A company’s annual report can tell a lot – if done well – about what the company does, how it does it and how well it has performed in doing it. Telling the story well means giving a complete picture that connects the value drivers of the business to financial performance. Sustainability-related risks and opportunities are an increasingly crucial element of this story, and articulating how they are incorporated into decision making is important for understanding the prospects of the business over time.
Interconnected issues need interconnected reporting
Awareness of the sustainability-related risks and opportunities facing a business is growing, and we know that access to resources is in fact finite. We also cannot ignore the impact that companies have on people and the planet. This is affecting investor, consumer, and employee behaviour, requiring company executives and boards to find the words to explain their approach to sustainability, when in many ways sustainability is, and always has been, implicit in running a business for the long term – they’ve just never had to explain it in this way before.
But explain it they must. Being silent or vague about how they manage the sustainability issues facing their business lets others take control of the narrative and fill in the gaps. To tell their story well, companies need to have a coherent and connected narrative across all their reporting. Indeed, integrating the story to give a complete picture of performance, showing the financial implications of sustainability plans and actions, is the best outcome of all. Taking a siloed approach to assessing performance is no longer sufficient.
Making the right decisions requires having the right information
New sustainability reporting requirements and stakeholder demands present an opportunity for companies, challenging them to articulate more clearly and deliberately how sustainability influences their business models, strategies and performance (in other words, embedding integrated thinking).
That process of articulation can highlight areas of the business that require attention – for example, how its plans to meet its net zero ambitions might require operational changes that need capital expenditures or that make some assets obsolete. In other words, what’s reported externally can affect how companies manage themselves, by [exposing] the risks and opportunities that have the most influence on their value creation potential and their ability to attract capital.
Equally, how companies manage sustainability is fundamentally the basis for what they report. The sustainability disclosure standards published by the International Sustainability Standards Board (ISSB) complement the financial reporting standards published by the International Accounting Standards Board (IASB). The two together, along with the Integrated Reporting Framework, have the potential to help companies achieve integration and connectivity between a company’s financial and sustainability performance. Importantly, the ISSB standards speak the language of business – and can be understood both by companies and investors.
Managing the learning curve
Sustainability reporting is still maturing, and while that happens regulators and standard-setting bodies have work to do in harmonising the plethora of different sustainability standards and achieving consistent interpretation and application. But they aren’t the only ones with work to do. Investors need to educate themselves about how sustainability information links into their traditional financial analysis and can inform their decision making. Companies must invest in the people, processes and infrastructure needed to be able to provide useful and reliable information that helps themselves and their report users gain a sufficient understanding of prospects and risks, and the link between financial and non-financial performance.
Only by having consistent and comparable information are investors (and others, even companies) able to allocate their finite resources to those opportunities with the greatest prospects over the long term. Until then, investors will continue to ask for ‘more’ when what they really mean is, ‘Tell me why and how this matters, and make sure I can trust it’.
Better information – inside and out
The new sustainability disclosure standards bring with them an opportunity for companies to get insights about their business – and what their investors care about. That will help them focus on what matters most, and assign resources, assess performance, and evolve their strategy more effectively as a result.
While the reporting landscape continues to evolve, there are three actions that companies can take now to be prepared:
- Identify what’s material – this is the foundation for reporting what matters. If it is not material, it doesn’t need to be told. Materiality isn’t a once in a lifetime exercise; to keep up with what’s relevant and to adapt to any changes in its internal and external environment, you will need to undertake the exercise regularly
- Have absolute clarity of your business model – and how your business’s relationships and activities impact its prospects
- Clarify your business story – take the opportunity of a new reporting regime to revisit how you articulate your company’s purpose, strategy, and impact on the world. What and how you choose to disclose matters
Written in collaboration with Charles Tilley (Chair of the Integrated Reporting and Connectivity Council which acts as an advisor to the IFRS Foundation).
