Reporting on broader value creation: what good is beginning to look like

Posted
18 August, 2017

Since 2005, we have conducted annual research on reporting trends across the FTSE 100. What we’ve observed is corporate reporting focused on broader value creation become the norm across the UK’s best practice reporting landscape. Our data shows a steady trend of companies reporting on more than just financials – by integrating more pre-financial factors into their reports.

At a time when companies are pressured to think more about the long term in how they are creating value – the multi-capital approach (core to Integrated Reporting) – provides a framework for communicating more broadly how an organisation’s social and environmental impact has been threaded into strategic thinking, while remaining focused on information material to investors. A multi-capital perspective captures how organisations create value for different stakeholders, and highlights long-term value drivers and strategies for achieving competitive advantage in a more holistic way.

Purpose used as a lens for value creation 

Building trust in business is inextricably linked with long-term value creation. It is no wonder we are seeing many organisations come back to the foundation of ‘why they exist’; their purpose. Our annual FTSE 100 research “The Real Drivers of Value: Lost & Found?” this year found that 60% of companies set out their purpose in the annual report, up from 27% last year. It shows that companies are starting to think about purpose as the lens through which to consider prioritising, planning and operating within their organisations, and as a compass that guides strategic analysis and decision making.

Value creation business models are the dominant approach

For many, the biggest change has been the improved communication of business models and long-term value creation, an area not even on the reporting landscape ten years ago. Questions such as: ‘What is our business model?’, ‘How does it create value?’, ‘What is our relationship with stakeholders?’, and ‘Why is our business model sustainable for the long term?’ are now being addressed head on by companies. Significantly, a majority of the FTSE 100 (63%, up from 25% in 2013) now take a value creation approach to business model reporting, giving a clear overview of the inputs, outputs and, in some cases, the outcomes it generates (39%, up from 26% last year). Ambitious reporters are even beginning to quantify the outcomes created for the capitals.

Sustainability integrated in business models and strategies

We are also seeing a clear move towards integrating an ESG-focus into the business model; found within 57% of reports. More companies are setting out a strategic framework for long-term value creation and evidencing how sustainability issues which are material to the company are being embedded into strategy. Today, 45% of FTSE 100 annual reports feature strategies that incorporate a sustainability focus, demonstrating that value is viewed both through a financial and a long-term sustainability lens.

Importance of understanding stakeholder expectations

In today’s world, organisations need to take into account the interests of all major stakeholders in their strategic decision making, as the ability to understand how investors, customers and employees perceive organisations, and the value they create, is imperative. This is an area that needs work. Although most FTSE 100 companies conduct some form of stakeholder engagement, our research found that only 11% outline what stakeholders expect of the company, and a mere 9% evidence that stakeholder feedback has impacted strategy. A clear view of an organisations’ purpose and how it is measured across all material stakeholder groups helps us understand how an organisation is creating value and for whom, both central to understanding the creation of long-term value.

Today, reporting practices in the UK are moving swiftly towards a multi-capital approach which captures the consideration of long-term value drivers to the success of the company in line with the principles of Integrated Reporting. Moving forward with the EU’s Non-Financial Reporting Directive and the FRC’s proposed amendments to the Guidance on the Strategic Report which highlights: ‘encouraging business to consider the impact of their activities on stakeholders and the factors that contribute to the success of the company over the longer term’, UK reporting and Integrated Reporting are set to become even more aligned and will – ultimately contribute to a more sustainable capital market system.

For more inspiration, visit the <IR> Best Practice Examples Database here.

Want to find out more? Request a copy of our research here.