Recommendation to G20 on <IR> Integrated Reporting
In a report commissioned by the B20, the business forum that advises G20 governments, the six largest global accounting networks¹ have endorsed <IR> as a key innovation that will make corporate reporting more conducive to long-term investment.
The report highlights the urgency with which policymakers must tackle the structural gap in infrastructure investment, estimated to be US$500 billion annually, and says that corporate reporting has a vital role to play in refocusing investment horizons in favour of longer-term returns, reversing the current trend towards short-termism. The report will help to shape discussions prior to the B20 Summit in Sydney on 16-18 July, an event that will agree and prioritise policy recommendations to heads of government later in the year.
This is the latest significant endorsement of <IR> and is consistent with the IIRC’s approach to encourage the removal of barriers to corporate reporting innovations, and create a regulatory environment in which <IR> can flourish.
The report says that <IR> has "the potential to support better investment evaluation models [...] and hence better investment decisions with a more forward-looking time horizon." It calls on G20 Finance Ministers to "assess and address any practical, legal or statutory barriers to improved corporate reporting [...] in order to make corporate reporting more conducive to infrastructure and other long-term investment."
The accountancy firms are asking the B20 to call on G20 leaders to "Encourage corporate reporting innovations and initiatives that provide investors with a longer-term and broader perspective on shareholder value creation to complement the historical financial performance and current financial position perspective provided by financial statements."
Commenting on the report, Paul Druckman, CEO, IIRC said, “Time and again, it has been shown that the world faces a chronic shortage of investment in infrastructure – projects that are as vital to building capacity in emerging economies as they are to driving connectivity and productivity improvements in the developed world. This report makes the most compelling case yet that corporate reporting should be re-weighted, so that the information available to providers of financial capital includes the material factors that will determine long-term performance, including the potential risks and opportunities. The absence of this information, and the inherent focus on short-termism, deters long-term thinking and behaviour. <IR> offers a Framework with which the market can work to explain these factors in a cohesive way.”
The report, "Unlocking investment in infrastructure" identifies "Integrated reporting principles as a means by which improved corporate reporting could be achieved" and says that the Framework "has been designed to achieve a more holistic view of how value is created over time by providing more insight in business strategies, performance and prospects in corporate reports."
It has been estimated that US$3.2 trillion² will be needed each year for the next fifteen years to fund infrastructure development. However, the shortfall in available funds is significant - estimated at US$500 billion annually. Therefore, governments and businesses share an interest in identifying the causes and finding solutions to close this funding gap. The B20 group asked the six largest international accounting networks to come together to analyse the issue and develop practical recommendations that would promote more long-term investment from non-government sources in infrastructure. A Panel of experts from the firms identified recommendations in three areas:
- Using corporate reporting to achieve a longer-term focus, referencing the relevance of <IR>
- Continuing to improve financial reporting through ongoing accounting standards development
- Encouraging improved alignment of regulatory risk calculations with the actual risk profiles of infrastructure investments.
As a strong endorsement of IIRC policy the report continued, "To support long-term investment, improved corporate reporting content should be driven by the needs of investors in relation to the specific circumstances of the business. It should therefore allow companies to determine how best to tell their own value creation and risk story. Accordingly, the Panel does not recommend that integrated reporting be mandated or regulated at this stage, but rather believes that businesses should be encouraged to explore reporting changes and continue to drive innovation in this area."
This report will feed into discussions ahead of the B20 Summit and the IIRC is preparing its own report which further explains the connection between <IR> and long-term investment. The report will also reinforce that <IR> is a connecting theme across the other priorities of the B20: financing growth, human capital and trade.
Jonathan Labrey, Policy and Strategy Director, IIRC said, "The world economy may be healing from the unforgettable consequences of the Global Financial Crisis, but we must now respond to urgent challenges which, if left unaddressed, will inhibit economic progress. A core element of any action plan involving the private sector should include building resilience and long-termism into the DNA of business and investment decision-making. <IR> offers a practical, market-led Framework to do just that. The ears of governments and regulators should be open to calls from across the world that hurdles must be overcome to ensure long-term capital flows to the projects and innovations that will drive a new wave of economic prosperity. It is not a 'nice to have' – it should be an essential part of the G20’s core focus and mission”.
¹ BDO, Deloitte, EY, Grant Thornton, KPMG and PwC.
² Estimate by McKinsey and Standard & Poor’s.