Analysis: How integrated reporting and EU proposals seek to build from ‘plateau’

It was Richard Howitt, the British Labour Member of the European Parliament who is a powerful voice for corporate social responsibility at the European level, who probably summed it up best.

Howitt, who as well as being the Parliament’s ‘rapporteur’ on CSR is also an ambassador for the International Integrated Reporting Committee (IIRC), said the growth of sustainability reporting has reached a plateau.

So he sees a direct connection between the launch of the long-awaited Integrated Reporting consultation draft and a virtually simultaneous draft law on corporate non-financial reporting issued by the European Commission yesterday.

Internal Markets Commissioner Michel Barnier’s proposals would oblige large companies to disclose their risks and policies related to the environment, social and human rights. Integrated Reporting, meanwhile, will – in the words of IIRC Technical Director Michael Nugent – seek to show the “unique value creation story of an organisation”.

The investor interest in both projects is clear. As well as being backed by a range of blue-chip corporates, the Integrated Reporting project is supported by 30 major institutional investors. Its investor network is chaired by Colin Melvin, chief executive at Hermes Equity Ownership Services, the engagement arm of the fund manager that is ultimately owned by the BT Pension Scheme.

Howitt argues the EU proposals, which he has championed, will be a “stepping stone” to integrated reporting being accepted internationally. “These are not alternatives, they are similar,” he said at the launch of the IIRC draft in London.He sees integrated reporting developing along similar lines to the Ruggie principles on business and human rights, by using the “same consensual, evidence-based approach”. It’s an important point. Integrated reporting is a voluntary, private sector solution to the problem of how to express sustainability information. How this approach will meld with the EU’s more top-down ideas will be interesting to watch.

Central to the notion of integrated reporting is the idea of ‘the capitals’ – not just financial capital but manufactured capital, intellectual capital, human capital, social/relationship capital and natural capital. A key point is that an integrated report, under the draft proposals, would show how these factors “are used to arrive at performance-based compensation”. The IIRC’s Nugent makes the point that IR will inform the allocation of financial capital – though he stresses it’s not about trying to make measurements per se.

Julie Hudson, head of the SRI team at UBS, argued that integrated reporting would demonstrate how “good disclosure converts to value”. The new approach should also improve market efficiency by removing potential surprises.

Another point to note is that it’s not currently envisaged that Integrated Reporting will replace existing reporting requirements; US-listed companies will, for example, still have to file voluminous 20Fs with the Securities and Exchange Commission. The concept of materiality is discussed at some length in the draft and, again, it will be interesting to see how this debate plays out during the consultation process.

And it’s only fair to say that Integrated Reporting is not the only sustainability reporting initiative either. Take for example, the US Sustainability Accounting Standards Board (SASB) project.

Turning to the European Commission’s draft proposals, reaction to them has been somewhat mixed. Aviva Investors said they needed to go further to promote full integration of non-financial information. Also lacking, Aviva reckons, is oversight from investors and reference to the likes of the CDP (Carbon Disclosure Project).

For its part, the investor-backed CDP said it would like greater emphasis on mandatory disclosure of material – that word again – information that is relevant, as opposed to a “wide range” of environmental, social and governance data. “This would minimize the reporting burden on companies and ensure that it is the decision-useful information that is consistently available for investors,” said CDP Chief Executive Paul Simpson.Campaign group the European Coalition for Corporate Justice said the Barnier draft is a “missed opportunity”. It said: “We fear companies will only identify and disclose the risks that affect their economic performance, and won’t take responsibility for the impacts they have on the people and the planet.” It added that without sanctions, the accuracy and reliability of the information companies provide could not be guaranteed.

But perhaps the final word should go to the Global Reporting Initiative, which said Barnier’s plans could “open the door for a quantum leap in transparency and accountability”.