In a country like South Africa, the term ‘employee benefits’ means so much more than the cost-to-company incurred during that period − it embodies not only today’s food for breadwinners’ families but also the promise of a better tomorrow through the education of our youth, who hold the nation’s dreams and aspirations.
It seems that there is much more value encapsulated in the activities indicated in a company’s annual financial statements than may appear prima facie, and which could have far-reaching impacts for a company and every stakeholder in its business environment. So why are we not reporting this?
Does our current reporting environment facilitate this kind of information to be communicated to relevant parties and if so, to what extent does this information land in the company’s annual reporting regimen?
In November 2020, the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) announced that the two organisations would merge to form the Value Reporting Foundation (VRF), and in January 2021, a new version of the IIRC’s Integrated Reporting Framework was introduced. Both of these events indicate a key shift in sustainability reporting regarding the drive to achieve standardisation of key concepts across different reporting frameworks and standards at a global level. During the inaugural VRF symposium in December 2021, the following was discussed which could make sustainability reporting more appealing, particularly for SMEs:
- Lowering the cost of reporting
- Creating consistency and decision-usefulness of disclosure
- Enhancing the value of that information both inside and outside organisations
Another promising development is the proposal for SASB standards for SMEs, which is expected to provide clarity on how SMEs can practise sustainability reporting in a way that is accessible to them.
For many SMEs, financial reporting, although mandatory, is typically a paper-pushing, box-ticking exercise done solely to avoid non-compliance with laws and regulations, rather than a value-driven process to optimise business outcomes, both internally and externally. Sustainability reporting would likely face similar treatment, as it has not, at this point, been mandated by law. However, by considering a company’s impact on society holistically, which is what sustainability reporting calls upon, directors of SMEs would find that the company’s activities have a much more substantial and far-reaching impact than might appear at surface level.
We need to do a better job at communicating the value that we create – not only for the business itself, but particularly for the communities, ecosystems and networks we inhabit.
What if there was a way to communicate not only a company’s impact on its business ecosystem in the past year but also the value expected to be created by that company in the coming year (and beyond)? The most logical alternative reporting forum is integrated reporting – however, the arguments against this, particularly in the case of SMEs, are compelling – who am I really preparing the report for? Will anyone really see this? I’m already paying so much for just financial statements, audit and tax affairs, can my business really afford this exercise in addition? What about the integrity of the information contained in such a report?
While these are all valid considerations, one must first begin by answering the question ‘why?’.
According to the IR Framework, the primary purpose of an integrated report is to ‘explain to providers of financial capital how an organisation creates, preserves or erodes value over time. It therefore contains relevant information, both financial and other.’1 The ‘other’ information referred to is of particular interest in the case of SMEs, where the financial reports may not tell the full story of the value created by that entity during the period, or the value that it expects to create in the future for itself and others.
In the case of SMEs specifically, company directors would need to carefully consider the audience of the integrated report, and by extension, who would have access to this potentially sensitive information. For private companies incorporated in terms of the Companies Act 71 of 2008, there is no requirement to make public the contents of an integrated report, therefore access could be restricted to key persons who would be interested in this information including (but not limited to) the providers of finance, such as banks as well as significant creditors, who would be interested in understanding the impact of the business beyond solely the numbers.
Perhaps the greatest benefactor of the integrated report for an SME would be the company’s leadership, who would be in a position to assess the business from a bird’s eye view through integrated thinking. Directors of SMEs can use an integrated report not only as a means of communication but also as a tool to identify strategic opportunities within the wider business environment. From the Integrated Thinking and Strategy: State of Play Report, the Standard Bank of South Africa now rewards all employees on the basis of the company’s performance across five different social, economic and environmental value drivers, and HSBC UK Bank plc reports that its own investors are increasingly interested in environmental, social and governance (ESG) issues.
The IIRC encourages companies to practise integrated thinking in order to encourage those charged with governance to realise and take accountability for the impact of their companies’ actions in the wider business ecosystem. Integrated thinking gives directors of companies the opportunity to identify the relationships and links that lie within the company’s field of operation, and how those could be optimised. For example, considering the impact on local communities of the procurement of goods from a cheap supplier whose product releases a by-product that is harmful to the environment through a company’s production process is an example of integrated thinking at work.
Another example of integrated thinking at work is a company taking heed of President Cyril Ramaphosa’s mandate in November 2020 to put an end to gender-based violence in the country. Many companies in South Africa have taken it upon themselves to spare some financial capital to ensure the upliftment and security of the women they employ as well as the households that those women represent. Integrated thinking recognises the fact that in South Africa, two out three children are raised solely by a woman, and that the little that a company does (or does not do) to protect its women has more far-reaching effects than it may recognise. This further supports the case for reporting on the measures taken by a company in more detail rather than merely labelling the line item as (for example) staff benefits in the financials, which could easily be overlooked in a sea of numbers and computations.
Integrated thinking can be used to solve some of the toughest challenges businesses of all sizes are faced with today – for example considering the impact of their operations on the environment and putting into action a meaningful plan of action to mitigate negative externalities. In August 2021, protestors took to the streets in London and threw red paint across the doors of Standard Chartered’s building and took camp outside the Bank of England building – all to draw attention to the fact that the City of London has host companies that according to Tim Crosland, a lawyer and a coordinator at Extinction Rebellion, ‘supports 60% of carbon emissions around the world’. This kind of public outcry is likely to become more commonplace the longer companies turn a blind eye to the climate crisis, which could be mitigated by company directors practising integrated thinking. A change in mindset is required from a ‘head-in-the-sand’ approach to one where business leaders actively acknowledge how their company’s actions impact the people, organisations and planet around us.
Earlier this year, the International Sustainability Standards Board (ISSB), which was established at COP26 to develop a comprehensive global baseline of sustainability disclosures for the capital markets, launched a consultation on its first two proposed standards: one sets out general sustainability-related disclosure requirements while the other specifies climate-related disclosure requirements.
In the introduction to the first draft standard, the ISSB mentions that the reason for publishing this exposure draft is to respond to calls from primary users (investors, lenders and other creditors) of general-purpose financial reporting for more consistent, complete, comparable and verifiable sustainability-related financial information to help them assess an entity’s enterprise value. The second exposure draft was published in response to calls from users of general-purpose financial reporting for more consistent, complete, comparable and verifiable information, including consistent metrics and standardised qualitative disclosures, to help them assess how climate-related matters and the associated risks and opportunities affect factors such as an entity’s financial position and financial performance or its strategy and business model.2 The ISSB’s consultation period for the two exposure drafts has since closed and it is currently reviewing feedback on the proposals with the aim to issue the new standards by the end of the year, subject to the feedback.
1 IIRC, The International Integrated Reporting Framework, 2021, paragraph 1.7.
2 IASB, IFRS S2, Climate-related disclosures, Introduction, p 3.
Edwin Sibutha CA(SA), Senior Associate, PwC UK