Extent of Capacity of Company’s Annual Report & Corporate Governance Statement for Enabling a Company to Meet Current Environmental and Climate Change Risk Challenges

This report explores the extent to which a company's annual report and corporate governance statement can enable the company to address current environmental and climate change risk challenges. It discusses the limitations of these reports and explores the use of sustainability reporting guidelines and integrated reporting as potential solutions. The advantages and disadvantages of integrated reporting are also examined, as well as its relevance to various stakeholder groups.

Accounting and Financial Theory
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Contents
Introduction.................................................................................................................................................3
Part 1: Extent of Capacity of Company’s Annual Report & Corporate Governance Statement for Enabling
a Company to Meet Current Environmental and Climate Change Risk Challenges.....................................3
Part 2: Sustainability Reporting Guidelines developed by the Global Reporting Initiative framework........4
Part 3: Integrated reporting and its use in addressing the limitations of the annual report and the
corporate governance statement................................................................................................................4
Part 4: Explaining the advantages and disadvantages associated with integrated reporting using
theoretically informed arguments...............................................................................................................6
Part 5: Relevance of integrated reporting to various stakeholder groups...................................................7
Conclusion...................................................................................................................................................8
References...................................................................................................................................................9
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Introduction
As such, businesses are emphasis on disclosing their sustainability measures in the
annual report by developing integrated reports. In this context, this report has been developed
from the perspective of an accounting firm that aims to provide explanation regarding the
measures that can be adopted by businesses for addressing the environmental and climate change
risk.
Part 1: Extent of Capacity of Company’s Annual Report & Corporate
Governance Statement for Enabling a Company to Meet Current
Environmental and Climate Change Risk Challenges
The directors of a company hold the responsibility of developing and presenting the
annual report. The annual report developed by a company intends to disclose its financial
performance that helps its stakeholders in assisting the decision-making. The directors’ report
included within the annual report of a company discloses information in relation to its state and
its compliance with the financial, accounting and Corporate Social Responsibility (CSR)
standards. However, it provides only an overview regarding the environmental and social
performance of a company and is not able to give a detailed overview regarding the company’s
CSR performance. The operating financial review provides depiction only regarding the past
financial performance such as gross revenue and does not give any details regarding its future
growth prospects (Steyn, 2014).
The corporate governance statement of a company only provides information regarding
the structure, rules, practices and processes that are used for directing and managing the
performance of a company. It provides an overview regarding the measures adopted by the
Board of Directors of a company for protecting the right of its stakeholders. As such, it can be
said that annual report and corporate governance statement provides only an overview regarding
the environmental performance and does not provide sufficient details regarding the various
measures that has been adopted for promoting the environmental and social benefits. They are
not able to meet the interests of its wide range of stakeholders that requires different type of
environmental and social disclosure to predict the long-term performance of a company (Wadee,
2011).
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Part 2: Sustainability Reporting Guidelines developed by the Global
Reporting Initiative framework
Businesses nowadays are placing larger emphasis on carrying out their different
operations and activities in a sustainable manner for enhancing their long-term performance. The
increasing pressure on businesses for promoting transparency in their operational activities is
causing the need for developing sustainable reports that provides disclosure regarding their
environmental, economic and social benefits. As such, the GRI (Global Reporting Initiative
framework) standards have been developed to provide assistance to the businesses, governments
and other organization to gain an understanding of the ways through which they disclose their
sustainability issues among its stakeholders. The global standards for sustainability reporting
have been widely adopted by business to structure their sustainability reports and meeting
adequately the diverse needs and expectations of its varying stakeholder groups. These guideline
have developed and providing an adequate structure to businesses for providing detailed
information about its broader ranges of economic, environmental and social impacts (Global
Reporting Initiative, 2015). Thus, it helps in providing the global best practices that can help in
overcoming the disclosure limitations of annual report and corporate governance statements in
providing information about the environmental and climate change risks. The GRI guidelines
are relatively simple to be followed by businesses and help the reporters to prepare sustainability
reports that matters a company the most and thus assisting them to provide valuable information
about their most critical sustainability related issues. It is universally applicable to all the
organization and provides a consolidated framework that can be used by entities to provide
measures adopted by an entity for enhancing its environmental and social performance. Thus, it
helps in addressing the various need and expectations of an entity various stakeholder groups by
meeting their environmental and social needs (Stacchezzini, Melloni and Lai, 2016).
Part 3: Integrated reporting and its use in addressing the limitations of
the annual report and the corporate governance statement
Integrated Reporting is a single report through which a company communicates about its
financial as well as non-financial information such as strategy, performance, governance,
environmental and social information. Generally this information is found in various reports like
annual report, corporate social responsibility report, sustainability report etc. The International
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Integrated Reporting Council (IIRC, 2011) says that development of integrated report is far
better as it incorporates together both financial and non-financial information on a single report
making it more useful by linking financial and non-financial performance metrics (Hoque, 2017).
Addressing the limitations of the annual report and the corporate governance statement
regarding environmental/climate change risk challenges by integrated report:
In the current scenario of increasing need for businesses to improve of sustainability and
transparency, the stakeholders require both financial as well as non-financial performance of a
company to analyse its long-term growth prospects. The stakeholders require this type of
information to address the potential risk and examining the avenues for future growth and new
opportunities.
Below are some limitations of annual report which are overcome by integrated reporting:
 Financial report /annual report don’t provide the non-financial information to its
stakeholders such as the impact of company’s operations on society and environment.
 Annual Report doesn’t show the sustainability prospective of the company’s
performance. It fails to provide nay depiction regarding the extent of businesses carrying
out their operations in an ethical manner.
 The annual report fails to address the extent to which a company efficiently utilise its
different types of resources for promoting its sustainable growth (Stacchezzini, Melloni
and Lai, 2016).
The occurrence of different type of financial scandals and crises is causing the need for every
reporting company to communicate the information about the activities done by board, nature of
company’s hierarchy, its objectives, strategies, remuneration of key managerial person to its
stakeholders for improving the transparency in its operational activities.
As discussed above, there are some limitations in corporate governance statement also which
integrated reporting covers and they are:
1. Activities done by entity towards culture, ethical values, relationship with consumers,
employees, those charged with governance.
2. Sustainability strategy of the company is not provided in corporate governance statement.
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3. The statement doesn’t show up the skills and qualitative information about its employees,
manager, and company itself to sustain in the competitive market.
4. The impact of company’s behaviour on its product, its customers, society, environment.
5. The compliance of a company as per the government rules and regulations regarding
environment protection and its ethical values that are used for carrying out its operations
(Serafeim, 2015)
The above discussed limitations in the annual report and corporate governance statement are
overcome by integrated reporting by providing this information in a single piece of report which
is a major tool to analyse company’s financial as well as non-financial performance.
Part 4: Explaining the advantages and disadvantages associated with
integrated reporting using theoretically informed arguments
Advantages:
. IR framework reports on each form of capital- intellectual, invested in terms of money,
human, social, natural, and relationship and environmental. IR framework builds integrated
thinking and management which make managers to take more defined decisions. It highlights
clear picture of entity’s issues that it is facing in context of environmental and climate changes
risks that can have a negative impact on its long-term performance. The report is more important
for users as it helps them to take accurate decisions by not relying solely on financial but also
non-financial information that can have an impact on an entity profits and returns. Also, the
business owners by gaining the trust and believe of the stakeholders can enhance their
profitability by seeking more capital, gaining support from government and improving goodwill
among the mind of the customers (Stacchezzini, Melloni and Lai, 2016).
Disadvantages
The major drawbacks that is associated with developing the integrated reports is that it
requires huge costs on the part of a company to transit from its traditional annual report format to
a much wider report that attempts to disclose information about the value creation of an entity.
Integrated report requires different approach to reduce or concise the information and hence
become complex and time consuming. Also, there is no specific structure in development of
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integrated reports which can pose difficulty in its interpretation by the stakeholders. It has also
been stated by the positive accounting theory (PAT) that higher is the political cost incurred by a
firm, greater is the probability for a firm manager to adopt the accounting policies that shift
reported profits from current to future periods. As such, business managers should not disclose
their CSR information as it can result in enhancing their income and impacting their political
supervision (Cheng, 2014).
Part 5: Relevance of integrated reporting to various stakeholder groups
Integrated Reporting provides information from strategy through risk management to
inclusions of other capital (social and environmental) to meet the needs of various group of
stakeholders such as retail investors, institutional investors, lenders, environmental lobby group,
customers, national communities, international community’s etc. These stakeholder groups
prefer to use the information that is capable of providing evidence in relation to the
environmental and social measures to improve the transparency in the business operations. The
retail and institutional investors require information about the company’s future growth
prospects (Churet and Eccles, 2014). This can be adequately explained by the by the use of
agency theory that stipulates the relationship between principal that are shareholders and agents
that are the business managers. The theory has emphasized on maintaining the transparency
between the business owners and its managers. The development of integrated reports helps in
promoting the sustainable performance of a company and thereby maximizing the benefits
attained by the principals and agents. It helps in resolving the agency issues between them by
promoting transparency in the business operations and ensuring to the shareholders that business
managers are acting in their interest and are adopting the use of sustainable measures for
maximizing the growth and development of a company. Thus, it helps in achieving the trust and
reliability of a company’s operations in the mind of its shareholders such as retail and
institutional investors and lenders (Churet and Eccles, 2014).
Similarly, it helps in legitimizing a company’s operations among the mind of its
stakeholders such as environmental lobby group, customers, national communities, international
communities. The legitimacy theory has stated that business reports will develops a positive
reaction among its various stakeholder groups only when it is perceived to be in congruence with
the society at large where it operates. As such, businesses need to voluntarily disclose CSR
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information to maximize its legitimacy among the stakeholder mind (Eccles and Saltzman,
2011).
Conclusion
It can be stated from overall discussion carried out in the report that integrated reports
provide information about the financial and triple bottom line, that is, economic, social and
environmental performance of a company. Integrated reporting (IR) framework resolves the
drawbacks in traditional accounting and helps the business to grow in long term by addressing a
firm’s environmental and social challenges.
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References
Cheng, M. 2014. The international integrated reporting framework: Key issues and future
research opportunities. Journal of International Financial Management and Accounting, 25(1),
pp. 90-119.
Churet, C. and Eccles, R.G. 2014. Integrated reporting, quality of management and financial
performance. Journal of Applied Corporate Finance, 26(1), pp.56-64.
Donnelly, R. and Mulcahy, M. 2009. Board structure, ownership, and voluntary disclosure in
Ireland. Corporate Governance, 16, pp.416-429.
Eccles, R.G. and Saltzman, D. 2011. Achieving sustainability through integrated reporting.
Stanford Social Innovation Review, 9(3), pp.56-61.
Global Reporting Initiative. 2015. Sustainability Reporting Guidelines. [Online]. Available at:
https://www.globalreporting.org/resourcelibrary/grig4-part1-reporting-principles-and-standard-
disclosures.pdf [Accessed on: 22 April 2019].
Hoque, M. 2017. Why Company Should Adopt Integrated Reporting? International Journal of
Economics and Financial Issues, 7(1), pp.241-248.
Serafeim, G. 2015. Integrated reporting and investor clientele. Journal of Applied Corporate
Finance, 27(2), pp.34-51.
Stacchezzini, R., Melloni, G and Lai, A. 2016. Sustainability management and reporting: The
role of integrated reporting for communicating corporate sustainability management. Journal of
Cleaner Production 65.
Steyn, M. 2014. Organisational benefits and implementation challenges of mandatory integrated
reporting: Perspectives of senior executives at South African listed companies. Sustainability
Accounting, Management and Policy Journal, 5(4), pp.476-503.
Wadee, N. 2011. Integrated reporting: An opportunity to reshape business. Accountancy SA.
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