IR ans sustainability

Question 1

What is IR?

Answer 1

An integrated report is a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term

Question 2

why are ACCA among other bodies looking at IR?

Answer 2

looking at IR as a really important part of companies reports, as a means of enhancing their value. They want to hopefully make the co reports, shorter (so not repeating), more readable and more understandable.

Question 3

What is the general idea behind IR?

Answer 3

Enhane the communication between the users of the accounts. IR aims to tell a story about what the company does, how they do it and how it leads to shareholder value creating (uk law).

Question 4

What problems can IR help to deal with?

Answer 4

1. Company reports are mainly backward looking.
   
   • ​​A set of FS relate to historical information. They look at a period of time that has already taken place
2. Lack of focus on sustainability​​
   
   • Climate change is a problem for us now and the problem in the annual reports is being massively underplayed.
   • The way we calculate profits also doesn’t take account for some of these environmental costs.
3. Compliance based approach 

   
   • So companies just try and meet the rules and make sure they have all the information that the corporate governance rules, the co.’s acts, accounting requirement standards require you to put in.
4. Lack of long-term vision and thinking leading to excessive short-termism 

   
   • In the market there is a focus on short term performance.
   • One of the things that IR should try and do is move the agenda away from being so heavily biased on the short term because the problem with this is it doesn’t help the company or the shareholders.
5. Incentive schemes are built around the wrong targets and incentivise sub-optimal behaviour .​​
   
   • So they are incentivising the maximisation of short-term profits.
6. Financial markets are less than efficient and cost of capital is higher than it could be 

   
   • IR might help make markets more efficient as it provides the users of the accounts with a clearer picture of how the company has added value but also how it intends to in the future
   • A more efficient comapny lowers the r* which increases the value of the firm, which adds to shareholder value.

Question 5

The idea behind IR is to explain how value is created over time, what are some the things that this should include discussion on?

Answer 5

1. External environmental influence
2. Relationships with stakeholders that are important
3. Ues of resources (the six capitals)

Question 6

What kind of approach is the IR approach and what does this mean?

Answer 6

It is a principle based approach. Meaning the companies are given guidance as to how to adopt it and it is up to them to decide how to in the end.

Therefore, judgement must be exercised.

Question 7

is there a verification of the principle based approach of IR for companies? and why?

Answer 7

No. They are not audited by auditors, but IR is forward looking so it would be difficult to do this.

Question 8

What are the six capitals?

Answer 8

1. Financial capital
   
   • Stuff that funds the business (debt and equity)
2. Intelectual capital
   
   • e.g. trademarks and patents
3. Natural capital
   
   • Anything renewable or non-renewable to do with the company.
4. Social and relationship capital
   
   • This is the relationships with major stakeholders of the company. (very important for companies).
5. Human capital
   
   • This is the knowledge and skills of the workers.
6. Manufacturing capital
   
   • This looks at the companies infrastructure.

Question 9

what is the significance of the six capitals for IR?

Answer 9

They represent the inputs an outputs of an organisation, and will be able to show how they are used as inputs to generate value within the organisation and resultingly turn to outputs.

Question 10

What are the purposes of the six capitals?

Answer 10

1. They underpin value creation 

   
   1. Remember they are both inputs and outputs.
2. They ensure organisations consider ALL forms of capital that are utilized by them.
   
   1. I.e. they enable you to think holistically as they cover pretty much everything the company will use as capital.
3. They don’t need to be followed to the letter.
   
   1. Not all the six capitals are important to each company. So talk about the ones that are important to your business. be judgemental to the ones you use.
4. Use them as a guideline.
   
   1. Treat them in a way that you capture everything important to value creation.

Question 11

The six capitals will be the inputs and the outputs to your business model, but what also needs to be considered?

Answer 11

• The governance structure of the company (inc assessing risks and opportunities associated with the value generation of the co.)
• External environment and how it impacts your business.

Question 12

what are the guiding principles of IR?

Answer 12

1. Strategic focus and future orientation
   
   • Should be orientated more to the future than for example the FS information (historical info)
2. Connectivity of information 

   
   • So not just disjointed pieces of info plugged together for an annual report. It needs to a story and have a narrative!
3. Stakeholder relationships 

   
   • These need to go beyond just shareholders and extend to all important and relevant stakeholders in the company.
4. Materiality 

5. Conciseness 

6. Reliability and completeness 

7. Consistency and comparability 


4-7 are the accounting principles.

Question 13

What is the IR guidelines of what to include in the report?

Answer 13

1. Organisational overview and external environment?
   
   • They say that typically they would be looking for some overview of the business and what’s happening in the world outside, in other words you are setting the scene and providing the context.
2. Governance model?

   
   • Include your governance model as governance should incorporate all of the things you talk about with IR.
   • This is not just what the governance rules say but governance in its broadest sense
3. What is your Business model? 

   
   • How do you claim to generate value out of the six capital? i.e. how does value creation work in your business?
4. What Risks and opportunities are you exposed to?
   
   • Might include how climate change might impact your supply chain.
5. What strategy do you employ and how do you allocate resources to meet that strategy?
6. Performance 

   
   • This is backward looking so is mainly historic and backward looking. This is driven in part by the Fs
7. Outlook
   
   • Whats the outlook with regard to climate change?
   • The short term is less important as its about long term value creation
   • So in part you should be talking about the demographic and some of the other trends that are influencing/impacting your business and your competitors. 

8. Basis of preparation and presentation 

   
   • This section includes the “this is how we have done it” part

Question 14

what benefits accrue from IR allowing companies to think holistically about their strategy and plans in the context of the business impact and the different capitals

Answer 14

It allows them to make better decisions, manage key risks and take advantage of key opportunities

Question 15

IR improved communication, which in turn…?

Answer 15

arts to create a dialogue around the issues that IR aims to solve (see below). What need to happen with this is more stakeholder activism (particularly institutional shareholders as minority shareholders have 0 say).

From this communication comes an understanding of the problems that are being faced, which can help drive real change. (for e.g. climate change).

Question 16

What is sustainability?

Answer 16

Sustainable development is development that meets the needs of current generations without compromising the ability of future generations to meet their own needs.

i.e. it is like long term going concern for the world.

Question 17

who is sustainability reporting important for?

Answer 17

Sustainability reporting comes in for companies who know the economic value (net profit) of the company but not the impact on society and the environment.

Question 18

how does sustainability benefit companies?

Answer 18

1. consumers are more likely to buy from brands that practice sustainability.
   
   • S&P 500 co.’s has 18% higher profit if they use Sustainability reporting.
2. make employees happier as it means the company doesn’t just stand for profits, which in turn improves the work environment of the company, and the productivity of the company

Question 19

what do we mean when we talk about sustainability?

Answer 19

E.g of sustainability = reducing waste, more energy efficient workplace and a more inclusive one too.

So, for example, we are not going to exhaust resources all at once, we are going to split it out so we can meet the needs of the future.

Question 20

what are the three main areas of sustainability? briefly explain.

Answer 20

1. Economic viability
   
   • This is the point on going concern but just simply saying it needs to be longer.
   • This encompasses a whole raft of different things like debt, profits, and cash etc., it’s a much broader discussion. We are also looking far further in to the future as we are talking about not compromising future generations
2. Environmental responsibility
3. (corporate) social responsibility (CSR)
   
   • ​​i.e. charity work, environmental issues, doing right thing for the employees etc.

Question 21

what is one of the key parts of IR?

Answer 21

Sustainability.

Question 22

who are the global reporting initiative?

Answer 22

“the biggest body driving the sustainability agenda for reporting purposes.”

• It is around 20yrs old and was always focused on sustainability even before people knew about it.
• They have lots of their website about how you can go about sustainability reporting.

Question 23

what are sustainability challenges that are faced by companies?

Answer 23

1. Human rights 

2. Climate change 

3. Governance and anti-corruption 

4. Barclays were in the news for corruption in early 2019. When the financial crisis broke 10 years ago they were scared they were going to receive government help as they needed an injection of cash. So they went to Qatar to raise funds. They then gave them backhanders (illegal payments) in return for investing in Barclays for hundreds of millions of £s. A lot of directors at Barclays are now in court for this. But so hard to prosecute these directors.
5. Gender equality 

6. Professional accounting firms currently struggling in terms of equality in terms of pay as most of the partners are men. Investor/key stakeholder groups looking at them and telling them they ned to sort it. But unless those at the top agree to make the changes it is going to be a long time coming.
7. Supply chain management 

8. Use of non-renewable resources 


Question 24

Why is it important for companies to manage these sustainability issues they face?

Answer 24

As it impacts their perceived value and and reputation.

Question 25

What will an analyst look at teh sustainabiliy report for?

Answer 25

To determine the long term value of the company.

Question 26

who is sustainability reporting most important for and why?

Answer 26

1. Business customers
   
   • businesses are looking at their supply chain. So companies earlier in the supply chain are also being forced to be more open and transparent about sustainability issues too
2. Employees
   
   • ​​This is because employees want to work for companies that have values they can sign up to. The new generations are paying more attention to the values of the company they seek employment in
   • So the more (as a company) you show your credentials in this area (sustainability) the more likely you are to recruit the brightest and the best, who want to work for companies that are doing something good and not ripping up the world while they are doing it
3. Shareholders
   
   • ​​Shareholders/investors are paying attention to this as the information is becoming more readily available

Question 27

why does sustainability not tend to get discussed at the AGMs?

Answer 27

lots of these motions are being proposed and then withdrawn by the companies from the AGM. This is because the companies then will admit they need to take action and then say they will do X, Y, and Z so that the shareholders will withdraw their motion.

Question 28

What is the tripple bottom line? What is the problem of this?

Answer 28

Triple bottom line = economic, environmental, and social.

Problem with this is we only measure one of these outcomes, economic value. As profits and the way we measure profits is all based on revenues and costs, and ultimately CF’s (all in FS) as CF’s is what drives economic value. Environmental and social value have no measurement tool. How can you measure environmental and social costs and benefits? If you can do this is it would change the way companies report

Question 29

What can the benefits of sustainability reporting be split in to? What are the benefits of SR?

Answer 29

1. Internal benefits:
   
   • Enhanced understanding of risks and opportunities 

     
     1. So now companies will be looking it the future at potential risks, and trying to source the problem. For e.g. temperature is going to increase 2 degrees where are we going to get our food sources from.
   • The dialogue that sits behind sustainability reporting should enhance and influence strategy and policy
     
     1. So you start engendering an internal dialogue around sustainability reporting which should lead to improvements in value creation.
   • Streamlined processes, reduced costs and improved efficiency 

     
     1. This is the obvious things companies talk about in their environmental and social reports. They talk about using less water, paper, waste from production centres, making products more recyclable etc. This is all good stuff but it is only part of the picture for environmental, social and economic sustainability.
   • Avoidance of value destructive negative publicity, scandals and governance issues 

     
     1. If you are at the forefront of sustainability reporting, then surely you are less likely to be criticised as a result of this.
2. External benefits: ​
   
   1. Mitigating negative environmental and social impacts 

      
      1. Remember we are trying to make today’s world sustainable so that future generations have what they should have from their lives.
   2. Enabling external stakeholders to better assess value creation 

      
      1. One of the benefits of reporting is the fact that you are giving shareholders and other users of the accounts better information about the business which should enhance the bottom line. Which should make your r* lower, your financial markets more efficient which should help in the value creation process.
   3. Demonstrating sustainability leadership
      
      1. And this is one of the defining topics of our day.

Question 30

Benefits of IR (highlighted by ACCA report)?

Answer 30

1. More integrated thinking and management 

2. Greater clarity on business issues and performance 

3. Enhanced corporate reputation and stakeholder relationships 

4. More efficient reporting for both users and preparers of reports/Accounts

5. Better employee engagement 

6. Improved gross margins (although some respondents argued these would take time to come through)
   
   1. Hence the grant Thornton issue where they sacked their managing partner because their short term profits have taken a hit when the managing partner was just trying to make profits more ethically sustainable.
   2. Arguably partnerships have more ability to do this than companies as companies are governed by their shareholders and partnerships are self-governing.

Question 31

what is it important to remember when it comes to IR and sustainability?

Answer 31

The management narratives are not audited. These are judgement areas.

Question 32

what is the relationship of IR and sustainability?

Answer 32

Sustainability is a subset of IR. So, by moving to IR they will also attend to sustainability to.