SO-CALLED ‘green reporting’ has just stepped up a gear – with listed businesses now having to increase the amount of detail they provide on their environmental impact. While many have scratched their heads over how to report on said impact, some of the most respected finance professionals are to release a consultation on a prototype framework that could help FDs achieve transparency on their business’ wider socio-economic effect.
All large listed companies will not only need to report carbon emissions, but also their greenhouse gas (GHG) emissions from the next financial year – a move that is likely to affect about 1,800 companies.
The Confederation of British Industry (CBI) has warned the new requirements will duplicate the workload of companies already required to report carbon emissions under the Carbon Reduction Commitment, which requires organisations that generally pay over £500,000 a year for their electricity to pay for emissions related to that consumption.
But what looks like more red tape could be the perfect opportunity for FDs to take a new approach to socio-economic costs (which takes into consideration costs borne by others through the business’ operations) and environmental costs in their financial statements through integrated reporting.
The International Integrated Reporting Council (IIRC), a collection of the largest organisations and accounting firms in the world, has released a prototype of a framework – marrying financial and non-financial information into one report. It outlines what principles should be adopted, how these should be disclosed, and what questions the report should answer.
“By publishing the prototype, we are encouraging businesses to start testing the principles of integrated reporting and evaluating their relevance and applicability,” says Paul Druckman, CEO of the IIRC.
“We have found out the hard way in recent years that our capital markets, governance and reporting systems need to evolve to encourage financial stability and a greater long-term focus. Integrated reporting will be one of the tools that ensure we don’t slip back into ‘business as usual’.”
The framework takes a principles-based approach and does not focus on rules for measurement, specific key performance indicators or key risk indicators. It requires senior management to judge which matters are important, and ensure they are disclosed. The idea is to strike a balance between flexibility and mandatory requirements that recognises the variation in circumstances for different organisations, but enables a sufficient degree of comparability across business to meet relevant information needs for investors and shareholders.
The main way the framework assists organisations is that its guiding principles and content elements help them determine how best to disclose their data way. The framework does not set benchmarks for the quality of an organisation’s strategy or the level of its performance. Assessing these things is the role of the intended users based on the information in the integrated report.
Another section that can help a compiler understand what to include is “content elements”. These are questions that should be answered in a way that describes how the organisation adds value and accounts for its socio-economic costs. These include:
• Overview and operating context
• Opportunities and risks
• Strategy and resource allocation
• Business model
• Performance and outcomes
• Future outlook
The prototype has been years in the making, with big hitters such as HSBC, the Big Four, Microsoft, Marks & Spencer, SAP, Tata Steel, Unilever and Deutsche Bank, as well as the largest institutes, such as ICAEW and ACCA, joining forces to tackle the issue of integrating socio-economic costs with financial statements.
It is the first of its kind and more than 80 businesses, as well as 25 investors, from more than 20 countries are piloting the framework. Following the pilot, the IIRC plans to release a formal consultation draft in April 2013 with the final version, 1.0, to be rolled out in December.
The following guiding principles set out by the IIRC should underpin the preparation of an integrated report, informing the content and presentation.
Strategic focus and future orientation: A report should provide insight into strategy, and how that relates to ability to create value and to the use of and effects on the capitals
Connectivity of information: A report should show, as a value creation story, the combination and dependencies between components that are material to the organisation’s ability to create value over time
Stakeholder responsiveness: A report should provide insight into the the organisation’s relationships with its key stakeholders and how it understands and responds to legitimate needs, interests and expectations
Materiality and conciseness: A report should provide concise information that is material to assessing the organisation’s ability to create value
Reliability: The information in an integrated report should be reliable
Comparability and consistency: The information should be presented in a way that enables comparison with other organisations to the extent it is material to the reporter’s own value creation story, and on a basis that is consistent over time