The World Changes… Now by Law! The innovation of D.Lgs. n° 254/2016 and of the Integrated Report

The World Changes… Now by Law! The innovation of D.Lgs. n° 254/2016 and of the Integrated Report    By Andrea Ragazzini

 

At the presence of more than 200 participants, the conference “Il D.Lgs. n° 254/2016: interpretazioni, applicazioni e sviluppi dell’informativa non-finanziaria in Italia e in Europa” (“The Legislative Decree n°254/2016: interpretations, applications and developments of the non-financial circular in Italy and in Europe”) was held on 25th october 2017 in Milan. The summit organized by NIBR (Italian Network of Business Reporting) and by Deloitte was addressed to deepen the Legislative decree 254/2016. The contributions were prestigious: among all of them, we would like to mention the ones of Richard Howitt, IIRC CEO and Stefano Zambon.

 

A turning point
Stefano Zambon reflected on the importance of the of the EU directive n.95/2014 and then on the D.Lgs. 254/2016. These ones represent a crucial moment in the story of the reporting. It represents both a turning point and a change of mind. In fact, today social and environmental aspects are integrated with decision in the reporting duties of more than 6.000 European business organizations, thus configuring a perspective of capitalism where business companies contribute in time to sustainability of both the natural environment and the social context. In this respect, the connection with the Objectives of Sustainable Development selected by UN in 2015 is direct. In Italy, with the D.Lgs 254/2016, the framework where business organizations should be compared becomes complex and articulated. This happens in consideration not only of the models, but also of the information and the technical parameters to be implemented, as well as in consideration of formal processes, consequences in the corporate governance, risk management, corporate strategy and responsibility of the management board that should be  provided. In the application of D.Lgs 254/2016, the most relevant corporate issues can be resumed in the choice of the referenced model, in the positioning of the non-financial matter statement, compared with the annual financial statements, in the information collection, in the KPIs identification and the perimeter of accounting. Furthermore, the integration with other directional systems and the reliability of data could represent yet more possible issues. At governance level, the necessity of the corporate boards to govern both the ESG and non-financial themes emerges and influences the level of diversity of the Board members in a wide sense. For what concerns the management of corporate risks, the new directives require that business companies should individuate the environmental, social and normative compliance risks. Furthermore, business companies should also determine the subject of their reputational risks and of their possible worsening in both ethical rating and corporate rating. Corporate strategies become crucial in the application of the D.Lgs 254/2016 to the extent that companies are addressed to formulate explicit policies for environment, society and board diversity. The systematic introduction of the variables of environmental and social impact as strategic options in the evaluation establishes a new model of evaluation that goes beyond the traditional model of Discount Cash Flows. Furthermore, these aspects influence the possible rethinking of business models, of behavioural and operational corporate codes and the communicational systems addressed to the external direction. In juridical and reputational terms, the new decree also confronts the members of the Administrative Council, of the union board and management in general with new responsibilities. In consideration of these observations, the crucial adoption of a positive attitude towards this new directive needs to be underlined and to be included systematically and constitutively in the strategical horizon and in the risk management of a business company with all aspects concerning sustainability and the creation of value in a wider sense. Through this idea, the interpretation of the D.Lgs 254/2016 as a driving force of a corporate change which founds its basis on the aspects connected with sustainability and also with the role of intangible resources will be possible. In this context, the transition from the economic and financial value to the wider concept of value creation implies the necessity of a more extended instrument with the capability to integrate all these different aspects. The Integrated Report derives from the evolution of the corporate accounting with the aim to connect all the information that together express the process of value creation in the business companies.  It is an instrument of “sense making” of the activity of an organization in respect to the creation of value in the short, medium and long term. The Integrated Report founds its basis on information about Financial Capitals (Financial and Material Capital), Intangible Capitals (Organizational Capital, Social and Relational Capital and Human Capital) and the Capitals of Sustainability (Natural Capital). The difference and the nature of the collected information through the Integrated Report directly connects the corporate practices with the UN Objectives for the Sustainable Development.

The D.Lgs 254/2016 highlights the integration between non-financial and financial information, and for the expression of the nature of the business company through these relations, the connection between financial and non-financial data should be emphasized.
The Integrated Report represents an ideal instrument for the respect of the prescriptions of this directive and – at the same time – it also stands for the most realized representation of the corporate value creation.

 

The role of Consob
It is still true that, as we have already affirmed, while writing the Integrated Report, some critical points for business companies are present: the risks evaluation of the company impact , the adoption of a proper strategy, the collection of the information. In this respect, Guglielmina Onofri, in charge of the CONSOB Division of the Issuers Information, emphasizes the fundamental importance of the comparability, the access to standard, the usefulness, the precision and the legibility of the collected information. With the aim to address business organizations to a more correct application of the directive, Guglielmina Onofri confirms that in a short time CONSOB will publish the Implementing Regulation of D.Lgs. 254/2016, anticipating that the final draw-up of such Regulation will mainly resemble its draft in circulation during the summer. In the Regulation, indications about the themes to discuss in the instruments of reporting as well as the modalities of analysis of the themes in object will be illustrated. The principles at the basis of the documents writing remain the materiality, that is the significance, the comparability and the concision of the information. According to CONSOB, the instruments of reporting should be flexible and readable as well as presented in various modalities. At the moment, different models are present and are available to write the accounting specified in the directive, so that business organizations will have to indicate their motivations for their choice of a specific model in order to guarantee the comparability of the information. In this context, the responsibilities of the control institutions evolve. The union Board of the business companies is in charge of the verification of the processes that companies adopt for the draw-up of non-financial reports in order to produce reliable information and the Firms of Auditors are in charge of verifications (e.g. the limited assurance), producing an attestation of the accordance of the information provided by business organizations in respect to the principles and the conditions of D.Lgs. 254/2016. The small business companies should not necessarily request the certification of the Firm of Auditors. During the activities of the Regulation, CONSOB can request to the business companies further information in respect to the ones published on non-financial reports and can also check with inspections. If no notifications are reported by union Boards of business companies, the same members should communicate to CONSOB the problems encountered. CONSOB can also request to business companies to complete the information which could be lacking in the non-financial reports.

Sustanaibility and the Investors
The attention to the reporting of the non-financial aspects of a business organization allows the investors to evaluate the impact of the company at business level. Livia De Gasperi, Director of the Corporate Division Actions & Corporate Supervision of Borsa Italiana S.p.A., explained this to us during her intervention. When a business organization makes a sustainable choice and undertakes a consequential business strategy, it sets itself in a sensitive perspective with respect to both people and environment towards the investors. This approach implies a subsequent evolution of the strategic and financial performance of the business companies. For this reason, the non-financial effects of the business organizations directly impact on their financial aspects. The larger significance of the information is translated into a concept of materiality: in the non-financial reports the most relevant aspects of the business organization and its value creation (that are the information about the environmental and social management with regard to the effects produced by companies) should be present. Such information are useful in order to understand the future of the business organization and emphasize the structural keys of the companies. Consequently, the reported information are important for all the investors and for all the stakeholders. The adoption and the introduction of the themes of sustainability in the strategic management means the creation of value in the long term for companies. At the same time, this fact entails the stakeholders’ orientation towards a longer-term portfolio allocation behaviour towards those business organizations that integrate such sustainable models in their activity. In this regard, this is also the opinion of Franco Amelio of Assirevi and Sustainability Leader of Deloitte. In his intervention, he outlines the fundamental role of the intangibles for conveying and fostering the business organizations that are busy in the comprehension of the models that allow the submission of their investments in a historical moment when all the business organizations are going through an evolutionary process. In conclusion, today the reporting of non-financial aspects represents an essential element of importance and great opportunity for the business organizations.

 

The Integrated Report and its positive acceptance in various sectors
Reporting in the corporate accounting non-financial aspects implies first of all an internal communication of the model of reference and its integration in the corporate culture. This allows to enhance the commitment of the business organization and – at the same time – to evaluate the supply chain as a process of support to the value creation. The sector of luxury has realized that sustainability can be a relevant competitive advantage for the business companies and a chance of corporate awareness: Veronica Tonini, Risk Management & Group Compliance Director, CSR Coordinator of the group Salvatore Ferragamo, informed the audience in this respect. In the sector of fashion, directives about the non-financial aspects of the corporate reporting have been positively accepted and the luxury brands have been collaborating with workshops on sustainability that have a great importance for all the sector of fashion, because of their importance for the strategies of business organizations. Luca Marconcini, Executive of the Drafting of Corporate Accounting Documents of Mediaset S.p.A, also points out that his business organization demonstrates a positive acceptance of the Integrated Report and the adoption of medium and short time objectives of sustainability that are functional for a highly variable market. The report on the management has already reflected the model of an integrated report since 2008 analyzing both the financial and non-financial results associated with a risk and complementarity approach. The project of alignment to D.Lgs 254/2016 has initiated during the midsummer 2017 and created the first moments of engagement among the operators of the business company. The decision about the separation between the financial and non-financial information has not been taken yet. However, using this kind of activity of reporting to enhance the social performance of the business company is a shared thinking.

Lorenzo Caruso, Corporate & Business Communications Director of ‎Prysmian, talks about the manufacturing sector. In his sector-leading business organization, the collection of non-financial data also represents a considerable benefit. Even if the requests of the clients for non-financial reporting are still moderate, the conviction that the trend will increase significantly exists and represent an element of diversity for the business organizations. Besides these strategical aspects, the possibility to adopt reporting systems in relation to non-financial information will allow the members of the Board to enhance the processes of information collection and the dialogue with all the stakeholders. Giuseppe Zammarchi, Group Risk Management Staff, Unicredit S.p.A., speaks in the name of the banking sector and affirms how the attention at the environmental and social themes should become integral part of the corporate life and follow a standard among the European countries, thus allowing a comparability between the business companies. Unicredit S.p.A. has already published its social and environmental budget in 2000 and the reporting process of intangibles has its natural evolution in the integrated report. For a business company of such dimensions, the difficulties in accounting all the most significant elements at both strategical and operational level in the integrated report is an element of considerable complexity because of the high number of controlled business organizations. However, the theme of the directive ruling the non-financial information is considered positively by all the banking system and as an opportunity to enhance the process of financial brokering towards all the business companies that in diversified modalities use all the available capitals with a strategic approach.

Reputation, change and relations
Alessandro Iozzia, Brunseick Partner and member of the jury of the Oscar of the Budget, illustrates how reputation is an intangible. Good reputation consists in the capability of a business company to make promises and to guarantee their realisation. Leadership, performance, innovation, appealing workplace, quality and quantity of information all contribute to a good reputation of business organizations: an intangible with a considerable effect on business and on the stakeholders’ choices.
After the financial crisis of 2008, business companies are expected to be increasingly responsible by people in general. In this last decade, business companies put their actions in practice in remarkably variable contexts and with increasingly diversified rules. For this reason, communication has constituted a key element in the transmission of these promises. The process of reporting is addressed to communicate the fundamental information of business organizations which become equally important.

Livia Piermattei, member of the scientific Commitee of Ned Community, provides a further interpretation key for the discussion on communication, affirming that talking of a change means to evolve in the social relations. In a significant survey conducted by Ned Community in 2017 with a sample of business companies of the European territory, the lack of information still present about the directive was emphasized. Only 15% of the executive directors of the business organizations in the sample was informed about the changes that the European directive determines in the corporate boards, while only the 60% of them declared to apply the strategical actions of long period. Among the most strategical guarded areas in the risk management, the reputational risk and the relations with the stakeholders were indicated. All this highlights the necessary steps to allow the international governance systems of the business organizations to evolve in the next years.

Richard Howitt: the Integrated Report in the light of D.Lgs. 254/2016
The IIRC (the International Institution that has developed the model of Integrated Report) CEO illustrates the necessity to adopt a corporate management approach called integrated thinking. The study and the publication of the documents focusing on this theme has already occurred in Europe and in Italy, here in particular with the commitment of NIBR (Network Italian Business Reporting). Italian companies and more all over the world have built the model of the integrated report and its model has been already adopted by business organizations of 62 quite different countries. In Japan, it is by now the method of reference for the reporting of the intangibles, while in China it has developed relevantly. In Europe, the main enterprises listed in the Stock-Exchange have adopted or will soon adopt it in the next years. In the USA, the technological enterprises are oriented to the integrated report and in Southern America it is developing considerably.In this context, the model of the Integrated report represents a perfectly proper and compatible instrument in respect to the implementation of D.Lgs. 254/2016. The common objective also shared by the members of IIRC is to make this model the point of reference for the business multivariate analysis, for the long period strategies and for the material aspects of the business organizations. In the IIRC site, a database is present with a collection of the most relevant examples of integrated reports coming from all over the world and it highlights a fundamental characteristic of the whole system of non-financial reporting, that is the process of implementation. This can be defined as the method that business organizations undertake with the aim to apprehend this innovative modality of conceiving the corporate reporting and management. The European directive and the Italian one – as a consequence – represent an essential motivation for the evolution of mind. Through the integrated report, the achievement of a new step towards the complete structuring of the corporate reporting in a future perspective becomes possible.

All these facts confirm the positive acceptance that has been already expressed towards this practice of great importance for the progress of civilization.