Use of different reporting frameworks
Even though the majority of the companies use the Global Reporting Initiative (GRI), there is no common reporting standard for non-financial reporting. The extent to which companies report in accordance to the GRI standard differs: some reports are merely inspired on a few principles and indicators and others report in full accordance with the ‘Core’ option. Many companies (also) reference to the Sustainable Development Goals (SDGs), although this is not a reporting framework.
Other reporting frameworks, namely the International Integrated Reporting Framework (IR), the Climate Disclosure Standards Board (CDSB) or Sustainability Accounting Standards Board (SASB) are used to a much lesser extent.
Investors express an urgent demand for non-financial accounting standards to align topics, KPI’s and measuring methods. There is a need for collaboration between reporting standards to evolve towards reliable integrated reporting. The leading reporting standards have started a ‘Better Alignment Project’, but these negotiations seem complicated causing no immediate harmonization to be expected.
The annual report is replacing the sustainability report
Historically non-financial information is disclosed in stand-alone sustainability reports. Since 2018 large companies mostly use annual reports to disclose a more complete overview of their organization. Some would call this ‘Integrated reports’, but it’s not because a company includes sustainability info in the annual report, that is compliant with the International Integrated Reporting Framework.
In Belgium, only a couple of companies publish an Integrated Report, but the number is rising. As is the relevance, because 94% of investors state that integrated reports are very useful sources of non-financial information (EY’s Investor Survey).
The purpose of an integrated report is to demonstrate how an organization creates value over time, by combining both financial and non-financial information in one annual report. The framework enables to bring strategy, governance and performance together.
This is strongly linked with the disclosure of a strategy (short-, medium- and long-term objectives) and a business model. While all companies report a strategy and business model, the level of integration of the financial and non-financial aspects differs a lot and not all companies disclose detailed and quantitative objectives.
Shared topics – Climate on top
Despite the diversity of approaches, a similarity in topics can be observed across countries. In line with the European Directive large, listed companies focus on:
- Talent management
- Health and safety
- Responsible supply chain
- Climate change and management of resources
- Human rights
- Ethics and corruption
- Community involvement
- Customer satisfaction, innovation and products
The focus lays increasingly on climate impact and CO2 emissions: scope 1,2 and often scope 3. More and more, quantitative objectives are set to support carbon reduction strategies. In some cases these are science-based CO2 targets, in line with the Paris Agreement goals to limit global warming.
Topics that are only being disclosed recently, but are expected to gain importance are:
- Responsible supply chain
- Customer satisfaction and environmental
- Social impacts of products
It is crucial for companies to disclose information that is relevant, keeping in mind its own impacts and performance as well as the expectations of stakeholders. The latter can be obtained by carrying out a ‘materiality analysis’. This practice is common across Belgian companies.
Nevertheless, there is progress to be made on the relevance of certain KPI’s. Because even though there is similarity in (generic) topics, the KPI’s that fit under these topics differ widely. Materiality analyses could therefore be done in a more thorough way and with a risk-based approach; an assessment of ESG risks inherent to the company and its environment. These risks are currently only covered to a limited extent and when they are disclosed, they are mostly covered by qualitative information on mitigation measures alone.
Reliability of the reported data
The data management of non-financial performance is challenging. Companies face a number of pitfalls that influence the reliability of the data:
- Limited governance structure
- Reliance on one or too many individual(s) for data collection
- Undocumented and/or limited internal control environment
- Making commitments without clearly defining how they will be measured
- Lack of accepted measuring methodologies (i.e., the degree of estimation) and baselines
- Unclear boundaries and/or inconsistent with financial reporting
These pitfalls should be countered by using the quality and control principles used for financial reporting, such as operational management, internal control and external audit. Robust, standardized data collection processes and procedures reduce the risk of subjective interpretations, inaccurate estimates and incorrect calculations.
Working towards improvement
Companies are increasingly reporting their non-financial impacts, but as the availability of non-financial information is raising, so does the need for harmonized, relevant and reliable information.
With the reporting of 2019 ahead, companies can start working towards the improvement of the non-financial reporting, keeping the following in mind:
- The ‘shared topics’ open the way for more harmonization in the companies’ non-financial data.
- The relevance of the information is crucial and raises the need for more synthesis and prioritization of information.
- The performance of the past year should be interpreted relative to a company’s strategy and stakeholders’ expectations.
- The data management should be made more mature: stakeholders ask for consistent, complete and reliable information.
Nobody says it’s easy, but the benefits outweigh the efforts. Because reporting isn’t a goal in itself. It is a means to monitor and improve performance, to communicate with stakeholders about achievements, ambitions and challenges ahead. Ultimately, non-financial reporting is about the crucial role of businesses in sustainable development.