King III Integrated Reporting - sustainability reporting no longer a poor cousin to the financial numbers

King III requires companies to issue an annual integrated report that focuses on the impact of the organisation in its economic, social and environmental spheres.

“A key part of this integrated reporting will now include reporting on sustainability issues” says Alison Ramsden, PricewaterhouseCoopers SA Director in Risk Advisory Services. “While the concepts of sustainability issues and sustainability reporting were all contained in the previous King II report on Corporate Governance, they are now given heightened attention. We should start to see true triple bottom line communications from companies on economic, social and environmental issues.”

Ramsden says this new form of integrated reporting will holistically and comprehensively address all stakeholders, enhance trust between the company and these various interest groups, and build corporate credibility. “It also allows for a far more holistic and informed economic value assessment of a company. A company’s future is no longer only about what can be financially quantified and accounted for.”

Ramsden says that King III effectively ‘mainstreams’ the concept of sustainability through its requirements of integrated reporting across all areas of corporate performance, and by embedding sustainability into risk management practices and performance measures. “Companies should start linking the consequences of their social and environmental behaviour to financial consequences. Sustainability should be well integrated into all aspects of corporate strategy, including both risk management and opportunity.”

Previously, sustainability reporting has been piecemeal and selective. Brendan Deegan, PwC SA Assurance Leader, says it now extends to all areas of performance. It should also include forward-looking information and should consider targets and benchmarks.

The sustainability report has historically been a standalone document, drafted in isolation from the annual report, and is sometimes even viewed as an afterthought. King III, while still allowing for separate documents on financial and so-called non-financial information, requires far more integration between the two. Deegan says “there should now be a more holistic report that reflects both financial and non-financial performance and the relationships between them. The two reports should be linked together and ‘talk to each other’, not constructed in isolation as has been done in the past.”

The integrated report – in whatever final form it takes – should be prepared annually, and if comprising more than one document, should be made available at the same time.

Chapter Nine of King III deals with the various systems and processes that a company should put in place in order to deliver reliable and holistic integrated reports to stakeholders.

Deegan points to the responsibility for integrated reporting being clearly placed with the board of directors. “The board should then assign such responsibility to the audit committee.”

Deegan recommends that companies follow the Global Reporting Initiative’s (GRI) G3 guidelines for sustainability reporting, as this has become the accepted international standard.

King III also recommends that the board receives assurance as to the accuracy and completeness of the information in respect of sustainability reporting and that key performance indicators on sustainability are properly explained in terms of their implications and also having regard to available benchmarks. Such assurance should come from an independent third party in order to lend greater credibility and reliability to key sustainability disclosures.

The recommendation is that, in giving this assurance, the independent assurer should follow a combination of best practice procedures, being those in the International Ac­counting and Auditing Standard Board’s International Standard on Assurance Engagements (ISAE3000) and the AccountAbility AA1000 Assurance Standard.

The audit committee is given ultimate oversight responsibility for the integrated report and should also appoint the independent  assurance provider for sustainability reporting.

Deegan says companies will now have to establish formal sustainability strategies and polices and ensure that sustainability gets embedded into ongoing business activities and across all systems and departments, particularly risk, environmental, legal and financial. “Ideally, we should also see sustainability criteria being built into individual performance measurements.”

The sustainability information should also be aligned with internal management and reporting. “This means it should no longer be put on hold until the end of the financial year. Companies should be reporting internally on a quarterly, preferably monthly, basis on sustainability matters.”

Deegan concludes that with these new developments that now require sustainability to be linked to corporate strategy and to be comprehensively reported on, sustainability is moving from an intuitive to an intellectual science.