Despite the mounting volume of financial information published by companies in their Annual Reports and Accounts, there is a growing recognition that financial disclosures on their own do not tell the full story about an organization’s health or its prospects for growth and success. It is increasingly accepted that a balanced approach to financial and non-financial information provides a more complete picture that enables investors and other stakeholders to better understand how value is created, managed and sustained. It’s a view shared by the EU, which says that more transparency will drive the long-term performance of the EU’s largest companies and contribute to Europe’s competitiveness and the creation of more jobs.
To date, non-financial information in Europe has been disclosed on a voluntary basis but the coverage has been patchy and of variable quality. Currently, fewer than 10% of the largest EU companies disclose such information regularly and this has prompted the EU parliament to make additional disclosure requirements mandatory for the first time. A new EC Directive (Directive 2014/95/EU of 15 April 2014), will require large companies, groups and public entities with more than 500 employees to disclose material non-financial and diversity information on social and environmental matters, (employee-related aspects, human rights, anti-corruption, bribery and board diversity) for financial years commencing in 2017. Around 6,000 large European entities will become liable to report under this new regime.
However, companies that already voluntarily disclose non-financial information may not find the new requirements too challenging. That’s because the EC Directive focuses narrowly on just social and environmental information whereas many organizations have been reporting more broadly for some considerable period of time. For example, some EU Member States have introduced disclosure requirements that go beyond the Directive and other organizations are actively involved in the innovative Integrated Reporting initiative and <IR> framework promoted by the International Integrated Reporting Council (IIRC).
Integrated Reporting is founded on “Integrated Thinking” which is defined as the active consideration by an organization of the relationships between its various operating and functional units and the capitals (for example, financial, human, intellectual, social) that the organization uses or affects. It takes into account the connectivity and interdependencies between the range of factors that affect an organization’s ability to create value over time, culminating in an Integrated Report. This seeks to explain an organization’s strategy, governance, performance and prospects, in the context of its external environment, and how this leads to value creation in the short, medium and long-term.
But what many organizations will find challenging is the ability to marshal so many different structured (numbers) and unstructured (narrative) information sources and to assemble them efficiently into a number of different reports without jeopardising the integrity and the consistency of the information between them. Recent technologies such as Disclosure Management are pivotal to enabling the workflow, collaboration and control around the publication of these complex documents which is why software vendors such as Tagetik, with specialist capability are working closely with the IIRC as part of the <IR> Technology Initiative. This project is designed to enhance integrated reporting, facilitate the capture of the narrative elements of financial and non-financial information and to help enable the audit of it.
In fact Generali, a Tagetik user, an IIRC member and one of the 10 largest insurance companies in the world, says that the thrust of integrated reporting is transforming the day to day activities of the finance function from a compliance approach to a more integrated way of thinking. Generali says that Integrated Reporting has improved its external stakeholders’ perception by enabling them to better assess its financial performance which, thanks to the <IR> Framework is explicitly connected to its business model and strategy, not just its financial position.
Generali has also improved the connectivity between strategic initiatives, performance and related key stakeholders, thus improving the value of its Integrated Report as an information resource. And more broadly, Generali says that an ‘Integrated Thinking’ approach, has led to better strategic alignment between Head Office departments, through better communication of business targets their importance and consequences. For more on Generali’s position on this take a look at this blog post by Massimo Romano or this whitepaper on value creation in the insurance industry.
What has become clear from the voluntary reporting of non-financial information and the <IR> reporting initiative is that businesses have nothing to fear from the new EC Directive. Managed appropriately, a more transparent approach to the inclusion of non-financial information supported and facilitated by suitable technology brings its own rewards in terms of enhanced value on the inside of the organization and beyond its borders.
By Gary Simon, from: http://www.tagetik.com/blog/authors/gary-simon/2015-04-09-non-financial-reporting#.VTJs59LBzRY