Long gone are the days when the value of a business was measured on its financial performance alone.
Listed companies will always have an obligation to explain how they generate returns to their shareholders in financial terms.
However, we have an increasingly sophisticated toolkit to help us explain the relationship between those financial returns and other value drivers and impacts on the environment, on society and on the economy more broadly.
Long gone, too, are the days when these social and environmental issues were thought of as “soft” or side issues, that were somehow separate to the creation of shareholder value.
“The reality is that these things are intrinsically linked – because without maintaining its social licence by demonstrably creating value for its customers and the community at large, a company cannot maintain a sustainable base for future financial returns.”
Communities understand this, often holding a company’s social license to operate in their hands. Customers understand this, and demand more from companies or they will take their business elsewhere. And investors certainly understand this, and are voting with their feet, with issues like climate change, diversity and more recently political donations and industry association memberships becoming the subject of shareholder resolutions, focused company engagement or portfolio screening.
How does this impact investor and company behaviour?
Investors are canvassing a broader suite of risks than ever before, and are demanding that companies make better quality disclosures around their sustainability or ESG (environmental, social and governance) performance.
A recent research report by the Australian Council of Superannuation Investors (ACSI), whose members collectively manage over $2.2 trillion in assets, examined the ESG-related disclosures made by the ASX200 during the 2017 reporting period.
The ACSI report also refers to research undertaken by the Association of International Certified Professional Accountants (AICPA) and the International Integrated Reporting Council (IIRC) (February 2018), which surveyed over 400 executives (including 177 chief financial officers) and found that 96% agree that bringing financial and nonfinancial information together provides a more forward-looking, longer-term view of performance, but that only 24% believe that current corporate reporting is doing a very good job of meeting the information needs of investors and other stakeholders.
Moving towards Integrated Reporting
Globally, we are seeing more and more companies move towards ‘Integrated Reporting’ (IR), as defined by the International Integrated Reporting Council’s (IIRC) The International IR Framework. The technical definition of an Integrated Report is “a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term”. In more simple terms, I think of an Integrated Report as a holistic outlook on a company’s strategy, value drivers, prospects and approach to risk management, more than a backward catalogue of outputs from the preceding financial year.
What are the benefits?
Integrated Reporting is a better way of telling our value-creation story to our investors; it’s a way of highlighting how and why our business is going to prosper into the future – unpacking the “secret sauce” that drives our performance.
The ACSI report found that currently only four companies in the ASX200 are reporting against the IIRC’s IR Framework but noted research by KPMG which found that around 25% of the ASX200 are starting to talk about value creation – the essential and arguably central element of Integrated Reporting.
Indeed, the Australian Institute of Company Directors’ (AICD) policy position on Integrated Reporting encourages directors to consider the ‘aims and principles’ of Integrated Reporting, but cautions against the full adoption of the IR Framework.
In the consultation draft of the fourth edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations, the principles of integrated reporting are mentioned as a “useful framework for preparing operating and financial reviews to provide the market with information about a listed entity’s future prospects, risks and opportunities, strategy and business model”. Whether or not this reference is included in the final version remains to be seen (and it should be noted, there is no suggestion of the ASX Corporate Governance Council requiring Integrated Reporting), it’s inclusion in the draft signifies that expectations are changing, and will continue to change, in a way that I believe, will lead to better disclosure of ESG information from more listed companies.
So against this backdrop, what are AGL’s plans around its future corporate reporting?
I’m proud that AGL has been at the forefront of disclosing information about our environmental and social performance alongside our financial results to our shareholders and other stakeholders for well over a decade. This year, we released our full-year financial results, Annual Report and Sustainability Report on the same day for the first time in our 2018 Reporting Suite.
But, we want to make sure that we stay in the lead. From FY19, we’re planning to bring our non-financial reporting (which has traditionally been published in a stand-alone Sustainability Report as a companion to our Annual Report) much more front and centre in an Annual Report which has the principles of Integrated Reporting at its core.