Non-financial reporting from Ireland’s largest companies lacks consistency, making it almost impossible for stakeholders to compare one company’s performance easily and accurately with that of another, writes Caroline Pope.
The European Directive on Non-Financial Reporting was introduced in December 2014 and EU member states have two years to implement it. Although vague in detail, the Directive is clear on one point in particular – non-financial reporting and disclosure of long-term business value is becoming a fundamental element of corporate governance. This, along with increasing investor scrutiny on the topic, indicates an immediate need for corporate entities to integrate non-financial information into everyday business planning and disclosures.
Traditionally, reference to Corporate Responsibility (CR) conjures up images of trees, icebergs and employee volunteering. However, in recent years there has been a growing realisation and acceptance that good management of non-financial elements of the business results in long-term value creation and sustainability of the business model. For businesses in Ireland to improve their reporting and to keep up with the trends discussed below, they should ensure greater focus and accountability over the material non-financial or CR issues affecting business value and integrate these topics into business strategy.
The 2015 KPMG Survey of Corporate Responsibility Reporting analysed 4,500 companies worldwide and is aimed primarily at professionals who lead the non-financial reporting process within large companies. The survey found that:
- Around 75% of companies surveyed now report on CR compared with 12% in 1993;
- Including CR data in annual financial reports is now a firmly-established global trend with almost three in five companies doing this now, compared with only one in five in 2011;
- More companies now report on CR in Asia Pacific than in any other region;
- Companies in the retail sector have furthest to go, lagging behind all other sectors due to their reliance on supply chains for strong CR performance;
- Third party independent assurance of CR information is now firmly established as standard practice among the world’s biggest companies (G250). Almost 66% invest in assurance;
- The Global Reporting Initiative (GRI) remains the most popular voluntary reporting guideline worldwide; and
- Company reporting of carbon emissions requires dramatic improvement in quality across all regions and sectors in order to respond to the outcomes of the COP21 negotiations.
The survey also found that Ireland has a below average reporting rate with only 70% of the top 100 companies reporting on CR compared to 97% in the UK. Over half (57%) of Irish companies include CR information in their annual report, usually in a specific section dedicated to the topic, while just 9% of Irish reporters refer to integrated reporting – similar to the global rate.
Meanwhile, just 26% of Ireland’s top 100 companies have such information assured by a third party, which is significantly lower than the global average of 42%, and over half of Irish companies do not align to recognised reporting guidelines or standards such as GRI.
Through our research, we have found that inclusion of more non-financial information in annual reports is driven by two factors. First, non-financial information is increasingly perceived by shareholders as relevant for their understanding of a company’s risks and opportunities. And secondly, stock exchanges and governments are mandating companies to report on non-financial data in annual reports.
In relation to reporting rates in Ireland, which currently track below the global average, regulation is likely to be the key driver of increased reporting over the next year.
COP21 Paris Agreement
As a result of the COP21 climate negotiations in Paris last December, the global economy will evolve to a low carbon model. The challenge of limiting temperature rises and achieving a carbon-neutral world cannot be underestimated. It will require a significant transformation of power production, transport and industrial processes within a few decades.
To achieve this goal and deliver on national commitments to cut carbon, governments need to implement effective regulation such as carbon taxes, emissions trading systems and energy efficiency standards that drive businesses to lower their emissions. They will also need to provide incentives for businesses to develop and deploy low carbon technologies such as renewable energy, electric transport systems and fossil fuel decarbonising technology.
Our expectation is that investors will look more closely at climate-related risk and opportunity being reported by companies in their annual financial statements. Now governments have committed to stringent carbon reduction targets leading to a carbon-neutral world this century, investors will take an increasing interest in how companies plan to build shareholder value in the changing global economy.
They will expect companies to be more transparent about the financial, environmental and social risks and opportunities they face from the physical impacts of climate change, such as extreme weather, as well as from climate-related regulation, market dynamics and stakeholder pressure. The Financial Stability Board’s recently-announced disclosure task force on climate-related risk is just one example of increasing investor scrutiny.
In summary, non-financial reporting is becoming required business practice. Companies now need to focus on what they will report and how best to integrate their financial and non-financial information.
Consistency and accuracy of disclosures is fundamental to making this information valuable to stakeholders, particularly investors, and communicated in the sense of creating long-term business value.
Caroline Pope is Lead for Climate Change and Sustainability Services at KPMG Ireland.
This article was originally published in the February 2016 edition of Accountancy Ireland.