Why non-financial reporting is becoming as prevalent as financial reporting

Posted on the 31st July 2018

Author: Ian Jukes

Social Value Strategist

Since 1993, the percentage of the 4,900 companies surveyed in KPMG’s annual CSR research reporting on their corporate responsibility has grown more than six-fold, from 12% to 75%. With such a significant uptick in non-financial reporting among the top companies in the world, other companies are following suit, and the importance of – and expectation for – access to corporate responsibility information is growing: non-financial reporting is becoming as prevalent as financial reporting. This article explores why.

So, firstly, why is financial reporting so prevalent? There are four main reasons.

  • Stakeholders: effective financial reporting allows stakeholders to analyse and interpret financial data within the context of the company’s performance as a whole and, crucially, provides clues as to the potential for improvement, growth and sustainability for that company.
  • Transparency: trust in businesses in the UK has dropped to 33%, so companies need to promote financial transparency to maintain consumer confidence. Meanwhile, potential investors will only invest in companies that can display evidence of financial certainty.
  • Compliance: UK companies are required to report on their performance and activities over the financial year, including all money received and expended, records of the assets and liabilities, and so on. Sanctions are imposed on companies who fail to meet these expectations.
  • Benchmarking: financial reporting is a standardised measure of your company’s success. It provides a series of metrics which allow a like-for-like comparison with other companies, and so acts like a scorecard, of sorts, simplifying and condensing a broad range of other metrics into a single metric or set of metrics.

With these points in mind, we can better address why non-financial reporting is increasingly prevalent. Interestingly, the reasons for its rise in adoption mirror the reasons for financial reporting’s existing popularity…

Stakeholders

As with financial reporting, non-financial reporting helps stakeholders and potential stakeholders to make better business decisions. Insight into all three pillars of the triple bottom line – including environmental and social considerations – provides a more holistic overview of business performance. And, crucially, companies which perform better in terms of their social metrics are more likely to prosper in other ways: they are more likely to be sustainable, and less likely to suffer from the ill effects of a lack of responsibility. Poor social practices can result in environmental risks, health risks to your employees, and product risks to your consumers – so it’s best to reassure your stakeholders that you’re not one of the ‘bad guys’. As the Fast Company notes, “Investing in social sustainability allows companies to flip these types of liabilities into assets. When you provide safer working conditions, living wages, and job security, you create a more secure supply chain.”

One organisation that has understood the need for triple bottom line reporting is ClearlySo, who provides non-financial reports and strategic advice to investors looking to invest their capital in ethical business.

Transparency

There is a greater thirst among consumers and employees alike for transparency with regards to ethical standards. Companies who disclose their social impact are more likely to appeal to consumers, and many – especially from younger demographics – are willing to pay a premium for companies who display socially and environmentally responsible characteristics: a 2015 Nielsen report found that 66% of global respondents say they are willing to pay more for sustainable goods. Likewise, employees who work for companies with embedded CSR strategies are more likely to record higher levels of satisfaction (and therefore more likely to be retained), and to perform at a higher standard. One way of doing this is to meet standards set by others: members of the Ethical Trading Initiative are required to meet various targets in order to prove their social responsibility and, in doing so, are being actively transparent in their reporting.

Compliance

Alongside a growing expectation among stakeholders, consumers and employees for better non-financial reporting, there is also a growing institutional and regulatory demand for compliance to defined standards. Whilst there are regional differences in what this compliance looks like, there is an unmistakable movement towards a heightening of expectations, and companies who preempt these regulatory changes will be best positioned. In India, a 2013 law makes it mandatory for companies of a certain size to spend 2% of average net profits made during the three preceding years on CSR activities. In the UK, meanwhile, a 2016 regulatory update means that the  ‘Non-Financial Reporting Directive’ requires companies of more than 500 staff to disclose certain information:

  • the company’s business model;
  • the policies pursued by the company in relation to the matters noted, any due diligence processes;
  • implemented by the company in pursuance of those policies;
  • the outcome of those policies;
  • the principal risks relating to the matters noted arising in connection with the company’s operations;
  • how the company manages those principal risks, where relevant and proportionate; and
  • the non-financial key performance indicators.

Benchmarking

Finally, reporting allows you to create a standardised score or set of scores against which the non-financial success of the company can be assessed. This might be according to a predefined framework – such as the UN’s Sustainable Development Goals, or the Global Reporting Initiative – or according to a scorecard that reflects your company’s bespoke objectives. In either case, it is important for this work to be as coherent, focused and goal-driven as possible, in order to facilitate comparison (either year-on-year, or against other organisations) and improvement. Make sure you use flexible, ‘framework ambivalent’ software which allows you to capture, track and analyse the non-financial performance of your organisation. Impact provides a platform to do just that: allowing you to create and manage a digital scorecard of your non-financial metrics, de-centralise responsibility for capturing the necessary data, simplify the process of amalgamating the data, and better preparing your company for reporting non-financial metrics and meeting regulatory standards.

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