Integrated reporting: is Hong Kong ready?
Corporate reports that give stakeholders access to year-old financial statements and little else are clearly not sufficient. The notion, however, that companies currently serving up this stale fare can instantaneously upgrade to providing stakeholders with ‘integrated’ reports is highly contested. CSj asks whether Hong Kong is ready for integrated reporting.
As recently as 2010, sustainability reporting was the exclusive domain of a handful of large, high-profile companies in Hong Kong. ESG (environmental, social and governance) reporting had not yet found its way onto board agendas here and integrated reporting was largely unknown outside of South Africa. Only two and a half years later, however, the corporate reporting landscape in Hong Kong has changed significantly.
There has been a convergence of many different initiatives, both within and outside Hong Kong, which have combined to raise sustainability issues from minority concern to mainstream interest. Firstly, late last year, Hong Kong Exchanges and Clearing launched a new set of ESG guidelines as a recommended best practice. Then, earlier this year, came the consultation draft of the International Integrated Reporting Framework launched by the International Integrated Reporting Committee (IIRC). Lastly, the Global Reporting Initiative’s (GRI) new G4 sustainability reporting guidelines were released in May this year.
These initiatives are by no means identical in purpose, but they have some central themes in common. The new corporate reporting model emerging from these and other initiatives emphasises the need for reports that:
• are more forward looking
• are wider in scope (in particular reporting on the so-called ‘intangible’ factors such as: reputation; employee engagement; the company’s capacity for innovation; its environmental footprint; as well as the financial figures)
• take into account the connectivity between all these different factors, and
• are not afraid to articulate in clear terms the company’s business model – how the company proposes to create value over the short, medium and long term.
So are we on the verge of a new era in corporate reporting? Few would dispute the advantages of the reporting model outlined above, but there are differing views on the best route to achieve it. Critics of the integrated reporting project point out that very few companies are in a position to start using the integrated reporting model since it takes significant commitment of time and resources to build up the expertise required to measure and report on intangibles. And for whom? In Asia, the primary providers of capital are families, and the value of integrated reporting targeting providers of financial capital is questionable, although investor stewardship is an area that the Securities and Futures Commission is considering. Few companies in Hong Kong currently produce sustainability reports, so how likely is it that they will be able to make the further step into integrated reporting?
What is integrated reporting?
Although any company report that consolidates a company’s financial and non-financial metrics together could be considered ‘integrated’, the IIRC is working to set a standard for what should be included in a truly integrated report. They have identified six ‘capitals’, or sources of a company’s fortunes (financial, manufactured, intellectual, human, social and relationship, and natural), which companies need to measure and report on.
The IIRC, along with regulators, investors, companies and other interested parties, is consulting on a framework for companies to address each capital area in their company report. In 2012, the IIRC invited companies from around the world to participate in a pilot programme to test this framework, including Hong Kong’s CLP and HSBC (for more about CLP’s experience with integrated reporting, see this month’s second cover story on pages 12-16). Today, when people talk about integrated reporting, they are mostly referring to the IIRC’s International Integrated Reporting Framework.
At the centre of integrated reporting are concerns about how companies plan for their future. Nervousness over boom- and-bust business is not the only reason investors are thinking about sustainability. A company’s brand health (with all the social and environmental implications involved), together with the quality and robustness of their talent pool are all as important indicators of future success as past and projected profits.
On top of this, the social values of investors are changing. ‘These days, all shareholders would like companies to account for the triple bottom line,’ says April Chan, Company Secretary for CLP. For a capital-intensive business in the energy sector, keeping up with investor expectations is especially important. With expectations changing, CLP has looked to integrated reporting (they filed their first in 2011, ahead of the IIRC draft framework) to help them keep ahead of investor trends.
‘When they produce their reports a lot of companies mostly describe what they have been doing in the past. Not many people include in-depth coverage of their future outlook,’ says Chan. This approach no longer satisfies most stakeholders, she argues, and what is needed is a report that expresses the values and principles that guided past actions and will guarantee future success. This is the ‘why’ and ‘how’ of the business, she adds.
This is perhaps the main attraction of the integrated reporting model for companies – it gives them a chance to define their own stories for investors and stakeholders. Chan cautions, however, that while integrated reporting can improve communication with stakeholders, it would be a mistake to see it as just a new approach to communication, or worse, PR.
‘No matter what term you use, whether integrated reporting or not, your objective is to encourage long-term investment and business sustainability. Only then
can you put all that information together to ensure your investors can make an informed decision,’ she says.
ESG: a stepping stone to integrated reporting?
At the moment few Hong Kong companies have such an approach. The growing discussion of ESG reporting helps illustrate the challenge integrated reporting would pose to most companies here.
Sean Gilbert has had a front-row seat watching the rise of sustainability in Hong Kong and China for the past 13 years – first as the Director of the China Focal Point for the GRI, and then in his current role as Director of Climate Change and Sustainability in China with accounting firm KPMG. He believes it’s part of a broader social development as much as a reaction to investor and regulatory expectations.
‘The stereotype about Hong Kong has been that it runs on the idea that “whatever is good for business is good for Hong Kong” …My sense now, though, is that there’s a lot more dialogue starting up around environmental and social questions and how they relate to economic growth,’ he says.
In part thanks to the Exchange’s November 2012 guidelines on ESG reporting, many Hong Kong companies will be releasing their first sustainability reports this year. The guidelines remain voluntary until 2015 when the Exchange may upgrade them to ‘comply or explain’ status. Still, most companies have at least started considering how they will implement the guidelines.
As they do, says Gilbert, they are prone to making a critical error – that to produce a sustainability report, they need just to record what actions they are already taking. ‘They see themselves as doing a lot of things, but that they just aren’t well understood by other stakeholders and that what they need is a framework to package it up. I think that approach is fundamentally undermining what’s really going on.’
Most companies have added CSR activities and sustainability measurements one at a time, generally in response to a specific situation or requirement. This ad hoc collection of data, practice, and standards, says Gilbert, isn’t what investors or regulators have in mind when they talk about sustainability reporting. ‘There are a lot of people out there saying these are business factors to manage and companies should have done their homework to understand what issues will affect them, and how, and what they need to do about them.’
Developing such an understanding is the first challenge for any company, Gilbert adds, but is also the one they underestimate the most. All companies have environmental and social footprints, but their impact varies so widely that each company must come to an individual understanding of what matters and why. This, he says, takes more than a few meetings between top officers. To comply with the Exchange’s standards, you’ll need to put together a well-reasoned argument with some factual base to it to explain what has been measured and how.
Reporting, whether in separate ESG reports, or in a fully integrated report, requires deep consideration of how sustainability applies to your current business and future strategy. ‘Reporting should be the result of a management cycle – start by establishing good strategies and good systems and then the reporting will come much more easily,’ says Gilbert.
Coming to grips with intangibles
Reporting on non-financial factors is a two-fold challenge; first you need to understand what is important and then you need to find ways to measure it. The integrated reporting framework can provide meaningful references in both areas.
Collecting and measuring the non- financials poses a challenge that must, in part, be worked through by trial and error. Cathay Pacific Airlines, one of the Hong Kong companies with the longest tradition of environmental and sustainability reporting, took years to develop their best processes.
Janice Lao, Environmental Manager for Cathay Pacific, recalls the challenges involved in collecting the most appropriate information. For example, when the airline decided to include their resource consumption as part of their sustainability report, they initially collected data from every office – even tiny outposts worldwide. They quickly found that this detailed information was not only hard to get (some offices were not even equipped with water meters) but not particularly important when compared to the entire company’s overall water usage.
‘So now we just focus on regional offices at this point. The data is more robust and the cost-benefit of collecting the data from regional heads is much better for us. Still, one of our challenges is to get this information,’ says Lao. For the many Hong Kong companies who are beginning to collect ESG data, numerous decisions such as these lie ahead.
Such challenges are simple when compared to reporting on yet more nebulous areas, such as CSR. ‘We started measuring our community projects two years ago,’ explains Lao. Measuring community impact is quite a bit harder than other non-financial factors, she adds. ‘Of course, you could say that you’ve helped a certain number of children, or fed a certain number of people, but what exactly have you done? How do you measure the value to the community? Most companies are going to say: “we’ve done well”, but it’s hard to benchmark it. There’s not a lot of information out there,’ says Lao.
Cathay Pacific has turned to an outside organisation, the London Benchmarking Group, for help in choosing metrics to fairly and clearly express the impact of its community programmes. This standard has wide global recognition, which gives Cathay Pacific’s reports the credibility their shareholders demand. It’s a big help, but it’s not nearly as straightforward as the standards for financial reporting.
Though the number of independent auditors offering non-financial assurance is growing, it is still up to companies to find and implement standards that are both appropriate and honest. The integrated reporting movement is helping push for the development of these standards,
but for obvious reasons, a universal, internationally-accepted approach to match the standards surrounding financial disclosure is still a long way off.
Even when the data is available, it is often not enough to meet the needs of investors and other stakeholders. ‘Often, numbers are not in themselves meaningful,’ says Lao. A metric must be something people can relate to, otherwise they remain just abstractions. While it is up to each company to find the best way to express the non-financial aspects of their business, it is also part of the promise of integrated reporting to create a meaningful story from the particulars.
A new era?
At the moment few companies in Hong Kong are producing integrated reports and those that are being produced come on top of well-established sustainability programmes. As companies begin to develop their own sustainability programmes and put in place systems to measure ESG factors they may find themselves unable to express the scope and future trajectory of their company through traditional company reports and turn to integrated reporting. However, adopting this new reporting model, says Mohan Datwani, the Institute’s Director of Technical and Research, should remain a voluntary choice left to them.
There are still issues to be resolved concerning integrated reporting – in particular, can companies afford it and will it help them reach their target audience. But no matter how quickly they adopt integrated reporting, Hong Kong companies can have confidence that, as their business continues to evolve, so do the systems that help them share their story with the world.