Modern Corporate Reporting: Harmonizing Financial and Non-Financial Information. ESG Reporting: a Tool for Strategic Planning and Global Trends.
Key Components of Modern Reporting:
Financial Information: This section includes data on the company's financial position, such as the balance sheet, profit and loss statement, cash flow statement, as well as an analysis of profitability, liquidity, and financial stability indicators.
Economic and Political Information: This section presents an analysis of the external environment in which the company operates. It looks at economic conditions, including market trends, regional and industry features, as well as current legislation, tax system, and other regulatory mechanisms.
Forecast Information: This section contains information about the company's future plans and strategies, including production and investment projects, market competition analysis, price forecasts, as well as business valuation and potential risk assessment.
Technical Information: This section presents data on the company's material and technical support, including the volume of natural resource reserves (for example, minerals), production capacity of enterprises, product output, and the quality of the technologies used.
Legal Information: This section contains an analysis of the legal aspects of the company's operations, such as lawsuits, contingent obligations, property and contractual relations issues, as well as information about related parties (affiliates) and other legal matters.
Management Information: This section contains information about the company's management, such as strategic plans and goals, organizational structure, management methods, control and risk systems, as well as performance evaluation and management reports.
Environmental Information: This section discusses aspects of the company's environmental responsibility, including sustainable development strategies, measures to reduce emissions and waste, use of natural resources, as well as compliance with environmental standards and legislation.
Staff Information: This section contains data about the company's employees, including information about the composition, qualifications and experience of staff, the motivation system and support for professional development, as well as measures to ensure occupational health and safety.
Corporate Social Responsibility (CSR): This section presents information about the company's social responsibility activities, including participation in charity, sponsorship, volunteering, as well as maintaining ethical business standards.
Information Security and Data Protection: This section contains information about measures taken by the company to ensure information and data protection, including information security systems, access management, as well as compliance with personal data protection legislation requirements.
Other Information: This section can present additional information about the company, such as organizational structure, corporate culture, management decisions, as well as reports on social responsibility and interactions with stakeholders such as clients, suppliers, partners, and governmental bodies, etc.
Thus, reporting is not limited to just financial (accounting) information. Financial indicators take up less than half of the reporting volume of large companies. Everything else is non-financial information, the volume of which is constantly increasing.
The modern accountant currently performs a wider range of tasks than just keeping accounting records. He is a key integrator of a multitude of diverse and very complex economic and other information necessary for preparing full-fledged financial statements.
Is it Really Non-Financial Reporting?
The existing financial reporting of companies includes a multitude of indicators that can be classified as non-financial, but these data have financial significance as they directly affect the financial reporting indicators. For example, information about social, environmental, technical, and legal aspects influences the company's asset valuation, its overall value, and business prospects. Thus, the assertion of the existence of purely non-financial reporting is not entirely accurate, as all presented data have financial relevance.
a) Corporate social responsibility (CSR) can attract or repel potential investors and employees, which in turn affects the company's share price and labor costs.
b) Favorable working conditions and employee loyalty reduce the risk of staff turnover, which lowers costs for recruiting and training new employees, and also increases efficiency and business sustainability.
a) Compliance with environmental standards and norms prevents potential fines and sanctions from governmental bodies, which directly affects the company's financial indicators.
b) The development and implementation of environmentally sustainable technologies allow for reduced operational costs, providing long-term savings and improvement in financial results.
a) Innovative technologies and optimization of production processes increase production efficiency, leading to increased profitability and competitiveness of the company.
b) The implementation of a quality management system enhances product reliability, attracting customers and increasing sales volume, positively impacting the company's financial performance.
a) Timely updating and compliance with legislation reduces the risk of legal problems, preventing potential financial losses in the form of fines, compensations, or missed opportunities.
b) Protecting intellectual property and proper patent management provide an additional source of income through licensing fees and prevent competition based on unauthorized use of the company's developments.
In the given examples, it is evident that non-financial reporting provides significant information that directly affects the company's financial performance. Various social, environmental, technical, and legal aspects of organizational activities are important factors that determine its financial results, asset valuation, overall value, and business prospects. Therefore, the statement about the existence of purely non-financial reporting is not entirely accurate, as all the presented data have financial relevance.
The Purpose of Financial Reporting and Its Development Process
The purpose of modern financial reporting is to identify all existing factors, assess their quantitative impact on a specific business (i.e., digitize them), and reflect them in the prescribed form in the financial statements.
The reporting development process involves digitizing large volumes of information about factors that affect the business. That's why new types of information and, accordingly, reporting emerge.
Limitations in Information Disclosure
Companies should not restrict information disclosure as any limitation of information can reduce understanding of the company's activities. Even data such as information about owners and beneficiaries of the business, which is usually not disclosed, can be critically important for investors to assess the company's risks and prospects. Information limitations can be used by dishonest companies to conceal negative information. Russian companies with international obligations may also face difficulties in providing information to foreign users. Therefore, the question of any information limitation should be approached with caution.
Integrated Reporting and ESG: Tools for the Future Sustainable Economy
Integrated Reporting is the main trend in the future, where all types of reporting (environmental, social, sustainable development, risk-oriented, etc.) represent separate fragments of the future integrated reporting or its equivalent. The concept of integrated reporting is based on the integration of existing separate fragments in the form of financial reporting, sustainable development reporting, ESG reporting, statistical reporting, and other types of reporting.
However, ESG reporting differs from other types of reporting in its focus, as it represents a tool for building a global governed economy, uniting the efforts of the entire international community to address three main challenges:
1. E - Environmental (environmental disasters);
2. S - Social (social crises);
3. G - Governance (inadequate governance of the world/country/company/individual).
Achieving sustainable development is only possible through joint efforts of the international community, prioritizing public interests over individual and group interests. A special management tool in this context is ESG reporting, serving to create a global planned economy.
Uniting participants requires:
1. Defining common goals;
2. Developing an action plan;
3. Monitoring implementation at all levels - from individual businesses to governments and the international community.
ESG reporting is a tool of planned economy, similar to the principles of socialism and communism.
When organizations achieve their planned performance indicators, they receive recognition, ratings, media support, subsidies, investment, and reduced borrowing costs. Otherwise, they face the loss of bonuses, penalties, and sanctions.
Examples of Existing Incentive and Sanction Systems in ESG Reporting:
Green Agenda and Carbon Emission Quotas: As part of efforts to mitigate the consequences of climate change, companies are incentivized to implement innovative solutions to reduce their carbon footprint. This is achieved through the introduction of a system of greenhouse gas emission quotas, which provides financial rewards to organizations effectively reducing their emissions and imposes penalty sanctions on companies that exceed the established limits.
Responsible Consumption and Production: To support sustainable development and the rational use of resources, corporations are incentivized to transition to a circular economy, optimize processes, reduce waste, and enhance energy efficiency. The incentive and sanction system involves providing favorable financing and taxation conditions for environmentally responsible enterprises and implementing penalties for organizations that disregard environmental and social standards.
Labor Practices and Workers' Rights: Compliance with the principles of corporate social responsibility, including fair labor practices and respect for workers' rights, is an important aspect of ESG reporting. The incentive and sanction system in this area emphasizes transparency in matters of equal opportunities, working conditions, and the provision of social guarantees. Companies demonstrating leadership in social responsibility may receive preferential treatment in government procurement, while violators are subject to reputational and legislative sanctions.
Data Protection and Privacy: With the growing importance of information technology and digital resources, adherence to confidentiality and personal data protection principles is critical for maintaining the trust of customers and stakeholders. The incentive and sanction system in data protection involves imposing penalty sanctions on companies that experience data breaches or misuse of personal data, and rewarding organizations that implement advanced technologies and practices to ensure information security. Such measures may include government benefits, financial support, and industry recognition as leaders.
In the context of a global planned economy, various institutions, organizations, and instruments can be identified, performing the role of separate divisions of a global Gosplan. Among them:
World Trade Organization (WTO) - a division responsible for regulating international trade;
Organization of the Petroleum Exporting Countries (OPEC) - a division responsible for coordinating oil-producing countries;
World Health Organization (WHO) - a division specializing in global health issues;
International Monetary Fund (IMF) - a division monitoring macroeconomic stability and financial policies of countries;
United Nations Educational, Scientific and Cultural Organization (UNESCO) - a division addressing the development of education, science, and culture on a global level;
Social networks serve as significant tools for studying and shaping consumer preferences, as well as modeling their behavior and worldview. In recent years, machine learning algorithms analyzing user behavior and offering content based on their interests have been actively used, which can contribute to the formation of public opinion and influence consumer decisions;
Central banks and global financial institutions play a crucial role in implementing the global planned economy, particularly in the context of the ESG agenda. These organizations regulate money circulation and credit conditions through interest rates, determine preferences for financing different industries and projects, control the purchase and sale of assets, and establish rules and standards for financial markets. Thus, they influence investment flows and resource allocation in accordance with established priorities and sustainable development goals;
International credit rating agencies that assess the creditworthiness and ESG indicators of companies and countries, influencing investment decisions and interest rates.
Analysis of Controversial Aspects and Issues of ESG Reporting: A Global Approach
The approach to ESG reporting and its related global planned indicators requires comprehensive analysis as it encompasses several controversial aspects. The main issues relate to the governance of the global Gosplan, the establishment of key performance indicators (KPIs), and the determination of incentives and sanctions, which should be addressed with transparency and fairness. The main principle should be to consider the interests of all countries, not just individual groups, countries, or economic blocs.
Let's take a closer look at some KPIs that are currently being actively promoted on the international stage:
Establishing a "carbon footprint" fee primarily on hydrocarbon-producing countries rather than on consumer countries.
Questions of social and gender equality, which now go beyond the simple division of roles between men and women. With the increasing number of gender identities to several dozen, companies strive to demonstrate compliance with relevant KPIs, leading them to seek leaders with non-traditional orientations to attract investments, loans, etc.
Evaluating the contribution of companies to economic development and community well-being, especially in cases where corporations invest in developing countries or regions with underdeveloped infrastructure.
At the same time, the existing ESG reporting system largely ignores the advantages of non-Western countries, such as annual medical check-ups.
Russia is ready to build a "bright future" based on sustainable development, possessing not only theoretical knowledge but also practical experience of planned economy.
Our country has uniform standards for accounting for environmental, social, and other aspects of activities, as well as a unified information base capable of providing corresponding reporting, including environmental, social, production, and management issues. This system ensures the collection and processing of statistical information throughout the country.
Instead of simply following these processes from a distance, endlessly studying the details of new standards, and rejoicing in the approval of our "partners," countries like Russia can offer their experience and knowledge to improve global ESG reporting.
Given its readiness for sustainable development and vast practical experience, Russia can be a key player in shaping a fair and transparent approach to ESG reporting that considers the interests of all countries and ensures equality in the international economy.
Russia's Task in Creating a Fair ESG Reporting System
Based on the analysis of the information presented above, it can be concluded that the main goal of the agenda is to form global management strategies that are currently based on criteria developed by "developed" countries. In turn, this can create manipulative opportunities to provide unique economic conditions in favor of these countries.
It is worth noting that the socialist system of economy, the experience of which Russia inherited, initially set the task of achieving planned indicators and creating a unified system for their development. This system included a unified national system for collecting and processing statistical information (reporting) that covered all aspects, such as environmental, social, production, and management. Modern Russia has preserved and modernized this system based on achievements in information technology, such as digitization and data processing.
In contrast to Russia, Western countries historically did not have experience with state-level planning, unified standards and reporting forms, or unified rules. Therefore, their quest for uniformity and consistency is based on overcoming the chaos and diversity that exist in management.
Russia's task should be to maximize the advantages it has based on centralization and uniformity of management systems to create a fair ESG reporting system that conforms to international standards and takes into account national characteristics.
To successfully integrate and actively participate in the global ESG process, Russia needs to accomplish the following key tasks:
- Evaluate and understand the conceptual essence of the ESG agenda and similar initiatives, which will allow for the development of a participation strategy that takes into account national characteristics and interests.
- Developing our own ESG agenda as part of global processes that reflect the interests of our country and contribute to its successful development.
- Establishment of a single center to coordinate all types of information (reporting) that businesses should provide to users, ensuring data transparency and consistency.
- Creating an effective non-financial reporting accuracy control system, similar to the financial reporting control system, ensuring the reliability and quality of the information provided.
Implementing these tasks will allow our country to actively participate in international ESG processes, bringing its expertise and taking into account national interests, which, in turn, contributes to the fair and sustainable development of the global economy.
Given the importance of the ESG agenda and related resources (political, economic, and financial), it is necessary to ensure the reliability and accuracy of the information provided. To do this, the following items must be accomplished:
a. Ensuring professionalism in preparing ESG reporting. With the formation of standards and requirements for ESG reporting, focus should be placed on training specialists with professional standards and skills in reporting, such as modern accountants.
b. Verification of all types of reporting (financial, non-financial, statistical) for accuracy. The standard system for checking the accuracy of non-financial reporting (audit) is under development, and the current "verification" procedures do not provide a proper check of the information's accuracy. There is a need for auditors following the relevant professional standards.
The issue of reporting and information provided by economic entities is critically important as it determines the timeliness and substantiation of management decisions, which, in turn, affects the efficiency of managing economic entities and the economy as a whole.
To summarize, there is a clear trend (based on evolutionary development) towards the conduct of expanded (including ESG) reporting formats being implemented as a necessity. In the process of its implementation, sanctions, so beloved by the West recently, will be applied to companies that do not provide data (or violate the control principles embedded in them). The state's task is to prevent the implementation of unilateral principles, to find allies in the existing approach to solving this issue, and to create an ESG agenda that corresponds to declared principles, but based on objective criteria.