The summer silly season can work both ways in the media. You can get the smallest story making headlines as there is nothing else out there, or you can get important pieces of news being ignored, probably because many journalists are on the beach.
Last week saw the latter. The UK Financial Reporting Council published its revised Guidance on the Strategic Report, which forms part of a company’s annual report. Although these issues had seen some discussion in the media over the last year or so, this publication was met with a deafening silence. Yet I would see this event as marking a seismic shift in corporate thinking.
The revised guidance encourages companies to consider wider stakeholders and broader matters that impact performance over the longer term, rather than putting emphasis just on the company’s shareholders. The FRC hopes this will lead to a greater focus on non-financial reporting. In theory, there was already a duty on directors to address the wider stakeholder audience, as set out in section 172 of the Companies Act 2006. However, the new guidance introduces a specific reporting requirement on directors to report on broader matters. These include considering the interests of employees, suppliers, customers and other stakeholders as well as impacts on the community and the environment.
Many companies and investors have been addressing ESG (Environmental, Social and Governance) issues for years, but I have sensed this has often been driven by a box-ticking mentality. To be a reputable investor you had to be seen asking ESG questions, even if this process was separate from the investment decision taking. There are clearly some companies, such as Danone or Unilever, which have focused for some time on their wider responsibilities within society. However, others have felt obliged to disclose their ESG policies in order to tick the box, without really believing in the process.
Now, the game appears to be changing for both investors and companies. Earlier this year, the annual letter to companies from the CEO of fund manager Blackrock outlined his expectation that they start accounting for their effect on society. Separately, the social investing arms of most investment groups are becoming more integrated with the decision-making fund managers. And now the revised guidance on the Strategic Report sets out very clearly for directors that they have wider responsibilities to consider all stakeholders.
What does this mean in practice? More pages. Annual reports look set to get longer as they incorporate the wider reporting requirements. I expect an increasing number of companies to move towards integrated reporting in the annual report, including ESG issues. In theory, the new guidance is for accounting periods beginning after 1 January 2019. It wouldn’t surprise me to see companies moving to best practice sooner rather than later.
Years from now, the publication of this new guidance will be seen as the event which finally moved ESG reporting from a box-ticking exercise to a real part of the investment decision. It will be a brave company which doesn’t consider the new requirements very seriously.
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