SMEs under pressure to adopt integrated reporting

SMEs risk missing out on business if they ignore integrated reporting

An annual report focuses on financial and market data, governance, risks, business and operational structure and people compared to an integrated report that incorporates environmental and social sustainability performance that has traditionally been published in a separate report. Combining them helps customers, shareholders and potential investors understand how these fit into a company’s broader strategy.

This approach forces companies to streamline internal processes and systems for tracking performance, helps identify and manage risks more effectively by providing deeper insights into ESG issues that can be overlooked by financial reporting, and potentially identify cost savings in areas such as energy and waste management.

Larger businesses increasingly expect small businesses to conduct integrated reporting, according to Dr Brian Jones and Dr Albana Rasha from Leeds Beckett University.

They recently worked with several European partners on the INTEREST Erasmus+ project to help SMEs navigate integrated reporting. They conduct teaching, research and manage funded projects that focus on sustainability that address ESG and the United Nations Sustainable Development Goals, governance, social responsibility, corporate (financial and non-financial) reporting, integrated reporting and are engaged with real world business practice.

Reflecting on the project, Dr Jones and Dr Rasha say integrated reporting is increasingly something to consider for gaining business and “equips small businesses with proper information to report through the supply and value chain”.

“Small businesses that do not engage with integrated reporting run the risk of missing out on opportunities to engage stakeholders in the creation of shared value,” Dr Rasha and Dr Jones say.

Integrated reporting allows small businesses to review and shape their business models for a more sustainable future. “It helps small businesses understand the creation of shared value through the adoption of the various capitals,” Dr Jones says. This “improves their credibility in the eyes of finance providers because it allows a transparent description of the small business model”.

Dr Jones cautions that integrated reporting requires “knowledge, takes time and carries a cost”. SMEs must strike a balance between enhancing reputation and managing the risk of over-disclosure that could threaten their competitive edge for revealing commercially sensitive information.

SMEs may be swept up in supply chain reporting

Gurpreet Kaur, Sustainability Reporting Director for PwC UK, says while there is no specific reporting requirement for SMEs, they may be caught up in disclosures from their larger customers.

“New ESG reporting requirements are increasingly asking businesses to consider their whole value chain,” she says. “So companies that are not themselves required to do this reporting will need to be able to respond to requests for data from the larger companies they interact with.”

She urges smaller businesses to prepare for this to prevent larger companies looking for alternative suppliers. “Although it might seem like an additional burden initially, getting this right can actually be a source of competitive advantage going forward,” she says.

Kaur encourages finance professionals to prioritise training on the EU reporting requirements and the UK implementation of international standards. The reporting landscape is “becoming far more complex - and critical to being able to do business - and finance professionals have a key role to play in responding to it”, Kaur says.

Integrated Reporting Framework helps businesses prepare integrated reports

Integrated reporting is not mandatory in the UK, but many large companies with the need to disclose ESG performance have voluntarily adopted this approach. The UK’s requirements for non-financial reporting fall under the Companies Act 2006 and the UK Corporate Governance Code that encourage ESG disclosures.

The IFRS (International Financial Reporting Standards) Foundation, which provides guidelines for businesses, says the aim of integrated reporting is to:

• Improve the quality of information available to financial capital providers to support efficient capital allocation;
• Promote a more cohesive and efficient approach to corporate reporting that communicates material factors impacting value creation;
• Strengthen accountability and stewardship for financial, manufactured, intellectual, human, social and relationship and natural capitals;
• Support integrated thinking, decision-making and actions that focus on long-term value creation.

In May, the IFRS Foundation released a guide to getting started with integrated reporting and will hold a breakout session on the subject at its conference in London on 25 June 2024.