IIRC Newsletter - Highlights from 2016

2016: Breakthrough Year

 

Richard Howitt, CEO, IIRC reviews a year which has seen a number of breakthroughs for Integrated Reporting and looks forward to 2017.

2016 has been an important year for Integrated Reporting and the IIRC as an organization. It was my great honour to be appointed by the Board to succeed Paul Druckman as CEO on 1 November, a day that was also marked by the launch of the King IV Corporate Governance Code in South Africa - named, of course, after our Council Chairman, Professor Mervyn King. The King IV Code embeds the principle of Integrated Reporting in South African corporate governance, while creating the first outcomes-based governance system in the world. 

In South Africa - and also Japan - we have seen phenomenal take up of Integrated Reporting during the year as it becomes established as a key element of the corporate governance system in those two economies. Indeed the Nikkei newspaper estimated recently that the number of businesses practicing Integrated Reporting in Japan alone would rise to 320 in 2017. 

We have also seen important breakthroughs in other markets. We are delighted that China’s Ministry of Finance has joined our Council and expressed support for Integrated Reporting in the Ministry’s recently released five-year plan. In the European Union, the non-financial reporting directive has been established as a stepping stone to Integrated Reporting, a point made by the Commission itself when it released the Directive. A recent conference in Malaysia drew commitments from over 20 companies to begin their Integrated Reporting journey. South Africa. Japan. China. The EU. Malaysia. Different cultures and different models of adoption – some soft, some harder instruments of regulation, but all pointing in the same direction. The question this forces me to ask as I build on the success of the team and establish a clear path for 2017 is: why?

Why have we had breakthroughs in these markets and what can we do to tip the scales globally in 2017 and beyond?

I think three developments have supported the transformation in 2016. 

  • First, the evidence base is increasing and is truly compelling. Building on earlier academic research from Harvard Business School and Nanyang University, we have seen studies from Stanford and the National University of Singapore demonstrating that businesses practicing Integrated Reporting benefit from a lower cost of capital as well as higher share price performance. The fact that China’s Ministry of Finance has committed to a series of studies to evidence the need for Integrated Reporting adoption is testament to the importance of research and evidence as the world transitions towards multi-capital thinking and decision making.
  • Second, there has been a great increase in examples of leading practice with the IIRC’s own database now showcasing over 300 businesses that reference their use of the International <IR> Framework. Businesses from New Zealand, Australia, Singapore, India, South Africa, Germany, the Netherlands, UK, USA, Brazil, Canada, and many more markets across the world are featured. Integrated Reporting is a universal concept and the geographical and sectoral reach is truly impressive. Not only will we build on this progress in 2017, but the <IR> Training Programme will accelerate adoption by providing more practical support to individual markets who need a helping hand to guide them on their journey towards Integrated Reporting adoption.
  • The third welcome development has been an increase in demand from investors. Larry Fink, CEO of Black Rock, set the tone early in the year with his message to US and EU CEOs calling on them to produce an annual statement revealing how their strategy would deliver long-term value. This was backed up by a public call from the CFA Institute for businesses to adopt Integrated Reporting as a means of fulfilling Larry Fink’s vision. The tone has intensified in the last week with the release of the FSB Task Force Report on Climate-Related Financial Disclosures, chaired by Michael Bloomberg, which states that investors need clear, connected, timely and forward-looking disclosures in order to exercise their stewardship responsibilities and allocate capital productively and sustainably. An amplified investor voice will power Integrated Reporting adoption in the future. It is why I was so delighted that the International Corporate Governance Network (ICGN) included in its Global Stewardship Code a recommendation that businesses adopt Integrated Reporting. The Coalition for Inclusive Capitalism, PRI and Focusing Capital in the Long-Term are all initiatives that are helping to coordinate and engage institutional investors in a debate about creating long-term value.


Our mission is to bring about worldwide acceptance of Integrated Reporting, and it is important that we lead by example. So this year we released our own integrated report. It was a real challenge even for a small organization like the IIRC to exercise integrated thinking and to focus on outcomes – substance over form - as I like to think about it. But we crossed the rubicon, like so many other early adopters, and the discipline is becoming embedded within the organization. We think much more cross-functionally, have a clear forward-looking strategy and I came into the IIRC just as we were developing KPIs for 2017, so we have a much clearer plan that should lead to a qualitative improvement in our reporting next year.

In 2017 we will build on our 2016 achievements. The IIRC’s participation in the B20 – the business forum of the G20 – will be important as Governments and business reflect on the FSB Task Force recommendations and how to implement them. And I am looking forward to working with all of you – our partners and supporters, our ambassadors and our friends – because it is together that we will go forward and transform the important breakthroughs of 2016 into a sustained shift towards global adoption in 2017 and beyond. Thank you for your support.

Market-led <IR> adoption and investor pull in 2016

 
A clear theme that emerged during 2016 is the interest from investors in broader information to support their decision making. Delegates at the ICGN-IIRC Conference were emphatic: they are calling for innovation in investor decision making tools so that they can factor in information on longer term value creation. Furthermore, they pointed to Integrated Reporting as a focal point for better dialogue between investors and companies.

This call echoes the findings of a report produced by PwC, in collaboration with the IIRC, earlier this year: 'It's not just about the financials: The widening variety of factors used in investment decision making'. The IIRC contributed a foreword to this report stating, that integrating financial and broader information should, "lead to improvements in the way [investors] manage investment risk, evaluate industry dynamics and the regulatory environment, validate an investment thesis and asses a company's forward looking information." The journey the investment community is embarking on in many ways mirrors the journey early adopters of Integrated Reporting went on, as they incorporate the full aspects of value creation into their thinking.

As General Electric CEO Jeffrey Immelt said on the publication of their first integrated report, “For investors to make investment and voting decisions, we don’t believe that more information is necessarily better.  Instead, we’ve challenged ourselves to provide better information.”

2016 saw endorsements from a wide range of investor organizations. BlackRock, the CFA Institute, CalPERS and Eumedion were just a few of the organizations that reinforced the need for longer term value creation and the role of Integrated Reporting. 

It is clear that market participants globally are moving towards a new view of value creation - from both the investor and business community. A report produced by AICPA, CIMA and Black Sun in collaboration with the IIRC stated that 89% of executives surveyed agreed that business must deliver purpose beyond profit. 

The IIRC is leading the discussion on how this new view of value creation can become embedded into everyday business practice. <IR> Networks around the world continue to convene to develop leading practice in Integrated Reporting, such as the <IR> Commission in Brazil which hosts the largest network anywhere in the <IR> family with over 500 participants. The accountancy profession introduced a new network for professional accounting organizations this year, led by the IIRC's Breakthrough Partner, IFAC. The IIRC has collaborated with a number of organizations during 2016 to convene networks, for example in France, Germany and Russia. 

During 2016 we renewed a number of important MoUs with key partners including: WBCSD, GRI, IFAC and UNCTAD. 

The IIRC is focused on increasing the quality and consistency of training to support the global adoption of Integrated Reporting. We are delighted to now be working with a range of Foundation Partners who are delivering <IR> Training around the world.

The IIRC sets out its focus on dialogue and alignment - creating the conditions for system change in 2017


The Financial Stability Board’s Task Force on Climate-Related Financial Disclosures provides the latest call for greater alignment of the corporate reporting landscape. It is an important reminder that, whatever the strengths of individual corporate reporting frameworks and standards, the market can sometimes be confused or alarmed by the apparently fragmented approach. It is why the Corporate Reporting Dialogue has been such an important innovation to share insights, develop a landscape map and begin to articulate shared viewpoints and policy perspectives. Dialogue is the bridge to a more cohesive and relevant corporate reporting system.

The IIRC is an enthusiastic participant in the Dialogue and we look forward to a year of further progress in 2017 under Ian Mackintosh’s new chairmanship. We thank Huguette Labelle for her tremendous leadership having chaired the Dialogue since its inception in June 2014.

The corporate reporting system does not exist in a vacuum and the focus of many policymakers since the global financial crisis has been on the financial system itself – the interplay of behaviour, incentives and rewards that create and sustain our capital markets, the financial engine of economic progress. But change is in the air as governments and financial market participants both recognize that there is more to creating and sustaining value and managing risk than a relentless focus on just one source of value creation – ‘financial capital’. There are long term financial implications of a diminished social and environmental infrastructure, of talent and intellectual capacity. The Sustainable Development Goals (SDGs), universal in their application, set capital markets a challenge. It is a challenge that former World Bank Group CFO Bertrand Badré eloquently expressed at December’s ICGN-IIRC Conference in London: how do markets become servants of a wider purpose again, because they are such terrible masters.
 
So when we talk about dialogue and alignment, it has a real purpose: to help transform capital market thinking and decision making, extending the horizon so that plans can be made today to address future known risks and opportunities. Corporate governance and stewardship codes will be important methods of introducing these concepts in language that resonates with businesses and investors. We know that reporting influences behaviour. It is therefore right that corporate reporting adapts to the new challenges facing the world today. Advancing our role within that system is a key pillar of the IIRC's strategy, because integrated thinking and reporting can be valuable catalysts towards a capital market system that focuses on the long term and has inclusiveness in its DNA. It is a multi-capital system and is at the heart of all we do.

Organizations stepping up thinking, planning and reporting in 2016


Increasing numbers of organizations used the <IR> Framework during 2016 to help them deliver clear, concise, integrated information that explains how all of their resources are creating value. Globally, 1,500 organizations are now doing some form of Integrated Reporting with over 1,200 participants in <IR> Networks around the world.

Examples of leading practices from around that world have emerged throughout the year – some recent examples that have been highlighted on the <IR> Examples Database include: UBS, United Utilities, Tata Steel and FMO. The database highlights leading practices across all key principles of Integrated Reporting and includes a section for reports recognized by a reputable awards process or through benchmarking. Your suggestions and recommendations for others not yet on the database can be submitted here.

Throughout 2016 companies have fed back to the IIRC about the benefits of adoption Integrated Reporting, giving first hand insights into their journey towards Integrated Reporting:
 
The feedback on our first integrated report was that the information was clearer to stakeholders. Transparency has helped with bankers and investors – they understand our business better and have fewer questions.” Votorantim, Brazil
 
We put our efforts into improving connectivity and conciseness and we see the development of key performance indicators as the cornerstone of our Integrated Reporting and integrated thinking.” Indra, Spain
 
"Through Integrated Reporting, economic and financial outcomes can be measured together with other key values such as customer satisfaction, employee engagement levels, and impacts on the welfare of the communities in which the Group operates. UniCredit believes this approach is key to understanding and creating sustainable value.” UniCredit, Italy
 
As NAB’s materiality process becomes more integrated, with a fully comprehensive filter for business and societal issues, this also helps change the conversation about strategy development.” National Australia Bank, Australia
 
Integrated Reporting helps us provide a clearer picture of the total value we generate for society – not just financial value.” Gold Fields, South Africa
 
Around 80 companies have been proactively engaging with each other and the IIRC in the <IR> Business Network this year to support implementation of Integrated Reporting in their business thinking and reporting. Highlights have included: the report critique project (in collaboration with the ACCA) to feedback current strengths and weaknesses in reporting from investors and Integrated Reporting specialists; an <IR> Business Network Focus Day on 8 December 2016; and a programme of hot topic discussions with practical case studies and expert views. Popular topics have included: connectivity and mega-trends; effective stakeholder engagement; managing and reporting on human and intellectual capital; integrated thinking; and the role of the CFO in Integrated Reporting. 

The <IR> Business Network will continue to help organizations to progress in 2017, the programme for next year includes: ‘super groups’ for advanced reporters to develop thinking and practice in priority areas; liaison with academics, investors, technology providers and standard setters to inform joined up thinking and outcomes across the corporate reporting system; a new programme of hot topic discussions with expert insights and case studies from leading reporters; <IR> specialist feedback on organization’s reporting progress; and opportunities to inform technical thinking. To find out more about <IR> Networks, contact businessnetwork@theiirc.org.

During 2016 the IIRC appointed a panel of technical experts from across the world to support the IIRC in its technical work. The <IR> Framework Panel will recommend to the IIRC Board any revisions, modifications or updates to the <IR> Framework needed in the future. The Framework was only released in December 2013 and feedback from the market suggests time is still needed for companies to embed Integrated Reporting before we can properly consider whether modifications may be needed in the future. Insights from <IR> Business Network adoption progress, as well as a wider market review and academic perceptions, have already been fed back to the panel during 2016.

International business leaders and investors collaborate for longer term value creation at the ICGN-IIRC Conference

 

On 6 and 7 December 2016 the IIRC’s official conference, in partnership with the International Corporate Governance Network (ICGN), brought together 400 people from over 30 countries around the world. Delegates were a diverse group of leaders from business, investment, corporate governance, standard-setting, the professions, academia and NGOs – but they had a common aim: to explore ways of improving the capital markets to meet today’s needs.
 
Delegates converged on the Tower Hotel in London to dialogue with a formidable line-up of speakers about the role different groups must play to generate value over the longer term (as well as the short and medium term). Professor Mervyn King, IIRC Council Chairman; Lady Lynn Forester de Rothschild, CEO of EL Rothschild and leader of the Coalition for Inclusive Capitalism; and Bertrand Badré, former CFO of the World Bank Group, were among a high-profile line up of guest contributors who explored opportunities to bridge the gaps between participants in the capital markets.

The event kicked off with opening remarks from Professor King and Erik Breen, Chair, ICGN. Professor King considered the present shift from the “plague of short-term profit” and myopia of quick wins to an era of value creation and inclusive capitalism. Given the world’s constrained resources, he urged a reconfiguration of the role of Chief Financial Officer to Chief Value Officer, encouraging corporations to look right through the value chain in their investments, operations and behaviours. He acknowledged the proliferation of data in our modern world, but advised that we “must never let knowledge get lost in information”. “Integrated thinking,” he concluded, “is the bridge to maintain value creation in a sustainable manner.”

Erik Breen, meanwhile, discussed the innovative partnership between the IIRC and the ICGN. He referenced the two organizations’ mutual belief in the principle of transparency, and their shared goals of driving purposeful engagement between business and investors, and contributing to a more sustainable capital market system.

Across multiple plenary sessions, keynote speeches and workshops, the conference explored a number of urgent issues and themes, from aligning the capital market system to 21st century needs, to building credibility and trust around corporate reporting innovations. At a session hosted by AICPA, CIMA and Black Sun, panel members and delegates looked at how the C-Suite regards long-term value creation, while a plenary session chaired by Helena Morrissey, CEO of Newton Investment Management, considered how business models must adapt to megatrends such as environmental challenges, technological advancements and demographic change.

In several case study sessions, panel members discussed the pathways to and impacts of progressive business thinking and reporting. As preparers revealed how Integrate Reporting has changed the way their companies operate, some explained that the principles of integration have been at the heart of their business for years. For Danone, for example, integrated thinking has been embedded in corporate culture since 1972, when the company’s CEO announced that “responsibility does not stop at the factory gates” – a progressive mantra from the past, which many now seem to be adopting – not because they ‘should’ but because it is necessary to viable growth and financial stability.

United Utilities CFO, Russ Houlden, identified the ‘21st century need’ as sustained wealth creation which companies are at the heart of. He captured the action-oriented tone of the event when he called on business, governments and investors to take action:
  • Business: Get on board with integrated thinking and Integrated Reporting to tell their value creation story clearly
  • Government: Make sure new laws undergo independent impact assessments before they are passed
  • Asset managers: Make your pay transparent (as many corporate executives have to)
  • Asset owners: Explain what key broader measures you consider critical to the viability of companies
Throughout the conference, delegates engaged in interactive polls and debates and posted a continual stream of social media commentary. Twitter highlighted telling quotes from speakers:
  • “Integrated Reporting is about putting trust back into companies through transparency.” Jane Diplock, Deputy Chair of the IIRC Board.
  • “We try to understand what the long term value perspective is and how the management team are performing.” Michelle Edkins, Managing Director, BlackRock.
  • “What we are doing here is vital; the way corporations demonstrate they have an integrated view of the future is crucial,” Bertrand Badré, former MD and CFO World Bank Group.
  • “We have to guard against disclosure overload: the question is about the way we communicate, not ticking boxes.” Michel Prada, Chairman, IFRS Foundation Trustees.
The event ultimately provided a platform for the very thing that inclusive capitalism, resilient business and mulit-capital value creation need to progress – a true dialogue based on shared experiences, diverse perspectives, and understanding.

This article was kindly contributed by Stratton Craig: www.strattoncraig.co.uk. Look out for the continuing debate in articles from delegates and speakers at www.integratedreporting.org

The IIRC would like to thank the ICGN-IIRC Conference sponsors:

Watch now: Richard Howitt in one of his first interviews as CEO of the IIRC, talking to financial journalist Robert Bruce about using Integrated Reporting as a catalyst for market reform.
Professor Mervyn King's new book is out now: 'The Chief Value Officer'

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