Environmental Audit CommitteeWritten evidence submitted by the International Integrated Reporting Council
Executive Summary
1. In light of the current challenges faced by both the private and public sectors, including resource and water scarcity, population increase and climate change, there is a need for mechanisms to be put in place (at both a corporate and national level) to allow the accurate measurement and “valuation” of “non-financial” capital such as natural and social capital in order that this can be adequately taken into account into decision making and reported to investors and other stakeholders.
2. Integrated Reporting (IR) is about concise communication of strategy, governance, performance and is the language of sustainable business—the communication of how value is created and preserved, information investors can use to support their capital allocation decisions. Its adoption will be an important step towards sustainable capital markets.
3. We applaud the work of the UK Government in the run up to, and at, Rio+20, in supporting and helping to gain agreement on:
A set of global Sustainable Development Goals.
A call for redefining GDP measurements to account for broader range of factors by 2020.
A call for improved corporate Sustainability Reporting.
It is important that the private sector is involved in the development of the SDGs and Beyond GDP metrics such that these agendas link to actions already being taken by the private sector and the work being undertaken by the IIRC and others to improve corporate reporting. In such a way it can provide a coherent framework for action.
4. We welcome the call made by the Deputy Prime Minister, that corporate reporting “should eventually lead to a global framework”. The IIRC is developing the world’s first International (IR) Framework. We encourage the Government to engage with this to promote a better understanding of IR by mainstream business and investor audiences.
5. Going forward, the Government should build on the significant private sector involvement at Rio by establishing a working group focused on the business and investor communities’ role in implementing the Rio commitments with a particular focus on Paragraph 47 on corporate reporting.
6. The Government should apply, where possible, non-(primary) legislative mechanisms to introducing the Rio commitments, for example through amendments to the UK Corporate Governance Code, Stewardship Code for institutional investors or listing requirements.
Introduction
7. The IIRC welcomes this opportunity to provide written evidence to the Committee. Jessica Fries, IIRC Board member, Executive Chair of The Prince’s Accounting for Sustainability Project and Director at PwC, will provide oral evidence to the Committee on behalf of the IIRC.
8. This submission draws on our experiences in participating in events and meetings prior to, and during, the UN Rio+20 Earth Summit. Our activity in Rio centred on focused engagement at the UN Global Compact (UNGC) Corporate Sustainability Forum, the Sustainable Stock Exchanges (SSE) Forum, the World Business Council for Sustainable Development’s business conference and official side events held as part of the UN Summit. We also participated in meetings and events as part of the International Corporate Governance Network (ICGN) and UN Principles on Responsible Investment (UNPRI) conferences which took place in the week following the formal Summit.
9. In this submission we confine our comments to issues concerning the private sector’s contribution to Rio and the accounting, measurement and corporate reporting aspects of the Outcome Statement, along with recommendations for how to take this agenda forward post Rio.
Who We Are
10. The IIRC is a global coalition of companies, investors, regulators, standard setters, the accounting profession and NGOs. Together, this coalition shares the view that the communication of value—applying Integrated Reporting (IR)—should be the next step in the evolution of corporate reporting.
11. Integrated Reporting is a means by which companies communicate how value is created and will be preserved over the short, medium and long-term. This information is used principally by investors to support their capital allocation decisions. It involves a set of processes and activities, one result of which is external communications, most visibly through a concise, periodic “integrated report”, about the way in which a company’s strategy, governance, performance and prospects lead to the creation and preservation of value.
Background
12. In the aftermath of the global financial crisis, the world is facing up to the consequences of living beyond its means for too long—both in economic and environmental terms.
13. The IIRC was among the many organizations represented at the UN Rio+20 Earth Summit. We were pressing governments to put in place policy mechanisms to enable the accurate measurement of natural capital, so that businesses could begin to manage their use of precious natural resources and integrate this information into corporate reporting cycles.
14. One of the most encouraging aspects of the Rio process was the degree to which the private sector—businesses, investors, accounting bodies and trade associations—were involved actively in pressing for bolder solutions than had originally been on the table.
15. We believe that Integrated Reporting, which helps businesses focus on putting in place the systems and processes that result in the publication of value-relevant information, is a crucial element in the evolution towards more sustainable business practice—economically, socially and environmentally.
16. Paragraph 47 of the Outcome Statement, which calls on large businesses to integrate sustainability information into their reporting cycles, signals the behavioural change that will be required in future: change that begins with integrated thinking and results in Integrated Reporting.
The UK Government’s Pre-Summit Role
17. We believe the UK Government established a clear set of objectives prior to the Summit, which included achieving progress on:
Sustainable Development Goals as a successor to the Millennium Development Goals. The UK became an early champion of SDGs after they were proposed by the Columbian Government and is now in a key position to influence and shape them in the period up to 2015.
Refining GDP measurement to take into account a broader range of factors not currently included. The Government has announced that natural capital will be incorporated into the calculation for GDP by 2020 at the latest.
Corporate reporting: the Government supported moves to include a resolution in the Outcome Statement on sustainability reporting. We applaud the efforts of Paul Abberley, Steve Waygood and the Aviva team who put so much effort and investor capital behind achieving a corporate reporting resolution at Rio.
18. Aviva Investors built a significant and powerful coalition of business, investors and NGOs which called for action through the Corporate Sustainability Reporting Coalition. We recognise the support given to the Coalition by the UK Government and the Government’s decision to include the Aviva Coalition as part of the official delegation to Rio significantly increased the chances of a successful outcome (Paragraph 47). At the Earth Summit, the Government also announced plans for large companies to report their Greenhouse Gas Emissions annually, which is welcomed by business and can help lead the way for further reporting changes in the future.
19. The UK Government critically viewed Rio as a process rather than an event in itself, an analysis we share. However, we believe that further bold action is required to build a more sustainable economy and that the UK Government has several opportunities to demonstrate leadership over the next year, particularly as it prepares to chair the G8 in 2013.
20. Our recommendations are aimed at showing what the UK Government can do now to leverage the support of business, investors and institutions to provide the appropriate leadership to ensure successful implementation of the Outcome Statement.
Reflections on the UK Government’s Post-Summit Role
21. The UK Government should use its leadership of the G8 in 2013 to spearhead much greater coordination between the agendas of the G8 and G20 to achieve concerted long term delivery of the Rio agenda. These processes should track the progress of implementing the Rio commitments as part of their commitment to achieving a sustainable economy, and an annual progress report should be issued.
22. We support moves, announced by the Deputy Prime Minister, to widen the measurement and management of non-financial factors, of which natural capital forms a part, in the calculations for GDP growth from 2020. We believe the private sector should be brought into these conversations early so that businesses can learn from the process of measuring and integrating non-financial factors into their reporting cycles. This will also serve to build links between the measurement frameworks at a corporate and national level which is vital if we are to move towards a sustainable and efficient economy.
23. The Government should build on the significant private sector involvement at Rio by establishing a working group focused on the business and investor communities’ role in implementing the Rio commitments, including development of the SDGs, Beyond GDP metrics and corporate reporting such that these agendas build on actions already being taken by the private sector and provide a coherent framework for action. With respect to implementation of Paragraph 47 on corporate reporting, this group should involve those organizations that are critical to the implementation of corporate reporting and governance reform in the UK, including the Financial Reporting Council, the London Stock Exchange, the UK Listing Authority (UKLA) and stock exchange index providers (eg FTSE).
24. The UK Government should support moves by the “Group of Friends of Paragraph 47”, formed by Brazil, South Africa, Denmark and France to develop a roadmap towards implementation of Paragraph 47. These efforts are being coordinated by the United Nations Environment Programme Finance Initiative (UNEP FI) and the Global Reporting Initiative (GRI).
25. The Government should use the Rio commitments and current narrative reporting proposals from the Department for Business, Innovation and Skills (BIS) to catalyze an evolution in corporate reporting in the UK. Recognition of the interdependence between business and society is driving a greater degree of stakeholder engagement and a better alignment between a company’s financial, environmental and social actions. Integrating sustainability considerations into corporate strategy is an important way of demonstrating this interdependence, and could help to underpin BIS narrative reporting proposals relating to preparation of a strategy report.
26. We welcome the Deputy Prime Minister’s statement in his Rio plenary speech that work on corporate reporting “should eventually lead to a global framework”. The IIRC is developing the world’s first International Integrated Reporting Framework, with the involvement of all of the major international standard setting bodies, as well as business, investors and other key stakeholder groups, a draft of which will be published in spring 2013. We encourage the UK Government to engage with the IIRC to promote understanding of Integrated Reporting by mainstream business and investor audiences, and build a common international reporting framework. Such a framework includes several clear benefits including a greater focus on long term behaviour by companies and investors and more efficient capital markets.
27. The Government should apply, where possible, non-(primary) legislative mechanisms to introducing the Rio commitments, for example through amendments to the UK Corporate Governance Code, Stewardship Code for institutional investors or listing requirements. This will enable market innovation, leading to the promotion of best practice with the consent of business and other stakeholders. Lessons should be learned and applied from those companies that are, on a largely voluntary basis, measuring, managing and disclosing their sustainability footprint and their commitment to society, and reaping significant benefits from doing so.
28. The Government should engage with the forthcoming EU legislative proposals on non-financial reporting and consider how these may create the right environment to encourage the adaption of Integrated Reporting. This is an opportunity for the UK to take a leadership position in this area to build upon its work in support of Paragraph 47 of the Outcome document, with the support of business and investors as demonstrated by the Aviva Reporting Coalition.
29. The UK Government should encourage and support innovation in the measurement and disclosure of sustainability information to enable greater clarity and consistency (both of measurement and disclosure), and a focus on producing material information which is relevant to a range of stakeholders. Corporate reporting innovation (such as that envisaged by the IIRC) should be accelerated through the development of national innovation hubs involving regulators, standard setters, companies, investors and the accounting profession with the goal of enhancing the quality of reporting in a safe and secure environment.
5 September 2012