Date posted: 15/08/2019 8 min read

Communicating value through integrated reporting

It’s time for the pendulum to shift to long-term value creation.

In Brief

  • Sustainability of a business is not just about increasing the bottom line
  • The concept of value has fundamentally changed and with it the dynamics of the global economy
  • There is a lot of momentum, but there needs to be a step change in adoption for integrated reporting to become the norm

Summary

One of the biggest pressures in today's throwaway society is short-termism, which has the potential to undermine future economic growth.

But while we are often told to think long-term – to keep the big picture in mind – it is not always in human nature to focus on the future.

To institute real change to this way of thinking, there has to be a paradigm shift in the strategic goal of businesses from profit maximisation to value creation.

While the way market value has changed over the past few decades from a price based largely on tangible assets to one based far more on intangibles, most intangible assets are not recognised 'on balance sheet' under the current accounting standards.

As a result, a range of reporting modes have been developed that include a broader set of measures than just financial performance.

Extended External Reporting (EER) is an umbrella term coined by the External Reporting Board (XRB) – which has been adopted internationally – to refer to broader reporting beyond financial information. EER encompasses a multitude of frameworks, guidance and initiatives, one of which is the Integrated Reporting (IR) Framework.

This reporting framework clearly demonstrates the connection between an organisation's strategy and the often hidden social, human and natural capital underpinning it.

Generally, New Zealand is lagging behind global trends, which is atypical as we are normally fast followers at best. But IR is steadily gaining traction and the New Zealand Government is leading from the front.

Treasury is transitioning to IR using the Living Standards Framework to shift towards intergenerational wellbeing, and 2019 saw the first multi-capital budget delivered.

We recently held a seminar in Wellington to showcase best practice examples of IR in New Zealand and share the experiences of some pioneers from across the for-profit, not-for-profit and public sectors. We also had the opportunity to sit down and speak to three of the presenters. Here's what they had to say:

XRB: User-led revolution

The XRB's mandate includes determining what should be in general purpose financial reports (GPFR), and how they should be reported. Theoretically, the board could make IR mandatory, but it has no intention to do so. This is because the initiative needs to be market-led, not just another compliance exercise.

We have already seen explicit inclusion of IR in the recommendations in the revised Corporate Governance Code in Australia. So, we are at risk of other policy makers stepping in if organisations do not step up voluntarily.

Warren Allen, the XRB's Chief Executive, shared some results of research undertaken in collaboration with the McGuinness Institute that confirms stakeholders are increasingly demanding more non-financial information. Couple that with the fact that investors are now incorporating EER information into their investment decisions, the case becomes even more compelling.

Plus, international research shows EER can lead to a number of internal and external benefits, such as a reduced cost of capital. So, it really is a business imperative and the real question is: why would you not do it?

Zealandia: Telling your story

Zealandia has an extraordinary 500-year vision to restore a Wellington valley's forest and freshwater ecosystems as closely as possible to its pre-human state. The ecosanctuary is a groundbreaking conservation project that has reintroduced more than 20 species of native wildlife into the area, some of which were previously absent from mainland New Zealand for more than 100 years.

Zealandia Chief Executive Paul Atkins demonstrated how this story could not be told through its financial statements alone. IR provides an opportunity to report a more holistic view of the organisation and enables entities to better tell their whole story.

Zealandia's annual report, that won the Tier 2 category of the CA ANZ 2019 NZ Charity Reporting Awards, uses four of the six IR capitals – social, environmental, human and financial.

IR allows you to communicate future-focused information about an entity's purpose, business model, strategy and long-term sustainability. For Atkins, IR ensures the true value of nature is at the heart of decision-making.

The Warehouse Group: Measuring what matters

But, of course, reporting this information is not enough, and that is why integrated thinking is central. IR is founded on integrated thinking, which is defined as an "inclusive process of decision-making based on connectivity that affects an organisation's ability to create value over time".

Mark Yeoman, now Chief Operating Officer of the Warehouse Group, was also the CFO of New Zealand Post Group when it was one of the 140 businesses worldwide that participated in the IIRC Pilot Program.

In this case, IR had to come first, with integrated thinking retrofitted. Conversely, the Warehouse Group has spent a few years getting its integrated thinking in place and is about to release its first annual report using the IR Framework.

Materiality is the critical concept in determining what matters – you need to do a materiality assessment and then focus on what the key issues really are.

IR does not represent the superset of information relevant to that audience but a focused accountability report reflecting ways organisations create and use the multifaceted concept of value. Yeoman also warned about the perils of monetisation, as you need to be comfortable talking about the value of each capital in non-financial terms.

"Integrated reporting is an evolution of corporate reporting, with a focus on conciseness, strategic relevance and future orientation.” - International Integrated Reporting Council (IIRC)

KiwiRail: Better communication

Fran Roulston, Financial Performance and Planning Manager at KiwiRail, has been involved in KiwiRail's IR from when it adopted the approach in 2016. She said the most substantial investment was in the first year, and since then it has been about continuous improvement.

Aspects that have worked well have included photographs, infographics and case studies on how the capitals are applied. Do not be afraid to take inspiration from other organisations, Roulston said.

She said some keys to success were getting executive level buy in and having a multi-disciplinary project team that includes at least finance, strategy and communications in an integrated exercise.

Accountants do not have all the necessary expertise required for IR, but accountants are the ideal champions to lead. This presents the best opportunity in decades for our profession to respond to user demands and serve the public interest.

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