Chair of WICI; Advisor for Sumitomo Corporation
Congratulations on the tenth anniversary of the IIRC. I feel fortunate to have contributed to the IIRC’s work, especially in establishing the International <IR> Framework from the beginning, as the Chair of WICI, World Intellectual Capital/Assets Initiative, when the Ministry of Economy, Trade and Industry Japan sent me to Brussels as a Liaison Officer to the EU between 2009 and 2013. WICI and I also took the responsibility to create the background paper on ‘connectivity,’ which supplemented the <IR> Framework. Returning to the Chair of WICI, I have been one of the IIRC Council members since July 2019.
During this decade, corporate reporting has made a big step forward by focusing more on non-financial elements, company’s value creation and interests of not only shareholders but also various stakeholders. In Japan, the number of companies which published integrated reports has exceeded 500 in 2019, partly due to efforts of the Japanese branch of WICI. Certainly, the quality of those is not satisfactory, but most companies have placed more attention on their own value creation mechanism, which is mainly formulated by non-financial elements. It is true that the <IR> Framework triggered the shift of stakeholders’ interests from short-term financial performance to long-term value created by companies. The notion of ‘integrated thinking,’ the six capitals model and the concept of materiality from the viewpoint of a company’s unique value creation mechanism were so persuasive that more investors recognized the important role of non-financial elements or intangibles in a company’s long-term performance.
On the other hand, there is a concern that investors, analysts, regulators and social organizations pay attention mainly to environmental, social and governance (ESG) factors among non-financial elements or intangibles, which can be relatively easily measured among companies and tend to be used to check the risk of eroding corporate value in the future. But we should not forget other factors which are not necessarily typical ESG ones, such as corporate culture, long-term business network, reputation, brand, accumulated data, technological advantage and employee’s capability or loyalty to companies. Though these are not common to each company nor easily measured, they are quite likely to be the real driver for positive value creation by a company and for innovation impacting the whole society. As the IIRC indicated in the joint announcement on intangibles and the UN Sustainable Development Goals (SDGs) in early 2019 together with WICI, companies need to utilize their own intangibles in creating their unique value, which may lead to innovation, then contribute to solving the issues related to the SDGs.
In the next ten years, corporate reporting will be increasingly expected to be a tool for realizing sustainable development. To be so, we should pay balanced attention both to ESG factors which have a nature like ‘social license to operate’ and to a company’s specific intangibles which play a key role for its own value creation and innovation. This is also needed for users of disclosed information, including investors, analysts and evaluators to improve the ability to understand the unique value creation mechanism of a company based on its own intangibles. The idea expressed in the <IR> Framework can be the starting point of this balance, since it puts the emphasis on value creation per se, rather than specific elements, including those related to ESG. I hope, in the next decade, the IIRC again takes the leading role in establishing this balance in order to encourage companies to bring about outstanding innovation for a sustainable earth. I am quite happy to be involved in such activities of the IIRC.