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Integrated Reporting delivering market resilience

In the wake of the global economic crisis of 2007, investors – the chief providers of finance capital – began calling for more transparent reporting.  In 2011, widespread dissatisfaction with available reporting frameworks gave rise to the development of integrated reporting, a framework that necessitates greater corporate transparency coupled with meaningful information about a company’s performance.

Integrated reporting <IR> was borne of six interdependent factors including globalisation; growing policy activity around the world in response to financial, governance and other crises; heightened expectations of corporate transparency and accountability; actual and prospective scarcity; population growth and environmental concerns.

A clear global need for far greater coherence in corporate reporting had become apparent, as had the desire to promote financial stability, sustainable development and resilience in the economy by better linking investment decisions, corporate behaviour and reporting.

This meant clearly communicating a broader range of information to increase the visibility of companies use of, and dependence upon, different forms of capital – financial, manufactured, human, intellectual, natural and social, and the company’s access to, and impact on, them.

Companies adopting <IR> could expect a more thorough, accurate assessment of their past and present performance, and anticipated resilience into the future against a range of conditions and scenarios.

The expectation that reported information would better align with investor needs was a key benefit cited by the International Integrated Reporting Council (IIRC) as giving rise to <IR> in its 2011 discussion paper.

Then Director-General of the International Organisation of Securities Commissions, David Wright, said “as the world begins a long shift toward a higher share of market-based financing, effective disclosure will become even more important. In the future, Integrated Reporting may well play a bigger role.”

Nearly five years later, around 1,000 companies are practising <IR>. As its components are subject to existing local regulations which vary between jurisdictions, progress towards <IR> was expected to evolve at different speeds in different countries. This has proven to be accurate.

In South Africa, <IR> is mandatory and many companies listed on the Johannesburg Stock Exchange have been practicing <IR> for up to five years. Research about this is showing a link between <IR> and a higher value in the market, primarily due to increased estimates of future cash flows.

Within the Asia Pacific region, the most significant uptake of <IR> has been in Japan. This may be attributed to a different corporate culture, specifically the Japanese attitude towards stakeholder engagement.  Japan’s history of adopting sustainable reporting had already seen greater acceptance of non-financial reporting in its system.

By contrast, in Australia and the United States, concerns about director liability and a highly litigious corporate disclosure environment may be subduing the <IR> take-up rate.

In the last several weeks, the UK Treasury has strongly encouraged public sector organisations to adopt <IR>. As they set out minimum requirements, some best practice guidance and the underlying principles to be adopted in preparing information, Treasury is encouraging corporate decision making to embed information typically found in stand-alone sustainability reports. This endorsement of the framework demonstrates it is regarded as robust enough to apply to stakeholders other than investors.

With the passing of time, <IR> is beginning to lead to demonstrable integrated planning in practising organisations.

The benefits of the early years of <IR> have started to translate to financial market behaviour. The information contained in <IR> is being applied to examining future prospects of companies and improvements in areas such as lowering the cost of capital are evident.

Taking an increasingly holistic organisational view of planning is linked to better performance, for example within internal capital allocations.

There is a call for investor bodies to promote the adoption of <IR>, which is gaining momentum in Europe. In a highly liquid and integrated global market, funds will move toward markets with best practice.

A fragmented response will arguably lead to early adopter advantage, and those who lag may have a lesser capacity for tapping into significant sources of finance.

Alex Malley is chief executive of CPA Australia

 

 

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