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Thought Leadership: Evaluating the benefits of integrated sustainable reporting according to the King III Codes of Governance, and what it means for those responsible.
The King III Code has brought more clarity and weight to the concept of integrated sustainable reporting, which has been to the benefit of all stakeholders. Those tasked with the responsibility of compiling accurate and reliable reports have been incorporating sustainability issues to a greater degree within their existing processes. But can this be done cost-effectively?
In version III of the King Code published in 2011 even more emphasis was placed on providing integrated sustainable reporting. But if you listened carefully, you could almost hear the groans of staff in the finance departments of medium-to-large corporates across the country. Why, you ask?
Because finance staff realised the responsibility would fall on their shoulders to carry the vision of Mr King forward, one reporting period at a time.
In case you missed the memo or were one of the people too busy groaning at the time to absorb exactly what was published in King III, it might be worthwhile revisiting the requirements and benefits of applying the code.
The point of departure for the concept of integrated sustainable reporting is the philosophy of providing a holistic view of the company’s performance across a range of financial and sustainable metrics. (Beware – Mr King does not like using the term ‘non-financial’. So instead use ‘sustainable’).
Companies have been encouraged not to do this half-heartedly either. The information needs to be of the same quality as audited financial information, i.e. complete, timely, relevant, accurate, honest, and accessible. King III even requires audit committees to assume oversight by, “Approving the disclosure of sustainability issues in the integrated report by ensuring that the information is reliable and that no conflicts or differences arise when compared to the financial results.”
Of course it’s up to each company to decide just how much time and effort is required to ensure the information is of a suitably high standard to be included in an annual report or any other official stakeholder communication. And that’s usually where push comes to shove.
But besides adding the sustainability requirements to a long list of responsibilities of those involved in reporting, King makes some very strong and sound arguments for the benefits of going to all this trouble. Reasons that we should never lose sight of.
The code notes that, “Reporting effectively about the goals and strategies of the company, as well as its performance with regard to economic, social and environmental issues, also serves to align the company with the legitimate interests and expectations of its stakeholders, and at the same time, obtain stakeholder buy-in and support for the objectives the company is pursuing. This support can be invaluable during difficult times, for instance when the company needs certain approvals or authority, or when it needs and relies on the confidence and loyalty of customers.”
So just what is this information? And how can it be used by companies as described above? For starters, it should reflect the choices made by the company in terms of the economic, social, and environmental (“ESG”) factors that have been impacted by the implementation of the company’s stated business model. The point being: so what if you made X many million rand profit this year, what was the real cost to society?
Never have these questions been more pertinent to answer than by those of resource and mining companies. Never have these companies had their “societal license to operate” questioned as much as they have in recent times. For businesses that consume large amounts of finite resources and that may often be large scale polluters, King encourages them to report both the positive and the negative effects of their actions. In doing so will develop transparency and accountability he believes.
So what appear to be mundane metrics – like reporting water usage or CO2 emissions for instance - allows stakeholders to see the bigger picture and formulate answers to serious questions like whether the business’ existence is justified or not. Failure to do so could have dramatic consequences. Company’s licenses can be revoked, or worse, their businesses may be nationalised!
Some of the large mining houses in particular have been cognisant of the importance of making the public aware of these factors, and have even incorporated aspects of their sustainable reporting into ad campaigns that aim to create a balanced picture of what the company consumes and provides. Data reflecting improvements in occupational safety or the consumption of resources have been married to the company’s brand. They have also realised that reporting the negative aspects of the company’s operations, and stimulating debate about issues in the public domain, can portray the company as a responsible corporate citizen.
The adoption of King III goes further, and even encourages companies to incorporate forward looking information into their sustainable reporting. In fact sustainability has been so earnestly adopted by the likes of companies in the fast moving consumer goods (“FMCG”) sector, that it’s become a core operating principle of the businesses concerned. We can only surmise that this was the intention of thinkers like Mr King in the first place.
Improvise, Adapt and Survive
As the demand for sustainable reporting has grown, so too has the body of knowledge and practices regarding its disclosure. The Global Reporting Initiative (https://www.globalreporting.org/) has become the global de facto standard for the reporting of sustainability issues. In May 2013, the initiative released version 4 (G4) of its Sustainability Guidelines which it thinks will be more user-friendly and accessible to those new to sustainability reporting.
While the initiative provides standards as to what should be included in integrated reports, there still is no standard as to how the data should be collated, consolidated, and communicated. So it’s a case of everybody for themselves when it comes to figuring out how to perform these functions in the most sustainable, cost effective, and simplified manner.
Within the context of this greater responsibility, many South African companies are faced with another conundrum. Their operations are becoming increasingly more international in nature, and specifically, more Africa-focussed with centralised reporting.
Incorporating and consolidating the operations of newly acquired or green field operations into existing reporting structures is no easy task. In Africa different languages and cultures, variations in best practice, and multiple technologies have forced managers to think long and hard about how best to adequately capture financial and non-financial data. (Apologies, Mr King).
Enterprise Resource Planning (“ERP”) systems may be the answer. But rolling them out to subsidiaries that are often much smaller and nimbler than the home country can be expensive, especially with the concomitant on-going investment in training and infrastructure that’s required.
The default is to use spread sheets. They are easy-to-use and can be applied to a wide range of metrics. But as divergent operations build scale they can become more problematic to work with, especially when a large number of subsidiaries are using them. Data consistency and reliability become an issue leading to increased reporting and business risks.
The third option entails applying some kind of cloud solution that can be easily accessed and which provides the automation of a substantial part of the consolidation process, without requiring the spend necessitated by a full ERP system.
The principles of King III – and with specific respect to integrated sustainable reporting - are noble and should be pursued by all companies serious about measuring their activities in relation to the broader context of society’s expectations. It makes for good business and a better future. But deciding just how and when to do this is the key question keeping managers up at night.