Richard Howitt, CEO, IIRC: Inspiring Global Alignment through Value Creation
Opening Speech to the International Integrated Reporting Council (IIRC) Global Conference 2019, by Richard Howitt, IIRC Chief Executive, London, 16 May 2019.
The International Integrated Reporting Council welcomes all of the participants to our Global Conference 2019, drawn from business and investment, from regulators and academia; from our ‘family’ within our own governance, our Ambassadors and team members, and from our many partners, stakeholders and allies.
We know that all are our Ambassadors for the defining concepts of ‘integrated thinking and reporting’.
Together we define ourselves as a coalition, a movement.
And the conference is an important coming together of that coalition, to inform eachother, to develop our common thinking and to reaffirm our common commitment.
It is a very global conference.
We have participants from Australia, Japan, Korea, India and South Africa to Saudi Arabia, from across Europe and North America, from Bolivia to Brazil. And many points in-between.
And our aim remains to make integrated reporting and thinking the global norm.
Incredible Progress
Since we met together in Tokyo, Japan for our last Global Conference a little over a year ago, we have seen incredible progress towards our aim.
In India, this year, we’ve moved to 30 major companies undertaking integrated reporting. We’re now at 60 top companies in Malaysia. With thanks to World Bank and Pan-African Federation of Accountants, integrated reporting is spreading from South Africa this year across the whole continent, from Botswana to Kenya to Morocco. Europe’s Non-Financial Reporting Directive is seeing a major push for integrated reporting on this continent. In the United States, our US community continues to develop, with three US corporates actually submitting their integrated reports in their 10-k financial filings for the first time. In Brazil, there are no fewer than 800 members of our Integrated Reporting Commission and now every one of the country’s State Owned Enterprises is required to produce an integrated report.
In terms of companies, we are delighted that the momentum for new companies to adopt integrated reporting has been maintained this year. Companies producing Integrated reports for the first time in the past twelve months include U.S. online retailer Etsy, banks Société-Générale and BNP Paribas from France, food manufacturers Fuji Oil and Danone, financial services company Old Mutual, European technology companies Atos and Tieto, the global accountancy institute AICPA, construction company ISG, both Garanti Bank and the Istanbul Stock Exchange from Turkey, pharmaceuticals company Cipla and car manufacturer Tata Motors – the owner of Jaguar Cars – both from India.
We’ve even got one of the world’s largest manufacturers of glass, NSG – which brings new meaning to the word ‘transparency’.
Helping report practitioners directly
This year we have fully updated the integrated reports on our leading practice database, and which we hope is one of the free resources which can concretely help practitioners develop their and your integrated reporting.
We have undertaken the first of a two year technical programme of advice and guidance to the market this year, including our Practice Aid and our recent publication ‘frequently asked questions’- making it easier for report preparers and helping drive up the quality of the reporting overall.
It’s an interactive tool, so you can help us constantly refine the answers.
Meanwhile, our report critique project which analyses the quality of integrated reports thanks to our friends from ACCA, will provide further evidence of how quality is being driven up, being published during the course of this conference.
Action on the Sustainable Development Goals
Following a special event on how integrated reporting can help business contribute to the Sustainable Development Goals held with governments at the United Nations headquarters in New York last year, we supported publication by UNCTAD of opening benchmarks for business reporting of the SDGs which we were pleased to launch with them in Geneva last October.
In New York the previous month, we took part in the launch of the World Benchmarking Alliance, giving extra focus to the SDGs, but recognising that indexes also put value on the company’s wider performance, and that different valuations add to the confusion we are trying to address.
The World Benchmarking Alliance is an important and natural ally for the IIRC, as they seek to emphasise inter-connectedness, of value beyond narrow financial capital, together with public disclosure.
As a member of the B20 the Japanese Business Federation asked the IIRC to be part of presenting their proposal for Society 5.0 for SDGs, a plan to apply digital transformation not simply to a fourth industrial revolution. but to delivering the Sustainable Development Goals.
And the international business leaders group agreed to specifically recommend our multi-capital approach in their formal submission to the forthcoming G20 Summit of Government leaders, due to take place in Osaka next month.
National adoption of multi-capital budgeting
It has been a year when, at the World Economic Forum, the Prime Minister of New Zealand explained how her whole country was moving to a multi-capital budget. And we are very proud that stems from the New Zealand Treasury being one of the early pilots of integrated reporting itself.
Corporate Reporting Dialogue moves towards alignment of metrics.
And at this conference about alignment, we saw the historic moment last November, when all partners in the Corporate Reporting Dialogue took part in a simultaneous Northern Hemisphere/Southern Hemisphere launch of our new ‘Better Alignment’ Project – at the World Congress of Accountants in Sydney and at the Bloomberg Sustainable Business Summit here in London.
We announced the start of a ‘Better Alignment’ Project in which together we are moving from having common positions towards one of actually aligning our metrics – starting with all the Frameworks having a common set of metrics to implement the recommendations of the Task Force on Climate-Related Financial Disclosure, which we expect to be able to publish this September.
You will hear from Chair Ian Mackintosh later today about the very positive market reaction to this project. Thank-you to him and all the partners for your collaboration in this highly significant joint work together.
Regulatory Endorsement
As you know, we believe the implementation of integrated reporting has to be led through market practice. But we are hardening the ‘ask’ of regulators, and have seen also significant response on this during the past year.
This has included explicit inclusion of integrated reporting in the recommendations contained in the revised Corporate Governance code in Australia and in the updated Guidance on the Strategic Report here in the United Kingdom.
We have seen a very positive response in the consultation by the European Commission on its ‘fitness check’ on the future of corporate reporting, for EU experimentation in integrated reporting and were proud to help launch the new Corporate Reporting Lab in Brussels which can help take forward that idea.
Management Commentary Practice Statement
This year we we’re grateful that the International Accounting Standards Board invited our Chief Technical Officer Lisa French to be a member of the Consultative Group advising on the revision of the IASB’s Management Commentary Practice Statement – the major guidance on narrative reporting by business in the world.
One of the areas already being discussed as part of the review, is in how the IASB defines resources and relationships used by companies, in comparison with the six capitals of integrated reporting.
We believe that this review provides a major opportunity for closer alignment with integrated reporting.
Engaging with Securities Commissions
In the United States we have seen the Investor Advisory Group of the Securities and Exchange Commission agree a positive recommendation to ask the SEC to introduce a requirement for companies to report on human capital, with the SEC Chair saying human capital can be seen as an asset not a cost.
This could be an important step towards integration with financial reporting in the U.S..
And last September we were pleased to present to the Disclosure Working Group of all of the world’s Securities Commission regulators, IOSCO, which helped lead to their very first statement on non-financial reporting in February of this year.
A statement which both directly referenced integrated reporting, but at the same time signposted the efforts represented at this conference for alignment with investors’ needs.
Investor demand
And for anyone who still thinks investors are interested in short-term, narrow financial information exclusively, the latest EY annual survey of institutional investors which specifically tests support for integrated reporting, saw nearly all responders (94%) reporting that integrated reports are very useful or that they are essential.
Last November the seven umbrella organisations which represent investor organisations in the world came to a united position on what they want from broader reporting, working jointly with the Corporate Reporting Dialogue, which is very powerful evidence of growing investor demand to support our joint efforts.
Once again, a crucially important group at world level has said – in this report – that integrated reporting “is the desirable end goal.”
Technological change
This year our Technology Initiative has continued to address how technology will change reporting, with this analogy developed with our friends in Fronesys about how information will change from being a tap which turns on and off, to a lake constantly fed by different streams of information coming from multiple sources.
Overwhelming research evidence in favour of integrated reporting
Also published this year, at the American Accounting Association annual conference in Washington, the new research database drawn together by the IIRC’s Academic Network, with now no fewer than 300 pieces of research, which show that integrated reporting is part of creating better capital markets. More secure long-term returns for investors, a longer-term investor base and a lower cost of capital for companies.
Launch of a new global strategic phase – Momentum Phase
It is this momentum in terms of companies adopting integrated reporting, the evidence-base demonstrating the benefits of integrated reporting and corporate reporting system actors endorsing integrated reporting, which led to the evaluation that the ‘Breakthrough’ tests for the growth of integrated reporting set in 2013 had now been met.
So in October 2018, this enabled us to announce that the IIRC had entered a new global strategic phase – the ‘Momentum Phase’ – in our journey towards the time when integrated reporting will have achieved the global adoption which is our mission.
A Momentum Phase which will see us drive the scale and pace of implementation of integrated reporting, put new emphasis on ‘system change’ including the shift to a sustainable financial system, and a Corporate Reporting Dialogue which moves from ‘dialogue’ to ‘alignment’.
New IIRC Council Chair
And as our founding Chair, Professor Judge Mervyn King became our Chair Emeritus, continuing in his new role as a key global advocate of integrated reporting and a key participant in this conference, I am delighted that this year the Chair of the IIRC Council was assumed by Dominic Barton, outgoing global Managing Director of McKinsey, and a major world figure amongst corporate leaders and in business strategy.
Tomorrow, Dominic will give his inaugural speech to this Conference as the new Chair, and he will share with us his vision of how we can bring greater clarity to the corporate reporting landscape; the need to move further and faster on ‘alignment’, the theme we have chosen for the Conference itself.
The imperative for greater alignment
Let me say a few words myself on that key part of our mission, at the opening of this conference.
There is an absolute imperative for us to move further and faster.
The Intergovernmental Panel on Climate Change this year made it clear that as each year goes on, the cumulative effect of carbon emissions from human activity, make it less and less possible that we can keep to 1.5 degrees global warming, and that by 2030 that window shuts.
And there has been another tsunami during the past year – but it has been a giant wave of social protest from the ‘Extinction Rebellion’ strikes in 100 countries, mass labour protests in Korea, the hashtag activism of #MeToo, the Tax Justice movement, the yellow vest protesters who actually oppose climate action because it is they who are disproportionately paying the social price, the anti-austerity protesters in many countries who follow in the closely path of the Occupy Movement earlier in this decade.
What combines these protests is that they are about economic more than political injustice, and are led by a Millennial generation which seems increasingly distanced from the social consensus which has underpinned traditional economic growth for the past 50 years.
And I’ve talked about the possibility that just as much as there are fixed planetary boundaries, perhaps we should start talking about fixed societal boundaries, in which business and economic models will be forced to change, to avoid breaching the limits of social acceptability.
What is socially acceptable is changing.
I fully admit to being a ‘Baby Boomer’ – or perhaps I should say a Boomer?
But the younger generation represented in this conference room and outside it have a different expectation for business, in the words of the AICPA/Black Sun study also being published here, of the pursuit of profit and of purpose.
2019 is the year – according to the Pew Research Center – in which Millennials will outnumber Baby Boomers in developed countries, which is going to have a dramatic impact on the markets in which businesses operate, on their consumers, their recruitment, their investors.
So the key for us is: Can we make a link between the Board Room, the workspace and the street below?
And the answer has to be: that we must.
An ecosystem or landscape
This is a year when we have tried to think about this in terms an ecosystem or a landscape.
There have been a series of different mapping exercises undertaken.
One was undertaken in a project on ‘Advancing the Reporting Ecosystem’ undertaken over the past year in the World Economic Forum.
Another is the ‘other initiatives’ mapped as part of the Embankment Project for Inclusive Capitalism or EPIC, published in Washington last November.
A third is the mapping undertaken by McKinsey in their independent report, which was discussed at the IIRC Council in Frankfurt last month.
And of course there are different fault lines between standards and frameworks, internalities and externalities, between management accounting and financial (or extra-financial) accounting, between holistic and specialist approaches, between different end users for the report itself.
But I think those on the street will have little patience if we spend too long drawing up maps, covered in dots.
Integrated reporting has to be about joining the dots.
And we’ll hear from Dominic that this is just as much what the companies want too: an end to the confusion and complexity in corporate reporting, a need for simplification.
The unifying factor
There is a unifying factor on which each of the three mapping exercises I’ve discussed – and on which many more – agree?
That the creation of value – not just financial value but broader value – is the common aim.
And not just the concept of ‘shared value’.
But value for the firm and value for the six capitals and the inter-dependence between them, which is at the heart of the Integrated Reporting Framework.
And although each of us may have different views about what is intrinsically valuable, these ten themes for defining what value-creation means were identified in a Pink Paper we produced in the early days of the IIRC, back in 2013, and which I think remains one of the best sources we can use right up to today.
Value in a context, value in outcomes, value with values.
The agenda for this conference
So at this conference, we want to test out whether this concept of ‘value creation’ can be the objective which can drive a substantial consolidation or convergence in the corporate reporting system?
They’ll be a chance to meet and question members of the Corporate Reporting Dialogue at one of the breakfast briefings tomorrow morning, but our main conference session on alignment, will ask market players what they want to see in us moving further and faster?
Over the next two days we’ll debate the next steps in embedding the concept of the multi-capitals in business and investment.
We will get the first chance to see a draft model we intend to publish next year on integrated thinking and strategy.
There’ll be a key debate on how assurance has to move from bring backward-looking to forward-looking, from financial to multi-capital audits, which can be a crucial part of the Momentum Phase.
We’ll hear from the IIRC Board on why integrated reporting is a key principle of 21st century corporate governance.
We’ll explore how the growth of integrated reporting is being driven by new impetus for investor stewardship, by greater regulatory endorsement and by purpose-led communications.
And we start very shortly with a keynote address from one of the leading figures in the world who is a futurist, who can inspire us all that the future is not unknowable.
Indeed I hope this conference will reaffirm that we have the ability to make the future.
And that we have the will to do so.