Integrated Reporting and the Value Relevance of Non Financial Information Empirical Evidence from South Africa

Initiatives concerning the regulation of non-financial information (henceforth, NFI) have been increasing dramatically for some years: in various parts of the world, particularly in Europe (European Commission - STATEMENT/14/124 15/04/2014 Improving corporate governance: Europe’s largest companies will have to be more transparent about how they operate) and, above all, in Denmark, Spain, France, the UK and Germany regulatory systems have been adopted in order to establish precise and pressing requirements in relation to non-financial reporting by large companies. These regulatory initiatives come alongside reporting frameworks and guidelines proposed by competing global standards for non-financial reporting, such as the Global Reporting Initiative and the UN Global Compact, which resulted in broad support from many companies at international level. Consequently mandatory rules coexist with voluntary guidelines adopted by a significant number of companies, including, in Italy ENI, Enel and the Generali Group and in the world, Henkel, BHP and Johnson & Johnson. Clearly, there is a strong need for companies to access information on how to implement these proposed legislative requirements and how to choose “the best” voluntary guidelines. Investors and financial analysts state that current non-financial reporting is not sufficiently comparable and agree that non-financial information should be more fully integrated with financial information (ACCA and Eurosif, 2013). Recently, the reporting of NFI has received a fresh boost thanks to the development of a new model of business reporting represented by the introduction of Integrated Reporting (International Integrated Reporting Council IIRC, 2011; 2012; 2013; Eccles, & Krzus, 2010; Eccles, & Armbrester, 2011). This is a new type of report which combines financial and non-financial information about the companies’ ability to create a sustainability value and their opportunities and risks. Although a standardized framework and detailed guidelines for disclosure are still now being defined(International <IR> Framework December 2013), Integrated Reporting has already been adopted by an increasing number of companies (IIRC Pilot Program, see the list of pilot companies at http://www.theiirc.org/companies-and-investors/pilot-programme-business-network). In particular in South Africa listed companies are required to draw up Integrated Reports following the guidelines issued by King Code of Governance Principles for South Africa 2009 (King III), and, after the adoption of these guidelines by the Johannesburg Stock Exchange (JSE), they have become a requirement for access to the stock markets (http://www.jse.co.za/Home.aspx). King III defines an integrated report as “a holistic and integrated representation of the company’s performance in terms of both its finance and its sustainability” and it highlights the reporting of NFI. The present research aims to assess the convergence of three different frameworks (listed below) in relation to the issue of the reporting of NFI through the analysis of the integrated reports issued by listed companies on the Johannesburg Stock Exchange (JSE): 1. Global Reporting Initiative, GRI non-paper Report or Explain: a smart EU policy approach to non financial information May 2013, and G4 Sustainability Reporting Guidelines 2013; 2. IIRC, International <IR> Framework December 2013; 3. King III; Institute of Directors in Southern Africa Practice Note Chapter 1 Implementation Guidance on Environmental Sustainability Practices and Performance, 2009 and Practice Note Chapter 1 Ethics Management, 2009. The purposes of the paper are the following: 1. to assess whether the adoption of the integrated report by listed South African companies could enhance the disclosure of NFI; 2. to evaluate the impact on the financial market.