Sustainability vs Integrated Reporting - What's the difference?


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An overview of Integrated and Sustainability Reporting. What's the difference and suggestions for best practice

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Sustainability vs Integrated Reporting - What's the difference?

  1. 1. Towards Integrated Reporting Reana Rossouw Next Generation Consultants - 2013
  2. 2. 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 01/04/2013Next Generation Consultants2
  3. 3. 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. 01/04/2013Next Generation Consultants3
  4. 4. 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 01/04/2013Next Generation Consultants4
  5. 5. 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 01/04/2013Next Generation Consultants5
  6. 6. 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 01/04/2013Next Generation Consultants6
  7. 7. 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) 01/04/2013Next Generation Consultants7
  8. 8. 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 01/04/2013Next Generation Consultants8
  9. 9. 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 01/04/2013Next Generation Consultants9
  10. 10. 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 01/04/2013Next Generation Consultants10
  11. 11. 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 01/04/2013Next Generation Consultants11
  12. 12. 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. 01/04/2013Next Generation Consultants12
  13. 13. 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 01/04/2013Next Generation Consultants13
  14. 14. Integrated Reporting …… 01/04/2013Next Generation Consultants14  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:
  15. 15. The integrated reporting process 01/04/2013Next Generation Consultants15  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!
  16. 16. 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 01/04/2013Next Generation Consultants16
  17. 17. 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 impacted 01/04/2013Next Generation Consultants17
  18. 18. 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 01/04/2013Next Generation Consultants18
  19. 19. An integrated report WHAT IT IS WHAT IT’s NOT 01/04/2013Next Generation Consultants19  One output of the IR process, speaking primarily to the providers of capital  A concise overview of the business, its strategy, governance, perfor mance 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
  20. 20. Typically… 01/04/2013Next Generation Consultants20  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.
  21. 21. Typically (2) 01/04/2013Next Generation Consultants21  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.
  22. 22. 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:  Web:  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