TAKEAWAYS
The IFRS Foundation released an announcement on 25 May 2022 entitled “Integrated Reporting – Articulating a future path”, and included the following joint statement by Andreas Barckow, Chair of the International Accounting Standards Board (IASB), and Emmanuel Faber, Chair of the International Sustainability Standards Board (ISSB),
“We are convinced that the Integrated Reporting Framework drives high-quality corporate reporting and connectivity between financial statements and sustainability-related financial disclosures which improves the quality of information provided to investors. Therefore, we strongly encourage continued use of the Integrated Reporting Framework and the Integrated Thinking Principles underpinning it.”
Sue Lloyd, Vice Chair of ISSB, echoed a similar view in an address1 in December 2022. She said, “ISSB sees its standards as part of a broader reporting package to meet the information needs about sustainability risks and opportunities. We are fortunate to be the sister body of the International Accounting Standards Board. This gives us a unique opportunity to ensure that companies are able to get a complete picture from an information perspective. We are working to use the Integrated Reporting principles to pull this package of information together.”
An integrated report is defined in the Integrated Reporting (IR) Framework as a “concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation, preservation or erosion of value over the short, medium and long term”. Given the renewed focus on the use of IR to improve connectivity between financial reporting (FR) and sustainability reporting (SR), this article discusses how IR helps to improve connectivity between FR and SR and examines the current state of use of IR in the Singapore FR landscape using the Straits Times Index companies.
When ISSB was formed in 2021, the IFRS Foundation had announced, “ISSB will sit alongside and work in close cooperation with IASB, ensuring connectivity and compatibility between IFRS Accounting Standards and ISSB’s standards – IFRS Sustainability Disclosure Standards. … ISSB and IASB will be independent, and their standards will complement each other to provide comprehensive information to investors and other providers of capital.”
We note that the objective of FR is to provide financial information about the entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. We also note that the objective of SR, as put forth in the IFRS S1 General Requirements for Disclosures of Sustainability-related Financial Information, is to “provide information about its significant sustainability-related risks and opportunities” to the same target group. The aim is to ensure connectivity between these two pieces of information.
One reason why the IFRS Foundation is tapping on IR could be that these two objectives are within the objective of the IR Framework. The objective of IR (as stated in the IR Framework paragraph 1.7) is to “explain to providers of financial capital how an organisation creates, preserves or erodes value over time”. We can see that both FR, SR and IR serve to provide information to the same target user group (that is, providers of financial capital), and IR goes beyond providing financial information and sustainability-related financial information. Instead, it provides “relevant information, both financial and other”. Given the broader nature of the information provided, IR should benefit “all stakeholders interested in an organisation’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators and policymakers” (IR Framework paragraph 1.8).
Another reason why the IFRS Foundation is tapping on IR could be that connectivity of information is a key guiding principle explicitly stated in the IR Framework. The IR Framework paragraph 3.6 states, “An integrated report should show a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organisation’s ability to create value over time.” The IR Framework discusses various forms of connectivity of information such as (i) the connectivity between the various capitals used, that is, financial, manufactured, intellectual, human, social and relationships, and natural; (ii) financial and other information; and (iii) quantitative and qualitative information, just to name a few.
For example, an integrated report supplements financial statements by sharing how the entity creates value through connecting sustainability issues and financial value creation. This enables investors and other stakeholders to properly assess a company’s exposure to sustainability risks, its ability to manage those risks, and its actual performance on sustainability and all other issues. As such, an integrated report provides a more comprehensive picture that helps investors to better assess the entity’s prospects, develop more robust forecasts of the timing, amount, probability of future cash flows and better assess the risk profile of the entity.
Both Chairs of IASB and ISSB “commit to a long-term role for a corporate reporting framework, incorporating principles and concepts from the current IR Framework”.
Given the increased role of IR in the future, we studied a sample of companies to examine the current state of IR in Singapore. We obtained a list of the 30 entities that make up the Straits Times Index (STI-30) on the Singapore Exchange. We reviewed one year of annual reports (not including the sustainability report) of these 30 companies with financial year ending between 31 December 2021 and 30 September 2022.
We examined the following:
(1) Whether the entities are using the IR Framework;
(2) Whether the entities disclose information on their business models and the value creation process given that this is a key objective of IR;
(3) Whether the entities disclose information on various capitals, that is, resources and relationships, and how they are used and affected by the entity.2
The findings on the 30 companies were as follows:
a) Only two entities reported using the IR Framework in the preparation of the annual report, and one entity reported incorporating the guiding principles of the IR Framework. These three entities also provided information on items (2) and (3) as well.
b) Two other entities that did not mention the IR Framework at all provided information on items (2) and (3).
c) Two other entities that did not mention the IR Framework at all provided information on item (2) but not item (3).
d) One other entity that did not mention the IR Framework at all provided information on item (3) but not item (2).
In total, eight out of the 30 companies reported some form of IR information. The results are summarised in Table 1. It would appear that a small proportion of the STI-30 component firms have taken to IR.
Table 1 Reported Use of IR Framework
All eight companies made some attempt to explain how the entities created value and provided some indicators on its impact on people and/or environment. DBS Group Holdings Ltd (DBS) was one of these entities and one of two entities that reported the use of the IR Framework in the preparation of the annual report. Included in the 2021 annual report are the following three sections:
(i) “How we create value – our business model”: Showing how the entity creates value, including listing its strategic priorities, helps communicate the connection between strategy and performance, and how successfully stakeholders are served (through the presentation of balanced scorecard measures, for example, the customer engagement score and employee engagement score);
(ii) “How we develop and use our resources”: Its discussion of resources used is not limited to financial and manufactured capital, but includes intellectual, human, social and natural capital. For example, presenting the number of training hours invested per employee shows how the firm values its employees and how improvements in the skill set of employees create future value for DBS;
(iii) “How we distribute value created”: Value created includes both financial and non-financial value, and it shows the proportion of financial value that is distributed to various stakeholder groups including society and employees.
As such, by using the IR Framework, DBS was able to communicate a holistic picture of the resources it used to create value over time, and show the connectivity between relevant sustainability issues and financial value creation.
The importance of connectivity between FR and SR has been clearly articulated since the formation of ISSB in 2021. ISSB’s intent to use the IR principles and concepts to drive connected and effective corporate reporting has also been communicated by ISSB. As such, companies that have not applied the IR principles in their corporate reporting should seriously consider getting on board the IR journey. The Value Reporting Foundation has released a guide in 2021 to help with the transition to IR. It lists various preparatory steps when embarking on the IR journey, including (i) fostering understanding across the organisation, and (ii) minimising siloed thinking. The preparation of an integrated report requires a holistic and integrated approach to thinking about the organisation and its operations, which is the integrated thinking mindset. This requires the breaking down of departmental silos and having the different parts of the entity working collectively to achieve a deeper understanding of how an organisation creates tangible and intangible value for the entity and its key stakeholders. While integrated thinking is a significant benefit of IR, it is also likely that moving away from siloed thinking is a challenge for many entities.
Patricia Tan Mui Siang is Associate Professor of Accounting, Nanyang Business School, Nanyang Technological University; and Koh Wei Chern is Associate Professor, Accountancy Programme, School of Business, Singapore University of Social Sciences.
1 Impacts, Outcomes, Integration in the Corporate World, 8th Colloquium Memorandum, 3 November 2022, Good Governance Academy
2 This is in line with the fundamental concept behind the IR Framework (International <IR> Framework 2021 page 6).
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