- Investors are demanding more information on strategies which build long-term value.
- More organisations such as Lend Lease, National Australia Bank, Stockland, Australia Post, Cbus and Vic Super are adopting the principles of integrated reporting.
Important drivers of value are intellectual and natural capital and social and relationship capital.
In a move being led by international investors and company boards, the way that accountants carry out reporting is changing worldwide. A trend towards non-financial reporting is the way of the future, and is set to become the global norm, a CA ANZ breakfast forum was told in October.
Australia as a country does not want to be left behind, warns Richard Howitt, the new CEO of the London-based International Integrated Reporting Council (IIRC). “There is a competitive advantage in being an early adopter and not a laggard.”
During a recent visit to Australia and New Zealand in October, Howitt delivered an address on Integrated Reporting to accountants at a breakfast hosted by CA ANZ in Sydney.
(Panellists discuss integrated reporting trends at the breakfast. Pictured: Dr Dale Tweedie of Macquarie University, Pauline Vamos, CEO Regnan, Richard Howitt, IIRC CEO.)
With about 1,600 companies worldwide already adopting the principles of Integrated Reporting, in Australia these include corporate heavyweights such as Lend Lease, National Australia Bank, Stockland, Australia Post and superannuation funds Cbus and Vic Super.
In New Zealand, where Howitt visited before Australia, eight of the listed N100 companies have now adopted integrated reporting, with a further 40 organisations in the public and private sector also producing the reports, according to local media.
South Africa is the only country in the world with legislation requiring integrated reporting for listed firms, but a growing number of companies in Australia and overseas are voluntarily adopting the International Integrated Reporting Framework, speakers told a panel session at the breakfast.
“In Europe, the EU Non-Financial Reporting Directive this year will see 8,000 companies integrate financial and non-financial reporting for the first time,” says Howitt.
Powerful institutional investors, such as the world’s biggest asset manager BlackRock, are leading the calls. “Investors have been driving this from the start,” says Howitt. The pricing of risks and opportunities in today’s more interconnected interrelated fast-changing world have not been properly captured by the existing corporate reporting system.
“It’s important for that to change in order for capital market decisions to be taken efficiently and to reward long-term returns.”
Integrated reporting offers a more cohesive and efficient approach to corporate reporting across the short, medium and long-term, says Howitt. Academic and other research on adopting non-financial reporting demonstrates evidence of these benefits:
- A more stable long-term investor base
- Lower costs of raising capital
- Higher share price
The benefits can apply to both SMEs and large corporates, he adds. Research carried out by Roger Professor Simnett AO of the UNSW Business School found that for smaller listed firms, improved information provided to investors lowers the company’s cost of equity capital. “I want to emphasise that this is about changing and sustaining capital markets, and about improving the stability of the financial system of the world,” says Howitt.
A strong desire for good corporate governance in the wake of the Global Financial Crisis has been a key driver. “Boards want a holistic approach. They want to know what’s going on before bad things happen, so they know about them early and they have been dealt with. That’s what good corporate governance is about, in a very simplistic way.”
What is the IIRC?
The IIRC was set up in 2010 and in its first three years, conducted a pilot program with 160 companies and investors worldwide, who experimented with integrated reporting. The Framework was released at the end of 2013 and now those innovator companies have become early adopters, says Howitt.
The IIRC now has a presence in 62 countries, including 20 of the 28 EU countries and all G20 countries, plus emerging and BRICS economies. “If they (emerging market players) want access to international capital markets to grow fast - which is what they want to do to become global players, then integrated reporting is a fast-track way of doing it because this is the benchmark as far as international capital markets are concerned.”
The IIRC also has a big Silicon Valley initiative where it works with technology companies “the Googles, Apples and Microsofts to ensure the next generation of technology reporting is integrated reporting.”
At present the world is in a “breakthrough phase” of Integrated Reporting, where companies, investors, the counting profession, regulators and other interest groups round the world are endorsing Integrated Reporting. In the next year, the IIRC will launch their “global adoption phase”.
Assurance of integrated reporting enhances the credibility of the information
Integrated reporting explains how an organisation creates value over time to benefit stakeholders and shows how its business model interacts with the external environment and the “six capitals” - financial, manufactured, intellectual, human, social and relationship and natural capital.
Human and intellectual capitals are probably the two least understood areas in non-financial reporting, because they are not easy to quantify, Howitt told Acuity.
“As far as ideas and knowledge are concerned, intellectual capital is the biggest intangible in this developing digitalised economy. It’s the most difficult but probably the most important to define and one of the most important for future success, survival and competitiveness.”
Accountants can start the process by checking the IIRC website, signing up to the newsletter and viewing the Framework which guides companies and other organisations preparing a report. They can then choose technical steps to follow, undertake training and workshops and incorporate changes into companywide reporting. This approach to corporate reporting reduces the burden of reporting and helps to make it more concise and material to the company, says Howitt.
Accountants are well-placed to provide assurance over non-financial information, including integrated reports, adds CA ANZ Ethics and Sustainability Leader Karen McWilliams.
“Assurance of integrated reporting enhances the credibility of the information included and improves its usefulness for informing decision-making. However, as corporate reporting evolves and the adoption of integrated reporting grows, accountants will also need develop new skills.
“They may need to go beyond the financials of an organisation to understand the business model and how it creates value. They will need to help organisations adopt integrated thinking and act as a transformation agent to the organisations they work for and with. We are looking at how we can help our members prepare for this reporting revolution.”
(Pictured: Karen McWilliams, CA ANZ Head of Ethics and Sustainability addresses the breakfast.)
Australian listed companies already have an existing structure to frame investor-focused disclosures in annual reports through ASIC’s RG 247: the Operating and Financial Review (OFR). But more work will be done by regulators, says Howitt.
While in Australia, he met with officials from ASIC (Australian Securities and Investments Commission) to discuss how to simplify the regime in Australia to encourage the adoption of integrated reporting.
A policy position released in September this year by the Australian Institute of Company Directors (AICD) also moved the integrated reporting approach locally to “a more positive plane”, he says. The AICD supports flexible, voluntary adoption of relevant content elements of Integrated Reporting.
However, the AICD does not recommend adopting the full framework due to directors’ liability concerns with forward-looking statements and the need for a directors’ compliance statement under the formal framework.
Early adopters: Lendlease and AGL
A number of Australian companies such as Lendlease and AGL are informally adopting elements of non-financial reporting, according to Pauline Vamos, the CEO of Regnan Australia, which assesses environmental, social and corporate governance risks of ASX200 companies on behalf of institutional investors.
Lendlease moved to adopt the principles of Integrated Reporting a year ago, according to the AICD magazine Company Directors. For the annual report, this resulted in Lendlease reducing its reporting portfolio by two reports and eliminating six weeks of report preparation and board and management time.
“We are seeing the best examples (of integrated reporting) in investor presentation packs. What they are doing is learning how to tell stories,” says Vamos, adding that accountants need to be more like investigative journalists to drill down into the non-financials.
This year the AGL AGM reflected a very clear strategy in the way they report, she adds. Some larger super funds such as Cbus and Vic Super have also adopted integrated reporting to set an example to the market and meet member expectations round communication of the fund strategy which is encouraged by the super regulator APRA (Australian Prudential Regulation Authority). There is now more pressure on funds to be active owners and to become more strategic and disclose that to members, she adds.
ASX-listed Primary Health Care, whose business success relies on attracting and retaining health care professionals, is one company focusing on human capital in its reporting. Primary discloses material information on strategic changes to contracts, human capital spending trends, and tailored metrics on staff attraction and retention rates.
Overall in Australia, the trend towards Integrated Reporting is “a slow burn but is gathering momentum”, Vamos told the breakfast.
(Main picture: Liz Prescott of the IIRC; Dr Dale Tweedie of Macquarie University; Karen McWilliams, CA ANZ Head of Ethics and Sustainability; Richard Howitt, IIRC CEO; Pauline Vamos, CEO Regnan.)