Corporate reporting after a year of chaos, what lies ahead?

2020 has been a year of great change for business, politics and society. Senior Investor Engagement Consultant Kay Kayachith considers how the pandemic may affect reporting in years to come, and what else is on the horizon for 2021 and beyond in the Investor Relations Society's magazine Informed.

 

As we look back on the year that has transformed our world, it’s hard to remember what it was meant to be. 2020 was meant to be the year of climate action when initiatives started bearing fruit and Climate Action 100+ commitments bore evidence of progress. 2020 was meant to be the year of stakeholder reporting. It was the year the revised UK Corporate Governance Code would be fully implemented and reporting on section 172 of the Companies Act 2006 introduced. 2020 was meant to be a milestone year for gender equality reporting too, marking 25 years since the Beijing Declaration.

 

But then the pandemic happened.

 

And it upended our lives in swift and extraordinary ways and pushed corporate governance and reporting frameworks to their limits.

 

A resilience test that brings sharper focus

 

It revealed the fragility of our global infrastructure and taught us that investment risks do not come from just financial crises, but from real-world crises too. The pandemic has been a major resilience test for the global financial system and society as a whole.

 

It has forced companies to rethink their operations and has brought corporate purpose, culture and stakeholders, key principles of the revised 2018 Code, into sharper focus. In our view, there are a range of factors that are impacting reporting now and into the future.

 

Firstly, we have seen the impacts of COVID-19 on economies around the world, in an unprecedented scale, with the financial fallout from nationwide quarantines plunging markets to depths we haven’t seen since 2008. On the political front, we have seen how an era of Donald Trump has shaped reporting content as companies grapple to explain how sudden political shifts become political risks within their business. 2020 will prove only to be a tipping point moment in international political unrest. We expect to see more of this in the coming years, with the impacts of Brexit and the decoupling of the US-Chinese tech sector still on the horizon.

 

Evolving regulations and converging frameworks

 

Evolving regulations and initiatives, such as the EU Directive on non-financial reporting, the Taskforce for Climate-related Financial Disclosures (TCFD) and European Single Electronic Format (ESEF) will also impact the types of data companies collect and report, which will ultimately change narrative reporting. The importance of environmental, social and governance (ESG) criteria to investors is increasing rapidly around the world. Reporting on ESG performance is gaining momentum as a gauge of business resilience alongside more traditional financial measures. More companies now recognise that ESG-related risks carry the potential to impact share price, company reputation, regulatory exposure and employee engagement.

 

The convergence of sustainability reporting frameworks will also shape reporting going forward. The International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB) have recently merged to form the Value Reporting Foundation, moving us closer to a more simplified standard for the disclosure of comparable and reliable non-financial information. We expect the UN Sustainable Development Goals (SDG), TCFD and the Value Reporting Foundation to play bigger roles in reporting content in the coming years. Reporting on climate change will become mandatory soon, holding companies to account on their commitments and pushing forward much needed progress in this area. In the coming decade, we expect more stakeholder activism to focus on real-world outcomes, especially as we move towards the 2030 target date for the achievement of the SDGs. The finance, technology and oil and gas sectors have already made loud commitments on this front.

 

Broader issues and the basics

 

Other broader issues and conversations are also changing content, from the Black Lives Matter movement pushing discussions about racial equality and diversity, to gender pay and supply chain transparency, through to human rights and modern slavery. Companies are attempting to tackle these sensitive issues in their reporting content, with several FTSE 100 companies already reporting on the guidelines set out in the Alexander-Hampton and Parker Reviews. This is a good start, but we have long race ahead of us to truly embed the goals set out in these reviews. Alongside these broader challenges, many companies are still struggling with the basics of annual reporting like communication of how they are moving their purpose to action, executing a business strategy that can weather unforeseen events, and explaining the nuts and bolts of their business model. 

 

Is ‘digital first’ here yet?

 

And lastly, there is digital. Everyone says that digital is the future, yet we are still thinking and designing for print. Research has shown that most readers of the annual report consume it in PDF form rather than ‘digital-first’. The reports we have reviewed are still being designed with PDF in mind and in a linear flow. As such, we believe that the transition to a ‘digital-first’ experience in the next few years will come through innovations in making the report content easier to access and more ‘bite-sized’ for digital and social media consumption. This could be through more inventive use of infographics, animations and 360 degree photography to help explain report content. The pandemic has increased demand for video content for virtual AGMs and Capital Markets Days, with annual review films injecting some warmth into an otherwise sterile webinar and the ‘fireside chat’ replacing typical CEO speeches. We expect this trend to continue beyond the pandemic, especially with the adoption of more AI tools in corporate reporting, and especially as, we still believe, the future is digital.

 

The annual report will become more important than ever

 

Looking beyond the shifting ground beneath our feet and into the horizon of 2021, we believe that the annual report will become more important than ever. Companies are under unprecedented scrutiny, and the public is calling for the private sector to fulfil both its purpose and responsibilities to all stakeholders with a reinvigorated urgency. As society as a whole turn their attention to long-term sustainability, the role of the annual report will become pivotal in providing more transparency and meaningful content, and to hold business leaders accountable for their promises, actions and own beliefs.

 

This article was featured in the Winter edition of the IR Society's magazine Informed. See it in full here.