Integrated reporting – the DIY approach
CSj looks at the benefits and challenges involved in adopting integrated reporting and at the potential role of the company secretary in the process.
There can be little doubt that the bar has been rising for corporate disclosure standards over the last three decades. Perhaps the two most obvious themes in this evolutionary process have been the widening of the number of stakeholders addressed by the corporate reporting process (from shareholders to a wide spectrum of stakeholders including employees, customers, clients, regulators and ultimately society at large), and the increasing importance given to non-financial disclosure.
Looked at broadly, we have had three major transitions since the 1970s. Environmental reports (covering the companies’ use of, and impact on, the natural environment) started to become mainstream in the 1980s. A decade later saw the emergence of the ‘sustainability report’ which, in addition to reporting on the company’s environmental performance, covered a wide range of non-financial issues such as health and safety, corruption, human rights, etc.
Then, in the early years of this century, the third transition got underway – the advent of the ‘integrated report’. In some ways, integrated reporting was a logical extension of the evolutionary process described above – it further expands companies’ responsibilities to stakeholders and the range of non-financial disclosures required. But Ernest Lee FCIS FCS, EY’s Assurance – Professional Practice Partner, points out that integrated reporting also represents a radical rethinking of the traditional corporate reporting model.
‘Traditional financial reporting has a very specific focus on reporting financial performance in the annual report and accounts,’ he says. ‘Whereas traditional ESG [environmental, social and governance] reporting has a very specific focus on reporting non-financial information on environmental, social and governance performance only. Integrated reporting is more than just combining the disclosure of financial information and non-financial information into one single document. It requires a new way of thinking about what a business actually is: instead of just money-making, an entity should see a business as a means that utilises various capitals, namely financial, intellectual, human, social and natural capitals, to create financial, social and environmental values.’
To produce a successful integrated report, he adds, companies have to adopt ‘integrated thinking’ – that is, they need to consider the relationships between their various operating and functional units and the capitals that they use or affect. In other words, the board and management need to acquire a holistic view of a company’s short-, medium- and long-term value, and refocus and redefine financial and non-financial goals. ‘This concept is too fresh to be the mainstream in Hong Kong,’ says Mr Lee. ‘It is after all not easy to articulate the connectivity between socio-environmental impacts and underlying business performance.’
For the critics of integrated reporting, many aspects of this new model set the bar unrealistically high, and certainly, seen from the perspective of the vast majority of Hong Kong companies which have barely started down the road towards ESG reporting, integrated reporting would seem to be a very distant aspiration.
Nevertheless, Hong Kong has been playing catch up with international best practice in non-financial reporting. In particular, recent regulatory developments have raised the bar for most companies in Hong Kong in terms of their ESG reporting obligations. Notably, the introduction of the ‘business review’ requirement of the new Companies Ordinance (Cap 622) in March 2014, and the matching of these statutory disclosure requirements in Appendix 16 of the listing rules. Then in July this year, Hong Kong Exchanges and Clearing (the Exchange) published a consultation paper seeking views on proposed amendments to its Environmental, Social and Governance Reporting Guide which would see many of the recommended disclosures of the guide being upgraded to ‘comply or explain’.
Despite these regulatory measures, however, Hong Kong still has a long way to go in its evolution towards ESG reporting which is a necessary first step before the adoption of integrated reporting. Based on a survey conducted by Bloomberg in April this year, the Exchange estimates that only about a half of companies listed on the Exchange are currently reporting on ESG matters.
The benefits of integrated reporting
The International Integrated Reporting Council (IIRC) hopes that, over time, integrated reporting will become the corporate reporting norm – this would currently appear to be a distant prospect in Hong Kong, but the early adopters here argue that integrated reporting holds a lot of promise for companies and, it turns out, for company secretaries.
Link Real Estate Investment Trust (Link REIT) adopted integrated reporting two years ago and Dr Calvin Lee Kwan, General Manager, Sustainability, at Link REIT, argues that the process has been beneficial both internally for the company and externally for stakeholders.
Prior to the adoption of integrated reporting he found that stakeholders were either interested in financial data interest or in ESG data, but rarely both. The company’s integrated report attempts to shows the interdependency of non-financial issues and financial performance and this, Dr Kwan says, has changed stakeholders’ perceptions.
‘Our main stakeholders are our investors, so we need to translate everything into something that investors understand and they understand finance, they understand numbers. They don’t understand carbon dioxide data and they don’t always understand how ESG factors add value to the company,’ Dr Kwan says. ‘It’s like putting together a book – if you write each section in a different language the audience won’t understand it all. That’s often what is happening with ESG reporting and financial reporting. By translating ESG data into financial data and numbers, we are basically writing all sections of the book in the same language so the audience will understand everything.’
The response from stakeholders to this new approach, he adds, has been overwhelming. ‘Our stakeholders say: “Now I know why it’s important, now I know what the impact is, now I understand why we should continue asking these questions”,’ he says.
CLP Holdings (CLP), an early adopter of integrated reporting in Hong Kong, tells a similar story about the external and internal benefits of integrated reporting. ‘People often think of companies as just for making money, but more often than not, their output is something more than that,’ says Dr Jeanne Ng Chi-yun, Director, Group Sustainability, CLP.
‘For instance, our product, electricity, contributes to the economy and local development in many ways and makes a difference. As our society gets more sophisticated, people are going to ask more questions about the total picture. So somehow we need to internalise externalities. With integrated reports, our stakeholders and capital providers get a more complete and holistic picture of how the company creates value for the different stakeholders including customers, shareholders and society. It’s not just about our financial capital, but about all the other capitals we need and how we manage the capitals to create value,’ Dr Ng says.
One of the greatest benefits of the integrated approach came as something of a surprise, she adds, since it quickly created better friendships and understanding across the organisation fostering more ‘integrated thinking’. ‘There’s so much more interaction between different departments now as a result of the integrated reporting. We now build better relationships and collaborate. This is one of the big value points of doing integrating reporting,’ Dr Ng says.
The role of the company secretary
This is where the integrated reporting phenomenon becomes particularly relevant for company secretaries. One of the key challenges in making integrated reporting work is the need to get ‘buy in’ from management, directors and employees in the company’s different business units. The company secretary already provides an important information link between all these different groups and he or she is therefore well placed to act as the central coordinating officer to oversee the integrated reporting process.
EY’s Ernest Lee lists three main areas where the company secretary can add value to the process:
- communicating the changes in integrated reporting disclosure practices to all relevant business units – and getting their buy in
- working with professionals and advising management on how the integrated reporting framework can be adopted, and
- coordinating and overseeing the data and information collection process.
CLP’s Dr Ng points out that the company secretary has an important role in ensuring that the integrated report meets regulatory requirements. ‘I can’t emphasise enough how important company secretaries are,’ she says. ‘In most cases they are the relationship holder for company administration-related regulatory bodies and are therefore key to providing content, guidance and directions for reporting to such bodies. They know which different pieces of information and data have to be in the report from the organisation’s different departments.’
Will integrated reporting become mandatory?
Currently there is no mention of integrated reporting in Hong Kong’s rule books, and, outside South Africa, no jurisdiction has yet made integrated reporting subject to a mandatory or ‘comply or explain’ obligation. Nevertheless, the Exchange is ‘monitoring developments in integrated reporting with interest’, it says. Will we see integrated reporting becoming a recommended best practice in Hong Kong’s Corporate Governance Code any time soon?
Such a recommendation looks unlikely at the moment, but David Graham, the Exchange’s Chief Regulatory Officer and Head of Listing, says that the Exchange’s proposed upgrade of its ESG Reporting Guide is just another step in an evolutionary process, with the longer term goal of achieving better and more comprehensive ESG reporting among issuers. ‘We believe that strengthening issuers’ ESG disclosure obligations will enhance the quality, sustainability and reputation of our market’, he says.
Steve Ong, Head of Accounting Affairs at the Exchange’s Listing Division, points out that the regulatory developments mentioned earlier in this article – the introduction of the business review requirement of the new Companies Ordinance and the proposed upgrading of the ESG Reporting Guide, for example – are all part of a journey. ‘We see all these developments as subsets of what we understand to be integrated reporting,’ he says. ‘Although Hong Kong has not yet formally adopted integrated reporting as promulgated by the IIRC, this does not mean that listed issuers in Hong Kong are not thinking strategically about their business models, investment in innovation and value creation in the short, medium and long term.’
Next big thing or passing fad?
So what will the future hold for integrated reporting in Hong Kong? At the moment, only four companies have adopted integrated reporting and, looking more broadly at the market, it quickly becomes apparent that very few companies are really in a position to adopt this reporting model.
Certainly, for smaller companies, cost may be a challenge. Another impediment will be the need to get the relevant expertise on board. Collecting the relevant data, alone, requires new skill sets such as carbon footprint quantification, etc.
‘Many listed Hong Kong companies are small or medium-sized enterprises and these smaller firms might not feel that they have the knowledge, resources and money to produce integrated reports,’ CLP’s Dr Ng points out.
‘There is interest in the market in integrated reporting,’ says Gayle Donohue, Assurance Partner at PwC Hong Kong. ‘But it comes with awareness that there are many internal alignment and communication issues that need to be addressed before this reporting model can be adopted,’ she adds.
The small number of companies engaged in integrated reporting in Hong Kong does not give an accurate picture of the level of interest in this reporting model. ‘Many CEOs are already thinking about the broader value chain for their companies, including considering the implications of sustainability, but this thinking isn’t always fully articulated in a way that can be reported externally’, says Ms Donohue. ‘Before you can implement integrated reporting, you need a broader understanding about value drivers in your business. When I meet clients, we often start talking about integrated reporting, but end up talking about other issues that need to be addressed first – such as alignment of strategic goals across the organisation and understanding what drives value in the business, in turn leading to a better understanding of KPIs [key performance indicators] and opportunities. It is very clear that integrating non-financial factors into business strategy is more than a fad; it is a way of managing business in the world today. If these building blocks are in place, an integrated report is of no, or less, effort. As I see it, the report is purely the output, at the end of the journey, not the start.’
The early adopters in integrated reporting in Hong Kong firmly believe that this is the direction that corporate reporting is heading in, both globally and in Hong Kong. ‘Smart companies will realise that there is a value to this. Done properly, they will learn a lot about the company and what the challenges are, and it will become a strategy document,’ The Link REIT’s Dr Kwan says.
‘We believe integrated reporting will eventually be the mainstream of reporting,’ says EY’s Ernest Lee. ‘Globally, pressures are mounting to increase the quantity and quality of financial and non-financial disclosure. At the same time, emerging social and environmental risks require companies to develop initiatives that transform these challenges into opportunities and sustained value drivers. This signals a larger shift in the marketplace in how investors and other stakeholders weigh components of a company’s market value. This shift in asset valuation, increasingly felt by company leadership, is already seen on various exchanges, finance terminals, independent sustainability reports and other reporting channels where non-financial information is readily available. Integrated reporting represents an excellent opportunity to meet these increased demands for transparency of non-financial information and the calls for both quantitative and qualitative improvements in all reporting.’
Johan Nylander, Journalist, and Kieran Colvert, Editor, CSj
The proposed upgrade of the Exchange’s ESG Reporting Guide is covered in last month’s CSj (see ‘ESG reporting: preparing for the new regime’, CSj, September 2015, pages 20–26). The Exchange’s consultation (‘Review of the Environmental, Social and Governance Reporting Guide’) is available on the Exchange’s website: www.hkex.com.hk.
Further guidance on integrated reporting is available on the websites of the International Integrated Reporting Framework: http://integratedreporting.org and the Global Reporting Initiative: www.globalreporting.org
SIBEBAR: Do it yourself?
Early adopters of integrated reporting in Hong Kong emphasise that adopting this reporting model will be an evolutionary process – companies do not need to go from a traditional annual report to an integrated report that fulfils all the criteria set out in the International Integrated Reporting Framework in one impressive leap.
‘Keep it simple. Start with what you have. Many people have made this reporting into a big deal, but it shouldn’t be,’ says Dr Calvin Lee Kwan, General Manager, Sustainability, at Link REIT. He acknowledges that the adoption of integrated reporting by Link REIT is in its early stages and that the company still has a lot to learn. ‘We are by no means an expert in the area. We see the value in it and we still learn as we go along.’
He adds that companies can cherry pick ideas from the various guidelines available. Link REIT, for example, uses a combination of guidelines to create their reports, including the G4 sustainability reporting guidelines by the Global Reporting Initiative (GRI). ‘GRI G4 is good for coming up with what issues you should look at. The International Integrated Reporting Framework is good for telling you how and why this matters to your company, so you need a combination of guidelines,’ Dr Kwan says.
One innovation that both Link REIT and CLP have followed is the creation of separate integrated and sustainability reports. This might seem to flout one of the central tenets of integrated reporting – that companies should produce a single integrated report rather than follow the previous model of separate annual and sustainability reports. This is an example of how the ‘do it yourself’ approach is relevant to the integrated reporting exercise – companies can take their own approach to making this reporting model work for their own circumstances.
While integrated reports clearly need to fulfil the regulatory requirements for corporate disclosure in Hong Kong, they do not need to be officially recognised as qualifying as an integrated report. CLP, for example, states that its report is ‘guided by’ the International Integrated Reporting Framework but it does not follow Framework rigidly.