This panel will discuss and demonstrate how integrated reporting can be done in a way that includes BOTH financial and non-financial data. The panel involves discussion of a format that can be used internally for strategy-setting and decision-making and externally to communicate out to investors and analysts. The report protocol and data is assurable. It is designed to meet SEC materiality disclosure standards to be used in 10K filings.
Using a single software platform, this session will show how a public company can begin producing an integrated report. It bridges the gap between ESG data (think CSO) and financial data (think CFO) in a simple and relevant manner. The demo will be used to briefly present how data is collected, structured, audited and communicated to all stakeholders. The discussion will highlight both investors’ and auditors’ points of view.
Integrated Reporting <IR> U.S. Community is a great resource for those interested in the integrated reporting movement in the U.S. This community provides live presentations on a variety integrated reporting topics that range from actual company reports to issues about assurance on integrated reports.
“Enact Sustainability Strategies, based in Sweden and The Netherlands, teams up with ISOS Group to expand its IIRC approved integrated reporting trainings in the United States and Kenya.”
“Approved by the IIRC, both one- and two-day trainings will be offered. To celebrate the partnership, representatives of both firms will ignite the U.S. market by co-delivering a training in New York City the first quarter of 2019.”
I will be involved in the Integrated Reporting training.
The GRI framework is used by 74% of the 250 largest corporations. So what does this have to do with cities? As the most widely used framework, it is known by a variety of investors, governments, and NGOs. Many of the same investors, governments, and NGOs are scrutinizing city reports. If the city reports were prepared with a widely used standard, the reports would likely be better understood and more usable for decision making.
Cities have economic, environmental, and social impacts that should be measured in a systematic approach in order to be managed. The GRI Standards provide such an approach and encompass the triple-bottom-line by focusing on an organization’s economic, environmental, and social dimensions. All three are necessary to measure a city’s progress toward sustainable development. The GRI Standards state that organizations need to report only what is important to that city and to be transparent about its determination process.
What are some of the benefits? They are adaptable because they can be applied to any organization of any size and in any location. Cities can compare their progress from period to period. Does using the GRI framework allow for direct comparisons across cities? No two cities are directly comparable but by using the same standards sharing lessons learned would be easier. Cities can assess their economic, environmental, and social risks in addition to engaging their stakeholders about what impacts are important.
The GRI Standards provide metrics that could be used for input into an integrated report under the International Integrated Reporting Council Integrated Reporting <IR> Framework. The <IR> Framework allows organizations to demonstrate how they create value in the short, medium, and long terms. This is especially relevant for cities as they plan for the long term. For example, if a city invests in electric buses powered with cheaper renewable energy, this investment creates value for the city in many ways. The city’s assets have increased because it purchased the buses. It now has a fleet of electric buses. Value is created each year because fuel and maintenance costs are reduced. The reduction in carbon emissions improves air quality, which results in the improved health of citizens. As a result, health care costs are reduced.
This meeting is part of the SEC’s process to seek public comment on modernizing certain business and financial disclosure requirements in Regulation S-K. The SEC Concept Release document, Business and Financial Disclosure Required by Regulation S-K, was issued on April 13, 2016 (click here for link). The purpose of this release is to seek input to determine whether SEC business and financial disclosure requirements still provide important information for investors and how registrants can most effectively present this information.
This discussion is an important step as the SEC considers how sustainability information fits into its disclosure requirements. This meeting focused on information that investors receive and in particular sustainability reports or environmental, social, and governance (ESG) reports. In this video you will find a good overview of the history of SEC sustainability disclosures along with existing sustainability reporting frameworks. There are likely to be more discussions in the future. I highly recommend that you watch the video (click here for link). To give you a preview, I have summarized the discussion below.
Over the last several decades, many perspectives and practices on sustainability reporting have come about. Questions raised at the beginning of the discussion provided context for sustainability reporting and SEC disclosures. Some of the questions included:
How do report issuers engage with investors?
How are sustainability issues identified and reported?
What do investors consider important to decision making?
What methods are used by investors and report issuers to determine material issues?
What do investors want?
What should issuers provide?
How much information should be reported and in what format?
How much information should asset owners be demanding and using?
How much should public companies be reporting?
Although these questions were not intended to be answered in this meeting, they do raise relevant concerns regarding what and how sustainability disclosures will be required.
Daniel Goelzer provided an excellent, concise overview of the SEC’s traditional approach to sustainability reporting. This approach, established in the 1970s, was in response to rulemaking petitions and litigation against the commission. The actions were sought to get the agency to adopt a comprehensive disclosure scheme for environmental and equal opportunity disclosures. After public proceedings to gather information, the SEC issued a release in 1975. Daniel Goelzer summarized the four conclusions from the release.
Disclosure requirement must be necessary to protect investors or inform their investment decisions
Disclosure requirement should have economic significance to investors
A small fraction of investors in 1975 used or were motivated by corporate social responsibility so there was no basis to require public companies disclosure of corporate social practices
Even without specific requirements ESG disclosures are sometimes necessary to make other disclosures materially complete or accurate
In a company’s business description, the company has to disclose the material effects that compliance with environmental protection laws may have on capital expenditures, earnings and competitive position and on estimated expenditures for environmental control facilities.
The threshold for disclosing environmental litigation is less than for other types of cases.
Since 1975, the SEC has made required risk factor disclosures more tangible in a company’s Management’s Discussion & Analysis of Financial Condition and Results of Operations (MD&A). Sustainability trends and events have the potential to be material risk factors for a company’s business in terms of financial position (balance sheet) or results of operations (net income). For example, drought and water scarcity could be risk factors for a beverage company that depends on a dependable supply of clean water. After the 1970s, not much changed with regard to sustainability related disclosures for public companies until 2010. The SEC issued an interpretive release on disclosure requirements related to climate change issues. Companies must disclose the impacts of climate change on their business as a result of legislation and regulation, international agreements, and physical impacts. In addition, with the Dodd-Frank Act, Congress directed disclosures that involved conflict minerals, resource extraction payments, and CEO pay ratios.
Outside of the legal requirements, there has been a major increase in corporate voluntary reports that are not filed with the SEC. Stakeholders such as employees, consumers, NGOs and communities are often the intended report users. Across companies and industries, there is considerable variety in the information and formats used in these reports.
Mr. Goelzer had several recommendations for the SEC on how to proceed regarding ESG disclosure. The current focus on investment decision making of the reasonable investor should be maintained. Although the topics that are material to the reasonable investor have changed since 1975, the SEC should retain its definition of materiality (i.e., information significant to the reasonable investor). The SEC needs to take steps to adopt a disclosure framework that takes sustainability information into account. On that note, sustainability reporting should be principles based rather than prescriptive. To reduce its burden, rather than creating its own reporting framework, the SEC should look at existing frameworks available.
Christianna Wood made a compelling presentation for the use of the GRI standards in SEC disclosures. She presented the history of GRI along with its current standing in the world as the leading sustainability reporting framework. Almost 20 years ago, Ceres (a national coalition of investors, environmental organizations and other public interest groups) created the GRI as the world’s first global sustainability reporting framework. According to a KPMG 2015 study, GRI is used by 74% of the Fortune G250 and by 72% of companies reporting on sustainability issues worldwide that publish stand-alone sustainability reports. In addition, there are thousands of organizations spanning all sectors in over 90 countries using the GRI standards. In response to the Commission’s Concept Release on Business and Financial Disclosure Required by Regulation S-K, the GRI outlined three points that would be in its formal response.
The responsibility to determine material sustainability issues lies with the registrant
GRI supports disclosure of all material issues whether they relate to financial or non-financial information
The use of GRI as an existing robust reporting standard increases the utility and comparability of information
The GRI recommends the GRI Standards be used if the SEC requires companies to file sustainability reports given that 74 percent of the largest global companies use the GRI framework. A potential approach is for companies already preparing comprehensive GRI based reports to include these as an Exhibit in their SEC filings.
Jean Rogers provided a thorough presentation on the SASB perspective on disclosing companies’ sustainability matters in SEC filings. SASB, which is an independent 501(c)3 non-profit, issues standards for disclosure of sustainability topics. The purpose of this disclosure is to help public corporations disclose material, decision-useful information to investors in their mandatory filings such as the Forms 10-K or 20-F. Jean Rodgers covered four topics.
Rising investor demand for sustainability information
The current inadequacies of sustainability disclosure
The need for a market standard for the disclosure of material sustainability information 4) SASB’s qualifications to fill this need
Lisa French made an excellent presentation covering the IIRC perspective. The IIRC is a coalition of some 70 organizations around the world representing businesses, investors, policy-makers, the accounting profession and civil society. Its concern is that traditional financial reporting is not providing capital markets the full range of information that could materially affect a company’s value creation in the long run. The IIRC perspective is that the Integrated Reporting Framework is complementary to the existing sustainability and financial reporting frameworks. Rather than issuing standards for performance metrics and methodologies, the IIRC’s focus is on encouraging discussion and connection of a company’s business model, strategy, governance, performance and prospects. The IIRC sees strong alignment between Integrated Reporting and the concepts supporting Management Discussion and Analysis. Lisa French discussed how the three pillar of integrated reporting drive their work. These pillars are
Strategic focus and future orientation,
Simplicity, conciseness and the use of plain language
Connectivity of information Corporate Reporting Experience.
The GE Story
Christoph Pereira presented the GE experience with its Integrated Summary Report and approach to disclosure. The summary report has the CEO letter, summary of 10k, summary of its proxy statement and summarized at information from its sustainability website. Based on feedback to GE, the level of interest in sustainability in the US is focused on the risk factors. GE’s general philosophy for determining whether to disclose something is their consideration of its impact on investors’ ability to underwrite the risks and opportunities of owning GE stock. By including sustainability pages in its Integrated Summary Report, the company sought to answer the following four questions:
How does sustainability relate to its overall business strategy?
What is their governance process for sustainability?
What are sustainability priorities and the process used to pick them?
What is their progress on the stated sustainability priorities?
Their approach on reporting focuses on the process in order to provide flexibility as sustainability reporting evolves over time.
The discussion following the presentations is great as well.