New Framework for Corporate Reporting to Integrate Sustainability and Financial Data

Investors and companies can give feedback on the International Integrated Reporting Framework, which will standardize the integration of sustainability performance and annual financial reporting.

A coalition of businesses and investors has called on corporations and financial professionals around the world for input on a draft of a new model for corporate reporting that promises to make sustainability data more relevant to investors.

The Consultation Draft of the International Integrated Reporting Framework, released this week by the International Integrated Reporting Council (IIRC), will provide a standard for companies seeking to integrate sustainability performance data into their annual financial reporting.

This process, referred to as "integrated reporting," has been heralded as a way to emphasize the interrelationship of sustainability and profitability, further assimilating non-financial performance data into the investment community.

IIRC chief executive Paul Druckman called on "businesses, investors, the accounting profession, regulators, standard setters and other interested parties to contribute to the consultation and shape this corporate reporting evolution which matters so much to the future of business and the global economy."

The IIRC has launched a 90-day consultation period of the International Integrated Reporting Framework so that relevant stakeholders can read, critique and challenge the Framework. The IIRC has said it will issue the first version of the Framework in December 2013.

The last several years have seen a dramatic increase in investor demand for information about companies' sustainability performance after studies repeatedly demonstrated a positive correlation between sustainability performance and profitability. Likewise, publicly traded companies are disclosing their non-financial performance in record numbers - 2011 was the first time that a majority of S&P 500 companies reported on their sustainability performance.

Still, the relationship between profitability and sustainability often remains unclear to investors seeking to understand companies' long term risks, in large part because there is no widely accepted standard by which companies can tie their non-financial performance data to more conventional financial metrics.

Paul Druckman, CEO of the IIRC, called integrated reporting a "corporate reporting evolution which matters so much to the future of business and the global economy.”

"Over the last three years," said Druckman, "the IIRC has built consensus around the idea that the current corporate reporting model must change to meet the needs of today's business and investment environment."

By baking sustainability data directly into companies' annual financial reports, integrated reporting, if standardized, promises to help companies eager to disclose their sustainability performance supply investors with information they can use.

The IIRC recruited businesses and institutional investors to participate in a pilot program to test the Draft Framework. Among the businesses participating in the pilot was Danish pharmaceutical company Novo Nordisk, which issued its ninth integrated reported last month.

"Novo Nordisk has been honored to play a role in creating the consultation draft and we encourage stakeholders to contribute their comments to help strengthen the framework," said Susanne Stormer, vice president of corporate sustainability at Novo Nordisk. "Since 2004, we have been reporting on our financial, social and environmental performance in one report with an aim to provide the readers with a better understanding of how we conduct our business and how we strive to create value."

Black Sun plc, corporate reporting consultancy, conducted a survey of the companies participating in the pilot program. Black Sun reported that 98 of the businesses surveyed believe that integrated reporting leads to an improved understanding of how an organization will create value over time, and 93 percent of respondents said integrated reporting leads to better quality data collection.

"The world today faces two critical and interconnected dangers: financial instability and unsustainability," said Mervyn King, Chairman of the IIRC.

"Crucially," he added, integrated reporting "will lead to changed behavior, a focus on the future as well as the past and a reporting model that reflects and communicates the reality of business, its operations and its impacts, in the 21st Century."