Investors also have recognised that these NFIs highly impact an organisation’s ability to create value sustainably.
Organisations should begin to provide pertinent disclosures on these NFIs to enable investors to translate these complexities into relevant financial information for decision making.
Traditional financial reporting faces a myriad of challenges regarding its relevance. One major drawback noted in recent times has been the inability of stakeholders to extract relevant financial information.
This specific challenge is born out of the realisation that complex non-financial issues (NFIs) in an organisation’s environment impact its fortunes.
Today, these complexities in the environment include increased geopolitical conflict, macroeconomic volatility, high unemployment, massive social inequality, climate change, diversity, technology, and innovation, to name a few.
Investors also have recognised that these NFIs highly impact an organisation’s ability to create value sustainably. The creation of the International Sustainability Standards Board (ISSB) by the IFRS Foundation last year is a direct consequence of the impact NFIs have on the long-term viability of organisations.
The ISSB is tasked among other things, with delivering a comprehensive global baseline of sustainability-related disclosure standards, following the demand by investors for high quality, transparent, reliable and comparable reporting by companies on ESG matters.
It implies that investors are eager to understand the impact of NFIs on an organisation’s financial position and performance.
Therefore, organisations should begin to provide pertinent disclosures on these NFIs to enable investors to translate these complexities into relevant financial information for decision making.
Determining what disclosures to provide on NFIs can be overwhelming for many organisations. However, organisations can approach this task by considering four main aspects of their environment coined using the acronym H.E.R.M.
This approach captures the information organisations should consider disclosing to translate the complexities in their environment into relevant financial information. Looking through the lenses of these four aspects, organisations can provide investors with pertinent information on NFIs, helping investors manage their investment risks.
By applying a systems theory approach to problem-solving, organisations can think holistically in a manner that recognises the significant impact these complexities have in determining their long-term viability. The four main aspects to consider in the environment are;
1. HUMAN CAPITAL AND VALUES - It is considered a fundamental aspect of an organisation. Therefore, it is vital to provide information on the human capital capabilities, experiences, competencies, incentives to innovate and reimagine within an organisation.
Organisations should also consider providing information on the fundamental beliefs that shape the attitude of human capital within an organisation, how ethical behaviours are defined, decisions made, and the organisation is governed.
2. ENVIRONMENTAL AND SOCIAL RESPONSIBILITY - Organisations should consider providing information on their legal and constructive obligations as demanded and expected by stakeholders on environmental and social issues.
It includes information on the risks and opportunities arising from climate change, social frameworks, protocols, and the relationships formed across society among others.
3. RESEARCH AND DEVELOPMENT - Organisations should consider providing information on Intellectual Property (IP) value, technology, know-how, infrastructure, and invention levels required to compete favourably in the short and long term.
It comprises information about the organisations’ ability to take both a defensive and offensive strategy concerning disruptions in their environment.
4. MERGERS AND ACQUISITIONS - Organisations should consider providing information on M&A activities in the environment related to the organisation directly and indirectly.
It also includes information on market-specific insights, encompassing issues ranging from the deal initiation to the post-acquisition activities.
By considering these four aspects and applying the appropriate reporting framework, organisations can begin to provide investors with the information they require to translate the complexities organisations encounter in their environment into relevant financial information.
It will result in benefits such as increased transparency by organisations following improved disclosures, reduction in transaction costs attached to M&A deals and transactions by making more relevant information available to stakeholders and encouraging organisations to adopt a long-term mindset regarding strategic goal setting.
Mr Awodumila is an associate director at PwC Kenya. An author who writes and speaks widely on corporate reporting topics
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