Value Reporting: What it means and why it’s important

28/06/2021 In November of 2020, the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) announced their intention to merge and simplify corporate reporting requirements for listed companies. On the 9th of June 2021, this merger became real and the Value Reporting Foundation was born.

By providing three key resources aimed at helping investors “develop a shared understanding of enterprise value and how it is created, preserved or eroded over time.” These key resources are the integrated thinking principles and the integrated reporting framework and the SASB standards.

The point of it all is to encourage corporate reporting on a more complete range of issues and relationships that drive enterprise value. To support an understanding of all the material sources of value for informed investment decision-making and engagement with stakeholders. This is important because a good investment can become a great investment when the business understands all the risks it must contend with and can be confident that the business has a handle on how to exploit all the opportunities before it.

Conversely, a seemingly good investment can quickly become a bad investment when it turns out what was understood about the business was incomplete. I write elsewhere that incomplete information leads to the mispricing of assets, the misallocation of capital and threatens the stability of the financial markets.

The integrated reporting framework, anchored in the “six capitals” – financial, manufactured, human, social, intellectual and natural – enabled a better understanding of the value creation story of a business and the factors that materially affected the businesses’ strategy, governance, performance and prospects, bringing all this new information together through the concept of “connectivity of information”.

The SASB standards make the framework actionable. They provide metrics that are “specific, detailed, and replicable”. Together, under the Value Reporting Foundation, we have a reporting regime that enables consistent, comparable, and reliable ESG information and how it has impacted financial performance.

The ESG link to value creation is made clearer:

  • We’ll see how sustainable products and services have contributed to top-line growth (innovation and new markets).
  • How resource efficiency has contributed to cost reductions.
  • How the business has done better in how it treats and relates to employees and the impact that has had on productivity.
  • How investments with longer-term environmental risks have been avoided and investment returns enhanced by allocating capital better for the long term.

Now, more than ever, we need tools and frameworks that encourage long-term thinking and reports that provide the complete picture of how businesses have performed and their prospects in a world that is changing rather rapidly. We need comparable reporting and businesses that understand the importance of “broader information” to their long-term strategies, to investors and providers of capital. This merger is an important step toward that, and it empowers managers with the information they need to make smart investment and strategic decisions.