Today a new project will be launched to promote alignment between the major financial and non-financial standard-setters globally – Richard Howitt of the IIRC explains the thinking behind the ambitious new initiative
Business knows it has to change to survive. The concept of ‘business as usual’ has become redundant.
It is now commonplace in business circles to hear dire warnings about how artificial intelligence will fundamentally disrupt today’s business models, how the contract between business and society is breaking down, and how climate change adaptation will strand not simply fossil fuel assets, but whole swathes of industries dependent upon them.
Of course, there is no single answer to these challenges.
But the global coalition of leaders from business, investment and regulation who came together at the start of the decade to form the International Integrated Reporting Council (IIRC), did so believing it was possible to enable businesses to move to a longer-term and inter-connected approach, which would ultimately sustain the continuing role of business to create value.
The reform of business reporting to focus on the goal of long-term value creation – integrated reporting – was and is seen as a key tool to achieve this.
Earlier this year, all of the ‘breakthrough tests’ set by the IIRC Council were evaluated as being met, presaging the announcement of a new strategic phase towards the global adoption of integrated reporting: the ‘Momentum Phase’
But one recurring impediment remained: a clear understanding in the market that reforming reporting can be a key driver of change, but a widespread perception that a proliferation of different, conflicting reporting frameworks holds business back from being able to do so.
The International Trade Centre identifies more than 230 corporate sustainability standards initiatives applicable to more than 80 sectors and 180 countries – all with an amazing variety of different acronyms.
Businesses are choking on the so-called ‘alphabet soup’.
Therefore, the IIRC which has the explicit aim of bringing alignment to corporate reporting in the world, convened the ‘Corporate Reporting Dialogue’, bringing together financial reporting standard-setters (IASB, FASB) and the four most comprehensive and global of sustainability frameworks (GRI, SASB, CDP and CDSB), to pursue this quest for clarity, coherence, consistency and comparability between the different reporting frameworks.
It is still a lot of acronyms, but one that holds out a real prospect that we can ‘cut the clutter’ in business reporting.
This dialogue has already produced impressive co-operation, publishing a common landscape map showing where each framework stands, immediately confronting the notion that there is competition between them.
The partners have begun the process of alignment through agreeing a common statement of principles on the key concept of materiality, each agreeing to move towards it in their next iteration.
There have been common positions agreed towards how the frameworks together respond to investor demands, to the UN Sustainable Development Goals and to the recommendations of the Task Force for Climate-related Financial Disclosure (TCFD).
But today, we are announcing a major two year-project in which the frameworks will undertake joint work to map and align their metrics, to identify how non-financial metrics relate to financial outcomes, with the ultimate aim for a paradigm shift towards the integration of financial and non-financial information.
The first phase will include alignment to the TCFD recommendations, but seek to go well beyond them.
This will not be an internal technical exercise between the frameworks, but an open process with structured communications, outreach and stakeholder engagement to seek to ensure the market is ready, excited and prepared to engage with the results.
The market told us it wanted greater alignment between frameworks, and this project sends a clear reply that this message has been heard and is being acted on.
Integrated reporting is seen in the Corporate Reporting Dialogue, not as an alternative to the existing frameworks, but as the ‘umbrella’ under which different reports come together.
The 1,600 global companies who have already adopted integrated reporting, many of whom doing so in the management commentary and financial filings of their own annual reports, are in reality the early adopters of what we expect to be the global norm in corporate reporting within the next decade.
The project being launched today is only one aspect of our work, which has seen the global accountancy profession commit to integrated reporting as the future of financial reporting; a call for integrated reporting in an increasing number of stock exchange guidance and corporate governance codes internationally and the IIRC being appointed to the consultative group of the International Accounting Standards Board as it reviews its guidance on company narrative reports.
The alignment of different environment, social, governance (ESG) metrics between the different sustainability frameworks is still an important component of the new Corporate Reporting Dialogue alignment project, advanced by the IIRC’s convening role, where together we have helped develop a genuine partnership between all the participants.
But it is only one component, in a project where the ultimate aim is not simply the alignment of different sustainability reporting frameworks, but the genuine integration of financial and non-financial reporting.
Those fast-changing trends affecting business which I outlined at the start of this article are now comprehended as far from being ‘non-financial’, but as sources of financial instability, risk – and opportunity – with very real financial outcomes.
The TCFD itself is a turning point, where climate is seen as a financial and not just an issue of ecology.
The rise of intangible assets saw one survey of investors showing more than 90 per cent think this information useful or essential, if contained in an integrated report.
Thus, we will seek to ensure that the new alignment project overall pursues metrics which meet investor standards, have the rigour of good accountancy principles and which are evaluated for their readiness for integrated reporting itself.
Does that mean we will end up with one, harmonised reporting framework from this project? No.
Each of the frameworks will align subject to its own focus, audience and governance. But there is a genuine intent to undertake alignment, wherever possible.
The beauty of the process from the frameworks’ point of view is that it is bringing about harmonisation in corporate reporting, not by creating winners and losers, but by pursuing a process of convergence in which all can win.
For business, it can address questionnaire-fatigue and reporting burden, by contributing to the IIRC’s aims for reporting which is more concise, material and aimed at value-creation for the business itself.
For capital markets and their regulators, the project will contribute to better pricing-in risks and opportunities, based on a broader, multi-capital perspective.
The real prize for all those who want to promote sustainable business, for companies to contribute to meeting the Paris agreement and the Sustainable Development Goals, is that this push towards alignment can help bring their aspirations in to mainstream business thinking.
Today, research evidence shows 75 per cent of the S&P 500 top companies publish non-financial reports, an impressive figure. But 75 per cent of the top 4,000 global companies with less than US$1 billion in annual revenue do not. Evidence from Europe’s largest 42,000 companies, sees that figure rise to 94 per cent.
If the impediment to changing that number is confusion in the market place, I hope the project we are jointly launching today will make it far less important which framework a company chooses, to start its journey towards the integration of financial and non-financial reporting.
Whichever route you take, in the end, you will reach the same destination.