ACCELERATORS

In any given market, the interactions of four market and regulatory forces increase the momentum of the integrated reporting movement or resist it. Explored below, these accelerators are regulation, multistakeholder initiatives, organizations, and endorsements.

Regulation

The only accelerating force to invoke the power of the State, regulation changes company behavior directly. It is a double-edged sword, however, whose successful implementation risks relegating integrated reporting to the status of a compliance exercise as companies, constrained in their ability to "tell their own story," might only adhere to the "letter" rather than the "spirit" of the law. Although only South Africa requires integrated reporting, regulations that support sustainability reporting are increasingly cropping up around the world. In the 2013 report "Carrots and Sticks," KPMG, the Centre for Corporate Governance in Africa, GRI, and the United Nations Environment Programme considered 180 policies in 45 countries to find that 72% were mandatory, compared with 62% in 32 countries studied in 2010, and 58% in 19 countries studied in 2006.26 Major trends included framing regulation in terms of corporate governance and disclosure requirements, an increasing number of policies based on a "report or explain" basis, a focus on large and state-owned companies (with voluntary reporting by small and medium-sized enterprises), sustainability reporting as a listing requirement on some stock exchanges (discussed more below), and governments striving to harmonize the use of multiple frameworks.27 Consistent with this trend toward mandated sustainability reporting, professors Ioannis Ioannou of London Business School and George Serafeim of Harvard Business School found that government adoption of mandatory corporate sustainability reporting led to positive organizational changes often linked to integrated reporting.28 While integrated reporting and sustainability reporting are distinct practices, the spread of mandatory sustainability reporting and growing evidence of its benefits could encourage governments to consider regulations in favor of integrated reporting—most likely on a "comply or explain basis."

The latest piece of legislation covering a large geographical territory was initiated when, on April 16, 2013, the European Commission announced proposals to amend the Fourth and Seventh Accounting Directives to improve business transparency and performance on social and environmental issues. On April 15, 2014, the plenary of the European Parliament adopted this Directive by a vote of 599 to 55 from its 28 member states: "Companies concerned will need to disclose information on policies, risks and outcomes as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity in their board of directors."32 The Directive, expected to affect around 6,000 companies, applies to listed companies with 500 or more employees, as well as certain unlisted ones.33 At the time of the legislation, only around 2,500 large EU companies were disclosing environmental and social information on a regular basis.34 Companies could choose whether to include this information in their annual report (at least leading to a "combined report") or in a separate report.35 They could also choose among various standards and guidelines for reporting this information, but they were not required to do so.

In a memorandum issued by the European Commission at the time the legislation was announced, the Commission explained its stance on integrated reporting:

The Directive focuses on environmental and social disclosures. Integrated reporting is a step ahead, and is about the integration by companies of financial, environmental, social and other information in a comprehensive and coherent manner. To be clear, this Directive does not require companies to comply with integrated reporting.

The Commission is monitoring with great interest the evolution of the integrated reporting concept, and, in particular, the work of the International Integrated Reporting Council.36

Thus, while the Commission made it clear that the Directive was not calling for integrated reporting, it explicitly acknowledged its existence and that of the International Integrated Reporting Council (IIRC) while positioning the current Directive as a possible step in the direction of integrated reporting. This simple statement conveys substantial institutional legitimacy for both the idea and the organization in the European Union.

Similar to what has been done in some jurisdictions with mandatory sustainability reporting,37 the European Commission planned to develop implementation guidance. The proposal's implementation, however, would be determined by each Member State.38 Steve Way good, Chief Responsible Investment Officer at Aviva Investors and integrated reporting policy advocate,39 expressed concern about the decision to leave implementation specifics and accountability to each individual country. He felt that if this were the case, "It is realistic to believe that fewer than these 6,000 large companies in the EU will be affected, taking realpolitik into account. Any number of countries may not do it effectively, and another category of countries will try to say the directives are already included in their legislation."40

Two central challenges exist: (1) each nation is responsible for creating its own accountability device for the legislation and (2) if the legislation is "comply or explain," there is no clear indication of who should be tasked with oversight, to which organizations companies should look to for guidance, and how to explain if they do not comply.41 In contrast to countries, Waygood viewed the regulation's principles-based approach useful when it came to individual companies in preventing a "tick-the-box" compliance approach. "It would have been a mistake to attempt to create a one-size-fits-all approach that specified one set of key performance indicators for all individual sectors," he said, observing, "The proposals also recognize the individuality of each firm and give boards the discretion to report on what they believe to be relevant for their sector and explain why they have not included other measures."42 As the proposed legislation does not include any discussion of materiality, companies will have to determine for themselves whether this idea is relevant to their determination of what is "concise, useful information" and, if so, how materiality should be determined. Despite its imperfections, Waygood was clear about the potential benefits of this legislation. "For us and other analysts, it makes more and more pertinent information available that can help us make more accurate valuation assessments for the benefit of end-investors. For the EC, it makes sense as part of the Single Market Act that envisaged creating a more sustainable capital market."43