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An investor perspective - corporate reporting reform can enhance long-term investment decisions in infrastructure

Posted 28 July, 2014

A report – Unlocking investment in infrastructure – published by the largest six accounting networks in June 2014 made some important recommendations to the B20.

The B20 has recognised this report in its paper, B20 Infrastructure & Investment Taskforce Policy Summary, calling for, “accounting rules to eliminate or address barriers to long-term and infrastructure investment” – a key endorsement prior to the G20 meeting to be held later this year in Australia.

From an investor perspective, corporate reporting reform is necessary to meet the B20’s objectives, particularly in relation to unlocking financial capital for investment in major infrastructure initiatives.

A more cohesive corporate reporting landscape would bring

  • benefits to businesses
  • clarity to investors to support longer-term decision-making and
  • benefits to the global economy through more efficient and productive capital allocation.

 Cohesion and simplicity to unlock investment

Markets need high-quality information in order to allocate capital efficiently and productively. According to Standard & Poor’s, and as quoted in the report, the global economy is confronted with a $500 billion annual gap in infrastructure investment.

It is not just that infrastructure projects themselves are essential to job creation and better economies and society – business in general relies on the existence of modern, reliable infrastructure in all areas of society to be successful, competitive and grow their own prospects. This issue therefore goes wider than investment in the projects themselves – effective investment decisions in infrastructure is a precondition of successful long-term economies. Nor is it an issue restricted to one type of economy (eg developing nations). The scale of the global economy and the global population growth make this an issue for countries at all stages of economic development – not least in countries affected by the financial crisis.

In order to make an effective long-term investment, an assessment of the future prospects of a business or project is required. Currently, there is a significant information asymmetry between the provider and recipient of financial capital, and this knowledge gap is one factor leading to short-term decision-making and potential market failure as capital fails to flow to the most productive enterprises. This situation is particularly acute in those sectors of the economy that require long-term finance – infrastructure, energy and healthcare key among them. The attractiveness of these sectors to high-quality financial capital is vital to achieve sustained economic prosperity and societal wellbeing.

This is a problem that is exacerbated by a corporate reporting system that can produce voluminous, complex and disconnected data that does not articulate effectively a business’ strategy, performance and prospects concisely and meaningfully.

Report findings

So what does the report set out as solutions? One area stressed in particular is that the transparency of project data and risks could be increased to help with effective decision making. It does not of course see this as an isolated development that could help on its own to unlock investment in long-term infrastructure projects. The report observes that regulatory issues, lack of suitable vehicles for investment, and even a poor availability of well-prepared projects clearly have an impact.

A further area for attention is a need to tackle systemic short termism. Here again, further transparency can play a role. If organisations more fully focus their communication on metrics that truly relate to long-term value creation (and which are useful to investors), then this can help to shift horizons towards a longer-term outlook.

The report explicitly endorses Integrated Reporting as a potential solution. Key features of Integrated Reporting, as set out in the International <IR> Framework, make it relevant to the agenda in relation to infrastructure investment: future orientation; more complete picture of value creation, including how capitals are employed; alignment to the important factors in investment decisions – such as future prospects and risk assessment. It is also essential that companies have the flexibility to tell the story most relevant to their value creation process as reporting content needs to be driven by investor information needs in relation to the specific circumstances of the business.

A particular distinction is drawn between the initial prospectus and ongoing disclosure. The report identifies that more information is often available at the point of evaluation, which is not sustained on an ongoing basis to enable investors to evaluate or monitor performance, or which could attract alternative investments. A particular gap that is highlighted is around the sustainability of the business model based on key factors such as:

  • Current and future revenue growth
  • Overall productivity and operating margin
  • Exposure to risk.

Conclusion

Looking at the evidence of the report, and based on the experiences of the IIRC’s global outreach, the B20 should prioritise the recommendation of the world’s six largest accounting networks as it calls upon G20 Governments to promote and remove barriers to corporate reporting innovations, such as Integrated Reporting, a system that is aligned with the objectives of economic policy. In fact, Integrated Reporting is consistent with the aims of each of the four B20 work-streams in 2014 – trade, human capital, financing growth and infrastructure and investment. An endorsement of <IR> could therefore be an important step forward across all areas of economic activity and align corporate reporting to long-term economic performance.