President & CEO, World Business Council for Sustainable Development
Over the past ten years, the IIRC has inspired and encouraged companies to publish integrated reports and to embed the principles of integrated thinking related to the stocks and flows of six capitals across business management, decision-making and investment allocations.
The International <IR> Framework was the first to highlight the need for companies to report on the role that environmental, social, relationship, human, manufactured and intellectual capitals can play in the value creating process, and in supporting reporters as they integrate this information alongside conventional financial information. The contribution this work has made to the field is invaluable, and now, the importance of, and relationships between, financial and non-financial information is clearer than ever.
Ten years ago, it would have been impossible to fully predict today’s reality. A global pandemic rages on; the global economy is facing its biggest recession in a generation; the climate threat, biodiversity loss and food insecurity loom larger than ever – and inequality continues to plague society.
Though the challenges we face aren’t new, they are more clearly pronounced and more urgent than before. Corporate reporting and transparency have an important role to play in providing clarity on how business responds to and performs against global challenges – building resilience and strong performance in times of economic and societal uncertainty and not just financial position.
What is also clearer each year, is the utility and necessity of sustainability reporting.
Since 1992, there has been a ten-fold increase in the number of corporate reporting requirements related to environmental, social and governance (ESG) topics. Stakeholders across the board are demanding decision-useful information beyond financial metrics – as key ESG metrics are not only a proxy for well-managed, resilient companies, but are increasingly affecting financial valuations, such as equity risk assessments. This isn’t surprising, as intangible assets like innovation, culture, and relationships – including with society and the environment – can make up to 80% of a company’s value.
Clear reporting on non-financial metrics allows companies to make better management decisions and provide better oversight. At the same time, information on these same metrics – if shared appropriately – can help inform capital allocation decisions from financial market participants creating a ‘race to the top’ where the most sustainable companies are recognized and rewarded. There are already clear signs that companies who value and consider non-financial information – like ESG – are more successful.
Across the WBCSD membership, there’s been a significant increase in the effectiveness in sustainability and integrated reporting over the past decade. Our annual Reporting Matters publication, now in its eighth year, highlights that combined corporate reporting on financial and non-financial information across the WBCSD membership has increased from 8% to 40% since 2013.
Though great strides have been made, there is still much work to do. The global financial system still rewards short-termism and shareholder primacy. The role of the IIRC over the next ten years must be to build on its momentum to further simplify the reporting space and move toward standardization, embedding and regulation.
Companies, investors and even regulators are finally realizing the validity of non-financial information in understanding the context within which businesses operate and allowing them to assess their strategic capacity and responses – including critical elements of risk and resilience.
As social and environmental threats intensify, stakeholders from across all sectors of society continue to demand action.
Every company must, in some way, combine financial and sustainability information to provide consistency and clarity on business responses to sustainability challenges and performance and to encourage better business and investment decision-making. The false distinction between financial and non-financial must fall away in favor of the inclusion of all material information if we are to power a more sustainable future. The next phase of the IIRC and the renewal of the <IR> Framework can help facilitate this process.