ASX 200: Integrated Reporting gains traction in Australia

CFO
Nick Ridehalgh, Lead Partner, Better Business Reporting

The last 12 months were a pivotal time in the development of integrated reporting and other innovative forms of external corporate reporting – and assurance – both in Australia and further afield.

In late 2017, a group of major global investors, including Cbus and VicSuper from Australia, signed an Investor Statement emphasising the value of integrated reporting and its importance in their capital allocation decisions.

In their statement, they confirmed that their investment processes require information on business models, strategy, and the resources on which the company relies. They stated, ‘better reporting and effective communication of how the business works in the long-term, through Integrated Reporting or other approaches, is valued by us and is important in how we allocate capital’.

KPMG Australia’s latest report, ASX 200 Corporate Reporting in Australia, shows demand for better information is now rising – and being answered by companies. In the last year, there has been a big increase in the number of ASX-listed companies adopting the principles of integrated reporting – 48 percent are now doing so, up from 25 percent a year ago. This represents a huge rise in the four years of KPMG undertaking this research.

There has been an even bigger jump in the proportion of organisations disclosing specific objectives, which underpin their high-level strategy giving the reader insight into how they intend to deploy the strategy. Last year just 12 percent were doing this – now 43 percent are.

Other notable increases are in the proportions of ASX companies including a narrative on non-financial performance (70 percent now compared to 50 percent in 2017) and those including a corporate governance statement (53 percent now compared to 37 percent).

Integrated reporting means these companies are focusing on how they are, and will, create value for shareholders and other stakeholders, rather than on historic financial information. Communicating not just how they apply financial capital and tangible assets but also how they use and nurture:

  • People and their behaviours
  • Brand, knowledge and know-how, processes and systems (intellectual capital)
  • Relationships, with customers, suppliers, regulators and the community
  • Supply chains and access to, and affordability of, natural resources and the business’s impact on the environment

Many of these organisations are not only improving disclosures to address contemporary business issues but in doing so are being innovative in how they present the information.

What is driving the increase in interest among ASX companies in transforming their reporting?

In my opinion there are several factors – notably the backdrop of falling trust in the corporate sector, as evidenced by the Edelman Trust Barometer. Companies realise that enhanced transparency in their reporting helps to address the trust deficit.

Secondly, the opportunities presented to business from rapid technical innovation – and disruption – are compelling. Business strategies and models have evolved and it makes sense to communicate these to the market. Integrated reporting allows them to do so in a way that stakeholders understand and trust.

And lastly, earlier this year the ASX Corporate Governance Council, in its draft revised Corporate Governance Principles & Recommendations, indicated its support for integrated reporting, by including a reference suggesting that companies should be consider adopting the integrated reporting principles when preparing its annual reports.

This builds on ASIC’s comment in its December 2017 media release that directors may wish to consider ‘whether it would be worthwhile to disclose additional information that would be relevant under integrated reporting or sustainability reporting where that information is not already required for the Operating and Financial Review (OFR)’.

The Australian Institute of Company Directors (AICD) also issued a policy statement encouraging ‘directors to consider the aims and principles of the Integrated Reporting Framework (IRF) in corporate reporting as relevant to their organisation and stakeholder needs. Flexible, voluntary adoption of relevant content elements of integrated reporting may help directors seeking to improve the quality and usefulness of information reported to the stakeholders’.

These changes in what is required by investors, and now being provided by companies through integrated reports and other extended external reporting is also impacting on where Boards want external assurance.

Earlier this month, Sydney hosted the quadrennial World Congress of Accountants (WCOA) (almost the Olympics of the profession). Eileen Hoggett, KPMG Australia’s Head of Audit, and I hosted a session on the future of external assurance, given the worldwide growth in ‘extended forms of external reporting (EER)’, which is where companies choose to report/disclose on non-mandatory issues. Assurance for these sorts of reports is vital, and there was considerable interest at WCOA in this area.

A few days earlier, Sydney also hosted one of the ongoing worldwide consultation events for the international assurance standard-setter, the IAASB, which is updating the assurance standard ISA3000 on EER by next year. KPMG has focused on better business reporting for two decades and has helped pioneering organisations implement the principles of integrated reporting for several years.

There is no doubt that adoption of integrated reporting is gaining traction in Australia in a way we have not seen before.

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