Richard Howitt became chief executive of the International Integrated Reporting Council (IIRC) on November 1 last year having been a Member of the European Parliament (MEP). RI spoke with Howitt about his recent work at the IIRC, notably a major trip to Japan, which is a market in transition on the subject of integrating long-term, sustainability factors into financial reporting by companies for investors: see RI story (LINK)
RI: You recently travelled to Japan, which is an interesting country for sustainability and financial reporting. How was it?
Richard Howitt: As a new CEO, it’s important to visit priority markets, like Japan. It counts the largest numbers of integrated reporters globally and has played a very influential role in the development of Integrated Reporting in the world. I wanted to learn about the Japanese experience and build strong relationships with our Japanese partners for the future.
RI: Was there anything that you learned which stands out?
RH: The concept of Integrated Reporting has been seized upon as part of wider reforms to modernise the Japanese economy, linked to Abenomics and the Ito review.
But the big truth I learned is that the companies like Integrated Reporting because they see it as a bridge connecting traditional Japanese values, social contributions, and long-term culture to a market capitalism that supports this.
RI: The United Nations Sustainable Development Goals (SDGs) have become a big topic in sustainability reporting. How can embedding the SDGs into Integrated Reporting help an investor in making good investment decisions?
RH: Firstly, the current path of globalisation is obviously under question and lacks a social license to operate. Investors understand the need to move towards more inclusive globalisation, and inclusive capitalism, which is a very strong stand for our work if we are going to maintain prosperous, open trading markets around the world. Secondly, the failure to transition to low-carbon growth is going to be linked to immense costs and risks that everyone like the Task Force on Climate-related Financial Disclosures (TCFD) led by Michael Bloomberg have enunciated in clear financial terms. The big response of the world to that has been the agreement of the sustainable development goals (SDGs). For investors in particular, the SDGs are a guide on how the world is changing and how the future will look. The mobilising power of the SDGs is immense. They have already been embraced by governments, leading businesses andmany in society across the board. Integrated Reporting is the new global norm of corporate reporting. It was absolutely essential that we gave investors the tools to show how the SDGs themselves can be integrated via Professsor Carol Adams’ report The Sustainable Development Goals, Integrated thinking and the Integrated Report, which was published in September.
RI: Can investors, by using an SDG Integrated Report, understand which companies are able to adapt to the new world and which aren’t?
RH: Like companies, investors themselves need to think about their own sustainability and presence in 20 or 30 years’ time too. And one of the key ways to do that is by measuring the companies they invest in. We think that companies that properly embrace, analyse and work out for themselves the materiality of the SDGs are the ones that will make sure that they are sustainable as businesses. In particular for long-term investors, the SDGs are a vital component for their judgements.
RI: Can you already see significant investor interest to invest in those companies?
RH: A lot of research backs this up. There are studies from Stanford University, Harvard University and Nanyang Business School and Nanyang Technological University showing that those companies that undertake Integrated Reporting have a longer term oriented investor base, higher investment efficiency, and higher market valuation. These are a clear set of indications for potential interest of both investors and businesses to embrace Integrated Reporting.
RI: Would SDG Integrated Reporting help me as an investor to easily identify more sustainable and profitable vs. less or unsustainable and less profitable companies?
RH: Yes, and that’s the point of Integrated Reporting. The whole philosophy and approach for Integrated Reporting is how the six capitals (financial, manufactured, intellectual, social/cultural/relationship, human, natural) in the world impact on value creation for the business. Investors can understand where the sustainability challenge in value creation within the company lies.
RI: Why hasn’t Integrated Reporting spread more if investors can easily identify profitability and sustainability degrees of companies? Is it just a lack of awareness?
RH: Firstly, investments are complex and not straightforward. And judgements are constantly reviewed. But if the sustainable development dimension is fully taken into account – cost and opportunity – there is a better price of the company and assuredness in the returns.
RI: Many reporting initiatives, such as the TCFD, are voluntary, or have voluntary aspects, like the Non-Financial Reporting Directive. Do you need mandatory regulation to drive the adoption of Integrated Reporting?
RH: There are different models and pathways to Integrated Reporting in the world. The International Integrated Reporting Council (IIRC) believes in a market-led process and calls for regulatory endorsement, not regulation. This was also the spirit of my discussions in Japan, whether I talked to the stock exchange, the Financial Services Agency – where our discussion was if the next review of the Corporate Governance Code would explicitly recommend Integrated Reporting – or whether it was the discussion with the Ministry of Economy, Trade and Industry (METI) who have agreed Guidance for Integrated Corporate Disclosure based on the IIRC’s framework, which I am deeply honoured that they have chosen to do that. We received the English language copy on the day it was published. It’s not for us to say it’s wrong if individual countries choose a mandatory path like South Africa, but we don’t seek to pursue this strategy on a global level. Through legislation alone, we wouldn’t see a change of thinking. For us, the change of mindset and integrated thinking is as important as the reporting for businesses and investors themselves. Ticking boxes wouldn’t suffice. What we are trying to do is more ambitious.
RI: Some companies lobby against a sustainability shift. Do you think that this will subside over time?
RH: I’ve seen lobbying on both sides of the fence when I worked in government. You need to depolarise the debate between NGOs and trade unions, who often call for regulation, and business associations, who often resist that. I hope in my own work, which brings together NGOs, regulators and businesses, to have the same inclusive, open approach based on dialogue, partnership and depolarisation like the one that I was involved in onthe UN Guiding Principles for Business and Human Rights at the United Nations. There, it led to a consensus by adopting a principle of a smart mix of both voluntary and legislative approaches. I’ve seen that being successful. That’s how we promoted non-financial Reporting in Europe, and I bring this experience with me to the IIRC.
RI: Take relatively unsustainable companies, such as automobile or fossil fuel companies, can they see value in doing Integrated Reporting?
RH: Differently than 10 years ago, today we have a much more intelligent and nuanced approach rather than to just stop investing in extractive or heavy manufacturing industries. We want to help these companies transform and be part of the transition to low-carbon growth in a way that is economically viable for them, and helps sustainable and planetary goals. And this is possible. In my role, I am also part of the international business leaders group, the B20, which works with the G20. Last year I served on the Energy, Climate & Resource Efficiency Taskforce, which includes energy and mining companies. And I’ve been in private discussions with the G20 governments, and these companies haven’t just argued against regulation; they haven’t argued against carbon pricing and taxes – they and we have argued for a transition. It’s got to be phased and it’s go to be affordable; but it’s also got to reach the end goal. Businesses fully understand this and show a strong interest, and I think that within the investment community there is equally growing interest. Many of those extractive and energy industries are the ones that are embracing Integrated Reporting alongside other companies. There isn’t one sector leading in Integrated Reporting. It’s not just the tech companies, or social and environmentally associated industries, it’s embraced across sectors.