Integrated Reporting South Africa

Integrated Reporting South Africa - 2013
Next Generation Consultants Reana Rossouw

Corporate Reporting Journey
01/04/2013 Next Generation Consultants Corporate Reporting Journey Financial information Backward looking Short term focus Compliance with regulations and standards to inform investors Financial Accounting Standards Board; General Accepted Accounting Procedures (IASB, IFRS) Mandatory for publicly listed companies Financial Reports Primarily non-financial information Backward and forward looking Long term focus Global Reporting Initiative (GRI) Voluntary and mandatory Sustainability Reports Financial and non-financial information Short-medium-long term Support more informed capital allocation International Integrated Reporting Council (IIRC), Sustainability Accounting Standards Board Integrated Reports

Tipping point or cross roads?
01/04/2013 Next Generation Consultants Tipping point or cross roads? Sustainability reporting at a cross road After 10 years sustainability reporting has become mainstream for big business in many countries, with the GRI as the reporting standard. Despite this, there has been no change in integrating sustainability into business strategies. Stakeholders don’t read reports and don’t use them for decision making. They want more and specific information. A one size fits all approach is not working. Huge parts of the economy remain opaque. SME’s, public agencies and SOE are sow on uptake and are not yet reporting en-masse. Reporting from specific industries and family owned businesses remain an exception. Sustainability reporting has to evolve to serve its initial goals – the world is not becoming more sustainable.

Tipping point or cross roads?
01/04/2013 Next Generation Consultants Tipping point or cross roads? Investors and shareholders want better reporting and Integrated Reporting is a trend that no business can escape The convergence of financial and non-financial information (sustainability and financial information) is the new norm. Materiality, balance, comparability and conciseness is key. Risks, opportunities and quantification of extra financial data are among the elements expected in an integrated report The implications of integrated reporting are profound for business However, the content still needs to be clearly framed according to the needs of specific stakeholders

Next Generation Consultants
01/04/2013 Next Generation Consultants Why a change? The growing concern that financial short sightedness is a major barrier to the true and vital emergence of a sustainable economy is now out in the press, with opinion leaders voicing the need for a longer-term financial focus. The latest wave of The Sustainability Survey reveals that a very large majority (88%) of the 1642 experts polled see pressure for short-term financial results as a barrier to businesses becoming more sustainable. Recent research from KPMG and Trucost shows that if companies had to pay the full environmental costs of their activities, they would have lost 41cents out of every dollar earned in 2011 – and that these costs are doubling every 14 years, sometimes outweighing the total EBITDA of a sector. With recent systemic and market failures having shown the vulnerability of the real economy to financial volatility, long-term plans and strategies that foster better resilience to crises are of great interest to the financial community.

Reporting in a unsustainable future?
01/04/2013 Next Generation Consultants Reporting in a unsustainable future? Strategy first, then management and then reporting “Integrated Reporting may mean the end of the lengthy ‘carpet bombing’ sustainability report, but it will definitely not become a one-stop shop.” Different types of sustainability communications with different contents, adopted to the expectations of all other stakeholders, will flourish with the help of new communication technologies. Reporting leaders are clear. Integrated Reporting will not mean the end of other sustainability communications.

Why communicate/report?
01/04/2013 Next Generation Consultants Why communicate/report? The ultimate objective of communication is to build trust – in a brand, a product, a company in a world where businesses are not trusted easily anymore. With more than 10% of the world’s population now part of social networks, and information on companies and products easily available through a diversity of channels, stakeholders knows a lot about companies. The old paradigm of communication, based on a vertical process where companies emitted a message towards receivers that were not empowered to react has had its day. Three major aspects are shaping this paradigm shift The rise of social networks The development of mobile access to the web The localisation of communications

Purpose of Corporate Reporting
01/04/2013 Next Generation Consultants Purpose of Corporate Reporting To engage and involve stakeholders in corporate practice To inform business practice, strategy and management focus To share the framework for measurement and target setting – performance To show commitment and compliance Show understanding and consideration of impacts and risks on external environment To account for sustainability performance and activities To improve internal processes To demonstrate adequate management of risks

01/04/2013 Next Generation Consultants Corporate Reporting Describes performance Where you are, where you come from and where you are going Involves measurement Against specific targets and objectives Is a recurring process Over time the story emerges by reporting regularly against consistent indicators For a specific audience The practice of measuring, disclosing and being accountable to stakeholders for performance against specific goals and metrics

Reporting is a management process
01/04/2013 Next Generation Consultants Reporting is a management process 1. Company identifies relevant sustainability issues and understands how these are linked to its business 2. To address these issues, the company defines action plans to implement business cases with performance targets 3. The company commits to performance targets, monitors and reports annually to stakeholders, and feeds back stakeholder perspectives into the company strategy

01/04/2013 Next Generation Consultants Reporting Trends (1) In the drive for greater transparency, companies are losing sight of the bigger sustainability picture Companies are increasingly providing reliable accounts of their sustainability programs However, on a global scale they are far from delivering solutions to the most pressing sustainability problems Companies today are increasingly aware of sustainability issues and actively integrate sustainability into core business strategy and decision-making. They are opening up and describing in detail how they define material issues, engage stakeholders and join multi-stakeholder initiatives. However, as they become more responsive to the Global Reporting Initiative (GRI) sustainability reporting guidelines and other reporting frameworks, they are failing to adequately put their performance into context. The largest companies fall short of sustainability leadership A lack of balance and comparability still pervades reporting

01/04/2013 Next Generation Consultants Reporting Trends (2) Innovation is the key Embedding sustainability into systematic innovation, applied company-wide, disseminated to supply chains and throughout product lifecycles, based on internal and external stakeholder feedback is increasingly important We can learn from the high-risk industries Stakeholder engagement basics are in place – but genuine two-way engagement at board level is rare There is a trend towards the use and reporting of indicators and targets Take-up of web-based and interactive reports continues to grow Integrated reporting is still in its infancy

Drivers of reporting – SA Context
01/04/2013 Next Generation Consultants Drivers of reporting – SA Context Stakeholder and peer pressure An initial driver fro non-financial reporting was the publication of environmental reports by international business peers, signalling the growing expectation by stakeholders more broadly for greater corporate accountability Growing awareness of the strategic importance of sustainability The drive to non-financial reporting during the 1990’s came at a time of growing institutionalism of the business response to sustainable development following the Rio Earth Summit in 1992 and the World Summit on Sustainable Development in 2002 (Johannesburg) Changing corporate governance requirements The King Code on Corporate Governance (King II – 2002) required that ‘every company should report at least annually on the nature and extent of its social, transformation, ethical, safety, health and environmental management policies and practices”; The subsequent King III (effective from March 2010) highlights the importance of Integrated Reporting. This became a listings requirement for the JSE on an ‘apply or explain’ basis that has raised the profile and implementation of these recommendations Awards Prompted in the mid-1990’s by WWF South Africa, there have since been various annual reporting awards (i.e. ACCA, KPMG, Ernst & Young, etc.) that have helped to encourage the uptake and improve the quality of reporting

01/04/2013 Next Generation Consultants SA Context Various voluntary initiatives These have contributed to fostering greater corporate accountability e.g. the JSE’s Socially Responsible Investment Index (SRI) – (May 2004); the international Carbon Disclosure Project (2007); as well as initiatives such as the UN Global Compact, Responsible Care and the International Council on Mining and Metals (ICMM) Finally, and more recently, there is growing pressure from social responsible investors for greater transparency on environmental, social and governance (ESG) issues Newcomers The growth in sustainability reporting is visible across various: South Africa’s listed companies – where there has been an increase not only in the number, but also in the spread of business sectors that are now reporting on sustainability issues Small and medium sized enterprises – i.e. Impala Clothing that has published GRI based reports since 2007 Industry sectoral organisations – such as the National Business Initiative (NBI) which produced an integrated annual report in 2005 Non governmental organisations – with sustainability reports published, amongst others by the HIV/Aids NGO Cotlands and environmental NGO Delta Environment Centre Governmental organisations – such as the Provincial Government of the Western Cape, which produced its first annual sustainability report in 2008 Changing legislation regarding corporate reports Including the BBB-EE Act that requires annual progress reports to be submitted to government, the Employment Equity Act on annual reporting to government on unfair discrimination in the workplace; the National Climate Change Response Paper that includes provision for establishing a detailed and up-to-national greenhouse gas inventory and requires companies and economic sectors or sub-sectors to prepare and submit mitigation plans that set out how they intend to achieve the desired emission reduction outcomes

Challenges in reporting
01/04/2013 Next Generation Consultants Challenges in reporting The definition of key indicators and topics to report on The sensitivity of some of the information that needs to be provided Non-financial information is not valued or considered as irrelevant The associated costs of reporting Ignorance or lack of knowledge about reporting and difficulties with linking sustainability performance to the needs of stakeholders and investors Internal organisational structures To continue reporting - for SMEs, the biggest challenge is not to report for the first time, but to continue reporting in the future – (resources, costs, time, technology, systems, processes)

Why people don’t read reports
01/04/2013 Next Generation Consultants Why people don’t read reports A general lack of interest in the issues covered A high degree of mistrust of the company’s intentions and lack of reliability of the reports Reports are often hard to find, too lengthy or difficult to navigate through More direct means of communication with companies are preferred to obtain the required/specific information Important general company statements with regard to good policies and issues (for example, animal testing or the use of GMOs) are often not included in the reports, but disclosed on the website of the company, which therefore are preferred sources of information

Report readers expectations
01/04/2013 Next Generation Consultants Report readers expectations Investors Value the (future) management of sustainability over the disclosure of sustainability. Questions asked by analysts tend to be forward looking, rather than focus on past performance, which is what current sustainability reports mainly present. Information that is linked to financial performance is of top relevance: it could be complementary to other policies, like anti-bribery or anti-corruption policies or sector specific issues. Information must be comparable across companies, which makes normalising of information necessary. Information must be consistent over time. Information must be relevant and material, linked to the company strategy. Companies should explain to investors why certain sustainability information is material. Information should be reliable, and therefore assured by a third-party. The scope of a report is important (right numbers, right topics covered). Stakeholder involvement can add value to quality and reliability. Information related to risks, including the reputational risk, is important because this also indicates how well a company is managing its relations with stakeholders. Information must be complete and comprehensive.

Other stakeholder’s expectations
01/04/2013 Next Generation Consultants Other stakeholder’s expectations Civil society Reports focus too much on good news and topics that are easy to cover; reports tend not to detail the impact of a company’s operations (and supply chain) on issues such as poverty and job creation. Current reports often deal with isolated issues, whereas a comprehensive systematic analysis is preferable. Reports do not use common indicators, making comparability difficult. Media As journalists tend to prefer ‘tough’ issues, whereas sustainability related issues are often perceived to be ‘soft’, linking sustainability to risk and to new technologies may make the information more attractive to the media. In their presentations to the financial media, companies often fail to explain how sustainability issues relate to strategy and financial performance. NGOs Carbon disclosure; water footprint; corruption issues; use of sustainability criteria in investment decisions; sustainability issues in general and human rights issues in particular; information on business deals; working conditions in the supply chain. Consumers Sustainability information related to product safety measures; the effects of products on health; product quality, liability and warranty; new product development , - the product manufacturing process: the circumstances under which products are produced (e.g. working conditions). Labour unions and employees Collective bargaining and good industrial relations within their own organisation and the supply chain; disclosure of details of supplier factories; disclosure of percentage of workers on short-term contracts -including the supply chain; information on management pay linked to performance on sustainability issues; the structure of incentives for the purchasing department; disclosure of Health and Safety issues; disclosure of data on integration of disabled people; disclosure of data on women in executive positions.

General information requirements
01/04/2013 Next Generation Consultants General information requirements A link between sustainability strategy and overall business strategy Including information on risk management and resource management (physical and human), purchasing and value chain management, research and development, and marketing and lobbying activities Commitment to sustainability, demonstrated by a balance of good and bad news A thorough stakeholder engagement process and incorporation of their feedback into strategy, plans and targets, a clear definition of targets and results with clear explanations and external verification of the provided information (assurance) Actions taken to address sustainability issues Showing what actual measures are being taken by the company regarding sustainability impacts in practical terms. Reporting companies need to provide evidence on how key sustainability impacts are addressed: operations, product development, sales, and relationships with customers, investors, government and other stakeholders Innovative thinking to solve sustainability challenges

Nirvana – what do we want?
01/04/2013 Next Generation Consultants Nirvana – what do we want? More comparable data As sustainability reporting becomes both standardised across industries and increasingly aligned with financial reporting, comparability will be paramount. When companies report on the same categories of information in the same way, stakeholders (including investors) will be better able to analyse them for side-by-side comparisons. More comprehensive data The number of activist groups seeking to have their topic covered in sustainability reports increases every year from diversity organisations to those focused on water or carbon or e-waste. There are more tools for measuring and reporting. More organisations are offering awards, rankings and indexes – and it’s clear what it takes to score high: more disclosure, on more topics. More quantitative data Hard data is already the standard, not the exception, for reporting leaders. Companies need to satisfy important stakeholders by adhering to the Greenhouse Gas Protocol and Global Reporting Initiative (GRI). Those that once avoided comparable numbers now compete to offer more of them.

01/04/2013 Next Generation Consultants What do we want (2) More visible data Sustainability websites are already being promoted, along with products, in commercials and press releases. Assurance brands are developing new sustainability marks for consumers. Professional associations are forming, new credentials programs are being tested, and corporations are creating new management positions for sustainability reporting. More strategic data Going forward, sustainability reporting will be proactive, aimed at brand enhancement (or outright rebranding). Choosing which customers and audiences to win over, what information to use for that purpose, and how to change the company itself are becoming matters of strategic, C-suite importance. More integrated data Companies are beginning to look for ways to integrate their annual financial reports and their sustainability reports. Companies won’t have to integrate multiple reports. They’ll just report, period. More interactive data As reporting matures and technology allows, organisations will continue to have more robust conversations with their stakeholders from online forums and surveys to conversations on social media. Companies that take the time to listen and respond to stakeholder interests will have the advantage of developing even more effective reporting. Even more importantly, beyond reporting, stakeholder conversations can inform and strengthen overall business strategy.

01/04/2013 Next Generation Consultants What do we want (3) A supply chain requirement Large companies are increasingly looking to their suppliers for help managing their own carbon footprint. Requests from large companies of their suppliers for sustainability data will continue to move down the food chain until many more companies are collecting and reporting their data. Powerful enough to make a difference There will be a tremendous increase in social awareness of the quantifiable social and environmental impacts of corporations. This will give other business customers, as well as individual consumers, a way to make choices that reward responsible behaviour. Standard audit / assurance process Third-party assurance means credibility, and credibility is key in sustainability. Companies that want to demonstrate leadership have to assure their reporting – and the big audit/assurance providers know it.

01/04/2013 Next Generation Consultants In conclusion Reporting Change Change Reporting Readers are taking action based on what they read, making investment, partnership and purchasing decisions Readers don’t consider reporting to be a form of stakeholder engagement Trust is driven by consistent, transparent performance demonstrated over time There is no trust without consistent and balanced transparency Readers discuss what they have learnt from reports Readers are now global and connected Design a strategy to identify the information stakeholders need to make decisions. Consider including ‘calls to action’ to readers on specific behaviours. Reporting and stakeholder engagement are not interchangeable. Create separate but complementary strategies for both. Focus on the track record of actions and demonstrated performance. Better yet, integrate financial and sustainability reporting into a comprehensive reporting strategy. Robust reporting must take into account dilemmas and failures as well as successes. Translate key messages into memorable sound bites, create accessible modular structures and conduct and enable social media communications. Appreciate and accommodate regional variations in report design and communications to deliver returns in both trust and action. Go beyond single language translation to account for local priorities, local concerns, and local success stories

An integrated strategy
01/04/2013 Next Generation Consultants An integrated strategy Commitment to effective reporting – Define roles and responsibilities Planning and Controlling – risk and opportunities, benchmarking – materiality analysis and sustainability context/strategy Stakeholder Engagement – Define report content Frameworks and standards – Define report process and systems Analysis and interpretation

01/04/2013 Next Generation Consultants An Integrated Focus Identify a senior champion who can drive integration as a way of building value for the company Use workshops to engage Board members and senior management Reinforce cases where integrated thinking and Integrated Reporting have had positive results in order to build the internal business case Use the report as a tool to advance discussions on strategy and the business model internally Focus on how to create value – this helps to shape thinking internally Think about what sustainability really means for the business Don’t ignore the governance structures of the business for driving activity internally as it enables everything to be more strategic Use the language of business; talk in terms of economic benefits Use both a financial and non-financial risk management systems and aim to get as much certainty as possible on the understanding non-financial risks

01/04/2013 Next Generation Consultants An Integrated Process Use non-financial data to gain a clearer picture of the business internally Develop more robust systems for performance management Reduce the amount of data that is published and make the story more accessible to stakeholders Streamline performance reporting and find efficiencies within the business so that data sets can be used in a range of different ways Reduce duplication of information and ensure consistency of messaging Find out what others are doing and the lessons they are learning Look at the content of the report from the perspective of audience needs and interests View the report as an evolution in response to stakeholders – ensure it is not just what you want to say but respond to what they want to know Aim to meet the top-level needs of as many stakeholders as possible but use alternative means to communicate the details, such as digital technology Differentiate stakeholders and enable them to access different information in ways that suit them – this will help them understand the business better

01/04/2013 Next Generation Consultants Going Forward (1) Differentiate Think beyond current reporting. Go for a competitive edge with Integrated reporting: Report on your stewardship of all forms of capital Think beyond the accounting definition of ‘control’ – consider risks and opportunities across the entire value chain and operations Consider cutting edge ideas and themes from competitors and industry partners Take a longer perspective and view Provide a forward looking perspective and orientation Fix Keep up with developments - it is a past paced industry Look for ways to avoid repetition and reduce the length to improve the narrative flow Consider whether your risk descriptions can better reflect your industry and specific circumstances Consolidate existing content to build a picture of your business model Use clearer signposting and cross referencing to demonstrate links between key information Explain why your key performance indicators are key

01/04/2013 Next Generation Consultants Going Forward (2) Innovate Understand key stakeholders expectations and information requirements and find innovative ways to address them Challenge your content and whether it is material Experiment with communication of key messages and communication channels Be inspired Use your strategy to underpin your reporting Demonstrate a clear link between strategic priorities, KPI’s and remuneration Discuss your risk profiles and how it has changed Explain the drivers shaping your markets and how it influences your strategy and strategic choices Embed the business model and sustainability into discussions about strategy and performance Provide more operational/non-financial KPI’s to discuss key resources and relationships

In closing – Content structure considerations (1)
01/04/2013 Next Generation Consultants In closing – Content structure considerations (1) Set the scene Provide an overview of your business and the environment (markets) in which you operate to contextualise your report for the reader Live it, breathe it Clearly describe your sustainability strategy over the short, medium and long term, demonstrate how it is integrated in your core business model and permeates the organisation, its objectives, values and deliverables What gets measured gets done Identify KPI’s that is relevant to your business, industry and strategy, explain why they are relevant, and how they are measured and monitored and linked to your targets The good, the bad and the ugly Present information in a transparent and balanced way. Explain why, where and when improvements will be made. Avoid glossing over under performance, under delivered or negative and poor performance

01/04/2013 Next Generation Consultants In closing – Content structure considerations (2) Snakes and ladders Clearly explain risks and opportunities, explain the relevance and implications on strategy, operational execution and performance management It’s a material world Demonstrate understanding of key sustainability issues, the relevance thereof to stakeholders and report only on those most material Cash is still king Illustrate the impact of sustainability on the bottom line. Identify and define potential ways and means to maximise the potential economic benefits going forward The great beyond Consider relevant upstream and downstream value chain aspects in order to take into account all economic, social and environmental aspects

01/04/2013 Next Generation Consultants In closing – Content structure considerations (3) Pay as you go Explain how directors and staff are incentivised to deliver on the sustainability strategy and the goals and targets set – ensure readers can understand the link between performance and remuneration Ask around Explain how you engage and how the input and feedback has shaped and informed strategy and actions Reach out Use multiple communication channels. Ensure that the medium, content and style are tailored to both the audience and the message delivered Big brother Explain how the sustainability governance system works. Identify those responsible for strategy and execution, describe the policies implemented and how it is managed Prove it Ensure the credibility of your report content – consider references to independent studies, case studies, external benchmarking, expert review panels, or conventional assurance. Remember to include the scope of the assurance work

01/04/2013 Next Generation Consultants Reana Rossouw Next Generation Consultants Specialists in Development Sustainable Development and Reporting Community, Social, Socio Economic, Local Economic and Enterprise Development Business Development Leadership Development Tel: (011) Web: PLEASE NOTE: THIS PRESENTATION IS PART OF A LARGER BODY OF RESEARCH! THIS INFORMATION IS COPYWRITED AND THE INTELLECTUAL PROPERTY OF NEXT GENERATION CONSULTANTS Contact:

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