Will investors benefit from efforts to align corporate reporting frameworks and make them more consistent and comparable?
- Reporting standards and frameworks are being aligned through the Corporate Reporting Dialogue and Integrated Report.
- The Integrated Report measures six types of capital that are keys for sustainability.
- Some investors are using the Integrated Report, but lack of awareness is still an issue.
Introduction
There are so many corporate reporting standards and frameworks nowadays. Some focus primarily on investors and information that is financially material to performance. Others have multiple constituencies—including employees, investors, and the public—and have broader goals and objectives that are not necessarily tied to financial materiality. Not surprisingly, investors feel overwhelmed by the amount of information available, are confused about how to use it, and are uncertain about where the initiatives overlap and conflict.
To address investors’ concerns, eight organizations formed the Corporate Reporting Dialogue in 2016. The International Accounting Standards Board (IASB), the Financial Accounting Standards Board (FASB), and the International Organization for Standardization (ISO) are members. Other members include the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), CDP (formerly Carbon Disclosure Project), and the Climate Disclosure Standards Board (CSDB).
The Corporate Reporting Dialogue’s mission is “to respond to market calls for greater coherence, consistency, and comparability between corporate reporting frameworks, standards, and related requirements.” The International Integrated Reporting Council (IIRC), based in London, is the convener and supports work to align the various frameworks and standards through the International <IR> Framework,or Integrated Report.
Investors, customers, employees, and other stakeholders all have a unique perspective, and they need material information presented to them within their own context. The Integrated Reportaligns various standards and frameworks under one umbrella by mapping the member organizations’ output to an overall framework.
The Integrated Report examines six types of capital—financial, manufacturing, human, intellectual, social and relationship, and natural—that create value and pose risks for companies and investors. Reporting guidance is principles based. The key is to enable companies’ management and boards of directors to build this multi-capital view of the business into their corporate strategy.
“Each company and sector is different,” Richard Howitt, CEO at the IIRC, explains. “The uniqueness of the business, the individual value creation story, its strategy—its business model is a narrative; it’s not just a metric. That’s why having overarching principles is so crucial.”
Different Frameworks
Each standard set and framework has a sweet spot in this multi-capital vision. GRI, for example, focuses on a couple types of capital. CDP is a carbon- and climate-related framework, whereas the CDSB and SASB are investor focused.
Based in San Francisco, SASB sets industry-based standards for the disclosure of financially material environmental, social, and governance (ESG) information to investors. The standards cover environmental, human capital, and social issues; business model and innovation; and leadership and governance. These major themes help investors look at companies holistically and understand important issues they face.
SASB has standards for 77 industries. Each standard has on average five disclosure topics that are likely to influence financial performance in a particular industry as well as 13 metrics on a company’s performance in managing that topic. For instance, affordability is a key topic in the pharmaceutical and biotechnology industry. Metrics include such questions as, “What is the average drug-price increase over the past year across your entire company?” and “What is the single-largest price increase that you have had across your entire portfolio over the last year?”
“This is a reputational issue,” says David Post, CFA, director of research at SASB. “Those metrics really bring it home in terms of our standards.”
The standard-setting process is cost effective and inclusive. SASB obtains feedback from companies and investors on the content of the standards, and, based on those conversations, issues exposure drafts for public comment. The entire process is overseen by a standards board, which has public meetings.
The SASB standards enable integrated reporting by providing information on what companies should discuss. SASB aligns with many other frameworks in that the topics and metrics are the subset of sustainability issues that are likely to affect financial performance and therefore are of interest to all investors.
Amsterdam-based GRI has been developing sustainability reporting standards for over 20 years. These standards represent global best practice for reporting on ESG issues. GRI also offers tools and services to guide and equip report preparers. Unlike SASB, GRI has broad goals and objectives that are not necessarily tied to financial materiality. Its constituents include diverse companies and organizations across business; consultancies; civil society; academia; and labor, public, and intergovernmental agencies.
Headquartered in London, CDP focuses on the impact of the environment on companies and vice versa. This focus is important because if companies’ activities are having a detrimental impact on the environment, they will also have a tangible impact on productivity, GDP, and society generally.
Responding to demand for information from institutional investors, with assets of US$87 trillion, CDP leverages investor and buyer power to motivate companies and governments to disclose and manage their environmental impacts. Over 6,300 companies with some 55% of global market capitalization disclosed environmental data via CDP in 2017. Through CDP’s supply chain program, nearly 100 of the world’s largest companies, with US$3 trillion in purchasing power, collected data from more than 4,800 of their suppliers. CDP provides data on companies’ performance to its 650 investor signatories.
CDP invites companies, cities, states, and regions to respond to questionnaires on its disclosure platform. The questionnaires vary by sector and are designed around the themes of climate change, water security, and deforestation. They delve into companies’ governance on those particular issues, how the issues are integrated into corporate strategy, and whether the companies do scenario analysis. The questionnaires also cover risk management, targets, and performance metrics.
The questionnaires are then assessed and scored based on four levels: Have they answered the questions? Are they aware of the issue? Are they managing it? Are they showing leadership to improve the resilience of their company and to reduce the impact they have on the environment?
CDP provides the scores as feedback to the companies that submitted questionnaires. Investor members and signatories can access the data through Bloomberg terminals, Google Finance, and stock indexes. In addition, the data are often used by ratings agencies and consultants who do ESG assessments for investment portfolios.
The London-based CDSB avoids duplicating other organizations’ efforts and instead tries to bring together existing work in a way that makes sense for companies. The CDSB does not ask companies to complete and submit a separate questionnaire, nor does it collect information in its own database. It provides a framework for identifying what is material and thus needs to be included in the annual report. It helps companies interpret international and national reporting standards—as well as climate change and natural capital reporting standards—and incorporate this information with financial information.
“We believe that the financial community trusts the annual report because it is a document that requires a higher level of sign off,” says Michael Zimonyi, policy and external affairs manager at the CDSB. “In addition, climate change can have an impact on the financial and governance information within the annual report.”
The CDSB explains how International Financial Reporting Standards can be used to report on climate change. It brings the relevant aspects of these standards together with established climate change accounting methodologies into a framework, and then it complements them with a set of principles. For example, the CDSB recently published a report covering IFRS 6, 7, 9, 15, 17, and 37.
Raising Awareness
Fifteen global investment firms, including BlackRock and Deutsche Asset Management, are in the IIRC’s network. Moreover, about 1,600 global companies are already reporting in accordance with the principles of the IIRC framework in mainstream financial filings such as the SEC Form 10-K or management discussion and analysis. These are the pioneers and champions of integrated reporting, but the number of companies is growing worldwide. In addition, business associations, investor coalitions, financial regulators, stock exchanges, market operators, and CFA Institute have endorsed it.
“We want our understanding of a company’s investment case, including the ESG aspects, to be as complete as possible before we invest,” says Jeroen Bos, CFA, head of equity specialties at NN Investment Partners in the Hague. “The Corporate Reporting Dialogue and the Integrated Report can add value in the transition to a more complete and inclusive way of reporting—a transition we fully support.”
According to Howitt, financial analysts are keen to learn more about integrated reporting. Younger analysts in particular recognize that the value of a company is much broader than it was traditionally seen to be, and they want their profession to embrace integrated reporting. To this end, integrated reporting is being built into the core curriculum for financial analysts, accountants, and finance professionals generally. Hundreds of people are in the IIRC’s academic network.
Tony Rooke, director of reporting at CDP, points out that sustainability professionals and financial professionals do not speak the same language, so they do not necessarily understand each other. Integrated reporting helps bridge that gap by enabling sustainability information to be captured in a single effort.
“We think there’s a massive need for basic training across the financial services on not just the state of the environment but on what the implications are for economic growth,” he says. “Fund managers and investors won’t get with the program until they understand what the risk is to their portfolio as a result of environmental degradation.”
The SASB has created a Fundamentals of Sustainability Accounting (FSA) credential comprising two levels that require a total of 20–40 hours of self-study. The first level focuses on the theory of how sustainability issues can affect value, and the second focuses on practical applications of the concepts. The FSA is a supplementary credential for CFA® charterholders, CPAs, lawyers, and others who want to increase their knowledge around integrating sustainability into decision making. There is also demand for a much shorter course about using this information in investment decision making, and the SASB is evaluating ways to meet that demand.
Most of the CDSB’s training focuses on the report preparer rather than on the investment community. According to Zimonyi, there is still more work to be done to get this information to a state where it is investor ready and useful for investment decision making.
The CDSB is running a series of workshops and webinars to train companies to improve their climate reporting practices in line with the FSB (Financial Stability Board) Task Force on Climate-Related Financial Disclosure (TCFD) recommendations. A recent webinar, for example, focused on scenario analysis, which is a relatively new concept in climate-change reporting. The CDSB is also working with the TCFD to develop a knowledge hub to provide tools, implementation resources, references, and links to climate-related disclosure frameworks that have incorporated its recommendations. The goal is to help financial and non-financial companies get comfortable with the recommendations and to help them understand what the recommendations mean in practice. The hub was launched in May 2018.
“There is a lot of interest, but it does not always result in actual implementation,” says Zimonyi. “The challenge is to convert that enthusiasm and interest into action.”