What will radical reporting look like?

The Government has big plans for corporate reporting. Its review of non-financial reporting had been moving at a glacial pace but accelerated last year. Under a new moniker, the Modernisation of Corporate Reporting now promises to overhaul every aspect of the annual report. In a field that tends to evolve in incremental steps, this is a radical agenda. No one disagrees that reporting needs to stay relevant. There is also a strong argument that incremental legislation of the past ten years has left the annual report looking muddled and confused in places. However, well-intended legislation can sometimes have unintended outcomes. When the Government publishes its consultation, which is expected soon, we’ll be looking for the following:

 

Will reporting be simpler?

 

The goal is “to refocus annual reports on concise, decision-relevant information for investors and creditors while removing unnecessary burdens”. An overriding aim is to simplify the reporting framework and proposals announced already show encouraging signs. Removing the requirement for all companies to produce a directors’ report, with some content relocated elsewhere in the annual report, makes perfect sense. Today’s directors report resembles an odd miscellany of unrelated content.

 

A true test will be how well the Government has streamlined legislation. For example, the requirements for Section 172 statements to meet the needs of the Corporate Governance Code and the Companies Act left reporters wondering which disclosures should go in the strategic report and which should go in the governance report.

 

For most companies, the non-financial and sustainability information statement is a cross-referencing exercise and offers little value. Layers of reporting legislation have created further complications, which reporters have spent a lot of time trying to reconcile. We can think of one FTSE 100 reporter that reconciles several reporting requirements in one statement. By organising the content according to the TCFD framework, it shows how it meets the listing rule (6.6.6R(8)) and by including this in the Non-Financial and Sustainability Information Statements (NFIS), it also meets the requirements of the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 and Companies Act. Another reporter cross references its TCFD index from its NFIS, so in theory, the reader goes to the NFIS, which redirects them to the TCFD index, which directs them to the actual content!

 
The Government’s desire to ensure that reporters need only follow one rule for each disclosure would bring some welcome simplification.

 

It doesn’t undo what works

 

In its desire to be ambitious and leave no stone unturned, we hope the Government won’t change the things that work. There is already a well understood structure to the strategic report, which has emerged out of current legislation and market practice that provides companies with the flexibility to tell their story in a way that makes sense to them. Changing the structure would create unnecessary upheaval across the entire strategic report, when time would be better spent simplifying thresholds, scope, and sustainability reporting regulations which have evolved in a piecemeal way over the past few years.

 

That’s not to say the front half of the strategic report is perfect. It is the case that reporting standards in some areas, such as the business model, have plateaued. We think this is more to do with enforcing the existing legislation and encouraging companies to follow the guidance rather than the rules themselves. It’s very possible that other priorities, including a focus on drawing up new sustainability legislation, have drawn attention away from this and we hope the latest review will get us to a point when we can refocus on the whole report and embrace the spirit of the law rather than getting bogged down in the letter of the law.

 

Is the consultation precise and clear about what it wants to achieve and how it will be done?

 

Section 172 reporting offers a good example of where legislation can go wrong. It wants to know “how the directors have had regard to broader matters in their actions, behaviours and decisions when performing their duty to promote the success of the company”. The guidance and market practice has resulted in a common approach where reporters list a generic set of stakeholders, list why they are important, what their issues are and what the company had done to address them. In theory, this sounds fine, but in practice it doesn’t work. Reporters are able to produce lengthy lists of communication channels to stakeholders, but there was no channel back to head office for the person writing the annual report to capture actual issues raised. Lists of generic stakeholder issues are of little value to readers.

 

Well intended legislation that isn’t precise and guidance that offers up too many ideas can end up generating too much unhelpful information. When companies lack clarity on requirements, struggle to source essential content, or fear that sensitive issues could be misinterpreted, they default to publishing only what feels safe. The same challenge also leads to what we would describe as declaratory statements when companies declare  they agree with the legislation without offering any insight. Section 172 reporting is best when it focuses on a limited number of big decisions that will deliver success and how all stakeholders were considered. Suggesting that reporters write out the way in which they engage and communicate with stakeholders to provide an insight into the relative importance that it places on those relationships didn’t work and crowded out what really mattered.

 

How well does the new reporting framework facilitate the integration of new sustainability disclosures into the narrative report?

 

Our starting point is that Sustainability Reporting Standards (SRS) will form the basis of a set of non-financial statements (sustainability report) to sit beside a set of financial statements with a narrative report (strategic report) sitting over the top to surface the key points and provide context for the statements. The question is then how best to show that sustainability is being considered within business decisions and doesn’t get siloed.

 

There are already robust and well-established principles for integrated reporting and if ever there was a time for them, it is now. Reporting on the resources and relationships a business depends on for long-term success has been an area that few companies have addressed. But they are at the heart of the biggest challenges facing business today, from energy security to the adoption of AI.  More detailed reporting on how human and natural capital are manged to underpin the long-term success of the business would vastly improve the integration of social and environmental factors in the narrative report. Explaining how a business ensures its people have the right skills, ensuring it has invested in the right areas, managed relationships with stakeholders and conserved natural resources are all things that reporting initiatives have tried to achieve. Doing this in a piecemeal way has been unsuccessful and this is an area where the Government could be really bold.

 

If the Government can unravel the complexities that have seeped into reporting, its plans will be welcomed. If it can be bold without upsetting what already works, its plans could be transformational.