Using sustainability financial reporting to attract investors

 

Listed companies are required to publish annual audited financial reports and interim unaudited financial reports prepared in accordance with the International Financial Reporting Standards (IFRS). Investors rely on the financial reports to get a glimpse of the financial performance and fundamentals of the companies.

By LOISE WANGUI

Summary

• Going forward, companies, listed or otherwise that seek to differentiate themselves and are keen to stay relevant must make a quick shift from just financial reporting to integrated reporting.
• Integrated reporting enables a company to tell its story of positive societal and environmental impacts and contributions; its intangible assets and competitive advantages tied to ESG matters and financial performance including profitability and returns to its shareholders and investors.
• Now is the time for businesses to prove to investors the “S” in ESG, and those that hope to stay relevant have no choice but to reconcile the business’ worth beyond just a balance sheet.

Generally, financial statements are voluminous and complex for most investors. In addition, most disclosures in the reports are often historical, quantitative and only depict the short- term performance of the company.

Gradually, issues of how companies impact the society they operate in- the environment, overall Environmental Social and Corporate Governance(ESG) structures- have increasingly become key for investors as they decide which companies to invest in. As much as financial performance is still very important, investors are turning to ESG frameworks that indicate long-term sustainability of businesses.

The Covid-19 pandemic has posed a real stress test to sustainability of businesses and the robustness of their operations. Business leaders have been forced to rethink and reimagine their vision of success, which was previously premised primarily on financial performance. Most listed companies, like other businesses, have been highly impacted by the pandemic. At the same time, investors, now more than ever are demanding information faithfully and accurately on the degree of impact of the pandemic on the listed companies’ business; the mitigation measures taken to ensure the ir sustainability as well as forecasts on operations of the business.

It should be appreciated that companies cannot predict, with precision, the effects of Covid-19 and that the actual impact largely depends on several factors beyond a their control and knowledge. However, investors have a right to this information as well as the sustainability fundamentals of those companies. Investors are now more informed and as the Covid-19 pandemic unfolds, there will be more scrutiny on the robustness, operational optimisation and sustainability of the business and operations of listed companies. Sustainability reporting would therefore be a vital tool for listed companies to bolster trust and confidence among investors and all stakeholders.

Going forward, companies, listed or otherwise that seek to differentiate themselves and are keen to stay relevant must make a quick shift from just financial reporting to integrated reporting. Integrated reporting enables a company to tell its story of positive societal and environmental impacts and contributions; its intangible assets and competitive advantages tied to ESG matters and financial performance including profitability and returns to its shareholders and investors. Now is the time for businesses to prove to investors the “S” in ESG, and those that hope to stay relevant have no choice but to reconcile the business’ worth beyond just a balance sheet.

This holistic approach will come with its own share of challenges, top of them being the shift in mindset from the traditional financial reporting. There is an urgent need to transform the thinking around ESG matters and integrated reporting.

For companies to create long-term value that will sustain them during and after Covid-19, their boards must empower management and investor base to bridge the information gaps around ESG and integrated reporting. Companies must also continually monitor the effects of the Covid-19 pandemic on the business performance and operations and provide accurate information in a proactive manner to investors and other stakeholders.