April Chan, Company Secretary, CLP Holdings Ltd, shares some of the experience her company has gained since switching to integrated reporting in 2011.

CLP’s financial statement of 1902 consisted of one page of exclusively financial data. By 2012, CLP’s annual report, based on the draft integrated reporting framework issued by the International Integrated Reporting Committee (IIRC), had grown to 230 pages and offered stakeholders information on a wide variety of factors, both financial and non-financial. While this journey has been a long one, there is still a lot of room for improvement, after all CLP only started issuing integrated reports in 2011. I would like to emphasise that my comments below are intended not as lessons in the right way to adopt integrated reporting but as an experience sharing exercise.

Six guiding principles

Every business is different and companies need to think about the best approach to reporting based on their own specific circumstances. Nevertheless the IIRC is currently working on a prototype framework (the International Integrated Reporting Framework) designed to establish a globally accepted framework which will ensure consistency and comparability to integrated reports worldwide.

In our 2012 annual report we applied the IIRC’s prototype framework, reporting
on the various ‘capitals’ on which our business depends: financial (our funding resources and capability); manufactured (our assets and investments); intellectual (our expertise); human (our people); social and relationship (our values, reputation and community involvement); and natural (our contribution to the environment). These are all, in one form or another, inputs to CLP’s business model.

We have applied the IIRC’s guidance in terms of applying the six guiding principles outlined in the prototype framework (set out in the following paragraphs), which the IIRC suggests should underpin the preparation of an integrated report. I have also outlined our approach to implementing these six guiding principles below.

1. Strategic focus and future orientation

The ‘Chairman’s Statement’ and ‘CEO’s Strategic Review’ sections of our annual report provide insight into our strategic objectives and explain how they relate to CLP’s ability to create and sustain value over time. But in addition to ‘strategic focus’ the Framework also requires a ‘future orientation’ to your report. This requires a different approach to the selection and presentation of your report’s content – for example, highlighting significant opportunities, risks and interdependencies flowing from the organisation’s market position and business model that affect the organisation’s ability to create value over time. That is, there needs to be a focus on the total picture of the organisation’s unique value creation story.

2. Connectivity of information

An integrated report should show the combination, inter-relatedness and interdependencies between the components that are material to the organisation’s ability to create value over time. One way in which we applied this principle was to link our annual report to all other information available to our stakeholders, including our online sustainability report and the wealth of information available on our website and in our other publications. These give our readers a connected view of our performance relating to the economic, social and environmental aspects of our activities. In the annual report we summarised CLP’s sustainability goals, key aspects of delivery against these goals in 2012 and the manner in which this relates to the KPIs suggested by the Hong Kong Stock Exchange.

3. Stakeholder responsiveness

An integrated report should provide insight into the quality of the organisation’s relationships with its key stakeholders and how, and to what extent, the organisation understands, takes into account and responds to their legitimate needs, interests and expectations. Responsiveness is demonstrated through actual actions and outcomes as well as ongoing communication with stakeholders.

Making internal processes more transparent is valuable to most stakeholders. In our 2012 annual report, we made a point of explaining CLP’s relationships with key stakeholders such as shareholders, lenders, employees, customers and the wider community in which we operate. The nature of our business requires effective engagement with governments, politicians and key decision makers.

4. Materiality and conciseness

An integrated report should provide concise information that is material to assessing the organisation’s ability to create value in the short, medium and long term. Determining materiality involves identifying relevant matters, assessing the significance of those matters in order to determine their ability to influence decision making and prioritising the matters identified.

It is a challenge to describe a business of the size, geographic range, technological diversity and complexity of CLP in a succinct manner. Nevertheless, we presented a five-minute annual report to provide material information and data at a glance. In addition, we use our online sustainability report and the information on our website to help stakeholders make their own choice about the breadth of information which they wish to access in order to make informed decisions about their capital allocation and their wider dealings with CLP.

5. Reliability and completeness

The reliability of information in an annual report is affected by its completeness, neutrality and freedom from error. It is not always possible for all information in an integrated report to be complete, neutral and free from error in every respect. So the objective is to maximise these qualities to the extent practicable, for example by ensuring that any negative matters are as faithfully reported as positive ones.

Our governance processes, which are described in our corporate governance report, are essential to ensuring the honesty, accuracy and reliability of the information set out in our annual report and online sustainability report. We seek to apply the same level of discipline and quality control to the environmental and social information we disclose as we do to our financial statements on the basis that both types of information are important to our stakeholders.

6. Consistency and comparability

The information in an integrated report should be presented in a way that enables comparison with other organisations and on a basis that is consistent over time. Reporting policies should be followed consistently from one period to the next unless a change is needed to improve the quality of information reported. We measured CLP’s performance on matters such as tariff, customer turnover, investment returns and many other elements against wider market references whenever this contributed to a better understanding of our performance.

The challenges

Adopting the integrated reporting model may seem quite daunting for businesses, but many of the questions this process requires you to ask are questions that you will inevitably have to address at some point in your corporate reporting journey. You need to think broadly about the major characteristics and qualities of your business. How do they create value? Who are the key stakeholders in your business? What do they need to know about how your business delivers value to them?

You then need to:

  • gain board and senior management support for broad-based disclosure
  • develop a framework for reporting
  • provide guidelines and obtain acceptance by business units
  • strengthen information systems and controls to capture relevant and material information, and, above all,
  • communicate to keep everybody on the right track.

This process will not be an easy one and we at CLP have faced many challenges in our migration to integrated reporting. I have outlined our approach to the main challenges we faced, in no particular order, below.

1. Disclosing non-financial information

The primary challenge for any company switching to integrated reporting is likely to be the difficulty of imposing the same level of discipline and quality control for non-financial information that you already have for your financial statements. Due to the wide range of non-financial disclosures, there are no widely accepted metrics which can be easily adopted and used for comparison with peers in the same industry. Moreover, non-financial disclosures are not specified in accounting standards and they are not disciplined by external audit. In addition to these constraints, non-financial disclosures are not currently driven by mandatory legal and regulatory requirements, so there may well be questions raised about why the company is devoting the not inconsiderable resources needed to make these disclosures.

2. Cultivating the right mindset

To successfully achieve integrated disclosure you need to have cooperation from your colleagues to collect the relevant data for disclosure and people in your organisation may be reluctant to adapt their current work practices to ensure this new data is captured. Switching to integrated disclosure therefore requires the cultivation of a ‘can-do’ mindset within your organisation.

This is all the more critical because there are many challenges to be faced in the collection and the interpretation of the metrics. For example, the choice of the reference date for this data can make a big difference to the resulting performance indicator. You need to avoid the charge of manipulation of your data and you need to ensure consistency in applying your metrics and data so that investors are able to compare performance indicators on a year-on-year basis and benchmark them against industry peers.

Cultivating the right mindset within your organisation is therefore critical to meet the challenges of this process and transform it from an information compilation exercise to one geared towards achieving an understanding of how all these different factors complement each other and contribute to the long-term sustainable growth of the business.

3. Adapting operational procedures

As mentioned above, people tend to prefer to stick to their ‘business as usual’ routines, but to capture the relevant and material information for sustainability reporting, your organisation needs to adapt its operational systems. You cannot afford to take a rigid and fixed approach to existing operational systems, particularly in this example your information systems, if you want to be able to collect the right set of data and compile the information that needs to be disclosed. Building knowledge and experience across the reporting system will be essential to long-term success.

4. Ensuring adequate resources

To report accurately on the commercial, social and environmental aspects of your business, you will require more trained manpower and increased staff time devoted to collect, organise and verify the data. Obtaining senior management support may be a challenge particularly in organisations where reporting is still perceived as a costly and non-value-added compliance exercise.

5. Knowing the limits of disclosure

While a switch to integrated reporting is likely to expand the scope of information disclosed to your stakeholders, this does not mean that you need to disclose everything. There may be perfectly good reasons to withhold certain information from stakeholders. You may need, for example, to strike a balance between meeting the information needs of your stakeholders and protecting commercially sensitive information.

Another consideration is the potential legal issues involved when disclosing forward- looking information. As mentioned above, integrated reporting encourages reporters to have a greater focus on the future but this has raised many concerns, in particular about directors’ liability. These might be addressed through the adoption of globally accepted and harmonised ‘safe harbours’, or the adoption of a broad ‘business judgement rule’. Another potential remedy may be found in better D&O insurance cover.

6. Using technology

Advances in technology have meant that corporate reports can be much more widely and quickly disseminated than previously. Moreover, stakeholders expect almost instant responses to their enquiries through the new online media. As a result you will need to be technologically prepared and enabled to disseminate information, including your integrated report, and respond to any enquiries or comments from stakeholders.

Integrated thinking

In corporate reporting, it has always been CLP’s approach to give a comprehensive view of the businesses of our company and communicate our value creation process concisely to investors for better decision- making. The IIRC’s International Integrated Reporting Framework is consistent with this approach with a view to bringing together material information about our strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which we operate.

April Chan FCIS FCS(PE)

Company Secretary CLP Holdings Ltd

The IIRC’s ‘International Integrated Reporting Framework’ was subject to a public consultation earlier
this year and has been developed with input from over 90 businesses worldwide (including CLP Holdings Ltd). The IIRC hopes to publish

the first version of the Framework by the end of this year. More information is available at the IIRC website (www.theiirc.org).

SIDEBAR: The CLP corporate reporting timeline

1902 – One page financial statement covering only financial data.

1951 – 14-page financial statement covering only financial data.

1967 – Annual report comprises 46 pages and includes a management commentary for the first time.

1997 – Launch of the EHS Review which reports on the environmental, health and safety aspects of the business and is designed primarily for interest groups.

2002 – The eight-page EHS Review is expanded into a 28-page Social & Environmental Report which is sent together with the annual report to shareholders.

2007 – The Social & Environmental Report becomes the Sustainability Report with an increased emphasis on sustainability issues.

2009 – Launch of the 211-page online Sustainability Report devoted to more up-to-date information about how the company tackles sustainability issues.

2011 – Launch of the first integrated report giving a full description of how the company addresses the economic, social and environmental aspects of the business. The comprehensive online version of the 262-page Sustainability Report remains as a useful tool to access more up-to-date information.

2012 – The integrated report makes reference to the IIRC’s prototype framework for integrated reporting.