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February 09, 2011
Guidelines for Integrated Reporting are Proposed
    by Robert Kropp

The Integrated Reporting Committee issues a discussion paper on guidelines for companies in South Africa that are required by the Johannesburg Stock Exchange to produce integrated reports.

Emphasizing "that the old form of annual report focusing primarily on financial information and the short-term horizon was no longer adequate to meet the needs of investors and other stakeholders," Mervyn King, Chairman of the South Africa-based Integrated Reporting Committee (IRC), announced in late January the publication of a discussion paper on integrated reporting, that, he said, "Will lead to a fundamental shift in the way companies and directors act and organize themselves."

In February, 2010, the Johannesburg Stock Exchange (JSE) began requiring its more than 450 companies to produce integrated reports. However, as King pointed out, "No specific guideline or standard defining the content of an integrated report for listed companies exists in South Africa or elsewhere in the world."

The discussion paper published by the IRC seeks to provide such guidance. According to the discussion paper, "The overarching objective of an integrated report is to enable stakeholders to assess the ability of an organization to create and sustain value over the short-, medium- and long-term."

Noting that Institutional Investors in South Africa will soon release a Code for Responsible Investing, King said that the Code "will require the institutional investor to make an informed assessment about the sustainability of the company's business before acquiring its equity."

"This cannot be done by reading the financial statements alone," he continued.

The discussion paper states, "It is becoming increasingly apparent that the success or failure of organizations is dependent on their ability to create and sustain value without depleting the capital assets…on which that value depends." As a result of the failure of strictly financial reporting to capture the materiality of sustainable issues, the movement on behalf of integrated reporting has grown to international proportions.

In July, 2010, the International Integrated Reporting Committee (IIRC) was formed. Its members include the Global Reporting Initiative (GRI). In addition to serving as Deputy Chair of the IIRC, King is Chairman of the GRI as well.

One of the immediate goals of the IIRC is to include integrated reporting on the agenda of the G20 meeting in November. The World Economic Forum's annual meeting last month included a session on integrated reporting as well.

According to a synopsis of the session last month, "Any new accounting format should be focused on efficiency of capital and resource allocation and the need to internalize externalities such as carbon and water, which are not priced in the markets. Requirements to publicly report on wider impacts, including environmental and social ones, can be a catalyst for change in business strategy and execution; integrating these impacts into mainstream reporting can prove beneficial for long-term investing."

In addressing the issue of materiality, the discussion paper notes, "In the context of sustainability, materiality is a more difficult measure to define and a great deal of judgment is required." It advises corporations to consider "the legitimate interests and expectations" of key stakeholders when determining how to report on sustainability issues.

As for the quality of the information disclosed in an integrated report, the discussion paper recommends that companies strive for comparability and consistency, in order to provide users of the report with a view of corporate performance over time as well as benchmarks to provide context for performance.

The discussion paper also stresses that the information in the report should be verifiable, as "Verifiability means that different knowledgeable and independent observers could reach consensus…that a particular depiction is a faithful representation."

Some of the issues that an effective integrated report should include are the governance structure of the organization, the identification of environmental, social, and corporate governance (ESG) issues and trends that are likely to affect the organization, and a consideration of the quality of relationships with key stakeholders.

In addition, identification of risks and opportunities, and a statement of long-term strategic objectives, should be included as well.

The discussion paper also recommends that integrated reports include a list of priority key performance indicators (KPIs). A report published last year "proposes a method for identifying key performance indicators on the sustainability—or social and environmental—impacts of US corporations in specific industries."

Steve Lydenberg, Chief Investment Officer of Domini Social Investments and co-author of the report, told last October, "While the GRI has done an exceptional job in identifying the issues that are relevant for a broad spectrum of stakeholders, the number of issues is very large. The challenge is to come up with a relatively targeted list of issue areas that companies and stakeholders should concentrate on."

Identifying integrated reporting as "an idea whose time has come because of the crises of our time," King said, "As companies integrate and connect the financial, economic, social, and environmental aspects into their businesses, they are likely to become more innovative and competitive and recognize new business opportunities."

"The capital markets in this country should also benefit from the improved presentation of corporate information, greater transparency, and more innovative strategy," King continued.

When Lydenberg spoke with in October, he described integrated reporting as "a big step forward," stating, "Within the context of the investment community, integrated reporting makes a lot of sense."

However, he continued, "Environmental and social information is useful to stakeholders beyond the investment community. The goal of integrated reporting is a worthy goal for the financial community, but what's the proper forum for getting the information out to other stakeholders?"

The IRC will be accepting public comments on the discussion paper until April 25.


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