Edition: December 2015 / February 2016


Benefits for pension funds

Properly formulated and perused, Sven Lunsche* says that integrated
reports should be of great value to trustees wanting to evaluate
long-term performance of investee companies.

Pension and other retirement funds traditionally have long-term investment horizons as they face the challenge of funding liabilities many decades ahead. Regulation 28 of the Pension Funds Act outlines a trustee’s fiduciary duty to “give appropriate consideration to any factor which may materially affect the long-term performance of a fund’s assets, including factors of an environmental, social and governance character”.

Tony Manwaring, the then chief executive of the Centre for Tomorrow’s Company, explained in 2013 that pension fund trustees should be good stewards by supporting companies that create value over the long term: “They need to understand value as integrating a number of factors over the long-term. The challenge is how to embed environmental, social and governance factors and other considerations into a new mainstream view.”

The tricky part is how the funds’ trustees can find the corporate information that enables them to evaluate the possible long-term performance of the companies in which they invest. This is where the Integrated Reporting Committee (IRC) of SA and the International Integrated Reporting Council (IIRC), both chaired by SA’s corporate governance doyen Mervyn King, come in. He believes that it is integrated reporting which enables investors to make investment decisions with greater confidence and over longer time horizons.

Since its inception in 2010, the IIRC has sought to establish a framework for integrated reporting, with the purpose of establishing guiding principles and content elements that govern the content of an integrated report. This work came to fruition in December 2013 when the IIRC formally released the International Integrated Reporting Framework (Framework). The Framework was endorsed by the IRC SA in March 2014 as guidance on good practice in how to prepare an integrated report.

The Framework defines an integrated report as “a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term”. In other words, it’s a report that should tell the organisation’s value-creation story in a clear, concise and understandable way.

A difference to the traditional interpretation of value is that in integrated reporting value is not created by the company alone, but is influenced by the external environment, the relationships with stakeholders as well as the resources used and impacted. As such, “value” is a lot more than the financial performance usually reported by companies. It is clear that the traditional understanding of value is no longer sufficient for most companies. New pressures and general global volatility signify that it is necessary to consider a longer-term and expanded view of value.

Intertwined with value creation in the Framework is the concept of six capitals. They seek to assist a company in identifying all the resources and relationships it uses and impacts in creating longer-term value. The six capitals, as defined by the Framework, are:

  • Financial capital e.g. shareholder equity and funds raised by issuing bonds;
  • Manufactured capital e.g. equipment and public infrastructure;
  • Intellectual capital e.g. technology, patents, research and development, and the organisation’s internal systems, procedures and protocols;
  • Human capital e.g. people’s skills and experience;
  • Social and relationship capital e.g. key stakeholder relationships, brands and reputation, as well as community involvement;
  • Natural capital e.g. water, land, and minerals.

While the Framework says the primary purpose of an integrated report is to explain to providers of financial capital how a company creates value over time, information contained in an integrated report benefits all stakeholders with an interest in the company’s ability to create value. These include employees, customers, suppliers, business partners, local communities, legislators, regulators and policymakers.

In summary, integrated reporting should present information that is material to how the company creates value over time. The IIRC on its website (www.integratedreporting.org) states that integrated reporting “is not just reporting on unconnected information about a range of factors without context, but presenting one clear, concise integrated story that investors are able to use to understand the strategy and resources of that company for creating value”.

SA companies have for the past five or six years been preparing integrated reports after the the King III Code recommended integrated reporting and the Johannesburg Stock Exchange included it as a guidance in its Listings Requirements; listed companies need to publish an integrated report or publicly explain why they are not doing so.

Most of the JSE top 100 companies, many smaller listed companies and some of the larger state-owned companies prepare integrated reports. Many of the SA reports are highly respected and are viewed globally as leaders in this field. Indeed, a number of SA companies – among them Anglogold Ashanti, Sasol, Gold Fields and Eskom - were among the pilot companies in development of the Framework.

Pressure to report in an integrated way is not only coming from corporate governance standards and regulators but also, increasingly, from investors. Currently, many investor-led initiatives – such as the Dow Jones Sustainability Index and the Carbon Disclosure Project, the UN Principles for Responsible Investing - are espousing ideas that will lead to improvements in corporate governance and encourage long-term investment.

Pension fund trustees should be able to use integrated reports to gauge whether the companies in which they invest are in a position to create longer-term value not only for themselves but also for the stakeholders on which they impact. If these companies are not doing so, trustees should be holding them to account and calling for integrated reports of high quality.

* Lunsche is vice president for corporate affairs at Gold Fields and a member of the SA Integrated Reporting Committee working group.