Sustainability and integrated reporting

New Integrated Reporting Framework may prove challenging for mid-sized businesses

It may be too soon for many South African companies to adopt the recently released Integrated Reporting Framework developed by academic and business leaders in South Africa

The new Companies Act and JSE requirements are continuing to raise the bar in terms of corporate disclosure and reporting. While a handful of listed entities in South Africa have the internal systems and reporting experience to keep up with these increasing demands, the majority of small- and medium-sized businesses both listed and private are only just at the beginning of their sustainability journey.

“Many small to medium sized organisations are still grappling to report accurately on their business’ sustainability and corporate governance risks without having to consider collating the process into a single, integrated format,” says head of Sustainability Services at Grant Thornton, James Brice. “In an attempt to maintain pace with the increasing expectations of the JSE, there’s a concern that those companies struggling to keep up will resort to tick-box approaches, or cut-and-pastes from year to year.”

In his introduction to the Discussion Paper, Mervyn King agrees in that “organisations are unlikely to achieve perfection in the first year”. Brice estimates that compliance may take two to three years for most mid-caps.

The framework for integrated financial reporting, developed by South Africa’s Integrated Reporting Committee (IRC), outlines a very useful principles-based approach to integrated reporting. It is intended that the integrated report, which includes financial and material non-financial data, replace a company’s traditional annual report as a method of communicating with investors, employees, clients, communities and other stakeholders. The framework is currently open for public comment until 25 April 2011.

“Raising the bar for compliance as the integrated reporting framework proposes is laudable because it helps to incorporate sustainability reporting into the core business of the reporting organisation,” says Brice. He argues, though, that many companies are struggling to gather the data necessary for decisive assessment of materiality, effective stakeholder dialogues and effective prioritisation.

“Medium sized businesses, many of which are listed, may need to take some baby steps first in order to advance corporate sustainability reporting processes at foundation levels before they are able to adopt the integrated reporting model proposed,” says Brice. “Many of these organisations still have to commence holding dialogues with key stakeholders and implement data collection on appropriate issues in order to allow effective decision making and reporting.”

“Engagement with stakeholders brings with it forward-looking and sustainable information as well as a more defined approach to the goodwill value of the organisation,” adds Brice. “The benefits of conducting a proper sustainability assurance exercise are not in the final report itself, but rather in the overall engagement process involved.”

But time may not be on everyone’s side at this stage. With King III recently incorporated into the JSE’s Listings Requirements, listed companies are required to issue an integrated report for financial years ending on or after 1 March 2010 or at least substantiate why they are not doing so.

“Less pressing timelines for non-listed or mid-cap entities may provide a useful window of opportunity to ensure that the foundations of sustainable reporting are appropriately addressed, before attempting the integrated reporting framework,” Brice continues. “What is worse than no reporting is sustainable reporting that is unclear or irrelevant, which has not resulted from thorough consultation, or which lacks credibility. Companies need to distinguish between the process of integrated reporting as presented by SAICA, and the process of compliance as required by the JSE.”

He advises that getting your sustainability report formally assured is also vital. “A properly audited sustainability report ensures that the time spent on the detailed report is credible and this can further improve investor confidence in the business.”