IIRC & KIRCHHOFF INVESTOR RESEARCH REPORT
Closing the gap: The role of integrated reporting in communicating a company’s value creation to investors 2 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Contents
Contents
3 Foreword 4 Executive summary
6 The imperative 8 Methodology 9 What is non-financial information? 10 What types of non-financial information do investors value? 12 Uses of non-financial information 16 Sources of non-financial information 19 How integrated reporting could help to improve non-financial disclosures 23 Levers for encouraging the integrated reporting of non-financial information 26 Summary and outlook
27 Appendix 1: Interview questions 28 Appendix 2: A brief overview of corporate reporting requirements in Germany 29 References | Acknowledgements
30 Imprint/Contact 3 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Foreword
Foreword
Integrated reporting is an important In Germany, uptake of integrated reporting Therefore, the foundations for enhanced development in the evolution of corporate to date has been relatively limited. A few high- reporting under the
Executive summary
This report explores the extent to which Integrated reporting focuses not only on MULTIPLE USES AND SOURCES investors and analysts value non-financial financial, environmental and social value information, the various ways they use it drivers but also the key areas of intangible Investors and analysts use non-financial and the benefits they see from integrated value, such as intellectual capital and information in many ways – from screening reporting. It also considers how to stimulate human capital, and tangible value, such as companies in or out of portfolios, through increased reporting of non-financial manufactured capital and the growing need to to estimating company valuations. In doing information in an integrated way. Although address global infrastructure gaps. so, they make judgements about future cash based on interviews with members of the flows and the risks companies face, for investment community in Germany, the This research focuses on a subset of the example by adjusting the classic discounted research has insights relevant to companies six broad value drivers included in the
CHALLENGES AND REQUIREMENTS LEVERS FOR ENHANCED REPORTING Integrated reporting is a well-established mechanism for linking the financial and non- Non-financial information can have some If investors would like to see more reporting financial information that companies report weaknesses. The data companies report can of this nature, how could it be encouraged? across the six capitals identified in the IR< > be subjective and is not always comparable. Investor pressure is essential. Regulation Framework. Although many entities around There is often a lack of linkage between the could also play a part, although some inter the world are now applying the principles of non-financial and financial content of company viewees have concerns that mandatory integrated reporting, take-up in Germany has reports. reporting requirements can result in less been relatively limited – hence the focus on relevant disclosures. Quantity may increase, Germany in this research report. Our findings What investors and analysts want is non- while quality decreases. Similarly, if encourage us to assume that, if embraced financial information that is material, relevant, regulations require funds identified as “green” by more companies across the world, reliable, comparable and consistent over time. or “sustainable” to meet certain criteria, integrated reporting could make a significant They also look for connectivity between all the some providers may be deterred from offering contribution towards closing the current different elements of a corporate report – a ESG-focused products. Further development information gap and meeting the needs of a coherence in the story companies tell. Most of of global standards might also stimulate wide range of investors. all, investors look for connectivity of the non- increased reporting, but again some investors financial information with the financials. fear that standardization can result in some loss of richness and the unique nature of the For this reason, integrated reporting can information companies disclose. Although help to provide investors with the information current regulations in Germany have improved they need, in a useful format that links non- corporate reporting, there is still much financial and financial impacts and outcomes. opportunity for further development. They appreciate the centrality of the business model and multiple capitals in the
The imperative
For many years, the relationship between a AN EVOLVING LANDSCAPE COMPONENTS OF S&P 500 MARKET VALUE company’s book value and market value has IN % TANGIBLE ASSETS INTANGIBLE ASSETS been weakening. The gap between the two is At the same time, the social and regulatory now extreme. According to research by Ocean environment in which companies operate Tomo in July 2020, intangible assets account keeps evolving. Society, governments and 100 10 for over 90% of market value among S&P 500 regulators see the need to encourage or 20 16 32 companies. [1] This compares to 17% in 1975. enforce behavior that minimizes harm to both 80 people and planet, while still encouraging 68 The increasing dominance of intangible profitable businesses. 60 assets is also seen in the European arena. 83 84 90 Based on companies in the S&P Europe From a global perspective, the United Nation’s 40 80 350 Index, intangible assets now account for Sustainable Development Goals (SDGs), 68 74% of market value (up three percentage agreed in 2015, provide a blueprint to achieve a 20 points in the last five years). better and more sustainable future for all. 32 17 0 As a result, although traditional financial Regional initiatives are also having an impact. and accounting metrics are still vital, they In the US, for example, President-Elect Joe 1975 1985 1995 2005 2015 2020* do not provide a sufficient explanation of Biden has outlined a plan for a Clean Energy the company’s value as determined by the Revolution and believes the Green New Deal Source: Ocean Tomo, LLC intangible asset market value study, 2020 market – and how it could change in future. is a crucial framework for meeting climate *Interim study update as of 1 July 2020. challenges. The Biden Plan includes ensuring This creates particular challenges for the US achieves a 100% clean energy economy investors and analysts. How can they and reaches net-zero emissions no later than estimate a company’s future value? How can 2050. Climate change will be fully integrated they understand the risks that could erode into national, foreign and trade policies. the intangible assets underpinning that value? 7 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT The imperative
The European Green Deal, which aims to THE VALUE OF INTEGRATED REPORTING However, although more than two thousand make the EU’s economy sustainable, provides entities around the world are now applying an action plan to boost the efficient use of One solution lies with the adoption of the principles of integrated reporting, take-up resources by moving to a clean, circular integrated reporting as developed by in Germany has been relatively limited. Only a economy, while also restoring biodiversity the International Integrated Reporting handful of companies explicitly report under and cutting pollution. Council (IIRC). The IIRC’s International
8 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Methodology
Methodology
We interviewed 12 individuals in German-speaking countries (11 based in Germany and one in Switzerland). These interviewees have a range of roles. They include sell-side and buy-side investors and analysts and risk management specialists. We interviewed representatives from large financial institutions with a global reach, family offices, and investment and valuation consultancies. Some interviewees have a mainstream investment focus, while others have a particular interest in ESG areas or a focus on impact investing.
All interviews followed a similar structure, covering issues such as:
IITypes of non-financial information investors and analysts use IIHow they use non-financial information IISources of non-financial information IIDesirable qualities of non-financial information IIFeatures of integrated reporting that investors find useful IILevers that could encourage increased reporting of non-financial information in an integrated way IIThe impact of regulation so far on reporting practices.
The core questions used to guide these discussions are included in Appendix 1. However, we allowed conversations to flow freely, guided by individuals’ experience and interests. 9 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT What is non-financial information
What is non-financial information?
Non-financial information is information that Non-financial information may be purely have investment goals that place as much does not currently appear in a company’s qualitative, expressed in text, such as emphasis on tackling climate change as financial statements – its profit and loss a description of the qualifications and on delivering profits. However, for typical account (P&L), balance sheet or cash flow experience of a management team. It may mainstream investors, the value of non- statement. However, it provides insight into also be subjective, e.g. when companies financial information does not depend on any the potential future financial performance report on how they are positioned in a market. ethical or moral viewpoint but on the extent or value of a company. However, it can also be quantitative and that it increases insight into a company’s objective, e.g. the number of insurance claims risks, future performance potential and Alternative terms include “extra-financial”, received by an insurer year on year, or market current valuation. referring to the fact the information is not share statistics. included in conventional financial statements, One business valuation expert uses the or “pre-financial”, emphasizing the fact that Some investors have moral or ethical example of environmental pollution, whereby these factors ultimately have an impact on standards that guide their investment polluters run the risk of financial penalties. the financial performance of the company – activity. For example, they may not want to He says: “Irrespective of whether we think its cash flows, P&L and balance sheet. invest in defence companies because they this [pollution] is good or bad, it is a question have a moral objection to the ultimate uses of valuation and financial risk alone.” of their products. Impact investors may
BUSINESS VALUATION CONSULTANT HEAD OF MUTUAL FUNDS EQUITY ANALYST “Relevant non-financial information “With non-financial KPIs, you always “In the end it is only the financials is that which may not be financial have a purpose or goal that you are that are interesting – or the future at the moment, but which may become pursuing. In addition, it is interesting financials… the profit or turnover in financial in the future.” to determine a financial reference value ten years, 15 years, 20 years or in from the non-financial information. one year. But in order to estimate that, It can be an enabler for determining a the non-financial figures are the financial figure.” decisive factor.” 10 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT What types of non-financial information do investors value?
What types of non-financial information do investors value?
Investors and analysts use many different GOVERNANCE A change of management could be an Assessing corporate culture is not types of non-financial information in their indicator not only of future earnings potential straightforward. For example, as one daily activities. Some investors have been considering but also future ESG performance potential. investor notes, employee surveys may give governance issues as an important part of As a senior analyst says: “You will not only some insight into corporate culture, but BUSINESS MODEL, STRATEGY AND their fiduciary responsibility since the 1990s. have an earnings momentum in the classic can be distorted, depending on participation MARKET TRENDS Aspects of governance considered important sense, but also an ESG momentum.” rates and whether staff of all levels of forms of non-financial information include: satisfaction take part. Information related to a company’s business Company ownership structures are also model and strategy, as well as market IIThe quality of the board and its independence of interest, for example, whether there is trends that could affect the organization, IIRemuneration systems – including whether a dominant major shareholder who is also are considered useful forms of non-financial these take account of ESG factors and have a represented in the management team or information. When considering market short-term or long-term focus on the supervisory board. Such a dominant factors, key non-financial performance IIRelated-party transactions shareholder may restrict the ability of other indicators are established for each sector, IIAuditors and audit-related issues shareholders to influence management with individual company performance IIShareholder voting rights decisions. The incentives driving decisions assessed against those KPIs over time. IICourt cases against the company may also differ from those in a company IIAny indications of bribery or corruption owned by “anonymous investors” with One equity investor comments: “We spent a IIAny indication of reliance on illegal migrants relatively little connection to it, one equity very, very long time on the business model… IIHuman rights violations in the supply chain. analyst notes. The business model, the environment, the products and services were crucial for us.” In terms of the quality of the management Some investors and analysts include If the story did not add up, there would be no and supervisory boards, investors will look at corporate culture under the governance IMPACT INVESTOR investment. the board members’ backgrounds, what they heading. “Corporate culture is an extremely have done in the past, what they stand for and strong governance mechanism,” says a “80% of the risk in early stage From a strategic perspective, investors any indicators to measure past performance. business valuation consultant. Companies investing or entrepreneurship want to understand how a business is with strong corporate cultures are better positioning itself, e.g. as a niche player, cost Understanding what motivates the able to address problems quickly. “This is lies with the founders’ team.” leader or whether it has some other form of management team is seen as valuable. One a form of risk management, because we as differentiation. The competitive environment early stage impact investor says: “Nobody company valuers, as investors, must look to and market trends are also of great works around the clock for money only. the future… Even if the question of corporate interest e.g. what impact might be felt from After three decades of investment and culture does not make our point forecast technological developments and digitization. entrepreneurship experience, I know that any better, it makes it more stable in a sense only your passion and purpose will pull because it represents a certain downside you through tough times, not the financial protection.” incentive.” 11 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT What types of non-financial information do investors value?
SOCIAL FACTORS any changes in regulation that may have an impact on a company’s business model and Social information of interest to investors and competitive position. Health and safety is also ESG INTEGRATION SPECIALIST analysts includes insights linked to internal a topic covered in the “social” category. AND FORMER ANALYST stakeholders. For example, investors look at information on employees, such as numbers ENVIRONMENT “On the environmental side, we look at large of employee fatalities and accidents, and blocks of topics such as the efficiency of the rates of employee absenteeism. Staff Interest in environmental non-financial turnover rates are widely considered. This information is strong, reflecting factors such company in the use of raw materials. How clean could be particularly relevant in consulting as increasing regulation to tackle climate is the company? Are there emissions? What is businesses, where employees build up change and concerns about water shortages. valuable knowledge and experience over time These are topics that many mainstream done with wastewater? Are there spills? Then and where high staff churn could indicate investors consider, as well as impact there are topics on the energy side and the a risk to the business model. If it becomes investors with a particular focus on climate harder to recruit replacements, the business change. company’s exposure to green innovation. What model could again be at risk. products or services does the company sell? Analysts and investors are interested in
One equity analyst explains the importance details such as CO2 emissions and water Does it help other industries to reduce their of considering social factors when evaluating consumption, although they interpret them in impact on the environment?” a mining company. Gaining the buy-in of a sector context. For example, they see little the local population (through employment point in an internet company disclosing water and local investment) may incur costs, but consumption. could reduce the risks of opposition and riots, including attempts to appropriate the VALUE CHAIN mine. He is therefore interested in various factors: “How many employees are local? One mainstream mutual funds investor notes Are schools or infrastructure being built? that rather than individually, companies How long term is the approach or is as much are analyzed in the context of their market as possible taken out quickly? In my opinion, environment and value chain. For example, behavior beyond the financial ratios naturally one investor knows to the nearest ton the has an immense influence on the value of the CO2 footprint (using the equity ownership company.” methodology) for all his funds. However, he believes it important to not only consider the External stakeholders such as customers are footprint (where the company can be held also of interest, for example, whether there accountable for it), but also the impact of the have been any issues with product safety footprint elsewhere in the value chain. or the need for product recalls. So too are 12 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Uses of non-financial information
Uses of non-financial information
Investors and analysts use non-financial in- SCREENING ESG funds in particular have specific rules. In principle, there are minimum formation extensively and in a variety of ways standards that need to be met. These could thresholds that companies must achieve when making investment decisions, from Non-financial information is used to be linked to global standards and initiatives, in order to qualify for such an investment pre-selecting a range of potential invest- determine the “investment universe” from such as the UN Global Compact. If there vehicle. We’re talking about the potential ments to estimating company values. which companies will be selected for an is a violation, the company will simply be investment universe from which individual individual client’s portfolio or a mutual fund. excluded. A senior analyst at a leading asset securities can then be selected.” Investors can screen out companies that do manager says: “There is simply no money not meet certain criteria or clearly defined then, neither on the equity nor on the fixed Screening can be highly focused. One hurdles related to ESG topics. They also income side. Not from us and not from many organization creates a “materiality matrix” raise “red flags” relating to existing investee others.” by sector or subsector – identifying the companies if some new issue occurs. Equally, ESG issues that are most relevant. Another some investors may be looking for “best- Similarly, a head of sustainability and interviewee maintains a form of KPI score in-class” investments as assessed against corporate governance at a major investment sheet, which defines specific financial and various ESG benchmarks. firm says: “Every portfolio has a dedicated non-financial KPIs for each company. sustainability policy, a set of sustainable The criteria used may relate to simple facts, e.g. that an investee company must not be involved in arms trading, the betting industry HOW INVESTORS USE NON-FINANCIAL INFORMATION IN PORTFOLIO DECISION MAKING or online gaming. There could be a threshold (ILLUSTRATIVE TABLE) for the frequency of workplace accidents. There may be human rights requirements. Excluding Including SUPERVISORY BOARD Sin stocks High performing ESG companies MEMBER OF A LEADING e.g. tobacco, defence e.g. ESG industry leaders, best-in-class Stranded assets Sustainability indices ASSET MANAGER e.g. oil, fisheries e.g. MSCI ESG Indexes/MSCI Climate Change Indexes, DJSI index family “If companies behave badly when High carbon industries Particular sectors it comes to ‘E’ and ‘S’, especially e.g. cement, transportation e.g. renewable energy when it comes to the environment, Special focus areas e.g. SDGs, impact investing then they drop out right away or are only kept in portfolios if they make visible efforts to improve their carbon footprint.“ 13 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Uses of non-financial information
One interviewee explains that in order to no longer considered externalities, but and beautiful planet, then it is sustainable. VALUATIONS be considered for a fund, a company must become an integral part of what I call Integral And if they do not, it is not sustainable.” In achieve a certain composite rating indicative Investing.” For impact investors, investee this investor’s view, ESG reports, although a In addition to serving as pre-selection criteria of its ESG performance. The investment companies must meet stringent criteria, step in the right direction, do not do enough for the investment universe, non-financial organization maintains its own proprietary including requirements for a corporate to ensure there will be a habitable planet for information can also influence investment database containing relevant information culture that embraces the idea of the future generations. With reference to the decisions with regard to the valuation of on companies. This includes a specially integration of people, planet and profit. The warnings of the Intergovernmental Panel on particular companies. The example of a calculated uniform ESG rating, created by decision-making process for any investment Climate Change (IPCC) that carbon emissions classic discounted cash flow DCF( ) model applying algorithms to ESG data from leading is intensive, involving direct interaction need to be cut by 45% by 2030 (from 2010 shows that non-financials can go into the information providers. It also takes account of with companies and extending far beyond levels) to restrict global warming to 1.5°C she valuation in various ways. the ex-ante view of internal analysts i.e. those information provided by databases or any calls for more ambitious goals to measure analysts’ views of ESG issues in relation to corporate reports. [3] the companies’ performance against, rather individual companies. The database helps than for a compliance exercise. analysts and portfolio managers to identify However, even for impact investors, financial whether a company is high risk due to sustainability and profit generation is a controversy e.g. in relation to the UN Global requirement. One investor aims to invest Compact principles or in relation to climate capital in longer-term infrastructure projects risk, including whether its performance is to protect the climate by reducing 1% of BASIC DCF MODEL (SIMPLIFIED) worse than its peers. global CO2 emissions. Thus, all potential investments need to contribute to this goal Impact investing by bringing “significant added value in terms ∞ Although mainstream investors increasingly of CO reduction”. The investor notes that CF 2 t use non-financial information for screening fund managers’ bonuses are dependent Equity = ∑ – Debt purposes, impact investors have particular on achieving both financial and climate- MV t MV needs in this respect. One impact investor related hurdles. An “impact measurement t=1 (1+WACC) explains: “In traditional investing, the management system” is currently being only measurement for success is profit developed, which will include ESG and SDG maximization, which is legally dictated criteria. through fiduciary responsibility. Since the 1980s, impact investors have begun adding For impact investors, however, current ESG their values to traditional for-profit metrics. reporting can seem like simply “ticking the They are trying to integrate metrics for box” rather than a “serious, deep integrated where, people and the planet with profit criteria, measurement”. One provides her definition EquityMV = market value of equity unfortunately without much success. of sustainability, as follows: “If a company CFt = cash flow in period t This will change only through appropriate works in such a way that our grandchildren WACC = weighted average cost of capital legislation when people and the planet are and great-grandchildren find a habitable DebtMV = market value of debt 14 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Uses of non-financial information
Cash flow estimates On a more general level, encouraging non- since the introduction of the EU Emissions child workers. Adidas customers reacted Starting with the numerator, non-financial financial indicators can also enable analysts Trading System. However, companies could negatively and the company took measures KPIs can be used to estimate future cash to forecast cash flows with more confidence do harm to the environment in other ways, regarding its supply chain behavior. “It’s not flows. The use ofCO 2 is one example that is and make judgements about the potential through pollution, excessive use of water that Adidas has morally or ethically better reflected in this approach. With the existing growth rate of cash flows. One equity analyst or damaging rainforests. As the valuation management; it’s simply they understood
EU Emission Trading System and its CO2 explains: “If one believes that companies act expert says: “They build up some sort of it has consequences for their revenues,” pricing, carbon use is often already included in a socially responsible manner towards environmental liability that does not show up comments one interviewee. in financial figures. However, one interviewee their employees and stakeholders, then one in a financial accounting balance sheet, but gives the example of a hypothetical CO2 price can assume that a certain excess return can which might be a liability from an ESG point In contrast, most customers of fast fashion that can be considered for airlines, even be sustained over a longer period of time. of view.” do not appear concerned about supply chain if they are not connected to the European So you gain more confidence in future cash issues such as low pay or poor conditions trading system. Given the possibility of a flows.” The same goes for social issues, such as of workers. “But that’s also a social debt,” future internalization of such effects – e.g. poor treatment of suppliers. For example, says a business valuation expert. “It might be through future regulation or taxes or through Balance sheet extensions squeezing down on supplier prices and that one day awareness in society changes a potential decrease in revenues – there Instead of going into the projection of future failing to monitor quality resulted in the and customers say they do not want to buy might be an effect on future cash flows. cash flows, non-financial information can in a horsemeat scandal of 2013. Food producers these clothes any more if they are not fairly similar vein also be used to recognize certain and supermarkets, including Tesco, were produced. It could be regulated or a tax put on Investors will consider whether ESG factors additional balance sheet positions, “an ESG badly affected by the loss of reputation and it. That’s some sort of social debt that could will require a company to invest in order to balance sheet extension” as one business customer confidence in their meat products. occur. But it’s tricky to properly take this into adapt and survive. One interviewee gives the valuation expert calls it. For example, this As one interviewee says: “It was a big social account.” example of a company affected by climate could take account of some form of social liability… It would be interesting to know such change, where capital expenditure may well debt or social burden. (In the valuation model, things in advance. From an investor point of be needed to change its business model: “If this would be reflected in the calculation of view, if you think there are some externalities a company is very much affected by climate the company’s equity value – by subtracting like this which might get internalized later, change and does not invest money, it will not the value of debt from the value of the entity). either by the reaction of society or taxes or be able to change its business model in the other regulations from the government – then future. This is why these capital expenditures A range of potential adjustments can be it’s worth taking it into account.” are extremely important – the extent to made to consider the sensitivities of various which ESG developments require future issues – indicating the range of impacts As another example, Adidas suffered investment.” Such assessments also affect certain non-financial information could have. when allegations were raised that some forecast future cash flows. Adjusting for CO2 emissions is relatively easy of its football production had involved 15 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Uses of non-financial information
Discount rate adjustments An investor’s assessment of strategic Moreover, non-financial information can risks can also be incorporated into the also impact the assessment of risks, which denominator. One interviewee gives the are reflected in the denominator in the DCF example of an oil company that increases its model, through an adjusted discount rate. activity in deep-sea wells, Arctic wells and oil sands, with the result that its reserves Investors identify a range of risks that could portfolio and operations become riskier. affect the discount rate, including risks linked This would be recognized in the DCF model to governance weaknesses, potential future by increasing the discount factor in the regulation and strategic positioning. denominator, resulting in a smaller net present value – and ultimately a lower fair As one investor identifies, one “classic value of the company’s shares. risk” that would affect the discount rate is poor corporate governance. There might, Investors may consider such issues from a for example, be concerns about a weak sector perspective (where there are similar supervisory board. This does not necessarily drivers and non-financial performance mean that the company will generate worse indicators) and from an asset class approach cash flows than expected, but causes some e.g. equity or bonds. uncertainty about its ability to cope with unexpected problems. “Anything that touches on the subject of uncertainty, or that reduces visibility so that I simply cannot make the forecast so accurately, these are topics that are more likely to be reflected in the interest rate,” says a business valuation expert. The DCF model allows the uncertainty to be “mapped”. EQUITY ANALYST “If the non-financial indicators are pointing in the right direction, a lower interest rate can be justified than for a business where it is more difficult to assess or where you see problems and risks. I would compensate for this with a higher interest rate.” 16 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Sources of non-financial information
Sources of non-financial information
Investors and analysts draw on many different One interviewee found the introduction of Ratings or scores by different agencies In addition, bare metrics or ratings do not sources of non-financial information. What ratings that cover topics related to the annual are not necessarily comparable, however. indicate threats to the business model they use and how many sources they draw on general meeting (AGM) helpful for assessing One interviewee, referring to the company or company strategy. As one interviewee is inevitably affected by their role e.g. whether administrative and legal issues across scores generated by some specialist ratings explains, database metrics “help us to get a a manager of a large investment portfolio multiple countries: “I cannot judge the quality agencies, added: “We did a study and feel for where the company stands today… containing hundreds of companies, a sell-side of the rating, whether it was right or bad. But found that these scores sometimes run in But depending on the issue at hand, we analyst focusing on a highly targeted sector, it has at least given me the opportunity to completely different directions depending also need to look at the companies’ annual an ESG specialist or an early-stage investor. compare and understand what the company on which criteria are weighted more heavily. reports or corporate responsibility reports… is doing or what has just been criticized in In the extreme case there was a stock that So we cannot completely ignore corporate DATABASES the rating, so that I can discuss and debate has 80 on one score and 20 on another. reporting.” it with the company. So agencies could This showed quite drastically that no real Investors make extensive use of information have an important role to play in assessing consensus had yet been found in the financial streams, databases and ratings from [information] and making it useful and world.” third party information providers such as readable, digestible for the financial-driven Bloomberg, Reuters, MSCI, Vigeo Eiris, imug, investor.” One interviewee, working in sell-side research, Sustainalytics, ISS, Trucost, Arabesque and “hardly ever” uses databases. He prefers to ecoinvent (a life cycle inventory database) – Technology has made data providers’ services use material produced by companies to name a few. even more useful. One equity analyst says: directly – particularly annual reports, but “Data quality has improved massively, and so also other documents and material produced The advantage of data from such providers has access to the data. With just one click, “on demand”. is that it is generally standardized and you can pull it into Excel or have a general comparable. It also needs to be objective. overview without having to download the Database information is not generally “I only rely on the information that someone figures.” sufficient to meet all investor needs. For HEAD OF has really measured, where there is no example, if a database indicates that an issue MUTUAL FUNDS great subjective evaluation,” says a business is still pending, investors can go directly to valuation expert. If a database identifies some the company for further information on the “It’s a bit like a mosaic. aspect of a company as “subjectively good”, current situation, any provisions relating to We turn over [a great] the analyst will want to check back to original this issue and financial impacts. sources if there is time, which is highly many mosaic pieces dependent on the number of shares that he to get the whole picture. or she analyzes. And this is based on a variety of sources of information.” 17 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Sources of non-financial information
COMPANY REPORTS According to one equity analyst annual reports now give more attention to non- Investors refer to a wide range of company financial information, includingESG topics. reporting, including annual reports, He says: “It is quite clear that the non- integrated reports and sustainability reports. financial focus has massively improved and Those using company reports in preference that the focus is now very prominently on to databases are typically individuals what happens outside the financial figures – ESG INTEGRATION SPECIALIST working in a consultancy role or focused on which is desirable… These are important AND FORMER ANALYST small numbers of investments, rather than factors that deserve to be presented more managers of large portfolios. “My preferred prominently in a report, and they really do add “Metrics and information from data source is clearly what the company produces value for shareholders or the addressees of providers are only a starting point. itself. I look less at databases,” says one financial reporting in general.” equity analyst. As well as current and past But in order to really develop an opinion annual reports, other material such as One sell-side research analyst considers on what impact it can have on the business company statutes (e.g. to determine the rights companies’ sustainability reports to be of minority shareholders) and remuneration less relevant than their annual reports: model, competitive position and value of reports can give useful insights. For example, “Everything that is really relevant is also companies over the next three, four, five a remuneration report gives insight into included in the annual report – and also in the incentive structures in place and what the form that the analyst needs it in the end.” years, we must sometimes rely on company KPIs influence management remuneration. Standardized tables simply stating emissions reporting or talk directly to the companies or electricity usage are “not very interesting”. Company reports can also help to show what and ask direct questions.” targets a company has set itself, whether Investors and analysts are also interested these targets make sense and ultimately in what companies do not disclose in their whether they have been achieved. various reports. The omission of disclosures raises a red flag, particularly if a company One equity analyst says: “My aim is to get as stops providing previously reported KPIs. good an understanding of the company as As a business valuation expert says: possible… and to read widely, read the annual “Corporate disclosures are central sources reports from start to finish, maybe even read of information in every respect – whether it is the footnotes to understand accounting.” in the integrated report or the sustainability Such detailed reading might give the investor report or the normal annual report, or some competitive advantage when making whether it is on the website. Especially for investment decisions. larger companies, one always knows what it means if disclosure is missing.” 18 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Sources of non-financial information
DIRECT DIALOGUE One mainstream mutual funds investor says: “I can get… market or transaction data from Investors will go directly to companies one sector and try to break it down to a single to check their understanding of reported company. For example, I can look at aircraft information or gain updates on ongoing movements and see what this data tells me issues. This is particularly likely when there about Airbus. We use a lot of such data for is a lack of standardization around reported investment decisions.” information. However, industry reports can sometimes One equity investor would seek information be “rather journalistic texts that provide directly from a company “to make sure that background information. They are not very what is written there [in a report] is what we quantitative or analytical”, says one sell-side understand it to be and not otherwise. This research analyst. standardization is missing at the moment. And the (partial) lack of quantification is a Targeted internet searches are also problem where one would simply like to have undertaken to look for statistical material on more information, especially on risk aspects.” a topic of interest. One mainstream investor says: “There are techniques where we look OTHER SOURCES at the pricing of individual products via web scraping and ask: is the pricing adequate for Investors and analysts will use any sources the expected margins, or better or worse?” of information that help them form a view on a company, including reports from directly In addition, websites such as Glassdoor comparable competitors. They also draw and kununu can give insights into corporate on industry and sector reports, including culture, which investors can find hard to do reports from trade associations and sell-side from the outside. research. 19 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT How integrated reporting could help to improve non-financial disclosures
How integrated reporting could help to improve non-financial disclosures
The non-financial information that companies One interviewee says that less can be more Companies applying the
CONSISTENCY OVER TIME This is why investors also want to rely on not only quantitative but also qualitative the complexity associated with the many auditors in checking the non-financial elements play a role,” says one mainstream sustainability standards and frameworks, can Information that is comparable and presented information and giving at least some form investor. For example, the results of be challenging for mainstream investors. over time is also valued. “I would definitely of assurance. One interviewee thinks that employee surveys and customer surveys may look at everything that is standardized and a regulatory requirement for reasonable not be readily comparable. “Many people have How integrated reporting helps comparable and is presented over time,” assurance on non-financial information would good approaches. There is also no right or The
well as SAP in terms of CO2 emissions. “But different approaches to calculating their Some investors would appreciate the Investors want non-financial information to they can be very transparent within their peer Scope 3 indirect emissions. “There is a lot of development of accounting standards be reliable. However, some information tends group – the utilities.” data available, but they all still have corridors that address sustainability. As one says: to be subjective. One interviewee refers to the of interpretation,” says one impact investor. “The IASB [International Accounting difficulty in assessing management quality: However, non-financial information as Standards Board] must define a set of “It’s difficult to compare or standardize currently reported is not always comparable The Global Impact Investing Network (GIIN) rules on sustainability in the long term so everything; that’s a very subjective between companies. “Comparability is not provides another example. One investor that the topic can be included in normal perception.” always guaranteed, especially since we are queries the meaning of “fair working accounting – then via IFRS accounting.” now talking about sustainability issues, where conditions”. This lack of clarity, as well as 21 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT How integrated reporting could help to improve non-financial disclosures
However, investors do welcome To explain the value of connectivity, one Linking actions with the financial results experimentation and initiatives such as interviewee takes the example of an IT is important to investors. It remains a the Value Balancing Alliance (VBA), whose company, for whom the workforce has a challenge for the companies, though. As goals include standardizing how to assess material impact on performance. If the one interviewee notes, when a company and monetize the value of a company company invests in healthcare for its reports that it uses renewable energy, and its financial and pre-financial value employees, it could achieve a lower rate has covered its roofs with photovoltaic contributions to society. The VBA seeks to of sick leave and absenteeism. There is modules or employs many trainees, this design a disclosure framework enabling therefore connectivity between healthcare may be good marketing and also good for stakeholders to compare natural, social, expenditure and performance. stakeholders such as the local community. human and financial capital performance However, these actions include additional across companies. How integrated reporting helps costs. This is why one equity investor Investors and analysts familiar with believes that companies avoid making a CONNECTIVITY integrated reports believe they are most “financial connection”. useful where there is a “comprehensive Simply adding non-financial information attempt to link the non-financial to to financial statements is an inadequate the financial in the reporting”, as one response to investor needs. Interviewees interviewee says. call for connectivity so that they can see the company has a clear strategy. Non- Integrated reports can combine comparable financial information needs to be integrated metrics with written explanations of issues into financial reporting in a way that is such as corporate strategy. Investors “transparent and consistent”, a senior analyst welcome integration of non-financial observes. Although both financial and non- information with the strategy and business financial information is provided, they are model. One interviewee says: “If you drill a “not yet put in relation to each other”, one bit deeper, the exciting thing is to see which impact investor says. indicators the company identifies that have materiality on the cost or revenue side.”
Similarly, an ESG integration specialist and For example, whether CO2 emissions have former analyst asks: “How am I supposed an impact on the P&L. to integrate this myself when I notice that the company is not integrating it at all? I can Assessing a company’s competitive make up my mind based on the data I get. But position is one thing. Converting that I do not know. The company itself does not assessment into financial numbers is know… so how can I do that sensibly?” “an extremely difficult step”. Integrated reporting is particularly good “if you can get this connection”, says a business valuation expert. 22 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT How integrated reporting could help to improve non-financial disclosures
AUTHENTICITY “The challenge is less in the data; the Investors and analysts would like to see challenge is that the sustainability more integrated thinking taking place One senior analyst wants to see “authenticity department and the accounting department within companies, as this would mean that in the transmission” of non-financial have to work together, which is like fire and relevant ESG issues would be reflected in information. Investors want to know water,” one interviewee says. CFOs may see the company strategy and the impact of what pieces of non-financial information integrated reporting and increased ESG such issues would be linked to financial management themselves think important. reporting as costing money, when their aim is performance. For one interviewee, to control expenditure. Sustainability teams integrated thinking is “the link between Another interviewee believes that some may lack power and authority to drive change, sustainability performance and the companies in the utilities sector have made sometimes having no board representation. financial impact of the company”. progress in explaining their way of thinking in their management presentations. For How integrated reporting helps A senior analyst expects in future there example, they explain why some ESG issues Companies can expect to benefit if they to be more scrutiny by capital markets of matter, what goals they have set and why. present their story clearly, in an authentic whether resources are being allocated This helps investors to understand why way through integrated reporting. “It in a way that aligns with the company’s the company is taking certain actions and helps companies because they can steer strategy, rather than just scrutiny of, for the impact on the business model and analysts and investors in the direction example, profits and cash flows. This competitive position. they want them to go,” one interviewee is because some vital resources will suggests. become increasingly scarce. There will be Lack of authenticity in transmission may heightened interest in whether companies be linked to the fact that companies are Integrated reporting encourages are able to achieve financial goals with not thought to be thinking and acting in an integrated thinking, which in turn fewer resources. The capital markets may integrated way. One ESG specialist and underpins better integrated reporting then value such companies more highly. former analyst says: “Many companies through a virtuous cycle of continuous disclose something about sustainability, but improvement. This supports the that is not an important part of the company’s authentic development and identification strategy. In these cases, what is missing is of companies’ strategies and business IMPACT INVESTOR ‘integrated thinking’.” models. The IIRC is publishing a series of case studies exploring the relationship “If sustainability is a satellite between integrated thinking and strategy function and is not considered across a range of businesses and institutions, which are available on the in an integrated way, then it IIRC’s website. does not have a really relevant effect on the company.” 23 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Levers for encouraging the integrated reporting of non-financial information
Levers for encouraging the integrated reporting of non-financial information
Gathering and reporting non-financial One mainstream mutual funds investor also has an impact in terms of inducing months later are also on the wrong track.” information requires resources and incurs says: “There are KPIs where we have companies to provide relevant non-financial costs. Companies will only undertake it if they made it our business to get them reported information. As a senior analyst says: “It’s Some investors will use their voting power see benefits from doing so or are required to as they are now. And that is also in the not so much a wish list anymore, it’s just in annual general meetings to try to drive do so by some mechanism, be it regulatory or long-term interest of the company… We what global investors are asking for… The improved reporting. One interviewee says: “It due to market forces. have an influence there and we use it very momentum is big enough to put pressure on could be that we do not grant discharge to a actively.” This lever is typically pulled through companies…” board of directors or supervisory board due to INVESTOR PRESSURE written correspondence, conversations and a lack of disclosure or because of qualitatively “constructive dialogue”. Many investors are becoming more incorrect, poor information.” Such voting Pressure for change lies to some extent with demanding in terms of the timing and activity will often relate to strategy issues, the investment community. Investors exert Investor involvement in various ESG initiatives format of the reporting of non-financial such as whether sustainability goals have pressure on companies individually when (such as CDP, the Climate Disclosure information. One interviewee from a leading been achieved or whether non-financial asking for specific non-financial information Standards Board (CDSB), the Task Force on asset manager says: “Everyone who does performance indicators form part of the or by excluding them from investments if they Climate-related Financial Disclosures (TCFD), not do it at all is increasingly no longer being remuneration system. fail to meet certain criteria or performance the Global Reporting Initiative (GRI) and the considered by us. Even those who do the non- hurdles. Principles for Responsible Investment (PRI)) financial report separately, but also three
BUSINESS ESG INTEGRATION SPECIALIST VALUATION EXPERT AND FORMER ANALYST “You can hardly expect “Not only do we demand that they [companies] make ESG infor companies to change their mation transparent, but we also say that it would be most helpful for reporting if they do not get investors if they did integrated reporting in accordance with the IIRC. the pressure from outside.” This is always a topic of discussion in our management meetings.” 24 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Levers for encouraging the integrated reporting of non-financial information
MARKET FORCES Research suggests demand for ESG Investors generally feel the CSR-RUG has However, one interviewee feels that investments will grow further. A survey had a positive impact on reporting, firstly regulation such as the CSR-RUG could result One interviewee believes that demand for of over 4,600 consumers in 14 countries by increasing the quantity of information in bloated company reports. Non-financial sustainable investments and products by Vontobel in 2019 found that 59% of available. One equity analyst says: “The and ESG issues could “dilute the report, but that perform well on an ESG basis is respondents did not know an ESG approach obligation to do more on the part of the are not really enlightening” unless they are now exceeding supply. Therefore, there to saving and investment was even possible; company has already massively improved the relevant to the company. is increasing justification for investors 47% would welcome greater support and information base.” requesting that companies produce ESG advice on ESG from their advisers; and 49% The CSR-RUG had little impact on smaller information, potentially in integrated reports, would like their advisers to provide more One interviewee welcomes the fact that the companies. Their responses to such which compile non-financial information in a information on ESG topics. In addition, 65% CSR-RUG has resulted in “greater openness”, regulation tends to depend on the attitude of “meaningful way”. believed ethical businesses would deliver but sees there is still “dark and light” – a wide management and their desire (or otherwise) better investment returns. [4] range of reporting. to present themselves like a DAX company. Voluntary adopters that want to stand out will Some interviewees suspect investors Overall, however, the quality of reported embrace changing requirements, even when have not pushed hard enough in Germany information is thought to have improved. not legally binding. Others will not. One equity for integrated reports and non-financial At the same time, the perception of the investor says: “Unfortunately companies see information. As a result, even German importance of this information internally – up it to a large extent more as a burden than as companies that initially embraced integrated to the supervisory board – has increased. a possibility to position themselves better or reporting may have lost some momentum. One interviewee says: “The audit committee differently. My impression is that many are However, as investors face new regulations usually has the non-financial statement not yet ready.” increasing their need for ESG, sustainability backed up with limited assurance.” This helps and non-financial information, their demands to ensure that reported information is robust Need for more regulation? of companies are expected to increase. and reliable. However, one investor even calls Some investors think that further regulation for a higher level of assurance: “We demand is needed to stimulate enhanced non- IMPACT INVESTOR REGULATION reasonable assurance. And we want to have financial reporting by companies and even an integration into the ICS [internal control integrated reporting. A senior individual at a “I believe that realizing German companies must meet certain system] and thus also into the compensation leading asset manager says: “You won’t get that the market is reporting requirements by law (see programmes.” it [more integrated reporting] through a pure Appendix 2 for a brief overview). One relatively market mechanism.” Barriers such as lack changing… and that there recent development is the requirement for As a result of the CSR-RUG, investors of resources and increased costs could limit is an economic necessity certain large public interest companies feel they can now more easily compare progress. One interviewee fears that, without to supplement their management report information. When companies within a sector regulatory pressure, many companies would has a different effect than with a non-financial statement for fiscal all report information such as CO2 emissions, lack the “courage or desire” to improve their when the legislator says: years from 2017 onwards. This requirement poor performers then come under pressure reporting. was introduced by the Corporate Social to explain why and ultimately to improve. The ‘You have to do it now.’” Responsibility Directive Implementation Act potential for improvement becomes more (CSR-RUG). transparent. 25 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Levers for encouraging the integrated reporting of non-financial information
However, regulations are likely simply to In addition, from March 2021, retail investors’ to look at things more globally or at least require increased disclosures, which in itself sustainability preferences must be checked regionally and get away from this territorial will not lead to more integrated reporting. by organizations such as asset managers or national view. That simply doesn’t help, One interviewee is concerned that companies and banks in Germany. A classification because the investor and the capital market may focus on providing the disclosures, system will be introduced, based on certain are not local.” without giving more thought to how specific criteria set by BaFin. Specific company issues interact and affect the business model, information will be needed in order to ensure Another investor would like to see a corporate strategy and performance. customers’ sustainability preferences “preferably global” approach to the reporting are met in the investments made on their of non-financial information. “But to get ESG INTEGRATION One interviewee working in sell-side research behalf. “Companies that do not provide ahead at all you start with the EU. And here in is also skeptical about the value of a report this information are not then eligible for Germany too.” SPECIALIST AND or integrated reporting that is regulatory investment,” one interviewee notes. FORMER ANALYST driven. In this case, companies may view One investor believes the EU Action Plan the regulated reporting as just extra work, However, one impact investor fears that puts Europe ahead of other parts of the world “Regulation – even if it does potentially resulting in disclosures that additional regulation could reverse progress and expects the rest of the world to have to not create a perfect world – investors see little value in reading. He says: already made in ESG investment activity. follow suit: “Because the investor is globally “If it [reporting] is not demand-driven, but For example, if the EU requires funds that oriented, the better standard always prevails.” at least helps to move in the imposed from above, then it is often no longer call themselves “green” or “sustainable” to right direction.” interesting or relevant.” meet certain criteria, some financial services However, there is some concern that providers may not issue such products unless standardization can reduce some of the Investor regulation there is market demand for them to do so. richness in reporting. Companies may stop As well as companies, investors are also They will not want the regulatory burden. reporting some information they previously facing new regulations that affect their Some existing fund managers could even had identified as relevant to their own demand for and use of non-financial withdraw from the arena. situation. “Standards always develop, and information. One interviewee refers to BaFin, with standardization, information is lost the German Federal Financial Supervisory Global standards again,” says one mainstream investor. Authority, which issued guidance in December German investors recognize the global nature 2019 on how supervised entities should deal of capital markets. Ideally, therefore, standards with sustainability risks. [5] This requires that for the reporting of non-financial information in entities include sustainability criteria in their an integrated way should be global. risk control systems. Aggregating this data will create “statistical noise”. As the investor One senior asset manager believes national says: “This is the spearhead, where this identity will become less important in non-financial information will have an impact terms of reporting – regardless of whether beyond portfolio management and beyond the the global standard embraces integrated research process.” reporting or any other approach. “You have 26 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Summary and outlook
Summary and outlook
It is clear that investors and analysts rely governed, structured and managed to support information relevant to enterprise value on non-financial information when making long-term value creation. creation, sustainable development and investment decisions and forming an opinion evolving stakeholder expectations. on a company’s value. Traditional financial Investors do not necessarily agree, however, reporting alone is no longer sufficient for on the best way to encourage increased Our research among German investors many investors. reporting of non-financial information in an and analysts suggests that companies integrated way – whether this can be achieved have improved their provision of relevant The range of non-financial information that by investor pressure and market forces, or non-financial information. The investment investors and analysts use is extensive, whether further regulation is required. community does now have access to a including both metrics and qualitative wide range of information on ESG topics descriptions. Third-party data providers Looking ahead, on the international stage, that supports their activities. However, the deliver important services to investors, progress is being made towards a reformed quantity and quality of disclosures could be helping them to access data quickly and corporate reporting system that gives equal improved, particularly when considering the in a relatively comparable way. However, weight, where appropriate, to financial needs of specialist ESG and impact investors. many investors and analysts still turn to and non-financial information. This is company reports to gain more insight into evidenced by the cooperation of five global Investors want to see greater integration the many and varied drivers of a company’s organizations involved in corporate reporting between the financial and non-financial performance and value. In doing so, they and sustainability standards: the IIRC, CDP, information that companies report. Integrated want to see what particular ESG aspects the Climate Disclosure Standards Board, reporting, if embraced by more companies – management teams and supervisory boards GRI and SASB. It is hoped that by sharing not only in Germany but across Europe consider important. They aim to build a more and collaborating, these organizations will and the world – could make a significant complete picture of the business, its risks and establish a global consistency in reporting contribution towards closing the current opportunities. that will reduce burdens on reporting entities information gap and meeting the needs while facilitating analysis, interpretation and of a wide range of investors. Investors and analysts appreciate the action by users of information. strengths of integrated reporting. These EQUITY ANALYST include the focus on the business model, Consideration is also being given to the coverage of a broader range of capitals and creation of a new sustainability accounting “In the end, integrated the importance placed on connectivity across standards board that would exist alongside reporting has to become the all areas of reporting and between financial the International Accounting Standards and non-financial elements. An integrated Board. This could help in the creation of a actual reporting.” report supports the needs of investors reporting system that delivers consistent, by helping to identify companies which are comparable, reliable and assurable 27 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Appendix 1: Interview questions
APPENDIX 1 Interview questions
Our interviews with investors and analysts 3) What types of corporate reporting would 6) Turning now to integrated reporting, how 7) What are your views on the future of were structured on the basis of the following you use to access relevant non-financial familiar are you with the
APPENDIX 2 A brief overview of corporate reporting requirements in Germany
In Germany, medium-sized and large non-financial KPIs, such as information on methodology) from the prior year must also in Germany until the implementation of the corporations are required to prepare a environmental or employment matters when be presented and discussed. European Corporate Social Responsibility management report (Lagebericht) providing an they are relevant to an understanding of the (CSR) Directive. However, since the appropriate view of the course of business and entity’s business performance. These KPIs are subject to assurance, since implementation of the CSR Directive the position of the company. The management the auditor in Germany is required to express Implementation Act (CSR-RUG), certain public report and financial statements typically form These requirements are specified in the a reasonable assurance opinion specifically interest entities with over 500 employees the basis of a company’s annual report. German Accounting Standard governing on the management report as a whole. The on average throughout the year have had to the group management report (GAS 20). German Assurance Standard (IDW AsS 350) on supplement their management report with The management report must satisfy certain The most important financialKPI s are the management report specifically mentions a non-financial statement for fiscal years principles of proper management reporting required disclosures in connection with the KPIs and stipulates the auditor’s procedures. from 2017 onwards. They must describe (GAS 20.12-35), including, amongst others, reporting entity’s report on its economic their business model and address specified completeness, reliability and freedom from position in the group management report. In a separate section, for some companies, the non-financial aspects: environmental issues, bias, clarity and transparency as well Since GAS 20 came into force in 2013, non- management report also needs to include the employee and social matters, respect for as materiality. It must also contain certain financial KPIs would supplement these if Corporate Governance Statement, which may human rights and the prevention of bribery content elements, including the most they are material for an understanding of alternatively be published on the company’s and corruption. Where neccessary for a important financial and (for large entities the course of business and position of the website. The statement includes a number proper understanding, additional disclosures also) non-financial performance indicators, group. Thus, their inclusion is subject to the of corporate governance disclosures like the are required. and an explanation of the company’s expected entity’s discretion, as applied in the individual declaration of compliance (on a comply-or- development and significant risks and circumstances (GAS 20.54). In either case explain basis) with the German Corporate The non-financial information can be opportunities. these should be KPIs used for internal Governance Code, information on corporate integrated throughout the management management purposes for managing the governance practices and the diversity report, presented as a separate section or, The German law – the Commercial Code group. GAS 20.101 et seq. and GAS 20.284 concept. In connection with this statement, the alternatively, presented in a non-financial (Handelsgesetzbuch (HGB)) – contains give further details and provide examples. German Corporate Governance Code requires report. A fourth option would be to publish the specific requirements. According to companies to publish a separate Corporate the non-financial information on the entity’s Article 289 (1) the management report has to GAS 20.26 requires consistency in the Governance Report. However, following a website later (up to 4 months after the end include an analysis of the entity’s economic content and format of the management revision to the Code, this additional report will of the reporting period). Companies are performance, which must include financial report. As the KPIs reported are specific no longer be required. able to apply integrated reporting and to use KPIs together with their relation to the to the individual company, there is no frameworks such as those of the GRI and IIRC. amounts and disclosures in the financial standardized calculation method in place, With the exception of the aforementioned statements. According to Article 289 (3), so consistency in methodology is important. requirement to report the most important for larger entities (according to size criteria According to GAS 20.113, significant changes non-financial KPIs, there were no legal also defined inHGB ) this also applies for (in the outcome – i.e., not in calculation requirements for sustainability reporting 29 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT References | Acknowledgements
References Acknowledgements
1 Ocean Tomo, Intangible Asset Market Value 4 Vontobel Asset Management, Act ESG: Charles Tilley OBE Klaus Kirchhoff Study, 2020 Closing the ESG knowledge gap, – An Dr. Jeremy Osborn Dr. Stefan Hannen https://www.oceantomo.com/ opportunity for product providers and intangible-asset-market-value-study/ advisers to engage with end clients Thank you to all our interviewees from, https://am.vontobel.com/document/ amongst others, the following companies* for 2 Robert G. Eccles, Michael P. Krzus and f72cc5f3-7cf5-4b7d-9b26-056ec4cf3d60/ generously sharing their time and insights: Carlos Solano, A Comparative Analysis Act-ESG_-Closing-the-ESG-knowledge- of Integrated Reporting in Ten Countries gap_20190901_EN.pdf IIAllianz Global Investors GmbH (2 March 2019) IIAQAL Capital GmbH https://ssrn.com/abstract=3345590 5 BaFin Guidance Notice on Dealing with IICFA Society Germany Sustainability Risks IIClimate Endowment Group 3 Mariana Bozesan, Integral Investing – From https://www.bafin.de/SharedDocs/ IIDeka Investment GmbH Profit to Prosperity (Cham, Switzerland Downloads/EN/Merkblatt/dl_mb_ IIDWS Investment GmbH 2020), pp. 167–209 Nachhaltigkeitsrisiken_en.pdf?__ IIIndependent investors blob=publicationFile&v=5 IIRisk management specialist IISelf-employed consultant IISell-side analyst in equity research IIVALUESQUE
Moreover, thank you to Sarah Perrin and all IIRC and Kirchhoff employees who helped to conduct this study and prepare this report, as well as to Gillian Waldbauer (IDW) for her support on regulatory matters.
* Please note that the interviewees spoke in a personal capacity and the views expressed in this report do not necessarily reflect those of the companies in this list. 30 IIRC & KIRCHHOFF | INVESTOR RESEARCH REPORT Imprint/Contact
Imprint/ Contact
PUBLISHED BY PRESS CONTACTS ABOUT THE IIRC ABOUT KIRCHHOFF CONSULT AG
IIRC IIRC The Helicon, Dr. Jeremy Osborn The International Integrated Report- At Kirchhoff, we design sustainable value for 1 South Place, FCMA, CGMA, ing Council (IIRC) is a global coalition of both our customers and their stakeholders. London, EC2M 2RB Director of Business and Stakeholder Engagement regulators, investors, companies, standard Kirchhoff is a team of specialists focusing on [email protected] T +44 207 504 2574 setters, the accounting profession and capital markets, corporate communications, Kirchhoff Consult AG NGOs. The coalition is promoting commu- and sustainability. Experience, creativity and [email protected] Dr. Stefan Hannen nication about value creation as the next holistic thinking distinguish us. We lead the www.integratedreporting.org Senior Consultant, Head of Sustainable Finance [email protected] step in the evolution of corporate report- way in annual and sustainability reporting, ing. The International
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