Why integrated reporting makes enormous sense?

In India there is increased willingness to adopt standards like integrated reporting, but investors still have to keep pace with forward-thinking measures.

Vartika Rawat
  • Published On Jun 11, 2018 at 06:56 PM IST
Read by: 100 Industry Professionals
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Every June 6, which is observed as World Environment Day, questions about the price of progress and the value of development pop up. Increasingly, companies across the world figure out how do they respond to these questions.

According to forward-looking companies, integrated reporting offers a way out. Integrated reporting is a holistic view of value creation which goes beyond financials to other non-financial but equally important metrics of sustainability. No surprise then that enhanced reporting for Environment, Social and Governance (ESG) practices is gaining ground.

The need for change is apparent not just across the world but in India too. “When you protect the environment, you also improve your balance sheet,” said Akhil Gupta, the Executive Chairman of Bharti Infratel in an earlier ETCFO interview.

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“This is where a good CFO will apply his mind and make a good investment decision, for example, in solar,” he explained with an India-appropriate example. Gupta felt ESG considerations should be part of the financials and not considered charity.

Companies such as Mahindra & Mahindra which produced its first integrated report for the financial year, 2016-17 believe that transparency is at the heart of their engagement approach and making a move towards IR is a natural progression in their journey.

VS Parthasarathy, Group CFO and Group CIO of Mahindra and Mahindra, however, points out that IR is but a small step in an overall journey. “It is an important part of corporate governance. However, corporate governance has a much larger remit than just integrated reporting,” he told ETCFO in a chat.

The rationale & the process

The creation of an IR is not restricted to integrating ESG into reporting. Integrated reporting as promoted by the International Integrated Reporting Council (IIRC) relies on business disclosures through six capitals that guide businesses in long-term decision-making and planning. These six capital include financial, manufactured, human, natural, intellectual, social & relationship capitals.

Integrated thinking is along these lines is about making sure that all parts of the organisation are aligned. Helen Brand, the Vice-Chair on the IIRC Board and also CEO of the global body for professional accountants, Association of Chartered Certified Accountants (ACCA) says the “key is to understand what is relevant to your stakeholders.”

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Currently, the financial reports are so technical that it is not understood by investors – and sometimes the relevant information gets buried. Some of the principles of IR are around relevance and transparency, points out Brand.

Brand adds, “if a company combines all the elements of value creation, thinking about how as an organisation it (value creation) can be done sustainably and telling the world about it transparently, it really drives better performance.”

And it seems that companies which adhere to the best practices do well in the capital markets. Harvard professors Bob Eccles and George Serafeim along with the London Business School professor Ioannis Ioannou proved this in an article in Management Science in 2011.

They compared two different sets of 90 companies, a “high sustainability” group and a “low sustainability” group. The two groups were made of “matched pairs” in terms of size, financial performance, growth prospects, etc.

The high sustainability group also had superior performance in both stock market and accounting terms. The superior performance took some time to show up, but it eventually did.

Interestingly, Dhiraj Relli, MD and CEO of HDFC Securities makes the same point from an investor point of view. “If you are not following guidelines and making enough disclosures then your product can be under threat. If your business model can be a threat then definitely it is a question mark on your future potential. So companies that are cognizant about ESG do come with a premium,” he adds.

Investors when they differentiate between companies on such counts exert a “pull” factor for integrated reporting. Investors with views like Relli, however, are rare especially in the Asian context.

According to a recent report, while about 50 per cent of the funds in developed economies such as Europe and Australia leverage Environment, Social and Governance practices for investment, in Asia only 1 per cent funds do so.

The report was researched by Singapore-based Asian Venture Philanthropy Network (AVPN) in collaboration with management consulting firm, Oliver Wyman and was released on June 6.

<p>Plastic bottles are used to create an installation to mark World Environment Day at Marina Barrage in Singapore June 5, 2018. REUTERS/Edgar Su</p>
Plastic bottles are used to create an installation to mark World Environment Day at Marina Barrage in Singapore June 5, 2018. REUTERS/Edgar Su
Regulatory push


In the absence of adequate “pull” factors, regulators are stepping in with a focused “push” of their own. There are several stock market regulators who are mandating IR like Japan, Brazil, South Africa and so on.

In fact, India’s market regulator Securities Exchange Board of India (SEBI) has mandated IR – requirement of submission of Business Responsibility Report (‘BRR’) for top 500 listed entities.

The circular by SEBI dated February 2017 states that, “Key principles which are required to be reported by the entities pertain to areas such as environment, governance, stakeholder’s relationships...”

Companies listed on South Africa’s Johannesburg Stock Exchange have been producing integrated reports since 2010. The King code on corporate governance prevalent in South Africa is explicitly aligned to the IR framework.

Globally, it is a growing movement. According to the IIRC website, there are now over 1,750 participants in IR networks worldwide.

More than 1,500 businesses globally are using it to communicate with their investors and there is increasing interest in IR by pioneers in the public sector.

In India, leading companies from groups such as Tatas, Mahindra & Mahindra follow IR. Others like YES Bank too are pioneers.

Others tend to follow the spirit of IR rather than the form. For instance, TK Sridhar, CFO, ABB India says, “As long as we have a board process which also discusses about the long term value creation initiative, it is enough. As long as management or the board discusses long term value goals and value creating elements there is no need for the proof of disclosure, as it comes out eventually.”

Backing this argument, Gupta of Bharti Infratel believes that everything a company does reflects on the business. “When a group focuses on philanthropy, what does it do? It creates brand equity. Your customers and vendors feel nice about you. The government takes a more benevolent stand with you. All that is great investment for the business – it is good for business.”

Now who can argue with such an irresistible logic?

  • Published On Jun 11, 2018 at 06:56 PM IST
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