Integrated reporting: Companies will need to rethink approach to disclosures
Integrated reporting requires companies to have a long-term view and disclose value creation of business impact
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The world over, there is a move to push businesses into disclosing more than just their financial statements. This global trend found resonance in India in February, with the Securities and Exchange Board of India (Sebi) issuing a circular advising the top 500 companies by market capitalization to release integrated reports (bit.ly/2kzA8Le)
“An integrated report aims to provide a concise communication about how an organization’s strategy, governance, performance and prospects create value over time,” the circular said, but left the adoption of an integrated reporting framework as a voluntary option.
As per Sebi’s circular, information related to integrated reporting can form part of the annual report, accompany management discussions and analysis or come out as a stand-alone document.
Aditi Haldar, director, South Asia regional hub, Global Reporting Initiative (GRI), said the exercise is a great step in the evolution of corporate reporting practice as it provides a holistic picture of the impact and risks businesses take during their operations.
GRI is an international organization that promotes transparency on sustainability performance and impact. Its guidelines are the world’s most widely used sustainability reporting framework, adopted by companies across 38 sectors in more than 85 countries.
Adding a note of caution, Haldar pointed out that in India the uptake of integrated reporting could be slow given that “businesses’ outlook is focused on short-term financial gains—with emphasis on quarterly performance”.
Citing the example of the existing sustainability reporting requirement for the top 500 listed firms, Haldar said, “There are thousands of listed companies, but the ratio that publish sustainability reports is still low. This suggests that business thought towards non-financial performance is still in its nascent stages in India.”
Since integrated reporting requires companies to have a long-term view and disclose value creation of business impact, firms will need to rethink their approach to sustainability disclosures. “Without first undergoing a sustainability reporting process and linking environmental, social and governance aspects linked to business strategy, it seems difficult for companies to undertake ‘integrated thinking’ needed to prepare a meaningful integrated report,” Haldar said.
Currently, listed companies in India are required to disclose their financial and non-financial performance via a number of reports as per directives from the ministry of corporate affairs and stock exchanges. These include the director’s report, corporate social responsibility report, business responsibility reports (applicable to only top 500 listed firms) and sustainability report, among others.
The new framework for integrated reporting is expected to blur the demarcations that exist between financial and non-financial disclosures.
“Integrated reporting is a step forward from sustainability reporting,” said Dipankar Ghosh, global partner at Thinkthrough Consulting, a specialized sustainable development advisory firm. He explained that integrated reporting requires firms to mention what they are doing for betterment of the environment, resettlement and rehabilitation, or community development, and also show how these activities/initiatives create value for the organization and impact ground realities.
To be sure, the significance of integrated reporting and non-financial disclosures is not lost on many companies. For instance, Sriram Ramachandran, senior vice-president, investor relations, at Mahindra and Mahindra Ltd said, “Integrated reporting provides the opportunity for firms to be able to present a holistic picture of their strategies and ethos which create value... a feature that investors are increasingly demanding to review.”
Ramachandran added that financial disclosures alone do not capture the whole picture of a company and the current framework issued by Sebi provides enough flexibility for firms to use constructively.
While sector experts support the intent and aim of integrated reports, many like Nabeel Ahmed, partner at Grant Thornton India LLP, said that the impact of integrated reporting and its uptake will only be known next year onwards. “The intent is great but effective application of this circular requires clearer guidelines and making businesses understand the need and importance of non-financial disclosures.”
He added that to avoid the integrated reporting framework from becoming just another tick-the-box exercise, authorities need to review the existing legislations and systems in place to track non-financial disclosures.