Novo Nordisk, the Danish pharmaceutical group focusing on diabetes care, is a pioneer in integrated reporting. The company has been producing an integrated report since 2004 and has won multiple awards for its IR and corporate reporting strategies (including IR Magazine Awards in 2012 for best analyst/investor meetings, best IR by a Danish company, and best IR in the healthcare/pharmaceuticals & biotech sector).
‘Novo Nordisk is a good example of successful integrated reporting,’ remarks Heather Rankin, vice president for Europe at corporate sustainability consultancy Context. ‘Its business model has the advantage of being quite straightforward: having basically one product, it is relatively simple for Novo to tell its story in one document.’
The first key step in integrated thinking is to determine which non-financial issues, among hundreds of ESG indicators, are ‘material’ to the business.
‘We have a risk management team that conducts a mapping of issues presenting high risks,’ explains Young. ‘The business planning department provides us with topics of general business concern.
‘We also work with the in-house media reputation team to identify topics that interest people: topics that are in fashion, some of which are time-specific and others more long term, such as philanthropy, patient safety and access to healthcare. We get direct feedback from key stakeholders, such as NGOs and patient groups that come to us to discuss their specific concerns. In determining those material issues, you also shouldn’t neglect your gut feeling.’
Comparing like with like
Another challenge faced by companies keen on integrated reporting is that stakeholders expect the non-financial data to be as accurate and reliable as the financial figures. It can be difficult for firms to apply the same level of robustness to non-financial indicators because they are more subjective and there are no regulations dictating how they should be measured and reported.
‘Companies don’t necessarily have sophisticated systems and huge departments gathering, auditing and verifying the data so there is a lot of nervousness around non-financial disclosure in the annual report, because a lot of effort has to go into checking that the data is robust,’ says Rankin.
Guidelines and best practices for sustainability and integrated reporting, although numerous, are still widely in development. The International Integrated Reporting Council (IIRC), the body promoting the development of a global framework for integrated reporting, has previously circulated a list of principles and is due to publish the full set of final guidelines early next year.
Currently, the UN–backed GRI is the most extensively used framework for sustainability reporting. It sets out a number of disclosure levels, rising from C to A (adding a ‘+’ if the data is audited by a third party), which firms can choose to apply. There have been successive versions of the guidelines, the third and most recent having been released in October 2006.
Although the GRI guidelines can be useful to companies just starting out in sustainability reporting, which will find it convenient to follow a checklist, the guidelines can also prove too comprehensive.
‘If a company applies the GRI guidelines at application level A, it will end up with a very long, hard-going report,’ notes Rankin.
‘If you want people to actually read your data once you put it out in the public domain, then producing a 200-page report isn’t necessarily the best way of going about it.’
In that sense, applying the GRI guidelines can achieve the opposite of integrated thinking by encouraging companies to report on far more issues than those that can affect business value.
‘At the moment, the GRI framework doesn’t support integrated reporting,’ Rankin adds. ‘But it is updating its guidelines and is due to publish version four, and I believe the new version will have more information about integrated reporting and will also be more closely aligned with the integrated reporting guidelines coming out next year.’
Another important point about the emergence of integrated reporting is the assumption that it means the end of the sustainability report. This isn’t necessarily the case.
Annual reports are mainly for investors, and companies have a lot of other stakeholders interested in the broader data investors might not care about, such as detailed environmental performance, waste production or recycling policies.
‘Some stakeholders reading the annual report and looking for specific information on corporate responsibility might become frustrated because they can’t find the data all in one booklet,’ says Young.
‘You need to continue communicating with your wider audience – NGOs, rating agencies, policymakers, SRI analysts – in a way that is appropriate for those stakeholders. If your annual report is a snapshot of the business as a whole, your website can provide additional context for that audience.
‘There is an increasingly important role for the internet in disclosing non-financial data. Online information allows you to update your information and communicate continually. There have been trends in corporate reporting, and integrated reporting may just be one of them. I believe in the longer term the annual report will be transformed into more of a review, and will become thinner and thinner.’
Mandatory carbon reporting in the UK
As of April 2013, carbon emissions reporting will become mandatory for the UK’s largest listed companies. The measure, which will affect 1,800 firms, is not expected to create a great stir in the reporting landscape as guidance on carbon reporting has been available since 2008 and carbon emissions disclosure is widely considered best practice. The vast majority of FTSE 250 companies already disclose their carbon emissions data, although the impact may be more visible on smaller companies further down the listings.