Companies financial reports are critical to investment decision but insufficient as they only tells 20 per cent of the story of a company, whereas integrated reporting give a complete view.
Professor Mervyn King, chairman of the international integrated reporting council, said before investing what is ultimate beneficiaries’ money into a company’s equity, ESG factors should be taken into account as part of the investment analysis. This is because 80 per cent of the market cap of companies are not represented by additives in the balance sheet according to traditional financial reporting standards.
“Is it not in the public interest to know what is happening inside this artificial person, the company, in which your money is invested in the equity, providing the capital? The answer is absolutely yes,” King told delegates at Australian Council of Superannuation Investors annual conference.
Towards the end of the twentieth century an analysis of companies listed on great exchanges, like the ASX, showed an 80 per cent gap with the market cap according to the two common financial reporting standards: the international financial reporting standard used in Australia; and the financial accounting and reporting standard used in the United States.
The question naturally arose of what made up this 80 per cent.
According to King, governance was a critical part as it dealt with the long-term sustainability of value creation. He also identified six capitals which between them cover the gap, adding to the view brought by the financial report. These are: financial; manufactured; natural capital; social capital; human capital; and intellectual capital.
The key to integrated reporting is to extract the material matter in these classes, defined as that which impacts financially, socially and environmentally. It then needs explaining in a clear concise and understandable language so that the user (whether investors or in the case of a fund, its members) can make an informed assessment that the business of this company can, in all probability, sustain value creation long term.
VicSuper’s integrated report and had a positive reaction from stakeholders as they can read it, understand it and make an informed assessment about what VicSuper was doing.
He said the following questions should be asked before an investment decision is reached: Has the company done and integrated report? If not, why not? Has the company done a sustainability report? If not, why not? Has the company got a supply chain code of conduct? If not why not?
“Because how often have we learnt that something happens in the supply chain which impacts adversely on the value of the equity in which we invest,” King said. “To borrow a quote, we have to continue business as unusually.”
To emphasise his point King said there are three shifts happening in the world.
One is the move from financial capital to inclusive capital. At a conference held in London speakers including Bill Clinton and Ratan Tata all said the future as inclusive capitalism is we can no longer continue with the plague of short term capitalism.
The second shift is from short term capitalism to sustainable capitalism, defined as being able to say what the positive impacts are, and how a company is going to enhance those positive impacts across finances, society and the environment.
And the third shift is from silo reporting to integrated reporting.