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The role of Integrated Reporting in reviving the economy

Alan Johnson

The language of accounting is changing

It is a privilege to be IFAC President, especially now. This is a time of many challenges but also many opportunities. For centuries, accounting has been the language of business, governments, trade, and capital markets. In the 21st century, however, it has become clear that this language is insufficient in a rapidly changing world. Even the fundamental concepts of what value is, and how value should be created, are not accounted for in the traditional financial methods of reporting on an organization’s activities and impacts.

Organizations are pivoting to integrated thinking and reporting

Organizations are therefore increasingly using integrated thinking and reporting to connect all important aspects of value creation and sustainability, Integrated Reporting brings together related narrative, quantified, and monetised information:

  1. It incorporates the same level of quality expected from financial reporting;
  2. It is a predictive as well as a historical analysis of performance and resilience; and
  3. It can enable integrated management thinking, which is what is ultimately needed to improve decision making and capital allocation.

Organizations are using integrated reports to get the best, most complete information to investors and stakeholders, and to engage with them about the full scope of a company’s activities, and importantly, its role in society. IFAC supported the formation of the IIRC in 2010 to enhance corporate reporting in a way that would enable boards of directors to discharge a duty of accountability well beyond financial performance. Since then, the number of organizations using integrated reports has now grown to more than 2,500 organizations in more than 70 countries.

Consistent, comparable, reliable, and assurable information

Financial accounting and reporting on their own are no longer sufficient for boards to discharge their duty of accountability for long-term value creation. We need to move to a reporting system that delivers consistent, comparable, reliable, and assurable information related to enterprise value creation and sustainable development. IFAC has, therefore, supported the creation of the International Sustainability Standards Board (ISSB) under the auspices of the IFRS Foundation. Climate and other sustainability issues are global in nature and the ISSB, with its multi-jurisdictional footprint reflecting this realty, can deliver a global solution for sustainability and facilitate a global implementation of its standards. Achieving the full promise of the ISSB certainly will be a much longer effort and I encourage all stakeholders in value creation to remain engaged at the jurisdiction level and to speak strongly in support of the ISSB’s two initial pronouncements, which are currently in a public comment period.

The Climate Disclosures Standards Board and the Value Reporting Foundation

A fragmented approach to sustainability reporting standard-setting brings inefficiency, increased cost to investors and companies, and a lack of trust. Combining the CDSB and the VRF with the IFRS Foundation provides a much-needed consolidation which positions the ISSB to build upon these existing initiatives and harmonise the landscape. Ultimately, this system will deliver a comprehensive global baseline of sustainability information, material to enterprise value, connected to financial reporting through the fundamental concepts and guiding principles of integrated reporting. These organizations are the basis for the next, crucial phase of international standard-setting on sustainability reporting and for effective integrated thinking and reporting.

Interconnected corporate reporting is necessary

The accounting profession must remember that it is a partner in the pursuit of economic recovery. We want to support, deliver, and act on a full understanding of value and value creation in each of our organizations. Corporate reporting is not only about creating greater transparency and accountability for performance; it also, conveys how a company creates and sustains value and ensures that this information truly reflects a business’s operations and impacts. This information gets to the heart of the public interest: everyone needs the most complete picture of value and value creation that an organization can offer. This is a precondition for achieving a sustainable economic and environmental future. To better position investors and asset managers to allocate capital toward long-term value creation, there is a strong need not only to move to global standard setting for non-financial reporting under the ISSB, but at the same time to embrace integrated reporting principles. The development, adoption, and implementation of the ISSB’s standards will enhance the quality of reporting and support robust assurance practices. However, interconnected corporate reporting that has integrated thinking at its heart is the foundation for changing corporate behaviour and practices. The International Integrated Reporting Framework provides the strategic context and framework for global efforts to develop standards and ensures alignment between internal thinking and external reporting.

Maximising the benefits of integrated reporting

Those companies that benefit the most from an integrated reporting approach usually have their Chief Financial Officers (CFO) and finance teams as a central part of this effort. These leaders are ideally positioned to shift the corporate mindset from short-term shareholder value creation to long-term stakeholder value creation and protection. Through integrated reporting, they can better deliver these insights as needed. These leaders can connect non-financial areas to core strategic objectives and the financial decisions that are made and ensure that external and internal reporting is consistent. Integrated reporting empowers organizations to break down reporting silos and recast reporting as a more meaningful activity involving the measurement, management, and communication of what matters to long-term success. It is through the integration of corporate disclosures that investors and other stakeholders can properly assess a company’s exposure to sustainability risks, its ability to manage those risks, and its actual performance on sustainability and all other issues.

True sustainability requires behavioural change

For our work toward sustainability to have real value, however, it must lead to different behaviours: whether a company’s behaviours change is the truer measure of its progress in aligning short-term decisions toward long-term value creation, sustainability, and resiliency. Any company can claim to be building sustainability information into, for example, its strategic decision making; however, the bar is much higher than that: companies must also, in practice, choose to act differently.

Professional accountants and investors are well positioned

Professional accountants are well positioned to objectively identify and analyse strategic trade-offs. The sustainability and multi-stakeholder agendas often present such trade-offs, and a judgment call is needed about how they can be reconciled with business objectives. Professional accountants are well positioned and need to understand how best to address these challenges in planning and execution.

A re-orientation of society towards sustainability and fairness is required

Professional accountants can lead on sustainability to fulfil their public interest mandate by making informed decisions that build resilience into foundational systems and institutions. They can  help those in the private and public sectors make the tough choices that are inevitably facing every organization and country. Developing, adopting, and implementing global standards for sustainability disclosures remains a critical task for the profession and should be a top priority and tackled with the urgency of the climate emergency itself.

The significant contributions of Professor Mervyn King

I would like to thank Mervyn. Mervyn is the main reason why, for the past 10 years or so, we have been talking about Integrated Reporting. He is a renowned international corporate governance expert and sustainability pioneer, challenging business to change the way they address corporate strategy and corporate governance, forcing us all to think and plan on a longer-term horizon and ensure that organizations’ purpose goes well beyond the interests of just a few stakeholders. The creation of the IIRC was his initiative, and it has driven much of the change in both corporate decision-making and in corporate reporting. He has challenged the accounting profession to step up, to understand its role in creating, protecting, and reporting value and, of course, to ensure there is effective governance at the heart of every organization. His leadership has resulted in:

  • Improvements to the quality of information;
  • A more cohesive and efficient approach to corporate reporting;
  • Enhancements to accountability and stewardship; and
  • Driven integrated thinking, decision-making and actions that focus on the creation of value over the short, medium, and long term.

On behalf of IFAC and the accountancy profession, I thank you, Mervyn, for your significant contributions over many decades to making the world more fair and more sustainable.

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Alan Johnson

Chair of the Good Governance Academy

Alan Johnson is the immediate past President of the International Federation of Accountants (IFAC). He previously served as Deputy President from 2018-2020 and had been a board member since November 2015. He was nominated to the IFAC board by the Association of Chartered Certified Accountants (ACCA).

 

On January 1, 2021, Alan was appointed a non-executive director and member of the Audit and the Succession & Appointments Committees of Imperial Brands plc, a FTSE 100 company in the UK.

 

Alan is a former non-executive Director of Jerónimo Martins SGPS, S.A., a food retailer with operations in Portugal, Poland, and Colombia, having completed his board mandate in 2016. 

He is currently the independent chairman of the company’s Internal Control Committee. Previously he was Chief Financial Officer of Jerónimo Martins from 2012 to 2014.

 

Between 2005 and 2011 Alan served as Chief Audit Executive for the Unilever Group. He also served as Chief Financial Officer of Unilever’s Global Foods businesses and worked for Unilever for 35 years in various finance positions in Africa, Europe and Latin America.

 

Mr. Johnson was a member of the IFAC Professional Accountants in Business Committee between 2011 and 2015, a member of the ACCA’s Market Oversight Committee between 2006 and 2012 and chair of the ACCA Accountants for Business Global Forum until 2018. Alan was a member of the board of Gildat Strauss Israel between 2003 and 2004.

 

Mr. Johnson is the chair of the board of governors of St. Julian’s School in Portugal and chairs its Finance & Bursaries Committees.

 

In October 2016 he was appointed to the Board of Trustees of the International Valuation Standards Council and chairs its audit committee.

 

Between July 2018 and September 2020 he was a non-executive director of the UK Department for International Development (DFID) and chaired its Audit & Risk Assurance Committee.

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