By Pauline Ho
Is the Integrated Reporting (IR) Framework still relevant amid the increasing convergence of frameworks and standards? After all, it has been a decade since this principles-based framework was launched by the International Integrated Reporting Council (IIRC) in 2013. It is definitely not a new term in the Malaysian market, as one of the early movers in Southeast Asia to take a market-led approach to its adoption. Against the backdrop of increasing momentum on addressing sustainability issues catalysed by the pandemic, a number of developments have taken place, with the IR Framework having gone through a revision in 2020 to emphasise the importance of balanced reporting. The IIRC itself merged with the Sustainability Accounting Standards Board in June 2021 to form the Value Reporting Foundation (VRF). One year later, the VRF was consolidated into the IFRS Foundation. Early this year, new sustainability standards were released by the International Sustainability Standards Board (ISSB), a standard-setting body established in 2021–2022 under the IFRS Foundation.
The answer to this question is clear. The joint statement issued by the Chairs of the International Accounting Standards Board (IASB) and the ISSB in May 2022 states that they are convinced that the IR framework drives high quality corporate reporting and connectivity between financial statements and sustainability-related financial disclosures. The continued use of the IR Framework is also encouraged. In Malaysia, platforms which recognise good corporate reporting – such as the National Annual Corporate Report Awards (NACRA) – have realigned their assessment criteria with the principles of the IR framework. When reading the recently issued IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, the disclosure requirements which promote communication about sustainability-related risks and opportunities are precisely an element that is promulgated by the IR framework in explaining how an organisation tells its value creation story. More importantly, good reporting is a by-product of integrated thinking which aims to promote cohesive strategies and measurement. Therefore, sustainability strategies can also be integrated as part of business strategies.
The adoption of the IR framework as part of a company’s corporate reporting has been on an increasing trend. There are currently over 100 adopters of integrated reporting amongst Malaysian listed companies in 2021. The inclusion of Practice 12.2 in the update to the Malaysian Code on Corporate Governance issued in April 2021 where large companies are encouraged to adopt integrated reporting based on a globally recognised framework would have pushed the number of adopters even higher. Concerns around readiness for compliance are weighing on companies’ minds, especially with the release of the new Bursa Malaysia listing requirements on sustainability-related disclosures for listed companies in stages from 2023, and the proposal to mandate the adoption of IFRS S1 and S2 in stages.
What we have observed
I believe that listed companies in Malaysia already have a head start in complying with these enhanced disclosure requirements. As part of PwC Malaysia’s Building Trust Awards 2023, selected FBM KLCI companies and Mid 70 Index companies were assessed for Integrated Reporting and Sustainability Reporting using PwC Malaysia’s IR benchmarking tool and PwC Malaysia’s ESG reporting assessment tool. Some notable findings from the IR benchmarking exercise which will be useful for listed companies in their journey towards adopting IFRS S1 include:
The above findings demonstrate that connectivity of information has improved over time – where the external factors that affect the company’s business model are considered, the risks and opportunities impacting the company’s strategies are identified, tracked and mitigated, measures of success are established and results reported transparently.
As for ESG reporting benchmarking, some of the good practices that were noted which will be useful for the adoption of IFRS S1 and S2 include:
However, there is a longer journey towards the adoption of IFRS S2 given the limited number of companies that have included Task Force on Climate-Related Financial Disclosures (TCFD) in their annual report. This is an area that can be progressively addressed in line with companies’ efforts to meet the Bursa’s sustainability reporting requirements. There is alignment between the IR Framework and the TCFD recommendations at a strategic level, notably in focusing board thinking and decision making on strategy, which provides a case for change given the 2025 target deadline for reporting TCFD-aligned disclosures for Main Market listed issuers.
Aiming for progress, not perfection
Companies that have adopted IR for their corporate reporting will note that it is an iterative process. Refinements and adjustments will need to be made along the way. Improving the ability to demonstrate the integration of resources used by the business and the impact they bring to the stakeholders over time will be key for better decision making. This same approach can be applied to the adoption of the new sustainability standards.
In order to disclose sustainability-related risks and opportunities, it is important to ascertain the material matters to providers of financial capital (as one of the stakeholders of the IR framework). This will provide the starting point for determining the governance processes, controls and procedures that the company should implement to monitor, manage and oversee.
There will be a need to incorporate the additional requirements into existing governance structures of companies, where sustainability reporting oversight resides. Additional controls and procedures may need to be considered as more data points will probably be required to be disclosed. Those providing oversight will also need some assurances that the data reporting is accurate and complete. Similar governance processes, controls and procedures are expected of companies preparing an integrated report.
Whilst we have seen some disclosures of sustainability pathways especially on emissions such as carbon neutrality or net zero emissions, short and medium-term targets may not have been set or disclosed. There are also other material sustainability-related targets which are not disclosed. The relevant governance body will need to set these goals, embed them into management KPIs and review periodic reporting on achievement of these targets.
Ultimately, it is important to establish the value and impact delivered by the business. The materiality assessment performed as the first step will establish what is of value to your stakeholders. We observed from our benchmarking exercise that many companies have been including stakeholder metrics in their annual report, focusing on material matters around people, planet and prosperity. The management information system that is designed based on the process of value creation will help with the monitoring of performance and informed decision-making. The end result will be the impact delivered (outcomes) to the stakeholders.
I am a strong believer that consistent, transparent and balanced reporting will help companies build trust with their stakeholders. There are certainly merits to continuing the use of the IR framework for long-term value creation and in promoting stakeholder trust.
This article is the view of Pauline Ho, Chair of the MIA Integrated Reporting Committee. Pauline is also the Chief Operating Officer and an Assurance Partner in PwC Malaysia.
