World Congress of Accountants 2010

“Accounting for Sustainability – The Connected Reporting framework”
YBhg Tan Sri Zarinah Anwar
Securities Commission Malaysia
11 November 2010

Good morning ladies & gentlemen

First of all, allow me to take this opportunity to congratulate the IFAC and the MIA for organising the World Congress of Accountants 2010.

It is truly a privilege to be here speaking at this plenary session, and an honour to be amongst a panel of distinguished experts in the field of sustainability reporting.

The inclusion of this topic in the program suggests to me a growing momentum for dialogue and opportunity to build further on the idea of ‘accounting for sustainability’.

I am not an expert on sustainability reporting, but as a capital market regulator and custodian of corporate governance, our paths are bound to cross. As the regulator I have an interest in a vibrant, free and fair capital market that promotes economic well being in a sustainable manner.

If businesses are to be sustainable, they must preserve their long-term “License to operate” – this means businesses must remain profitable, but not at the expense of society. Recognition of this fact means that corporate reporting cannot be confined to just the financials. More needs to be reported if investors are to be able to determine the sustainability of the companies well into the future. I believe therefore that defining corporate governance in a way that allows for entrepreneurial behavior and promotes long-term sustainable value creation for all stakeholders will ultimately result in greater transparency in corporate reporting leading to higher quality businesses.

I would therefore like to focus my remarks this morning on (i) how sustainability is gradually reshaping the way companies approach corporate governance; (ii) the increasing realisation that financial reporting alone cannot capture the full dimension of corporate performance and worth; and (iii) the challenges some of us face in integrating financial and sustainability reporting.

Ladies & gentlemen

The reporting environment has changed dramatically since the 1980s. The rise in ethical consumerism, socially responsible investing, shareholder activism and sophisticated use of the internet, have made companies more accountable than ever to their stakeholders. Decisions to be made about a company’s real performance are based not just on financial information but also non-financial information that accounts for the effects of their strategies, risks, practices and outcomes on external stakeholders. Thus today there is a galaxy of non-financial reports, including those relating to sustainability, environmental social and governance (ESG), corporate social responsibility (CSR), environmental health and safety reporting, and the like.

The global financial crisis and events such as the recent Gulf of Mexico oil spill disaster have also focused greater attention on corporate accountability and highlighted the need for capital market decision-making to reflect longer-term considerations, challenging the extent to which corporate reporting disclosures draw attention to the governance and management of risks.

This shift in corporate reporting will support the information needs of long term and strategic investors. In turn, through integrated reporting, a company can understand the interlink between financial and nonfinancial performance in order to make the right decisions for creating a sustainable business. What is clear is that for businesses to be sustainable, environmental, social and governance considerations must be embedded in its core business strategies and fully integrated into its operations. This can facilitate the integrated reporting of its performance, which in turn induces greater impetus towards higher levels of achievements, resulting in a mutually reinforcing framework that will engender trust and reputation

The challenge with integrated reporting though is that there is no ‘one set of standards’ for companies to adopt. That is why the efforts of the International Integrated Reporting Committee (IIRC) to develop an overarching integrated reporting framework to promote a global standard for reporting both financial performance and sustainability in a single report is to be lauded.

Developing such an integrated report is made more difficult because, even today, the volume of information included in the annual report and accounts, all too often boilerplate disclosures, risks obscuring rather than increasing transparency. I believe there needs to be a reassessment of the information required – to focus on that which provides both a more concise and a more complete picture of the company’s performance and the factors that will influence its long-term success.

This does not necessarily mean more data, but greater insights into the strategy, risks and value creation of the company. So what is the best way to do this? Each company has different drivers of shareholder value and different sustainability issues. So how much data is enough? It is difficult for regulators to determine what data should be required and how to monitor the adequacy of its reporting especially with hard to quantify data, such as social issues. First there is the question of valuing the impact of these activities and second of validating them.

Given these concerns and challenges, it is vital that the anticipated integrated reporting framework by the IIRC is designed to capture and surface issues that can materially affect a company’s performance and reputation to enable stakeholders, in particular shareholders, to make informed investment decisions.

Ladies & gentlemen

I do believe that for issues such as ESG to truly become integrated into the performance of a company, it is crucial for the CEO and the Board to take ownership of the agenda; it is essential that they take it upon themselves to improve accountability by setting the “tone at the top” honoring the responsibilities that arise from the trust placed in them by investors. Boards must consider the long-term impact of short-term decisions they take on the sustainability of the business. This may require choosing directors with suitable experience to form a sustainability committee. The existence of such a committee allows specific issues to be explored in more depth than is possible at board level, even though ultimate responsibility remains with the board as a whole.

It may require supplementing such expertise with expert stakeholder advisory panels to help bridge the gap between an organisation’s wider stakeholder engagement and its governance, by bringing experts together with senior management.

The accounting fraternity also has a key role to play in supporting boards of companies in their efforts to meet sustainability demands. Accountants can bring professional rigour in demanding transparency, adopt standards and processes that will highlight key concerns, and ensure their risk discussions with management are robust and productive and will help the company and the board to prepare for change. Accountants are in the best position to provide independent challenge to practices they observe within a business.

Ladies and Gentleman

The paths of corporate governance and sustainability are converging with new demands being placed on companies and their leadership. Codes and best practices and the increasing recognition of the importance of sustainability issues are compelling companies, especially the larger ones, to integrate these issues into their corporate reporting. A KPMG study published in 2008, found almost 80% of the Global Fortune 250 companies report publicly on social and environmental data. This is a marked increase from 50% in 2005.

According to the World Federation of Exchanges there are almost 50 socially responsible investing (SRI) indices offered by stock exchanges and these indices are predicated on the voluntary disclosure of a broad range of social and environmental indicators. The Johannesburg Stock Exchange (JSE) SRI index and the Novo Mercado by the Sao Paulo Stock Exchange Bovespa are two examples.

A recent survey “Gaining Ground” commissioned by the IFC and carried out by Mercer indicates that 46% or $300bn worth of emerging market investment now factor in environmental social and governance issues. These and other examples of strong growth in voluntary sustainability reporting suggest that companies and their stakeholders find value in such reporting.

The obvious question to ask next is whether or not sustainability reporting should remain strictly voluntary, or should be mandated by regulators or stock exchanges. Personally, I am not convinced that we can leave it to market forces to cause change in the approach to reporting.

It is something that requires an assertive nudge. In this regard the role of regulators and exchanges is vital in setting minimum thresholds for reporting and ensuring that such reporting frameworks are in line with developments in regulatory standards and international best practices. A number of countries have already made broad based sustainability reporting essentially mandatory – South Africa as a result of the King III Report, for example, now requires all listed companies on the JSE to publish an integrated report.

Malaysia has yet to mandate integrated reporting although in 2006, our stock exchange, Bursa Malaysia, amended its Listing Rules to require PLCs to report on their CSR activities; and to state so, if there are none. At the same time, the exchange launched a CSR Framework as a guide for PLCs in implementing and reporting on CSR, but no requirements are outlined with respect to the amount of disclosure required. While many PLCs make genuine efforts to ensure disclosure and reporting as part of their CR strategy, without the requirement for integrated reporting, there remains the risk of CSR and other similar efforts to be treated merely as add-ons.

But initiatives are also already underway to educate companies to integrate sustainability into the management and operations of their business, and to draw awareness of capital market participants to the growing relevance and importance of sustainability. These efforts highlight that good sustainability performance has the potential to enhance brand value, act as a catalyst for innovation, and facilitate new business opportunities, reduction of risks and cost efficiencies.

In addition to Bursa Malaysia, the government linked corporations (GLCs) have also played a pioneering role in raising the profile of sustainability reporting through the publication of the Silver Book in 2006 which provided for the development and implementation of a communications and reporting program of the GLCs’ contribution to society.

Despite Malaysia still having some way to go on the sustainability reporting ladder, our efforts have not gone unnoticed. The recent 2010 Asian Sustainability Rating (ASR) which covered 542 companies, ranked Malaysia 3rd amongst 10 Asian countries. According to ACCA’s recent research publication The Rise of the Report and the Regulator, over a hundred and twenty companies operating in Malaysia, Thailand, Indonesia, Singapore and the Philippines produce sustainability reports, or include substantial sustainability-related reporting within their annual report, with Malaysia having the highest number of reports (49 PLCs producing 97 sustainability reports) in the past eight years.

Undoubtedly there is a growing awareness of the importance of sustainability issues in the investment process. Shareholders, fund managers and publicly listed companies are all paying more attention to these issues, especially so in a harsher business climate.

While Malaysia and ASEAN’s progress in sustainability reporting has been encouraging there is still much to be done and the pace needs to be accelerated. There is growing acceptance for the eventual replacement of the annual report with an integrated report, but until that day arrives we are faced with the challenge of what is material and relevant and how much data is enough. There is also need to create a level playing field for companies disclosing crucial information related to financial and sustainability performance. It is a challenging task to try to address all these in the absence of global standards. In this regard, the IIRC’s integrated reporting framework will certainly help address the inconsistencies in present guidelines and practices, application levels as well as relevance of core issues.

Integrated reporting is an idea whose time has clearly come. Now the task is to make sure that it is a practice we are all ready for.

Thank you.