When I first heard about integrated reporting I thought “Not another reporting framework. The world does not need another one!”
Given my role at the time was heading up Blackrock’s stewardship function for APAC, I thought I should be able to provide an intelligent response to the question, “What do you think about integrated reporting?” So I undertook a significant amount of research and also reached out to several professionals who were experts on the topic of integrated reporting.
During this time, I came across research by Ocean Tomo which showed that in 1975 - 83% of the market cap value of S&P 500 companies was represented by tangible assets, and by 2015 that figure had dropped to 16% - in 2020 it has dropped again to 10%. Intangible assets represent a significant portion of the value of a listed company yet reporting standards focussed on only two aspects, physical and financial assets.
Being an accountant I was very good at reading and understanding financial statements, yet as I increased my understanding of integrated reporting it became clear to me that the current reporting frameworks failed to measure in any way the intangible value of companies. If users and decision-makers were only provided information on two aspects of a company’s operations, how could they make sound decisions on long-term value creation?
Tangible assets are represented by physical and financial capital, while intangible assets are represented by human, social, environmental, and intellectual capital. Current financial reporting standards only focus on physical and financial capital. Now that 90% of value is represented by the non-financial capitals, it is vitally important for senior leadership teams and boards to have the information on the non-financial capitals to ensure that the business strategy will have a positive impact.
I recently spoke with the director of a top 30 ASX listed company and she commented that the adoption of integrated reporting had, “changed the discussion in the board room” for the better.
For a significant number of companies that produce separate financial and sustainability reports, there is little or no connection between the two. Integrated reporting allows investors to understand the long-term sustainable strategy of a company. This cannot be achieved with two separate reports. Integrated reporting is a clear and understandable way to tell investors how the board has applied its collective mindset to the social and environmental issues that are relevant to the operations of the company.
Integrated reporting provides companies with a framework that facilitates clear communication regarding the use and allocation of resources utilized to create and preserve value in the short, medium and long term. This helps investors to manage risks and allocate resources more efficiently.