Growing concern from stakeholders for the environmental and social impacts of companies has brought the reporting challenge of communicating intangible risk to the forefront of many minds. Currently, financial reports do not explicitly address environmental, social, and governance (ESG) risks, which limits the extent to which they reflect a company’s capacity for future growth. As investors rely on these reports to make capital allocation decisions, there appears to be an opportunity to improve that allocation through increased ESG disclosure.
While financial reports reflect companies’ prospects for short-term success, capacity for long-term resiliency depends on a combination of both financial fundamentals and exposure to ESG risks. Integrated reporting provides information about the resource intensity of companies’ product processes, which might reveal exposure to price volatility in certain commodity markets. Additionally, it highlights efforts taken by management to address such risks, which can offer insight about corporate decision-making tactics.
Investors would benefit from integrated reporting because in order to make well-informed decisions they would need to identify and understand any imposing obstacles. As stated by the International Integrated Reporting Council (IIRC), an organization of business leaders working to define a globally accepted integrated reporting framework, “integrated reporting reflects the broad and longer-term consequences of the decisions organizations make […] in order to create and sustain value.”
Integrating intangible risks into conventional corporate reporting is a daunting task and thus calls for collaboration. This need becomes particularly apparent when considering the underlying objective, which is to standardize the report across multiple industries. Ian Ball, the CEO of International Federation of Accountants (IFAC) and a chairman of the IIRC, confides that “financial reporting on its own [is no] longer telling us enough about a company to really understand its prospects.” That is why the IIRC, Global Reporting Initiative (GRI), and Sustainable Accounting Standards Board (SASB) are underway to standardize integrated reporting so that all risks are effectively conveyed and stakeholders can better understand a company’s probability for long-term success.”
The SASB recently launched its goal to “standardiz[e] corporate reporting of the social and environmental performance of every publicly traded company’s operations, across 89 industries.” Although the investment of time to create standards and benchmarks for each industry is significant, the SASB has begun the process by developing a Materiality Map. This will help identify the sustainability issues most applicable to individual industries and establish a system for disclosure in a new model of reporting.