Information needs to be interconnected for investors to understand how to use it

Posted
3 September, 2015

Integrated Reporting can enable investors to make investment decisions with greater confidence and over longer time horizons. But for Integrated Reporting to become mainstream, investors need to recognize its potential and start demanding the companies they invest in produce the type of information Integrated Reporting offers. Only then will the full benefits of this reporting evolution be realized.

The good news is that the pull from the investor community is becoming bolder. It is more mainstream to want information that talks to the strategy, performance and competitive advantage of a business. Currently, many investor-led initiatives are espousing ideas that will lead to improvements in corporate governance and enable long term investment, both of which Integrated Reporting can facilitate.

The CFA Institute has published highly relevant research, ‘ESG Issues in Investing: Investors debunk the myths‘ that demonstrates mainstream investors are starting to look seriously at the role wider information has in their investment decisions.

A total of 1,325 CFA members working as portfolio managers and research analysts responded to a CFA Institute survey. Of those who responded, 63% of investors take wider information (in this instance, ‘environmental, social and governance’ issues) into account because it helps them manage investment risk, by likely providing greater insight areas such as a company’s strategy, business model, risk and opportunities, performance and prospects.

Over a quarter of survey respondents (27%) don’t take such factors into consideration. When asked why, 35% didn’t consider these issues to be material and believed they added no value and 21% said they had insufficient knowledge of how to consider these issues. 15% of survey respondents said their inability to integrate ESG information into quantitative models restricted their consideration of these factors.

There’s a great opportunity in these findings for Integrated Reporting. Integrated Reporting presents an interconnected view by only including information that is material to how the company creates value over time – it is about being transparent with a purpose – not just reporting unconnected information about a range of factors without context, but presenting one clear, concise integrated story that investors are able to use to understand the strategy and resources of that company for creating value.

We welcome the findings of this research and the comments made by Sandra Peters, Head, Financial Reporting Policy Group, who has recently joined the IIRC Council, “In general, it can be daunting for investors to keep up with the veritable gamut of initiatives aiming to enhance corporate reporting in one form or the other. Nevertheless, ongoing developments in integrated reporting warrant the growing attention they are receiving from investors and companies alike — especially given the goal to augment the reporting framework to better communicate a company’s business model and potential to create long-term value.”

One fifth of respondents to the CFA Institute’s survey would consider wider issues in their investment decision-making if they had the capability. The willingness is there on both sides to enhance the way businesses and investors communicate. For our part, the IIRC will continue working with partners such as the CFA Institute in the investor community to deepen understanding of the benefits of <IR> in relation to investment decisions and its wider societal benefits.