Sustainability vs Integrated Reporting - What's the difference?

Towards Integrated Reporting

Reana Rossouw

Next Generation Consultants - 2013

Next Generation Consultants2

Corporate Reporting Journey• Financial information• Backward looking• Short term focus• Compliance with regulations and standards to inform investors• Financial Accounting Standards Board; General Accepted Accounting

Procedures (IASB, IFRS)• Mandatory for publicly listed companies

Financial Reports

• Primarily non-financial information• Backward and forward looking• Long term focus• Global Reporting Initiative (GRI)• Voluntary and mandatory

Sustainability Reports

• Financial and non-financial information• Backward and forward looking• Short-medium-long term• Support more informed capital allocation• International Integrated Reporting Council (IIRC), Sustainability

Accounting Standards Board• Voluntary and mandatory

Integrated Reports

01/04/2013


Reporting in a unsustainable future? Strategy first, then management and then reporting

“Integrated Reporting may mean the end of the lengthy ‘carpet bombing’ sustainability report, but it will definitely not become a one-stop shop.”

Different types of sustainability communications with different contents, adopted to the expectations of all other stakeholders, will flourish with the help of new communication technologies. Reporting leaders are clear. Integrated Reporting will not mean the end of other sustainability communications.

01/04/2013


Purpose of Corporate Reporting To engage and involve stakeholders in corporate practice To inform business practice, strategy and management

focus To share the framework for measurement and target

setting – performance To show commitment and compliance Show understanding and consideration of impacts and

risks on external environment To account for sustainability performance and activities To improve internal processes To demonstrate adequate management of risks

01/04/2013


Corporate Reporting Describes performance

Where you are, where you come from and where you are going

Involves measurement Against specific targets and objectives

Is a recurring process Over time the story emerges by reporting regularly against

consistent indicators For a specific audience

The practice of measuring, disclosing and being accountable to stakeholders for performance against specific goals and metrics

01/04/2013


Reporting is a management process

1. Company identifies relevant sustainability issues and understands how these are linked to its business

2. To address these issues, the company defines action plans to implement business cases with

performance targets

3. The company commits to performance targets, monitors and

reports annually to stakeholders, and feeds back stakeholder perspectives

into the company strategy

01/04/2013


Challenges in reporting The definition of key indicators and topics to report on The sensitivity of some of the information that needs to be

provided Non-financial information is not valued or considered as

irrelevant The associated costs of reporting Ignorance or lack of knowledge about reporting and difficulties

with linking sustainability performance to the needs of stakeholders and investors

Internal organisational structures To continue reporting - for SMEs, the biggest challenge is not to

report for the first time, but to continue reporting in the future – (resources, costs, time, technology, systems, processes)

01/04/2013


Why people don’t read reports A general lack of interest in the issues covered A high degree of mistrust of the company’s intentions and

lack of reliability of the reports Reports are often hard to find, too lengthy or difficult to

navigate through More direct means of communication with companies are

preferred to obtain the required/specific information Important general company statements with regard to

good policies and issues (for example, animal testing or the use of GMOs) are often not included in the reports, but disclosed on the website of the company, which therefore are preferred sources of information

01/04/2013


Sustainability Reporting is… The practice of measuring, disclosing and being accountable to

both internal and external stakeholders for the progress towards a more sustainable future

Documenting the journey of progress against organisational performance targets against specific economic, environmental, social and governance goals and metrics that support sustainable development

Confirms how sustainability is considered and integrated into business strategy and execution “Sustainability reporting gives a snapshot of performance that can

be used both internally to focus on the most material issues and drive improvements, and also by external stakeholders to assess how a company manages sustainable development risks and to monitor performance over time.” – SAB Miller

01/04/2013


Integrated Reporting is… Integrated Reporting is a process that results in

communication by an organisation, most visibly a periodic integrated report, about value creation over time

An Integrated Report is a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term

An Integrated Report should be prepared primarily for providers of financial capital in order to support their financial capital allocation assessments

An Integrated Report should be prepared in accordance with the IIRC IR Framework

01/04/2013


Issues to consider Do not reduce the concept of integrated reporting to:

Combining the sustainability and other business impacting information with the annual report

There is a risk of the information getting lost in the abundance of legally required information, space being too limited to tell the full and balanced story and the medium being inaccessible to key stakeholder groups

It might be an option to combine the annual report with web reporting on the road to integration

Take care to balance the story and the figures: Not all information can be captured in figures and quantitative targets – while telling a

story may be incomplete without the concrete results to support it. Be willing to share the key dilemmas the company faces in order to provide credible and

transparent reporting Consider the option of external assurance as part of the process to further

improve the quality of the information and add credibility to the report Look for ways to provide easily accessible information tailored to key

stakeholder groups; avoid an overload of information by putting it all together in one report

01/04/2013


Differences between integrated and sustainability reporting (1) While experience in sustainability reporting may prove invaluable to

some on their journey toward integrated reporting, there are key differences between the two forms of reporting, particularly in the context of the capitals. It is worth noting that sustainability reporting: targets a wider stakeholder audience than integrated reporting which

focuses primarily on providers of financial capital, particularly those with a long term view

focuses on impacts on the environment, society and the economy, rather than on the effects of the capitals on value creation over time, as in Integrated Reporting

As such, sustainability reporting is less likely to focus on the connectivity between various capitals or the strategic relevance of the capitals to value creation, and is more likely to include many disclosures that would not be material for inclusion in an integrated report. 01/04/2013


Differences between integrated and sustainability reporting (2) For Integrated Reporting, an organisation’s impact on various capitals is

ordinarily material only if it: Significantly affects the availability, quality and affordability of capitals upon

which the organisation depends affects stakeholders’ perceptions of the organisation in such a way that it has a

significant business consequence (e.g., strengthens/weakens customer demand, or affects the organisation’s licence to operate)

has some other strategic relevance. Other forms of reporting: Reporting on aspects of natural, social and

relationship, and human capital is also becoming more prevalent in: Legislative and regulatory regimes, such as the Grenelle Act in France and the

National Greenhouse and Energy Reporting System in Australia Listing regimes, such as implementation of the principles of King III (King Code of

Governance Principles) for companies listed on the Johannesburg Stock Exchange in South Africa

Voluntary regimes, such as the United Nations Global Compact and the Carbon Disclosure Project

01/04/2013


Integrated Reporting ……

01/04/2013

Integrated reporting is not the stapling together of different pieces of loose hanging information. It is meant to be a strategic and holistic explanation of HOW a company uses the resources and relationships available to it in order to create and sustain value in the short, medium and longer term. Therefore it would include information as to HOW the company performed in the past as well as its plans and the challenges that it faces in the future.

A number of internal changes are required to achieve this strategic and holistic reporting. These would include:


The integrated reporting process

01/04/2013

Changing focus within the company away from only financial drivers, indicators and economic information, to more connected, strategic drivers including social and environmental indicators

Changed timeframes from focusing and measuring short-term, through annual or bi-annual performance and budgets, to a more medium- and long term focus

Condensing the level of detail from long, complex lists of information to a handful of key material issues and indicators

Changing the mind-set from focusing on compliance and rules such as financial reporting disclosure requirements, to becoming more responsive to the company’s unique circumstances and needs

Thinking differently outside the traditional convention where financial, social and environmental matters were put into silos to be managed by different people and processes, to become integrated in how money is allocated, performance is measured and boards make decisions

Changing the company’s view on stewardship beyond financial performance to include social, natural, intellectual, capital of the business

It is very simple – REPORT WHAT YOU DO AND DO WHAT YOU REPORT!


Reporting Trends Companies that have not properly embraced the concept of Integrated Reporting are

becoming increasingly isolated The foundations are strengthening:

In general, companies are demonstrating their ability to tell their integrated story in a more concise and clear manner. More and more reports reflect the use of quick reading options, graphs and illustrations, and the general flow of the company’s story (strategy, risks and opportunities, KPIs and KRIs) seems to be improving

Companies are increasingly starting to engage with sustainability issues as it affects their businesses, but have not yet adequately embedded this into their business strategy and processes

Contrary to popular belief, the response to King III is still not as strong as many boards believe The most common weakness lies with companies’ response to IT risk management and the

effectiveness of risk management and compliance programmes The disclosure of the companies’ remuneration policy has improved but the detail provided is

not sufficient to determine how remuneration is aligned to facilitate delivery on the strategic objectives

Risk disclosure remains superficial The ethics performance of companies is not well reported on or adequately assured as required

by King III

01/04/2013


Reporting Trends Companies are still reluctant to set measurable non-financial targets The definition of materiality as it relates to non-financial information is

not well explained The Assurance regime applied in Integrated Reports requires substantial

attention Reporting on stakeholder engagement has improved, however the

alignment of the identified and moderated material concerns with the strategy, key performance indicators and remuneration still requires improvement

It remains easy to spot the window dressers. Producing an Integrated Report in the absence of a proper process allows the reader to easily identify companies that produce a report in order to apply the guidance rather than embedding and integrating ESG aspects into their business model and strategy

Slowly but surely, supply chain management will be impacted01/04/2013


It’s complicated so why bother? Integrated Reporting can have several benefits –

An in-depth understanding by top management of how strategy is affected by environmental, social, financial and economic issues

A demonstration of C-suit commitment to a sustainable long-term future

A holistic view, useful for stakeholders wishing to make decisions A greater balance resulting in better trust and confidence in the

company Better risk management and access to capital Better management of key resources The development of a culture of innovation A new and better understanding of the business environment and

better leverage of new business opportunities

01/04/2013


An integrated report

WHAT IT IS WHAT IT’s NOT

01/04/2013

One output of the IR process, speaking primarily to the providers of capital

A concise overview of the business, its strategy, governance, performance and prospects

A reflection on how the organisation creates value over time

A combination of the AR & SR

An attempt to address all stakeholders in one report

An attempt to convince readers that ‘sustainability’ is important to the organisation


Typically…

01/04/2013

Link to strategy The primary reason for including

performance indicators in corporate reporting is to enable readers to assess the strategies adopted by the company and their potential to succeed.

Definition and calculation What is being measured allows

comparisons between companies within an industry.

In the absence of standards for the measurement of many industry specific indicators, and with many companies also applying their own indicators, an explanation of the components of a metric and how it is calculated is vital.

Purpose Management must explain why they believe a

performance indicator is relevant. In many instances this will be because it measures progress towards achieving a specific strategic objective. The rationale for why certain quantified measures are considered “other performance indicators” should also be communicated.

Source, assumptions and limitations Readers must be able to make their own

assessment of the reliability of the information, it is important to identify the sources of the data used in calculating performance indicators and any limitations on that data.

Any assumptions made in measuring performance should be explained so that readers can reach an informed view of judgements made by management. An indication of the level, if any, of independent assurance of the data would also be valuable.


Typically (2)

01/04/2013

Future targets Some performance indicators are best suited to

a quantification of future targets. Expectations and aims for other indicators may be better explained in commentary. Either way, a forward-looking orientation is essential for readers to assess the potential for strategies to succeed, and to give them a basis against which to assess future performance.

Trend Data Measurement of performance in isolation over a

single period does not provide the reader with very useful information. An indication of how performance has improved or worsened over time is much more valuable in assessing the success of management’s strategies.

It is also beneficial to explain to the reader what a particular trend in the data means – for example, an increasing measure is not always a sign of strength – and to explain management’s actions to address or maintain such trends.

Segmental Often KPIs make little sense when consolidated at group

level. In those instances corporate reporting users want more detailed segmental information to assess progress towards specific segmental strategic aims. Performance indicators that are relevant to a specific segment’s industry or strategy should therefore be provided in addition to those with a more group-wide focus.

Comparability Comparability over time is a key principle of good

corporate reporting. It is recognised that KPIs may evolve over time as strategies change or more information becomes available. When such changes are made to the KPIs being monitored, either in terms of the KPIs used or how they are calculated, these changes need to be explained.

Benchmarking Performance benchmarked against a relevant external

peer group, with an explanation of why these peers were chosen, is considered extremely valuable to users. This provides a clear indication of who management believes the company’s competitors to be, as well as setting the company’s own performance in the context of a well-defined peer group.

Contact

Reana Rossouw Next Generation Consultants Specialists in Development

Sustainable Development and Reporting Community, Social, Socio Economic, Local

Economic and Enterprise Development Business Development Leadership Development

Tel: (011) 275 0315 E-mail: [email protected] Web: www.nextgeneration.co.za

PLEASE NOTE: THIS PRESENTATION IS PART OF A LARGER BODY OF RESEARCH!

THIS INFORMATION IS COPYWRITED AND THE INTELLECTUAL PROPERTY OF NEXT GENERATION CONSULTANTS

01/04/2013Next Generation Consultants22