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The MIssing Links of Integrated Reporting

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The MIssing Links of Integrated Reporting

  1. 1. 075 FROM THE LEADERS OF ACCOUNTANCYThe Next Stage in the Evolution of BusinessReporting - The Journey Towards anInterlinked, Integrated ReportAs key stakeholders to any company, analysts and institutional investors today are sending a strong message toCEOs, CFOs, Finance Professionals and Boards of Directors that their non-financial performance is just as importantin determining their attractiveness to the market as financial metrics. They are looking today for integrated reports -interlinked reports showing operational and ESG data. This is not simply the stapling together of an annual report anda corporate social responsibility (CSR) report or sustainability report; rather, this is about companies integrating bestESG practices within their operations and measuring and reporting on those integrated practices in an aggregated,machine-readable, XBRL format. The journey towards integrated reporting represents a fundamental shift in atraditional data paradigm in which accountants will play a central role as measurers and assurers of this information.Read on to know more. "Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted." - Albert Einstein Until the last few years, typical historical, backward- looking financial reports were widely used and relied upon for much of the decision-making among: Liv A. Watson*, Brad J. Monlerio" executives, analysts, investors and regulators. But: (The author is Director of Research and Development of Account- financial information alone is not the only indicator of a• Ability, a standard setting body for CSR assurance and stakeholder: engagement, and is one of the founders of the XBRL standard. She companys true performance, as we have come to find: can be reached at liv@accounlability.org) out with the increasing reliance on non-financial metrics as well as the advent of interactive data technologiesI (**The author is Managing Director and founder of Colcomgroup, Inc• and Chair of the Institute of Management Accountants (IMA) XBRL such as XBRL that help us access information more Committee. He can be reached at bmonterio@colcomgroup.com) easily and reliably. THE CHARTERED A C C O U N T A N T 75
  2. 2. FROM THE LEADERS OF ACCOUNTANCY 076 The market place is increasingly paying and long term sustainability; as a result, they havemore attention to non-financial information about an opportunity to help a company better relate toorganisations to better understand their performance, all stakeholders, not merely the shareholders. Thevalue and reputation - all one need do is look to the use of XBRL to tag operational and ESG datatrillions in assets under management of the signatories throughout the organisation will enable streamlinedof the UN Principles of Responsible Investing gathering, analysis and reporting of information for the (UNPRI), or for that matter, to the number of private integrated report.equity, venture capital and hedge funds dedicating The effort to report on operational and ESGsignificant portfolio allocations to companies that practices is not without its challenges today. Theremeasure and report on their operations as well as are some key missing links in the evolution totheir environmental, social and governance (ESG) integrated reporting that must be addressed to helppractices. Companies that dont follow good ESG the market progress towards the ultimate integratedface reputation and financial risks, as evidenced reports with user generated monitoring capabilities.by global brands such as Coke and Nike whose If companies dont address the missing link, theshares were dropped from the portfolios of asset stakeholders will... eventually.managers in the last several years for failing to deliverupon their ESG promises. Key Missing Link: Non-Financial Information and As key stakeholders to any company, analysts Economic Valueand institutional investors today are sending a strong Perhaps the greatest challenge is the lack of a clearlymessage to CEOs, CFOs, Finance Professionals established link between ESG performance andand Boards of Directors that their non-financial financial or economic value. Often times, the conceptsperformance is just as important in determining captured by ESG reporting are intangible... difficulttheir attractiveness to the market as financial metrics. to measure... and even more challenging to verify.They are looking today for integrated reports - Nevertheless, reliable, credible ESG information isinterlinked reports showing operational and ESG essential to investors, regulators, governments, capitaldata. This is not simply the stapling together of an markets and the general public today. Recent headlinesannual report and a corporate social responsibility demonstrate this - for example, shares of oil giant BP(CSR) report or sustainability report; rather, this is plunged after its failure to eliminate the oil leak in theabout companies integrating best ESG practices Gulf of Mexico, eliminating over $23 billion in marketwithin their operations and measuring and reporting value in one day alone. This move by investors (bothon those integrated practices in an aggregated, institutional and retail) to dump shares in the companymachine-readable, XBRL format. This also is not provides insight into the linkage that has formedjust about the companys own operational and between ESG practices and financial performance.ESG performance, its about that of the upstream But the general marketplace has not fully grasped thisand downstream supply chain participants. The linkage yet.journey towards integrated reporting represents Previously less obvious to most investors, thea fundamental shift in a traditional data paradigm capital markets and other stakeholders, this linkage isin which accountants will play a central role becoming part of the growing market evidence aroundas measurers and assurers of this information. the push for integrated reporting. Accountants have anAccountants around the world are helping to important role to play in educating the market aboutdefine what counts among operational and ESG this linkage. The profession will play a central roleinformation and helping organisations to develop either as preparers or auditors of integrated reporting,integrated reports that accurately reflect performance as well as internal or external trusted advisors he effort to report on operational around ESG information and how it can be usedT and ESG practices is not without its alongside financial data for better decision making. As challenges today. There are some government mandates and private sector requirements key missing links in the evolution for integrated reporting (e.g., Tata Group, Wal-Mart, to integrated reporting that must P&G, Puma and others requiring thousands of their partners and suppliers to be fully sustainable) come be addressed to help the market progress into effect around the world, both public and privately towards the ultimate integrated reports with held companies will be impacted. These best practice user generated monitoring capabilities. If leaders have taken a "comply or die" approach where companies dont address the missing link, the supply chain participants must meet their sustainability stakeholders will... eventually. standards in order to remain a part of that supply chain. 76 THE CHARTERED ACCOUNTANT JULY I 2011
  3. 3. 077 FROM THE LEADERS OF ACCOUNTANCY s with the established reliability and in London), the reliability and credibility of ESG dataA credibility of financial reporting, there is a well understood concept of what is material in financial performance. With ESGperformance, this again is murky at best. Acompany cannot report on everything in the will grow to eventually be equal with that of financial reporting. Key Missing Link: Materiality As with the established reliability and credibility of financial reporting, there is a wellESG domains; theyre simply too broad. This understood concept of what is material in financialmeans that determining what is material in ESG performance. With ESG performance, this again isperformance will be absolutely essential to the murky at best. Acompany cannot report on everything in the ESG domains; theyre simply too broad. Thisprocess as the global framework for integrated means that determining what is material in ESGreporting is established. Ml performance will be absolutely essential to the processAccountants in industry and public practice will be at as the global framework for integrated reporting istheir sides as one of their most trusted advisors to help established.them meet many of these complex challenges. Key Missing Link: Do Accountants Get It?Key Missing Link: Reliability and Market Credibility The role accountants will play begs the questionFinancial reporting has a relatively long history and whether or not they understand ESG reporting. Somereliability - there are fairly well-established standards interested stakeholders feel accountants have muchfor accounting and measurement, a trusted group more to learn about the ESG domains in orderto be seenof professional body of accountants to measure as integrated reporting experts, whether as preparersand assure that information, and clear oversight by (e.g., CFOs) or assurers (e.g., external auditors)established regulatory bodies. As a result, the market around that information. In some cases, accountantsplaces trust and credibility in financial information as in internal roles such as CFOs and Controllers mayindicators - and predictors - of performance. need to expand their body of knowledge and skill Contrast this with the area of ESG practices - a sets and collaborate with other industry expertsnascent area, the domains of ESG are not very well such as engineers. Eric Israel, Managing Director atunderstood. There is currently no established global KPMG, addressed a 2010 gathering of concernedframework or reporting standard for ESG - in fact, there stakeholders in ESG in Amsterdam and called onare so many competing frameworks that it is akin to CFOs to "learn more about carbon and sustainabilitytotal chaos from the accountants perspective in picking accounting." When pressed by the audience onwhich framework makes most sense. Without a clear whether accountants get it - whether they understandframework and standard, there is also a severe lack of complex relationships between environmental, labour,comparability and an understanding of what is good vs. social and governance issues and how to gather and bad ESG performance. The lack of a common lingua report that information - Israel went on to say that thefranca1 around a generally accepted ESG reporting issue is more "how prepared accountants are, not ifstandard presents a significant obstacle to effective they get it." Nancy Kamp-Roelands with the European risk management. After all, can you truly manage that aving worked with the XBRL Hwhich you dont fully understand or that around which standard for more than a decade, weyou do not have universal agreement? There is also no see the significant potential XBRL clear oversight body. As a result, the general market can play in integrated reporting. places less trust in ESG information than financial With financial information already information today. The asset managers, analysts and tagged in XBRL in the US, China, the UK, regulators that get it - such as in South Africa, the German, and Japan (and underway in many market with the worlds first requirements for integrated other countries, including India), it is not a reports by listed companies on the Johannesburg large leap to see that ESG data tagged in XBRLStock Exchange - are true pioneers in showing the rest of the market the way towards reliable, credible ESG will make the combined data set transparent, information and the ultimate integrated reports. With fully machine-readable over the Internet, andtheir guidance and leadership, as well as the creation readily available literally at the click of a mouse of a uniform, global framework and standards for or the touch of an IPad, for auditing, analysis, ESG reporting (as currently being undertaken by the benchmarking or other decision making or International Integrated Reporting Committee based planning. THE CHARTERED ACCOUNTANT JULY 2011
  4. 4. FROM THE LEADERS OF ACCOUNTANCY 078Federation of Accountants1 (FEE) Sustainability Group, : play in integrated reporting. With financial informationremarked at that time that "we (accountants) can • already tagged in XBRL in the US, China, the UK,measure everything." Therein lays the challenge. And : Germany and Japan (and underway in many otheras Einsteins quote implies, the key to effective reporting i countries, including India), it is not a large leap to seewill be to figure out which ESG elements are of value i that ESG data tagged in XBRL will make the combinedand should be counted, how they can be counted : data set transparent, fully machine-readable over thereliably and consistently, and how they should be : Internet, and readily available literally at the click of areported so that those who make decisions based upon ! mouse or the touch of an iPad, for auditing, analysis,this information can readily uptake and understand it. : benchmarking or other decision making or planning.Larger accountancy firms are adding domain experts, I Even in the absence of widespread XBRL-enabledincluding scientists, consultants and engineers, to their I ESG data today, we already have evidence of how WebSustainability teams. They recognise the opportunity - : 2.0 and social media platforms are helping leadingand missing link - here for the accounting profession. : edge companies share their ESG information with a • broader world of interested stakeholders. Rabobank,The Carrot vs. the Stick - Can We Have Parallel : a large, cooperative bank based in the NetherlandsStrategies? : has already produced a digital ESG report and madeThe global company, Novo Nordisk, is at the cutting ; it available on its website. Rabobank only produces 50edge of integrated reporting. The company has been ; print copies of its annual report, recognising the greaterproviding integrated reports since 2004 - clearly an : power of digital information to reach the masses. Thisearly trailblazer and shining example of best practice. : is a good sign for things to come - once we have anSusan Stormer,Novo Nordisks VP of Global Triple : agreed upon XBRL taxonomy for ESG information asBottom Line Management, indicated during the 2010 : well as a global framework for reporting, the valueGRI Conference that producing integrated reports I of digital integrated reports will improve manifold,was not easy, but that the time was now to begin ; allowing for real-time or near real-time ESG informationexperimenting even without an established reporting : to be available alongside financial data and eliminatingstandard. This is what leads to innovation and creativity : the missing links. Similar to how XBRL helped unlockin the process. The big stick of government mandates I financial information from historical, backwards-is not the only possible motivator to move companies ; looking, paper- or PDF-based presentation formatsalong the evolutionary path to integrated reporting ; (that were essentially not useful to most stakeholders- large global brands have the power to drive best ; today since they need current information in digitalpractices as well. The calls from corporate giants j format), XBRL will also help release ESG data from thelike Tata Group, Wal-Mart, P&G and Puma go a long : prison of ineffective reports that up until now have beenway towards inspiring public and private companies i simply "stapled" to company financial reports.to become more sustainable parts of larger supply • Think about where this leads us... shifting from achains. • historical view of outdated, limited-use information, ; around which assurance is somewhat meaningless, to aDynamic, Interactive, Integrated Reporting Data • real-time and forward-looking view with a strong degreeThrough XBRL : of assurance and reliability around digital, interactiveHaving worked with the XBRL standard for more than ; financial and ESG information - the interactive,a decade, we see the significant potential XBRL can i integrated report. This could be used for both external i reporting to regulators, media, analysts and investors BRL and its ability to connect ; as well as for internal decision making for businessX with various link-bases (e.g., back to source documentation or a reporting standard), paired with the independent assurance of anaccounting professional trained to review suchstructured information, will bring much needed • ; ; ; ; ; planning, marketing, benchmarking, performance measurement, and predictive business intelligence, and supply chain management. XBRL and its ability to connect with various link-bases (e.g., back to source documentation or a reporting standard), paired with the independent assurance of an accounting professional - •trust and confidence to ESG data. If it hoids : trained to review such structured information, will bringtrue that we fear what we dont know, XBRL I much needed trust and confidence to ESG data. If itcan help us limit that fear, and assurance by i holds true that we fear what we dont know, XBRL can ; help us limit that fear, and assurance by accountantsaccountants can improve trust and confidence : can improve trust and confidence in the things "thatin the things "that count." A* : count." • THE CHARTERED ACCOUNTANT JULY ; 2011

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