Next year, the Hong Kong Stock Exchange will require all listed companies to submit an integrated report or explain why it is unable to do so. One corporation that will not have problems with compliance is the CLP Group, a power assets investor and operator in the Asia Pacific region with market capitalization of around US$20 billion.
“CLP has been one of the pioneers in the matter,” says Group Director and CFO Geert Peeters, who joined the company earlier this year. “In line with our tradition of transparency and communications with our shareholders, we started very early with integrated reporting.”
While in theory listed companies in Hong Kong can opt not to submit an integrated report in 2015, they will have to explain why (and convince the stock exchange of the validity of the reason)
The company’s integrated reporting journey began back in 2001, with sustainability reporting, or rather, the lack thereof. CLP’s board subsequently acknowledged that sustainability reporting was needed and the following year, 2002, saw CLP release its first printed Group Sustainability Report.
Dr. Jeanne Ng, CLP’s Director for Group Sustainability, recalls that the initial sustainability report was only 36 pages long. The integrated report for last year, which combines financial and non-financial sustainability reporting, was around 200 pages.
The integrated report was prepared in compliance with seven guiding principles issued by International Integrated Reporting Council – CLP was a member of its first pilot program, which resulted in the first CLP integrated report in 2010.
Not everyone is as advanced as CLP, however. “There’s still a limited number of companies doing this,” says Vincent Liew, Global CFO at international architectural firm Aedas, which is not listed but prepares an integrated report anyway. Still, he says more and more enterprises are joining the bandwagon.
They may soon not have a choice. While in theory listed companies in Hong Kong can opt not to submit an integrated report in 2015, they will have to explain why (and convince the stock exchange of the validity of the reason).
In Singapore, Magnus Bocker, CEO of the Singapore Exchange, said in October that he is “serious” about requiring Singapore-listed firms to do the same. He is giving market participants a year to participate in an exercise on a “comply or explain” approach to sustainability reporting.
“I am told many companies are waiting for the Exchange to get really serious and make it a rule,” he said in speech. “Well, I am serious . . . Our market needs to collectively, take the next step upward and move to 'comply or explain' on sustainability issues.” Regulators in the rest of Asia are almost certain to follow.
CLP’s experience is useful for companies embarking on the integrated reporting or sustainability reporting journey. One starting point is complying with the seven principles issued by the Integrated Reporting Council. These are:
Strategic Focus and Future Orientation: An integrated report should provide insight into the organization’s strategy, and how it relates to the organization’s ability to create value in the short, medium and long term, and its use of and effects on the capitals.
Connectivity of Information. An integrated report should show a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organization’s ability to create value over time.
Stakeholder Relationships: An integrated report should provide insight into the nature and quality of the organization’s relationships with its key stakeholders, including how and to what extent the organization understands, takes into account and responds to their legitimate needs and interests.
Materiality. An integrated report should disclose information about matters that substantively affect the organization’s ability to create value over the short, medium and long term.
Conciseness. An integrated report should be concise.
Reliability and Completeness. An integrated report should include all material matters, both positive and negative, in a balanced way and without material error.
Consistency and Comparability. The information in an integrated report should be presented on a basis that is consistent over time in a way that enables comparison with other organizations to the extent it is material to the organization’s own ability to create value over time.
“As CFO, I’m also very mindful of making sure that we don’t get overly burdened with compliance certifications"
There were two particular things about the integrated reporting framework that spoke to CLP – the value creation model and how to better articulate the business’s story. “In the past, we could say we generate electricity, but we were not good at telling the story about electricity’s role in value development,” recounts Ng.
The past decade has seen CLP and its stakeholders move from “not knowing what was going on around the Group” to gaining an increased level of understanding about the different countries the Group operates in, she says.
“Integrated reporting was a good opportunity to tell others about the business in a more holistic manner, and it allowed us to explain why some things happened during the year and when.”
Remarkable progress, but CLP’s journey is far from complete. Stakeholders are now asking for even more value-add to the integrated report.
“Sustainability indices is an area that’s seeing increasing interest and stakeholders are right now asking for assurance on sustainability reporting,” says Ng, acknowledging the need for external assurance of the information in the report.
But Peeters is wary. “As CFO, I’m also very mindful of making sure that we don’t get overly burdened with compliance certifications and all this,” he says. “I’m always focused that this be substance over form.”
“We need to avoid that there be too much form,” he adds. “Certifying information of such a diverse range of sources could be incredibly burdensome.”
Acquiring such assurance may also lead to questions around the validity of the investment case from board members. Ng, however, was fortunate to have worked with two supportive CEOs over the years who both believed in the viability of investing in integrated reporting.
Challenges to Overcome
Indeed, board support is one of the key drivers for successful adoption of integrated reporting. In a 2014 survey by the National University of Singapore and the Institute of Singapore Chartered Accountants (ISCA), 21.5% of respondents said lack of support from the board and senior management is a serious challenge in adopting integrated reporting.
But by far the biggest obstacle is the perception of very high preparation costs, which was identified by 63% of the 135 ISCA members interviewed.
The other challenges are:
- lack of a proper information system to produce an integrated report (54.8%)
- fear of divulging market and/or price sensitive information (41.5%)
- lack of connectivity and integration of processes within the organization to enable adoption (41.5%)
- fear of litigation given uncertain outcomes of forward-looking information (31.9%)
- insufficient evidence of investors’ interest (27.4%)
- resistance from the ground level (17.8%)
Liew, the Aedas CFO, says that preparation costs do not necessarily need to be substantial. “If you do the integrated report at year-end, you have to spend a lot of resources,” he concedes. But at Aedas, “we always track what is happening, and we post it in our integrated reporting system.”
“At year-end, we just need to compile the information,” he adds. “Reporting is the easy bit. It costs money, but it’s the easy bit.”
The expensive bit is the donations and investment in community service. “The board needs to believe that from what you generate from Hong Kong city, you should give back to the Hong Kong in terms of cultural events, community service and so on.”
For Liew, however, “the most part is the involvement of your employees. How many people are willing to spend the weekend or one week off to help a community build a school? How many will sacrifice time with the family to go to distant place?”
Lack of Experience
The most basic challenge, though, may be simply the lack of expertise and experience with the contents of integrated reporting. Big Four firm PwC surveyed 30 Singapore-listed companies and found that very few have the capability to effectively communicate the seven content elements implied in the International Integrated Reporting Council’s seven principles (see chart below).
Steep learning curve in integrated reporting
A modicum of “effective communication” is ascribed to only three content areas: organizational overview (7%), strategy and resource allocation (3%) and business model (also 3%). The overwhelming majority are judged to have either the potential to effectively communicate or must work hard to do so.
The PwC study recommends that finance leaders increase awareness and education on integrated reporting, participate in the development of corporate reporting in Singapore and lead their organizations to adopt integrated reporting via the understanding its practical implications.
Rewards of Success
When a company gets it right, though, the outcomes can be very rewarding. Liew cites studies that suggest that companies that have adopted integrated reporting tend to see their share price rise more solidly than peers that do not issue integrated reports.
“Equally, if not more, important, our staff appreciate that they are part and parcel of a company that’s generating value meaningful to society and meaningful to the environment,” he adds.
Today, CLP’s integrated reports contain elements such as indices and key charts. Dashboards on the report help articulate the Group’s business model and strategy, an idea borne of the group’s CFO. There are also “in essence” versions of the report for stakeholders who find the current 200-odd pages too long.
"If you are not as good as people think you are, the house of cards will fall down; if you are better than what people think, you lose out on opportunities"
There’s more room for improvement. “Today, footnotes hover at the bottom of the report, but I believe this too, will evolve,” says Ng.
There are other challenges, particularly those around:
- disclosure of commercially-sensitive information (what and how much to disclose)
- potential legal issues regarding directors’ liability and forward-looking information
- strengthening governance, systems and processes to ensure quality of non-financial information (how to integrate with existing processes)
- how much and how fast to invest in new processes
- how to change and converge different mindsets (how to bring colleagues with different expertise and professional backgrounds together to encourage their belief in integrated reporting).
Inter departmental relationships are a key element behind a successful integrated reporting strategy, Ng stresses. “We need both internal and external controls.”
CLP is also facing a formidable balancing act, balancing the seven guiding principles of integrated reporting with the business case. In an ideal world, both would align, but this is not an ideal world.
“Joining the IIRC pilot was good a good practice,” says Ng. “If you are not as good as people think you are, the house of cards will fall down; if you are better than what people think, you lose out on opportunities. So you have to be as good as people think you are. But always remember you have more to learn even when people say you’re the best.
“We need to continue on this journey. We cannot stop, because the world is also moving.”
About the Author
Melissa Chua is a Singapore-based Contributing Editor for CFO Innovation. Hong Kong-based Online Editor Jefferson Mendoza contributed to this report.
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