The Future of Corporate Disclosure

Abstract

The growing interest in a company’s sustainability strategy and performance means that solely providing financial information in corporate disclosures will no longer fulfil stakeholder needs in the future. Traditional financial reporting is primarily targeted at capital providers and therefore provides information on the company’s current and future financial performance. Today, a broader focus on non-financial, sustainability-related aspects is required to meet the information needs of other stakeholders, such as employees, customers, suppliers, government and society. Non-financial information is also increasingly important for investors to assess a firm’s risks and opportunities related to sustainability issues, such as climate change, and to understand how the firm is preparing itself for these future challenges. The transition of non-financial reporting—in particular, sustainability reporting—is evolving from voluntarily applied frameworks to mandatory regulatory requirements by standard-setting institutions. The aim is to provide higher transparency and comparability and to build the basis for linking the former separate financial and sustainability reports of a firm on a concise integrated report. A key challenge is the choice (and clear definition) of appropriate performance indicators to achieve comparability between firms. As a result, new rules and formats for corporate reports and for financial, as well as non-financial, disclosures are already appearing on the horizon and will sustainably change the future of corporate reporting. Adapting to these new regulations while balancing the interests of multiple stakeholders will become a continuous challenge for companies and will require them to engage in comprehensive, integrated thinking.

4.1 Introduction

Crafting integrated strategies and pursuing integrated thinking (cf. Chap. 3) require new approaches to corporate reporting in order to provide stakeholders with relevant information about a company’s business activities. In general, corporate disclosures should fulfil the information needs of stakeholders, minimise information asymmetries and enable better investment decisions by investors, thereby leading to a more sustainable allocation of capital (cf. Bonsón & Bednárová, 2015; Cormier et al., 2005; Deegan, 2002; Moratis, 2018). Corporate reports are also an important tool for communicating and internally steering the implementation of business strategies.

The development of new digital technologies and the rapidly changing business environment further influence corporate reporting. These trends may shift stakeholder expectations; therefore, companies will be challenged to meet the changing demands on corporate reporting (Barrantes et al., 2022). At the same time, the reporting and disclosure of intangible assets are becoming increasingly important (Eierle & Kasischke, 2023; Haller & Fischer, 2023). In an environment characterised by high levels of volatility, uncertainty, complexity and ambiguity (VUCA), companies face various changes, such as the emergence of new business models. To adequately assess their situation, companies need to measure their ability to deal with these challenges (Duchek, 2020).

Another development relevant to the area of corporate reporting is the emergence of new regulatory requirements. To address the major challenges of climate change at a societal level, the European Union announced its EU Green Deal, a comprehensive set of plans that represent the need for the transformation of the economy and society (Council of the European Union, 2022). As part of the EU Green Deal, new sustainability reporting requirements have emerged for companies (e.g. EU Taxonomy, Corporate Sustainability Reporting Directive [CSRD]). To respond to these new requirements, companies can apply various strategies.

As described in Chap. 3, Crafting Corporate Sustainability Strategy, to stay on track on the Road to Net Zero, companies need to implement effectively integrated strategies that place sustainability at the heart of their corporate and business strategy. In addition to information on how environmental factors may affect a company’s business activities, the need to provide reliable information on the environmental and social impacts and risks of business activities has become a major trigger in developing reporting standards in the EU. Thus, Chap. 4 is dedicated to new ways of reporting and leads into Chap. 5, Creating Sustainable Products, which looks in more detail at the transformation of the actual business operations.

The main objective of the remainder of this chapter is to provide an overview of how new forms of reporting have evolved over the last two decades, the reasons for this development and the implications for practice in implementing the new reporting standards. Section 4.2 shows the evolution from voluntary to mandatory sustainability reporting standards and from separate sustainability reporting frameworks to a combination of sustainability and financial reporting in an integrated report. Section 4.3 outlines the current legal regulations in the EU regarding non-financial reporting. The illustrative example of the BMW Group in Sect. 4.4 demonstrates the transition from the prior generation of separate reports to today’s integrated sustainability reporting. The expert discussion between Prof. Oliver Zipse, Chairman of the Board of Management of BMW AG, Jonathan Townend, BMW Group’s Head of Accounting and Prof. Dr Thomas M. Fischer, Chair of Accounting and Controlling at FAU Erlangen-Nürnberg, focuses on the practical challenges of integrated reporting (Sect. 4.5). Section 4.6 discusses current and future reporting challenges arising from the present and diversifying regulatory environment. Finally, the conclusion in Sect. 4.7 summarises the key takeaways from the chapter.

4.2 New Ways of Reporting

In the context of reporting, the definition of the scope of relevant information has changed significantly over the years. Before the 1970s, corporate reporting focused on a company’s financial performance (Navarrete-Oyarce et al., 2021). As investors want to make their decisions based on reliable corporate information, financial reporting has been regulated early on by national governments to ensure this reliability and comparability. Following the United Nations (UN) Brundtland Report in 1987 (Brundtland, 1987) and the introduction of the ‘Triple Bottom Line’ (TBL) concept by John Elkington in 1994, the scope of corporate reporting began to broaden. In addition to financial information, environmental, social and governance (ESG) aspects of corporate activities became increasingly important as more investors considered these factors when evaluating a company (Alniacik et al., 2011; Böcking & Althoff, 2017). This has created a need for frameworks and standards that can be used to incorporate ESG issues into corporate disclosures in a concise and practical manner.

In 1997, the Global Reporting Initiative (GRI) was founded initiated by a multi-stakeholder initiative of companies, NGOs, audit firms, governments and others. Its aim was to develop an easy-to-use and standardised reporting framework that integrates economic, environmental and social aspects to enable informed decision-making by establishing specific metrics for sustainability issues (GRI, 2022). The GRI released its first global sustainability reporting guidelines in 2000 (GRI, 2022; Rowbottom & Locke, 2016). While only a few companies were listed in the GRI reporting database in the early years, companies increasingly adopted the framework with each revision of the guidelines in 2002 (G2), 2006 (G3), 2013 (G4) and 2015 (GRI Standards). Today, GRI is a globally disseminated framework and is recognised as a mature voluntary reporting standard (Chersan, 2016; GRI, 2022). Early on, GRI joined forces with international institutions such as the OECD, the UN Environment Programme and the UN Global Compact, a strategy that contributed to its success. For some time, however, GRI was considered difficult to compare with conventional financial reporting and therefore less investor-friendly, as the GRI framework was designed for a broader group of stakeholders than investors, such as society, employees, government or the media. In 2009, GRI announced that it would adjust its stakeholder focus to better meet the information needs of investors (Eccles et al., 2010; Rowbottom & Locke, 2016), creating a more integrated and comprehensive view of reporting.

The rationale for the GRI’s revised audience was that other emerging and competing reporting guidelines focus on investors as a company’s key stakeholder group. One example is the Carbon Disclosure Project (CDP), which was established in 2000 to transform environmental reporting by making climate-related environmental impacts measurable. By developing an independent scoring methodology, CDP measures the progress of companies or cities in their climate action and transparency. Each year, a ranking is produced and made available to the public. In 2022, CDP assessed 15,000 companies and claims to operate the world’s largest environmental database (CDP, 2022).

Another reporting initiative was the British Accounting for Sustainability (A4S) Project, initiated by the former Prince of Wales in 2004. The so-called Connected Reporting Framework developed by the A4S differed significantly from the GRI in that it combined the financial indicators with considerations on sustainable corporate governance and linked these to a company’s strategy and risk assessment (Druckmann & Freis, 2010; Rowbottom & Locke, 2016). South Africa has been equally important in the development of an integrated reporting format for financial and non-financial (i.e. sustainability-oriented) information. The first standard for an integrated report was introduced in 2002 with the King II governance code, which became mandatory for all companies listed on the Johannesburg Stock Exchange in 2010. This was the first time in the world that a regulatory body decided that integrated reporting should replace the previously often separate disclosure of financial and sustainability information (Brady & Baraka, 2013; Rowbottom & Locke, 2016).

There are many reasons for regulating sustainability-related disclosures. For example, mandatory non-financial disclosure can reduce information asymmetry if organisations present a holistic, and therefore more realistic and more complete picture of their different areas of organisational performance (Cormier et al., 2005; Du et al., 2010). In this way, non-financial reporting becomes an effective tool for legitimising an organisation’s activities towards its stakeholders and society (Bonsón & Bednárová, 2015; Deegan, 2002; Lock & Seele, 2015). However, this information needs to be credible, as sustainability information is easily at risk of being discredited as ‘greenwashing’ or ‘information overflow’ (Marquis et al., 2016; Velte & Stawinoga, 2017). If done properly, sustainability reporting can be beneficial to the organisation itself, as it increases organisational transparency and contributes to organisational development (Diehl & Knauß, 2018).

Driven by the economic and financial crisis in 2008, various initiatives in the US and the EU started to consider new regulations to make reporting more comprehensive and integrated. However, the plethora of reporting frameworks available globally posed a challenge to the goal of improving regulatory requirements, as each framework had its own philosophy and focus. Despite the lack of international recognition of the Connected Reporting Framework, its representative, the former Prince of Wales, was able to launch a multi-stakeholder initiative at the annual A4S Forum, where companies, standard setters, UN representatives, investors and audit organisations jointly discussed a new internationally accepted reporting framework. As the parties involved agreed that sustainable management at the corporate level requires the combination of financial and non-financial reporting, a joint body—the International Integrated Reporting Council (IIRC)—was finally established in 2010 with the intention of developing the Integrated Reporting Framework (IRF) (Druckmann & Freis, 2010; Rowbottom & Locke, 2016). As of August 2022, the International Financial Reporting Standards (IFRS) Foundation assumed responsibility for the IRF (cf. IFRS Foundation, 2022b, p. 2).

The aim of the IRF is to guide organisations in the preparation of an integrated report (IR) as a new, comprehensive reporting format (cf. IFRS Foundation, 2022b, p. 2). The IRF focuses on a company’s stakeholders, with particular attention given to investors and creditors to enable a more efficient and productive allocation of financial capital (IFRS Foundation, 2022b). Different types of capital are considered, such as financial, manufactured, intellectual, human, social, relationship and natural capital (IFRS Foundation, 2022b). This approach enables integrated thinking and business actions focused on long-term value-creation interdependencies (IFRS Foundation, 2022b). Companies can use the IRF to clearly communicate how their business activities lead to the creation, preservation or erosion of value over time, taking either a short-, medium- or long-term perspective. Figure 4.1 illustrates how the BMW Group applies this (reporting) process of transforming value from input capitals into output capitals.

Fig. 4.1

Elements in an integrated report to explain a firm’s value creation, preservation or erosion as applied by the BMW Group (BMW AG) (2021, p. 57)

The IRF proposes seven guiding principles that form the basis for the preparation and presentation of integrated reports (IFRS Foundation, 2022b). These relate to the strategic focus and future orientation of the report, the connectivity of information, the management of stakeholder relationships, the principle of materiality, the reliability and completeness of the report and its consistency and comparability (IFRS Foundation, 2022b). With regard to the content of the reporting, the IRF defines eight interrelated elements: an overview of the organisation and its embeddedness in the external environment, governance structures, a description of the business model, the risks and opportunities of the business operations, the strategy and resource allocation to achieve the organisation’s objectives, the organisation’s performance, an outlook on future challenges and the basis for preparation and presentation (IFRS Foundation, 2022b).

To date, mandatory use of the IRF is required in South Africa and Japan, but it has not become the global industry standard (Threlfall et al., 2020, p. 21). In the European Union in particular, the legislative landscape imposes different legal requirements on its member states, as the next section illustrates.

4.3 The Current Legislative Landscape in the EU

In the EU, some countries had implemented mandatory reporting standards for social and environmental aspects early on, such as France in 2001 or the Scandinavian countries in the 1990s (Hess, 2007; Hoffmann et al., 2018). In 2014, the EU Non-Financial Reporting Directive (NFRD) introduced mandatory reporting requirements with the aim of promoting harmonisation, transparency and comparability (Directive 2014/95/EU, see European Parliament and the Council of the European Union, 2014). Since fiscal year 2017, certain large companies in EU member states have been required to provide additional ‘non-financial information’ in their annual disclosures. In its most basic sense, non-financial reporting focuses on data other than financial data (Baumüller & Schaffhauser-Linzatti, 2018; Loew & Braun, 2018). In detail, however, the relevant content relates to environmental, social and governance aspects, often referred to as ‘ESG factors’ (cf. Baumüller & Schaffhauser-Linzatti, 2018; Loew & Braun, 2018). These ESG factors have gained particular importance since the financial crisis in 2007/08, especially in the financial industry. Indeed, there are even official recommendations on ESG criteria for financial products, such as the Statement on Disclosure of ESG Matters by Issuers of the International Organization of Securities Commissions (IOSCO, 2019) or rankings based on ESG criteria, such as the Fitch Ratings ESG Relevance Score (Fitch Ratings, 2019). According to a study by Union Investment (2021), 78% of all large-scale investors in Germany consider sustainability issues in their investment decisions.

To steer investment towards sustainable business models at the regulatory level, the EU taxonomy for sustainable activities initially set requirements for large listed companies with more than 500 employees, which are obliged to disclose non-financial information under Article 19a or 29a of the Directive 2013/34/EU (Böcking & Althoff, 2017). As the European Commission has pointed out, the ‘disclosure of non-financial information is vital for managing change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection. In this context, disclosure of non-financial information helps the measuring, monitoring and managing of undertakings’ performance and their impact on society’ (Directive 2014/95/EU, L 330/1). However, the legislation itself was criticised by public and private actors for still leaving much room to manoeuvre and interpretation, thus weakening the intended comparability and credibility (cf. Baumüller & Schaffhauser-Linzatti, 2018; Global Compact Network Deutschland e.V. & econsense, 2018; Loew & Braun, 2018; Velte, 2017). In parallel, another point from the EU Action Plan for financing sustainable growth, ‘Strengthening sustainability disclosure and accounting rule-making’ (European Commission, 2023), was addressed by a revision of the mandatory reporting approach by the European Commission and resulted in the EU CSRD (Directive 2022/2464/EU) in 2022 (European Parliament and the Council of the European Union, 2022).

The revised mandatory reporting legislation will change the future scope of the required disclosures for preparers and users. The CSRD regulations will be applied in four stages (Directive 2022/2464/EU, see European Parliament and the Council of the European Union, 2022) and the CSRD is expected to apply to 50,000 companies (European Commission, 2022).

In terms of the content of CSRD disclosures, companies will be required to report information on environmental (E), social (S) and governance (G) issues regarding several pre-defined subtopics, such as climate change mitigation, workforce or business ethics and corporate culture (Directive 2022/2464/EU, see European Parliament and the Council of the European Union, 2022). Information on these aspects must be disclosed if it meets the principle of ‘double materiality’. This requires companies to report information necessary to understand (1) the company’s impact on sustainability matters (‘inside-out’ perspective) and/or (2) how sustainability matters affect the company’s business development, performance and position (‘outside-in’ perspective). More precisely, either one or both of these conditions must be met for sustainability aspects to be reported under the CSRD, thereby broadening the scope of reporting content.

With respect to those ESG issues deemed material, companies are required to disclose information on (1) the business model and strategy; (2) time-bound sustainability targets and GHG reduction plans, including progress in each reporting year; (3) the role of the supervisory and management bodies with respect to sustainability aspects, including incentive schemes; (4) policies and due diligence processes, including the results of these policies; (5) principal risks and how they are managed; and (6) performance indicators relevant for disclosure. Furthermore, Article 19a (2) of Directive 2013/34/EU is expanded, for example, by introducing the new term ‘resilience’ and requiring companies to disclose related information (Directive 2022/2464/EU, L322/24, see European Parliament and the Council of the European Union, 2022). Another change in reporting requirements concerns information on intangible assets, which have become an important driver of company value (Fischer & Baumgartner, 2021).

Independent of the new EU regulations, other standards and frameworks for sustainability disclosure continue to exist. Some frameworks, such as the GRI, IRF or CDP, are explicitly mentioned in the CSRD to ‘minimise disruption’ to companies (Directive 2022/2464/EU, L 322/29, see European Parliament and the Council of the European Union, 2022). In 2021, the European Commission appointed the European Financial Reporting Advisory Group (EFRAG) as a technical adviser for the development of the European Sustainability Reporting Standards (ESRS). The ESRS will follow a modular structure and will be divided into cross-cutting standards and topical standards (representing the ESG topics) (EFRAG, 2022).The first set of the ESRS draft contains a total of 12 modules with 82 disclosure requirements and specified data points (equivalent to Key Performance Indicator [KPIs]). Two modules are available for cross-cutting standards (ESRS 1 + ESRS 2), five modules for environmental topics (ESRS E1–ESRS E5), four modules for social topics (ESRS S1–ESRS S4) and one module for governance topics (ESRS G1) (EFRAG, 2022). The ESRS are intended to become the primary and partially binding framework for reporting under the CSRD.¹

Another change introduced by the CSRD compared to the NFRD is the requirement to publish sustainability information electronically in accordance with the European Single Electronic Format, which has been applicable for financial information since 2020 (Directive 2022/2464/EU, see European Parliament and the Council of the European Union, 2022). Furthermore, sustainability information must be part of the management report and be subject to limited assurance by external and independent auditors. Having sustainability-related information prominently displayed in the management report as one of the first chapters of each financial report takes us a step closer to marrying non-financial (sustainability) information and financial information. As highlighted by the EU Parliament in a press release, the CSRD is a milestone as ‘[f]inancial and sustainability reporting will be on an equal footing […] [to enable better] comparable and reliable data’ (European Parliament, 2022).

The complexity of reporting in the EU increased further in 2020 with the implementation of the EU taxonomy, which is applied by companies in their reporting starting for the fiscal year 2021 (Regulation (EU) 2020/852, see European Parliament and the Council of the European Union, 2020). Taxonomy is a classification system for sustainable economic activities as one tool of the EU Action Plan on Financing Sustainable Growth (2018) and the EU Green Deal (2019). It is intended to provide a frame of reference for investors and companies that recognises corporate activities as environmentally sustainable if they make a substantial contribution to at least one of six environmental objectives of the EU taxonomy: (1) climate change mitigation, (2) climate change adaptation; (3) sustainable use and protection of water/marine resources; (4) transition to a circular economy; (5) pollution prevention and control; or (6) protection and restoration of biodiversity and ecosystems. The EU taxonomy is intended to be a ‘transparency tool’ (European Commission, 2021, p. 1), as it aligns the financial value of a firm’s corporate activities with reporting on specific environmental criteria. However, the EU taxonomy is expected to be revised over time to include other economic sectors that are currently outside its scope (European Commission, 2021). As a result, the regulatory requirements for corporate sustainability reporting will continue to change and expand.

In practice, the merging of financial and non-financial reporting has not taken place from 1 year to the next, but is the result of a longer period of transformation, as the following case of BMW illustrates.

4.4 Integrated Reporting in Practice

Companies that started to voluntarily apply sustainability-related frameworks early to extend their mandatorily disclosed financial information have achieved a good starting position to launch integrated reporting. This becomes obvious in the case of BMW, which has continuously developed its sustainability reporting since the 1970s and made it part of the strategy process.

In 1973, BMW became the first company in the automotive industry worldwide to appoint an environmental protection officer. After the turn of the millennium, the first sustainability report, the ‘Sustainable Value Report’, was introduced for the fiscal years 2001 and 2002. Even before the introduction of that report, BMW had already published reports on the environmental impacts of its operations and the measures taken to counteract them. When BMW began publishing its voluntary Sustainable Value Report, it initially did so on a bi-annual basis and, subsequently, beginning in 2012, on an annual basis (Value Reporting Foundation, 2022a). While the first reports did not follow specific reporting standards, the company has, since 2005, adopted the GRI standard for sustainability reporting and has voluntarily committed to the highest GRI application level (‘comprehensive option’) since 2008 (BMW AG, 2021). Considering that, according to a CSR-reporting ranking in Germany, only three major German corporations (Daimler, BASF and BMW) have committed to the highest GRI application level in their sustainability reporting as of fiscal year 2020 (Institut für ökologische Wirtschaftsforschung and future e.V.—verantwortung unternehmen, 2022), this further supports the company’s pioneering role in German industry and led to BMW being recognised by the Carbon Disclosure Project (CDP) in 2014 (BMW Group, 2014). With regard to auditing, BMW has strengthened its credibility by committing to a voluntary limited assurance audit of its sustainability report since 2013 (BMW Group, 2021). BMW claims to be the first premium car manufacturer in the world to finally complete the transition from separate sustainability reporting to a fully integrated report (BMW AG, 2021). BMW’s integrated reports for the fiscal years 2020 and 2021 follow the voluntary framework of the International Integrated Reporting Council, the Integrated Reporting Framework (BMW AG, 2021, 2022b).

According to BMW’s own statements in the context of a case study published by the Value Reporting Foundation (2022a), integrated reporting appears to be just another logical step in a continuous process of transformation across the entire company. The organisational perspective changes when sustainability becomes the core of corporate strategy. Then there no longer seems to be a need for a separate sustainability strategy (cf. Chap. 3), but sustainability becomes a central factor in corporate decision-making as part of an integrated corporate strategy. This gives rise to a new perspective on value creation, the so-called Integrated thinking, which views ‘sustainability, social impact and economic and business success as mutually dependent’ (Value Reporting Foundation, 2022a, p. 14).

In the following expert dialogue between Prof. Oliver Zipse, Chairman of the Board of Management of BMW AG, Jon Townend, BMW Group’s Head of Accounting and Prof. Dr Thomas M. Fischer, Chair of Accounting and Controlling at FAU Erlangen-Nuremberg in Germany, the implications of implementing integrated reporting at BMW Group are discussed and reflected upon in more detail.

4.5 Expert Conversation on the Implementation of Integrated Reporting at BMW Group

• Fischer: ‘Integrated reporting’ is a combination of mandatory financial and non-financial information as well as voluntarily selected non-financial factors to communicate a company’s value creation potential in a concise manner. BMW has prepared an integrated report for the first time for fiscal year 2020. What prompted you to do this?

• Zipse: If you’re an entrepreneur, you have to build up trust and you have to make sure that the business works. There are two key ingredients. The first is: What gets measured, gets done—and that builds up trust. If you walk your talk, you set specific targets and measure them. Trust is even higher when it builds upon full transparency. The second ingredient is to make sure you set the right goals. An organisation needs direction and trust in its leadership. So we thought it was a good time to bring together financial targets and reporting together with our non-financial targets and reporting, which we have been doing for many years. It’s not a one-off for us. We started more than 20 years ago to set a greater number of concrete goals, make them transparent and report on them to the outside world. We have had a sustainability report since 2001 reporting on a wide range of measures.

• Fischer: I agree about the internal impact of reporting, but what about the external drivers? What drove your decision?

• Zipse: Society and the political environment are changing in such a way that the credibility they expect from you is based on proven facts. We are a pioneer in merging our two reporting formats—non-financial and financial reports—and making integrated strategy and reporting a part of our internal policy. We want to bring up external transparency in line with our corporate strategy. To date, this has been a real success story. But bringing them together was a bold step. It sounds easy, but it’s quite difficult. You have to be very precise about the quality of each measure. Since we have auditors, it is much stricter that what you report has to be correct. However, part of our philosophy has always been to take the next step, to act. Sustainability is becoming a cornerstone of our corporate strategy. It is no longer something you report on to look good. If you don’t act sustainably in what you do, you will quickly disappear from the market.

• Fischer: So instead of ‘sheer driving pleasure’, it’s now ‘sheer reporting pleasure’, so to say?

• Townend: [laughter] Not so long ago, we still had a very heterogeneous standard-setting world. Different standard setters, different focuses. Now, the world has changed enormously. We have seen, for the first time, the major standard setters outside the financial sector working together intensively. The EU has also taken up the issue of sustainability reporting. A major development at the end of 2021 was that the IFRS Foundation announced the formation of the International Sustainability Standards Board (ISSB), following strong market demand for its establishment. I think this development will give corporates a much clearer framework of what is expected of them and that it will ultimately lead them to what investors are looking for. Investors want to see companies set targets and report transparently on these targets because this makes their actions comparable with what other companies and competitors are doing.

• Fischer: You mentioned that you want to improve trust in communication. This is not an easy step to take: Creating these new reporting processes is a complex task. What are the main challenges compared to the purely financial reporting of previous decades?

• Townend: When it comes to non-financial reporting, you’re dealing with a large number of players within the reporting process. So it’s not just the accountants or the controllers and the euros. You’re dealing with a wide range of numbers that are more technical. There are also interdependencies between these figures. If you look at a CO₂ figure in our non-financial reporting, it’s not just one person sitting at a desk calculating the CO₂ figure. You’ve got to look at the cars we sell, the type of cars we sell. You’ve got links to the engineering department. A lot more players are involved, and it’s important that every involved colleague knows what the other one is doing. You have to work as a team. Last year, we had a long discussion about the responsibility for non-financial reporting. You have to make sure that the dependencies and the responsibilities are 100% clear. It’s about making sure that every single player on the team is running in the right direction and fully understands the implications of his/her role.

• Fischer: And in this team play, who is driving the process? Is it still the CFO?

• Townend: The CFO is driving the process, because what you realise is that we’re dealing with figures. They may not be euros, but they’re still figures. And if you look at which department within a company is really best placed to understand how numbers are consolidated, how an internal control system ensures the quality of those figures, it is the accounting department.

  So, we have a very important role to play. But as I mentioned, the technical side of the figures—kilowatt-hours, CO₂ or other aspects of the whole process chain—really requires experts. Among others, we work closely with Thomas Becker (BMW VP Sustainability, Mobility) and his team on the environmental figures. And, of course, we work closely with our colleagues in HR on the social metrics, the diversity metrics and the training and other metrics, as well as with the legal department on the governance issues.

• Fischer: You mentioned controlling issues and addressed them to a professor of controlling, so I always like it to get some references to my home turf [laughs]. However, at the end of the day, you have to come up with a profit figure—a return on investment. You have to pay dividends in the end. How difficult is it to select the right performance measures, the non-financial or the quantitative indicators, to explain the resulting financial performance?

• Zipse: Our transition to integrated reporting was made in anticipation of something that we believe is going to happen anyway. Look at the supply chain legislation in Germany: the German Act on Corporate Due Diligence Obligations in Supply Chains (Lieferkettensorgfaltspflichtengesetz). Look at the [EU] Taxonomy and CSRD. They all have to do with transparency—transparency for society and investors. It becomes mandatory to demonstrate that you are on a continuous improvement path in whatever you do. It’s not just about setting long-term targets. It’s about getting better every year in everything you do: CO₂ emissions, water consumption, energy consumption, energy sources. What was the performance of our cars? How well trained are our employees? We want to see progress year on year. And this whole framework of integrated reporting is a good indicator that we are a good investment.

• Fischer: You are right. That is what reporting is all about: informing about the development of the business. Do you think that investors appreciate the integrated non-financial information?

• Zipse: Sustainability reporting is also an investment instrument. With integrated reporting, we can prove that we are not only a highly profitable but also a sustainable investment for the future. With our transparency, we have been able to demonstrate for many years that we are improving year on year on the most important environmental factors, such as energy consumption and all forms of resource use. For example, in 2021 and 2022, we significantly overachieved our CO₂ emission targets set by the European Union for our new car fleet.

  That’s just one factor that, if you don’t make it transparent, the outside world, the investors, may not even know that we are better than we are actually required to be. You have to be an attractive investment, an attractive employer and an attractive carmaker for customers—and that is the whole framework in which we operate.

• Fischer: So is integrated reporting then the end of accounting?

• Townend: [laughs] No, integrated reporting is the future of the accountants. Maybe it’s the end of controlling [laughing]. No, seriously, it’s definitely not the end of accounting. I think that integrated reporting is an integration of non-financial and financial reporting. Financial reporting must and will remain important in the years to come because financial reporting is about the reliability and quality of the company’s management. Management sets out to do something at the beginning of the year and reports on what it has done at the end of the year. How close it is to what was expected is an indication of how well the company has been steered and managed internally. The accounting policies can also tell you something about the management. Is it an aggressive management? Or one with more conservative accounting policies and more prudent management? And without cash flow, we can’t invest in the future anyway. So, I don’t think you’re going to move away from financial reporting.

• Fischer: Does the capital market perceive non-financial reporting in the same way as financial reporting?

• Townend: Non-financial reporting is now evolving to be on equal footing with financial reporting from an investor perspective. And the expectation around non-financial figures is that they will be derived and prepared with the same due process, care and attention to quality that we know from financial reporting.

• Fischer: That’s a crucial aspect: I am providing additional information to the capital market or to other stakeholders in order to build or restore trust. But we also know from empirical accounting research that additional information can be an additional risk. A stakeholder might say, ‘OK, now you are providing me with facts that I didn’t even know about, and now I see it in combination with, for example, cash flow, and it doesn’t always look like it’s going to have a positive impact’. What do you do as a company in this situation to achieve the results you originally intended? In a volatile environment, it is then a challenge for management to act reliably in the long term and to avoid myopic behaviour.

• Townend: You raise an interesting point about the number of KPIs to be reported. I strongly believe that it is better to report less than more, in line with the current legislation. They need to be clearly derived from our strategy. An integrated report shows what the company is doing and the ‘why’ behind it, and this needs to be derived from the integrated strategy. A link is also needed between strategy and the remuneration of the Board of Management. The risk of reporting too many figures is that you will end up with conflicts and figures that are difficult to interpret. It’s no coincidence that when rating agencies look at the same set of non-financial figures, they come to completely different conclusions about whether a company is a good or a bad investment.

• Fischer: So less is more?

• Townend: It’s very risky to start reporting too many figures because you might lose focus on what the company is aiming for. I’m very much in favour of principle-related guidelines because they give companies the flexibility that they need to differentiate themselves in their reporting. And I think that’s what investors need to know. They need to get a feeling what’s behind the figures. It’s not just a box-ticking exercise. It’s really something that is selling or reflecting the company.

• Fischer: A division into business segments would probably make reporting even more complex. But you mentioned the automotive segment as a whole, which brings me to the next topic of discussion: the EU taxonomy.

• Zipse: Good point! Let’s move on. The taxonomy is, of course, an important piece of regulation coming from Brussels. What is your assessment? Is it helpful for the development of the industry as a whole?

• Fischer: Well, whether it is helpful or not, I think that is still an open question and a debate that we cannot conclude here right at the moment. But it’s a very important topic that you’re raising, and one that has gained momentum over the last month or year. We now have different levers for reporting and also for disclosure when it comes to discussing the impact that a company has. We have a strictly microeconomic or even a segmental perspective in financial reporting and in the integrated report. And the issue that you have raised is more on a higher aggregated basis; so, for example, the discussion about the environmental or social footprint is not only done at the corporate level, but also at the sector level. And the interesting thing is that I also see emerging discussions—for example, among macroeconomic experts—that we need new KPIs, new metrics, to determine whether a business period was successful.

  The acronym KPI, for example, is then translated as a ‘Key Purpose Indicator’. There is an initiative, the Value Balancing Alliance, which says, ‘OK, at the end of the day, you have the environmental footprint or the social footprint, perhaps in combination with cash flow or dividend payments’, but then it is all about the transformation of resources and the process of creating value for the stakeholders. That is coming more and more into focus.

• Zipse: Do you expect integrated reporting to become the standard for all industry players in the near future?

• Fischer: I’m not in the political arena, but the ISSB’s exposure draft of the practice statement for the management commentary, which was published in May 2021, is more or less written under the guideline of integrated reporting, even if I think they don’t use the term. But it’s implicit, so let’s say that integrated reporting is the guideline for the future. In addition, most of the financial statements and therefore the management commentaries, especially in Europe, are already prepared according to the IFRS. So, at the end of the day, I would say that, not too long in the future, integrated reporting will become a very important format for corporate disclosures.

• Zipse: We think so, too. In today’s world, you can only be an entrepreneur if you take into account all the resources that you use—social resources, environmental resources, financial resources and natural resources—because they are scarce and limited. I think the whole world is coming to the conclusion that you cannot have a market economy if you do not pay for resources or at least if you are not transparent about the use of resources. We feel that this is going to happen very quickly.

• Fischer: So, as you mentioned, it will be about using scarce resources as efficiently as possible, and then explaining the value creation process in the company more comprehensively than just going over the financial report. I am confident that perhaps, in the near future, we will be able to discuss the progress and the next integrated report that BMW will prepare.

4.6 The Future of Reporting: Opportunities, Challenges and the Role of Integrated Reporting

Together with an integrated strategy, the Integrated Reporting Framework is leading the way in the sustainability-driven business transformation of companies. This is illustrated by the BMW Group case presented in the previous sections.

As described in Sects. 4.2 and 4.3, the regulatory framework for reporting has evolved from voluntary sustainability reporting (GRI) and climate reporting (CDP) to integrated reporting (IR) and the new mandatory EU reporting framework (CSRD) and standards (ESRS), as well as the EU’s classification system (EU taxonomy).

Navigating this dynamic regulatory landscape presents a number of opportunities and challenges, which are explored in the following section. Further, the future role of integrated reporting is discussed.

4.6.1 Opportunities of New Ways of Reporting

A major opportunity offered by the new ways of reporting is that they affect the process of developing an integrated strategy, integrated decision-making and management (cf. Chap. 3). This can be observed in both the Integrated Reporting Framework and the new EU reporting regulations.

The Integrated Reporting Framework has emerged as part of a management philosophy called Integrated Thinking (cf. IIRC, 2019; Value Reporting Foundation, 2022b).As a ‘multi-capital management approach’ (IIRC, 2019, p. 5), it thus pursues ‘[l]inking purpose and values to strategy, risks, opportunities, objectives, plans, metrics and incentives throughout the organization […] [to enable] better decision-making’ (IIRC, 2019, p. 5). Therefore, integrated reporting, as one of the principles of Integrated Thinking, provides the opportunity to build a bridge between strategy and the assessment of sustainability performance that spans all areas of an organisation and consequently leads to integrated decision-making.

The impact of applying integrated thinking principles to strategy and reporting can be seen in the case of BMW Group. BMW Group’s objective in adopting the integrated reporting format for its annual report was to provide a clear and comprehensive insight into the BMW Group and to explain the organisation’s activities in a transparent, comprehensible and measurable way (BMW AG, 2022a). With its integrated report, BMW Group explains its corporate strategy aimed at achieving both financial and non-financial targets (e.g. earnings before tax (EBT) margin, share of electrified cars in total deliveries and reduction of CO₂ emissions per vehicle produced) (BMW AG, 2022a). Thus, in the described case, the integrated report, on the one hand, serves to communicate the strategy internally and externally to diverse stakeholder groups. On the other hand, it serves as an internal management tool to monitor and control the achievement of objectives, and it can be used as a basis for informed decision-making in the company’s strategy process.

Although the EU’s new mandatory reporting framework (CSRD) and the development of European sustainability reporting standards (ESRS) are not based on any specific management philosophy, they have the potential to impact how companies communicate their strategies to stakeholders. The recent changes will also affect the company’s decision-making processes and business activities. This can be exemplified by the following two aspects:

First, a change in responsibility and in the attention paid to sustainability matters is to be expected at the individual level among management executives and in bodies such as management or supervisory boards. In the past, sustainability reporting did not always receive the same level of attention from a company’s management and board level as financial reporting attracted. This is expected to change with the introduction of the ESRS (cf. EFRAG, 2022), and will be in line with the basic idea of the CSRD in terms of aligning the relevance of financial reporting and sustainability reporting (Zülch et al., 2023).

The revised draft of the ESRS 2—General Disclosures, published in November 2022, not only covers firm disclosure on ‘the elements of its strategy that relate to or affect sustainability matters, its business model(s) and its value chain’ (EFRAG PTF-ESRS, 2022, p. 10), as well as reporting standards on the assessment of sustainability matters. It also names an obligation to provide information on the governance of this disclosure.

Regarding governance, it demands disclosure on ‘whether, by whom and how frequently the administrative, management and supervisory bodies, including their relevant committees, are informed about material impacts, risks and opportunities […], the implementation of sustainability due diligence and the results and effectiveness of policies, actions, metrics and targets adopted to address them’, as well as how they ‘consider impacts, risks and opportunities when overseeing the undertaking’s strategy, its decisions on major transactions and its risk management policies’ (EFRAG PTF-ESRS, 2022, p. 9). Further disclosure on whether ‘incentive schemes are offered to members of the administrative, management and supervisory bodies that are linked to sustainability matters’ (EFRAG PTF-ESRS, 2022, p. 9) also seems to have become part of the reporting standards. In addition, the ESRS draft states disclosure requirements on ‘how the interests and views of its stakeholders are taken into account by the undertaking’s strategy and business model(s)’ (EFRAG PTF-ESRS, 2022, p. 12) to account for the aspect of impact.

On the one hand, these new disclosure standards can certainly be seen as a challenge with respect to their implementation. On the other hand, the increased responsibility of management and supervisory individuals and bodies can be regarded as an opportunity to raise awareness among the management about sustainability matters and the associated opportunities and risks.

Second, the new reporting regulations will further accelerate the transformation and governance of sustainability-driven business models. Although non-financial information cannot be directly expressed as a monetary value, it could affect how stakeholders perceive a company’s financial performance over time (cf. Böcking & Althoff, 2017, p. 246). Sustainability aspects have an impact on an organisation’s opportunities, risks and the future going concerns of its business model. Moreover, sustainable business development can be beneficial for organisational resilience (cf. Schmidt & Strenger, 2019, p. 483). Sustainability risks can increase reputational risks, as they are highly relevant to society and subject to various regulatory developments. Consequently, sustainability reporting on ESG issues can contribute to reputation risk management (Bebbington et al., 2008, p. 337ff.). Non-financial KPIs are therefore early risk indicators and should be considered in an organisation’s strategy (cf. Böcking & Althoff, 2017, p. 249). Integrating sustainability considerations can ensure long-term profitability, thereby enhancing a company’s shareholder value (cf. Schmidt & Strenger, 2019, p. 483). As a further implication of regulatory reporting requirements, mandatory sustainability disclosures increase compliance sensitivity (cf. Bachmann, 2018, p. 233).

In addition to the opportunities and potential for sustainability-oriented corporate development through new forms of reporting, operational and regulatory challenges remain that need to be addressed.

4.6.2 Challenges of New Ways of Reporting

One of these remaining challenges is the operational implementation of the new reporting framework and standards. A ‘CSRD readiness’ ranking analysed by Zülch et al. (2023), which takes into account 160 management and sustainability reports of companies listed in the DAX, MDAX and SDAX, supports the assumption that companies that have previously engaged in sustainability reporting on a voluntary basis are better prepared for the implementation of the new reporting requirements and standards in the EU. Most of the ten top-ranking companies apply several recognised international standards for sustainability reporting and have a sustainability report integrated into their management reports.

With regard to ‘CSRD readiness’, two groups of companies emerge. Those that have been less advanced in sustainability reporting will now be challenged to define and establish responsibilities, strategies and processes to implement the regulatory requirements and increase personnel capacity to do so. The other group of companies has already voluntarily implemented standards, perhaps even including an integrated reporting framework and audits. This second group of companies will have to consider how to deal with their advanced reporting formats in light of the new regulations, as the integration of the sustainability report into the management report under the CSRD seems to be of limited scope compared to the Integrated Reporting Framework (cf. Zülch et al., 2023). However, if organisations exclude specific, detailed, stakeholder-oriented sustainability information from their integrated report, they will face the question of where to publish this information. Barrantes et al. (2022) therefore expect that organisations will continue to use separate sustainability reports in the medium term, but will eventually find ways to restructure them and to increasingly link them to corporate reporting content (cf. Barrantes et al., 2022, p. 90).

Another important challenge is the reporting of ‘key intangible resources’ in the context of sustainability reporting, which is reflected in a recent publication by Haller and Fischer (2023). In conventional financial reporting, the discussion about reporting of intangible resources, such as data, reputation, brand names or relationships, has become increasingly important because intangible resources can have a direct monetary impact on a company’s net worth, as well as a strategic, indirect impact on a company’s future opportunities, risks and competitive advantages. Consequently, inadequate representation of intangible assets can lead to an information gap in the management report, leaving room for interpretation that could potentially create a gap between book value and market value.

This issue becomes even more relevant in the context of sustainability reporting, as sustainability issues are predominantly intangible in nature and can directly and indirectly affect a company’s opportunities and risks to create, preserve or erode value. The CSRD therefore contains, for the first time in reporting history, a regulatory impulse to report on ‘key intangible resources’. However, as Haller and Fischer (2023, p. 82) point out, in the CSRD, the EU considers and regulates under the term ‘key intangible resources’ only those intangible resources on which a company is materially dependent as part of its value creation activities (outside-in perspective). According to Haller and Fischer (2023, p. 83), this understanding of ‘key intangible resources’ does not seem to be in line with the fundamental principle of double materiality on which the CSRD is based. Considering only reporting regulations on ‘key intangible resources’ that might affect the company’s business development, performance and position (outside-in perspective) leaves in question how to deal with information on ‘key intangible resources’ that would impact the company’s activities on sustainability issues (inside-out perspective). In addition, the CSRD does not provide a categorisation of ‘key intangible resources’. Both aspects—the lack of a definition and a categorisation of intangibles for external reporting—will decrease the comparability of related corporate disclosures (Haller & Fischer, 2023).

4.6.3 The Future Potential of Integrated Reporting

In terms of reporting format, the introduction of the CSRD changes corporate reporting in the EU insofar as the CSRD intends that companies include sustainability information in the management report of the annual report (cf. Baumüller et al., 2021).

Although this first step towards integrated reporting does not seem to be comparable with an Integrated Reporting Standard under the IR Framework, the legislative development in the EU can be credited with a certain push towards integrated reporting (see Barrantes et al., 2022, p. 90). Furthermore, the International Sustainability Standards Board (ISSB) has committed to additional development of the IR framework towards an international corporate reporting framework (cf. IFRS Foundation, 2022a), which speaks for the future relevance of the IR framework. In order to ensure the future global recognition of different reporting frameworks, the CSRD already states that the ESRS to be developed shall be consistent with the future basic reporting standards of the ISSB (Directive (EU) 2022/2464, L 322/29, see European Parliament and the Council of the European Union, 2022). Whether the CSRD will be able to achieve its objectives remains to be seen, as does the role the GRI Standards, the Carbon Disclosure Project or the Integrated Reporting Framework will play alongside the ESRS in the future.

On the one hand, an international trend is evident towards greater harmonisation of reporting frameworks and standards, which could lead to more homogeneous reports. On the other hand, the possibilities offered by digitalisation are encouraging a trend towards customised reporting formats. As the main target group for reporting expands from shareholders to various other stakeholders, such as employees, NGOs or sustainability experts, different information needs are growing (Barrantes et al., 2022). Whether this will be met in the future by adapting the communication format of reporting, such as an online platform with a search function, or by maintaining the diversity of different reporting frameworks also remains an open question for the future.

4.7 Conclusion

Corporate reporting is currently evolving faster than ever before. While companies must satisfy the information needs of diverse stakeholders, including employees, customers, media or experts, they are required to adapt their reporting processes to meet new legal requirements, such as the CSRD or the EU taxonomy. In addition, the landscape of voluntary frameworks intended to strengthen integrated thinking is currently undergoing adjustments to enhance the comparability of disclosure globally.

On the regulatory side, the most fundamental change in the EU is the introduction of the CSRD, which, in contrast to the previous NFRD, integrates sustainability reporting as a mandatory part of the management report and imposes an audit requirement with limited assurance. In addition, the information to be reported on environmental (E), social (S) and governance (G) aspects must comply with the principle of double materiality. This enlarges the scope of reporting content, as the non-financial information is considered material if the impact of the company’s operations on sustainability aspects is high (‘inside-out perspective’) and/or these sustainability issues affect the company’s business development, performance and position (‘outside-in perspective’). Implementing the CSRD and the EU taxonomy for classifying a company’s sustainable economic activities challenges conventional corporate reporting and requires a change in internal reporting processes. While the objective of integrated reporting remains desirable for policymakers and stakeholders, some companies may find it difficult to embed this type of integrated thinking in their business in the short term. Still, to achieve the potential of integrated reporting, it is prudent for managers to proactively initiate the required internal transformation of the related processes, even if this will take some time to materialise.

This chapter concludes with five takeaways that could stimulate further discussion:

• 1. The expectations of stakeholders and shareholders regarding sustainability issues have changed significantly. If these sustainability expectations are understood as an opportunity for a more sustainable business development, the new reporting requirements can guide companies in this transition process.

• 2. The new reporting requirements oblige companies to report on their sustainability performance on an ongoing basis. The paradigm shift towards integrated thinking enables companies to align their strategic goals, decisions and performance indicators with their reporting obligations and thus present a more consistent picture to their stakeholders in the long term.

• 3. Integrated reporting offers the opportunity to explain in an understandable way, both internally and externally, how a company creates, preserves or destroys value, and to prevent information overload.

• 4. In light of the new reporting regulations (CSRD) and standards (ESRS) in the EU, the future role of the Integrated Reporting Framework remains unclear.

• 5. Reporting on non-financial performance indicators should be in line with regulatory frameworks and standards, but should be limited to material aspects to meet information requirements, remain manageable for companies (and auditors) and provide relevant, comparable and timely information to all stakeholders.

On the Road to Net Zero, strategy and reporting are the starting and ending points of operational business activities. Thus, the following three chapters will focus on related operational business areas that will enable the internal sustainability transformation. Chapter 5, Creating Sustainable Products, will further elaborate the paradigm shift in product development towards a circular economy.