By Professor Cheng Nam Sang
Growing awareness of various global economic, environmental, and social issues continue to drive sustainability efforts among businesses and organisations today. Increasingly, companies are recognising that in making an effort to change and communicate the impact of their businesses to stakeholders, they would be more likely to create long-term value, as Associate Professor of Accounting (Practice) Cheng Nam Sang explained in an Accounting Masterclass titled Integrated and Sustainability Reportings: Creating value?
Sustainability reporting encourages organisations to have a comprehensive view and strategy on their sustainability practices and to consider the impact of their business operations on a wide range of sustainability issues, providing a platform for businesses to communicate their sustainability efforts and impact to stakeholders. To aid companies in preparing their sustainability reports, the Global Reporting Initiative (GRI) has issued a set of widely adopted sustainability reporting standards, which include Economic, Environmental, and Social measures and disclosures, shared Prof Cheng.
These measures and disclosures then help create value for all stakeholders and society. Some company boards and executives have started investing a significant amount of time and resources to address sustainability issues, as it becomes more apparent that sustainability is key to long-term viability and stakeholder confidence. Additionally, according to the Financial Analysts Journal, “earnings no longer reliably reflect changes in corporate value and are thus an inadequate driver of investment analysis.” This means that a significant part of a company's value is not actually captured in its financial statements, which can distort investment opportunities and risks.
With companies and financial institutions investing billions of dollars into sustainability initiatives - from creating green supply chains and green financing to waste management and reduction of a carbon footprint- it becomes more imperative for businesses to ensure transparency in reporting their sustainability efforts as part of non-financial reports. If stakeholders’ concerns not being properly addressed through appropriate sustainability efforts an organisation has taken, the appropriate value of the organisation will not be created. This is why companies should work vigorously on making reporting processes more efficient, less prone to error, and easier to control and audit. Similar to many stock exchanges globally, the Singapore Exchange (SGX) has also made it compulsory for listed companies to produce a sustainability report, with emphasis on Environmental, Social, and Governance disclosures and providing meaningful disclosure to its stakeholders. Further, the 2018 Singapore Code of Corporate Governance also emphasises that companies need to ensure long-term sustainable business performance and better engagement with all stakeholders.
Prof Cheng explained that governance has taken precedence here as the onus is on top executives to drive sustainability initiatives forward. “If a company’s top management holds ethical values, then the company would be driven towards ethical ways of doing business. If the management is dedicated to good environmental and social welfare-related businesses, then they would be in a position to drive the world forward,” stated Prof Cheng, citing examples by HSBC, Singapore Airlines, and City Developments Limited.
However, no report can cover all issues. Therefore, the key consideration is materiality, Prof Cheng pointed out. Materiality can be subjective, particularly in a sustainability report, stated Prof Cheng, explaining that something that would seem material to the company, may be immaterial to employees or stakeholders, and vice versa. As a result, a company should follow the GRI standards to disclose its materiality assessments, and methods of engaging relevant stakeholders to help identify choices of material topics in its sustainability report. This provides a precise guide of the ground covered to address the different stakeholder concerns, he added.
Taking corporate reporting a step further is integrated reporting, which delves into the way organisations think, plan, and report their value creation processes through its daily operations. It provides information on how an organisation’s strategy, governance, performance, and prospects, in the context of its external environment, will lead to the creation of value in the short, medium, and long term. This would then manage key opportunities and risks to build investor and stakeholder confidence and help oversee an organisation’s performance, build trust and confidence, and provide accountability to investors and stakeholders.
Integrated reporting incorporates six capitals (financial, manufactured, intellectual, human, social and relationship, and natural), seven reporting principles (for example, materiality, connectivity of information, just to name a few) and eight content elements - such as governance, business model, strategy and resource allocation, among others - to ensure enhanced values of the capitals. Although not mandatory in most countries, including Singapore, many large companies voluntarily embed the integrated reporting framework in their sustainability reports and annual reports, revealed Prof Cheng.
In order for companies to prepare an integrated report, they would need to disclose what kind of strategies they have and how to deploy their capitals and resources to create additional value. Readers can then understand a company’s material issues through its disclosure of meaningful measures with targets, achievements, and trends as well as management analysis. All these will ensure that companies move towards a better direction.
While integrated reporting and sustainability reporting have both started to gain traction among businesses and organisations, they are on their way to becoming part of the corporate reporting framework that covers both financial and non-financial performance.
“You can never go backward if you have these criteria in place because these will give companies a level of transparency on what's taking place in the business,” explained Prof Cheng.
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