The adoption of international sustainability
and integrated reporting guidelines within
a mandatory reporting framework: lessons
from South Africa
Mumbi Maria Wachira, Thomas Berndt and Carlos Martinez Romero
Abstract
Purpose – This study aims to explore factors influencing voluntary adoption of international sustainability
and integrated reporting guidelines within a mandatory reporting framework. Given South Africa’s
political history, the authors argue that accounting practice can be used to secure the legitimacy and
transparency of businesses.
Design/methodology/approach – Two logistic regression equations are used to predict the likelihood
of firms’ subscribing to either Global Reporting Initiative (GRI) or the Integrated Reporting (<IR>)
framework, respectively. The authors consider annual, sustainability and integrated reports issued for the
financial year ended 2014.
Findings – The results show a statistically and significant positive association between the adoption of
the GRI’s guidelines and the level of transparency of non-financial disclosures and environmental
sensitiveness. The application of the <IR> framework is also associated with the level of a firm’s
transparency score and with its respective analyst following, which acts as a measure for capital markets
requiring a high information environment.
Originality/value – This paper illustrates the development of integrated and sustainability reporting (SR)
practices within an emerging market. By drawing distinctions between locally developed South African
codes of corporate governance, namely, King I-III and international guidelines proxied by the GRI’s
guidelines for SR, and the <IR> framework, the authors show that South African firms still adopt
international guidelines despite the mandatory framework in place.
Mumbi Maria Wachira is
based at the Strathmore
University Business School,
Strathmore University,
Nairobi, Kenya.
Thomas Berndt is based at
the Institute of Public
Finance, Finance Law and
Economics, University of
St. Gallen, St. Gallen,
Switzerland.
Carlos Martinez Romero is
based at the University of
St. Gallen, St. Gallen,
Switzerland.
Keywords South Africa, Integrated reporting, Sustainability reporting, King III report
Paper type Research paper
1. Introduction
The interlinkage between business, society and the environment has become one of the
most defining singularities of our time. The role corporations have played in exacerbating
environmental and social problems has been brought under scrutiny (Aras and Crowther,
2009; Bebbington and Gray, 2001; Drucker, 1984). Thus, the need for businesses to
provide environmental, social and governance (ESG) disclosures within sustainability
reports has become imperative. Sustainability reports are instruments used by companies
to summarize key economic, environmental, personnel, social and community impacts
relevant to the organization (Bowers, 2010; Leszczynska, 2012). Sustainability reporting
(SR) encourages transparency and reduces information asymmetries between
organizations and their stakeholders (Gatti and Seele, 2014; Hahn and Lülfs, 2013).
Integrated reporting on the other hand, combines facets of SR, but is oriented toward
primarily fulfilling the information needs of investors (IIRC, 2013).
DOI 10.1108/SRJ-12-2018-0322
VOL. 16 NO. 5 2020, pp. 613-629, © Emerald Publishing Limited, ISSN 1747-1117
Received 6 December 2018
Revised 6 December 2018
Accepted 22 March 2019
j SOCIAL RESPONSIBILITY JOURNAL j PAGE 613
Though there are several factors explaining the emergence of sustainability and integrated
reporting globally, the drivers can be grouped as, namely, market, societal and political or
regulatory drivers (Vormedal and Ruud, 2009). Though such reporting is primarily targeted
at external stakeholders, prior research has shown that there is a business case for SR.
Benefits such as enhanced brand image, increased market value, reduced risks and costs
of doing business and purposive managerial decision-making are some of the advantages
associated with companies that issue sustainability reports regularly (Amran and Keat Ooi,
2014; Burritt and Schaltegger, 2010; Dyllick and Muff, 2015; Wangombe, 2013). Arguably
such findings connote a zero-sum game for all parties involved, i.e. businesses, society and
the environment.
A separate stream of critical thought, however, argues that in a capitalistic society
corporate actions are not oriented toward contributing to sustainable development. The
main premise of the argument is that accounting practice is ill suited for recording and
measuring social or environmental impacts (Bebbington and Gray, 2001; Deegan, 2013).
Placing the complex notion of sustainability at the core of managerialism is contentious.
Hence, the question arising is if corporate goals are aligned to wider societal and
environmental ones. Consequent questions of “why” and “how” companies prepare
sustainability and/or integrated reports need to be explored to settle the debate at hand.
SR, in particular, is not governed by universal accounting standards but bodies such as the
Global Reporting Initiative (GRI) are dedicated to providing companies with universal
guidance for SR. GRI guidelines have been adopted widely and could be considered as the
“de facto” global standard for SR (KPMG, 2011). However, there are other global bodies
such as the United Nations Global Compact, UNEP Finance initiative, OECD guidelines and
the World Business Council for Sustainable Development that offer guidance.
In total, 95 per cent of Fortune 250 companies issued sustainability reports in 2011 in
comparison to 45 per cent in 2002 indicating a rising trend in the practice (KPMG, 2011).
Currently, sustainability reports are primarily issued by companies based in developed
countries (Junior et al., 2014), however, there are several emerging economies that have
firms issuing sustainability reports such as China, Brazil and South Africa to name a few.
Less than 13 per cent of SRs produced on a global scale were from Africa. Africa’s context
of financial reporting is complex and characterized by problems unique to the region. Weak
accounting and legal systems, difficulties in implementing international accounting
standards, incompetence of accounting professionals and inadequate audit infrastructures
are difficulties experienced by firms operating in Africa (Crittenden and Crittenden, 2014;
Sedzani, 2012). Though the region’s economic momentum is widely recognized, social and
environmental welfare is also largely regressive. This bifurcation of economies is
characteristic of several countries in Africa.
Apart from South Africa, SR in Africa is a voluntary activity and is not standardized or
regulated at the national level (ACCA, 2014). Despite the ostensible rewards of producing
sustainability reports, the uptake of SR is sluggish among African corporations (Africa
Barometer Report, 2013). South Africa’s case, however, is unique as the Johannesburg
Stock Exchange (JSE), requires listed South African companies to provide sustainability
information on a “report or explain” basis (Tankiso, 2014). Specifically, integrated reporting
is mandated by the King Report on Corporate Governance (King III). Thus, this study
illustrates differences between King III’s guidance for integrated reporting and the
international guidance for integrated reporting that is the <IR> framework. The paper also
draws distinctions between what drives integrated and SR.
1.1 How do businesses address sustainability?
The concept of sustainability in business is a complex notion that places normative ideals at
the core of largely capitalistic goals (Gray and Bebbington, 2000). Essentially, sustainability
is oriented toward justice i.e. justice between people from the same and future generations
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(intragenerational and intergenerational justice respectively) and justice between human
beings and nature (physiocentric ethics) (Baumgärtner and Quaas, 2010). The discourse
on how to address the aforementioned sustainability issues has been discussed in depth at
a macro-level, centered on the economy and/or the wider society (Dyllick and Muff, 2015,
p. 3). However, the role businesses play in contributing to a more sustainable world is often
linked to a wider business case for corporations or as a way to securing their legitimacy in
the community (Archel et al., 2009; Cho and Patten, 2007; de Villiers and van Staden, 2006).
Though corporate action is a far cry from Friedman’s profit centric vision of businesses
(Friedman, 1970), economic gain and growth are still primarily yardsticks of success. The
question remaining is, how can corporate objectives be aligned to wider sustainability
goals?
Corporate reporting represents the main line of communication companies use to report on
social, environmental and governance issues, thus, reducing information asymmetries for
external stakeholders. (Ching et al., 2013; Hahn and Lülfs, 2013; Maubane et al., 2014).
Prior literature indicates a gradual increase in social and environmental accounting from the
1970s, with increased growth in the past decade (Solomon and Maroun, 2012). These
alternative forms of reporting are one of the ways businesses address wider precepts of
sustainability. SR, in particular, has gained marked traction with 95 per cent of 250 of the
largest companies in the world issuing SRs in 2011 (KPMG, 2011). Several disclosures
provided in these reports have often been described as excessive positive rhetoric,
however, they foster trust between companies and stakeholders (Amran and Keat Ooi,
2014).
Furthermore, a major finding from accounting research suggests that sustainability and
integrated reporting practices have the potential to transform and influence corporate
activities (Solomon and Maroun, 2012). This possibility is especially pertinent for
organizations operating in emerging or developing economies where social and
environmental problems infringe on development and posterity (Visser et al., 2005). Notably
reporting alone cannot resolve such problems, but it aids in bringing sustainability to the
forefront of the corporate agenda. Dyllick and Muff (2015) p. 7 states that for a business to
be truly sustainable (i.e. contribute to sustainability):
[. . .]it must shift perspective from merely seeking to minimize negative externalities (i.e. ecoefficiency) to understanding how it can create a significant positive impact in critical and relevant
areas for the society and the planet.
Sustainability and integrated reporting provide mechanisms through which such
transformation could begin.
Though SR is associated with a multitude of benefits, there is a shift toward a more holistic
and cohesive form of reporting that is integrated reporting (Ioana and Adriana, 2014).
Although SRs provide valid non-financial disclosures in a separate report, there is an overabundance of performance indicators included in reports most of which are disconnected
from each other thereby limiting the decision usefulness of the information (Eccles and
Saltzman, 2011). Integrated reporting as described by the International Integrated
Reporting Council (IIRC) in one of its earlier publications, extends SR by:
[. . .]bringing together material information about an organization’s strategy, governance,
performance and prospects in a way that reflects the commercial, social and environmental
context within which it operates (IIRC, 2011, p. 24).
The major difference in the approach integrated reporting takes is that sustainability issues
are not viewed as separate entities from the day to day workings of the firm, but are
embedded at all levels of business activity (Solomon and Maroun, 2012). Thus, clear
distinctions can be drawn between IR and SR practices.
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In this study, we demonstrate these differences in IR and SR further by testing potential
drivers/determinants of both forms of reporting. Prior literature on voluntary disclosure
practices discusses influencing factors of SR broadly (Ho and Taylor, 2007; Jensen and
Berg, 2012; Reverte, 2009). The contribution we make is to observe the differences
between drivers of SR and IR, which are frequently discussed separately in extant research.
SR is clearly intended for a wide audience given the breadth of disclosures given within
reports, however, integrated reporting has been described as an investor focused given its
holistic and concise view to corporate reporting (Dragu and Tiron-Tudor, 2013; IIRC, 2013,
p. 4; Serafeim, 2015). Therefore, the overarching assumption we make is that some
determinants such as a company’s investor base may be more pertinent to firms that
subscribe to the IIRC’s <IR> framework, which is the main international guidance for IR
than for organizations that use international SR guidelines such as the GRI.
1.2 Contextualizing sustainability and integrated reporting practices in South Africa
The origin of sustainability and integrated reporting in South Africa is intrinsically linked to
the country’s political history and is rooted in corporate governance reform (Andreasson,
2011; Atkins and Maroun, 2014; Folke et al., 2002). The shift in the country’s political regime
from minority rule to a multi-party democracy paved the way for radical changes in how
businesses operated (de Villiers and van Staden, 2006). Organizations were placed in a
situation where their license to operate and their right to generate profits was under severe
scrutiny from the society and the state (Ramlall, 2012). This scrutiny was mainly because
the majority of businesses in South Africa at the time were owned by Dutch minorities. The
African National Congress, which was the ruling party post-1994, expected exceptional
social and environmental disclosures from businesses as a way of ensuring businesses
actively contributed to society (de Villiers and van Staden, 2006). Consequently, the King
reports (I-III) were issued by the Institute of Directors in South Africa and all three reports
are reflections of the South African Government’s emphasis on neo-social aspects and
economic growth of listed businesses (Abeysekera, 2013; Andreasson, 2011; Tankiso,
2014). Arguably, the legislation of the King codes is an example of how accounting practice
echoes societal expectations and the potential it has in transforming business practices.
The first King report-King I was mandated in 1994 with the main aim of safeguarding the
public interest and ensuring the accountability of business entities in South Africa (IoDSA,
2009; Tankiso, 2014). King II was a modified version of King I that necessitated disclosure
of environmental, social and governance information in addition to conventional financial
reports (Serafeim, 2015). Notably, the first king report laid emphasis on matters concerning
corporate governance, for instance, matters surrounding board independence and
applying codes of ethics. Both King I and II reports did not require mandatory compliance
from listed firms, however, their principles were adopted by the JSE. The latest report-King
III Report on Corporate Governance, introduced in 2009 and enforced by the JSE requires
publicly listed entities to develop integrated reports on a “report or explain” basis (ACCA,
2014; Solomon and Maroun, 2012).
King III states that an integrated report is not a simple amalgamation of various sources of
information pertaining to the entity, but a holistic depiction of a corporation’s capacity to
create and sustain value for its various stakeholders (IRC, 2011, p. 12). This approach is the
distinguishing factor between King II and III, where the former made the disclosure of
sustainability related information mandatory but within a separate chapter and/or annual
report issued by listed companies (Eccles et al., 2015, p. 30). King III also differs
substantially from the previous codes of corporate governance (King I and II) by attributing
the responsibility of risk management directly to the board of directors (Tankiso, 2014).
The main difference between the IIRC framework and King III’s code for corporate
governance stems from the fundamental notions of prescription versus guidance as shown
in Appendix. Whereas the <IR> framework attempts to offer firms flexibility to decide what
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material elements and principles they should apply within their reports, King III lists specific
requirements that should be included within an entity’s integrated report based on
predefined principles and recommended practices (IoDSA, 2009). Though the code refers
to materiality in some of the core principles, South African organizations still provide
excessive information within integrated reports, a large amount of which is repeated
constantly in reports (Solomon and Maroun, 2012). For instance, the IIRC guidelines give
firms flexibility in disclosing risks that entities deem material in affecting their ability to create
value (IIRC, 2013). In comparison, King III gives a detailed list of expected disclosures that
companies should make in regard to risk such as, risk retention, tracking, perception,
optimization and assessment among other measures (IoDSA, 2009). Another striking
difference between King III and the <IR> framework is that King III does not provide a
section that classifies the various forms of capital available to an entity. The <IR>
framework has an entire section describing various components of capital such as natural,
manufactured and social capital among others (IIRC, 2013, p. 11).
Notably, both frameworks seem to describe integrated reporting in two distinct ways. King
III defines integrated reporting practice as “a holistic and integrated representation of the
firm’s performance in terms of both its finance and its sustainability” (IoDSA, 2009, p. 54).
The IIRC’s definition leans toward integrated reporting being a means through which entities
create value. More precisely the IIRC’s definition of an integrated report is “a concise
communication about how an organization’s strategy, governance, performance and
prospects, in the context of its external environment, lead to the creation of value over time”
(IIRC, 2013, p. 7) Furthermore, the <IR> framework lays emphasis on connectivity of
information that is, illustrating connections and interdependencies between strategy, risks
and opportunities and relating them to social, environmental, economic and financial issues
(Abeysekera, 2013; Eccles and Serafeim, 2011; Tankiso, 2014). King III on the other hand,
does not expressly emphasize on the significance of connected disclosures, but rather on
combining social, governance, financial and environmental information within a single report
(IoDSA, 2009). This approach to integrated reporting does not significantly improve the
quality of reports and instead leads to production of information that hinders decisionmaking (Solomon and Maroun, 2012).
2. Theoretical underpinnings and development of hypotheses
2.1 Institutional theory
Several theories have been used in tandem with previous studies on SR and integrated
reporting (Dragu and Tiron-Tudor, 2013; Larrinaga-Gonzalez and Bebbington, 2001).
Institutional theory, proposes that organizations conform to a predefined set of rules, norms
and routines (DiMaggio and Powell, 2012). An institutional approach to accounting theory
involves an examination of how individual companies come to accept a shared vision of
reality (Scott, 1987) and provides a lens through which an organization’s social structures
including schemas, rules, norms and routines become established as guidelines for
corporate behavior (Scott, 2004). Extant literature founded on institutional theory finds that
companies producing integrated and sustainability reports issue them based on the
influence of macro-level institutions within their environment (Abeysekera, 2013; Azcárate
et al., 2011; Dragu and Tiron-Tudor, 2013).
There is also the case for strategic legitimacy, that is reports would be issued in a bid to
create a picture of organizational legitimacy and garner approval from various groups of
stakeholders. Institutional influence can be further sub-divided into three main classes,
namely, normative (professionalism), mimetic (replicating best practice) and coercive
(regulatory) pressures (DiMaggio and Powell, 2012; Meyer and Rowan, 1977). For example,
findings from Correa (2003) show that the level of environmental disclosures made within
financial reports depend on mimetic pressures prevalent within an entity’s reporting context.
Dragu and Tiron-Tudor (2013, p. 278), contrarily conclude that coercive pressures
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significantly determine the extent of integrated reporting principles and content elements
(as defined by the <IR> framework) disclosed by companies. Garcı́a-Sánchez et al. (2013)
also show that firms located in civil law countries with strict regulations are more likely to
prepare sustainability reports. The need for organizational compliance to laws and
regulations indubitably influences financial reporting (Lourenço and Branco, 2013;
Crittenden and Crittenden, 2014; Deegan, 2002; Gatti and Seele, 2014; Wilmshurst and
Frost, 2000). However, though regulatory or coercive pressures significantly affect firm
behavior, Ioannou and Serafeim (2017) state that in the absence of legal pressures,
companies still seek for comparability and credibility. Both mimetic and normative
pressures seem to be tied to organizational action. However, it should be noted that
disclosure of sustainability information differs from actions and decisions taken by
n-Correa et al. (2016) find that top international firms
corporations. For instance, Arago
though characterized by high levels of environmental performance display poorer
environmental performance than their peers.
2.2 Stakeholder theory
Freeman (1984, p. 46) states that a stakeholder is “any group or individual who can affect or
is affected by the achievement of an organization’s objectives.” From the perspective of
strategic management, Freeman (1984) argues that managers have to understand and
address the stakeholder’s concerns to ensure the firm remains as a going concern. As
organizational legitimacy is assessed in a subjective manner by various stakeholders,
corporate actions cannot be judged equally by different stakeholder groups. Mitchell et al.
(1997) also contributed to the stakeholder theory by explaining why and under which
conditions managers consider specific classes of entities as stakeholders. Additionally,
they propose a theory of stakeholder salience, which explains how managers prioritize
stakeholder relationships. According to the authors, stakeholders can be identified and
prioritized by their possession of one, two or all three of the following attributes:
1. the stakeholder’s power to influence the firm;
2. the legitimacy of the stakeholder’s relationship with the firm; and
3. the urgency of the stakeholder’s claim on the firm.
Within the context of integrated reporting, stakeholder identification is essential for
determining materiality. Specifically, the integrated reporting framework states,
“understanding of the perspectives of key stakeholders is critical to identifying relevant
matters” (IIRC, 2013, p. 17). Hence, stakeholder identification and consequent classification
is a prerequisite for the second step of identifying relevant matters to key stakeholders.
Beyond the stakeholder definition, Greenwood (2007) proposes a model that reflects the
multifaceted relationship between corporate responsibility and stakeholder engagement.
Her model is defined based on two variables, namely, stakeholder engagement and
stakeholder agency. This last variable is a proxy for the responsible treatment of
stakeholders and is measured by the number and breadth of stakeholder groups in whose
interest the company acts.
2.3 Hypotheses development
Using precepts derived from stakeholder theory and institutional theory, we argue that firms
operating in highly environmentally sensitive industries are more likely to adopt GRI
guidelines in addition to the mandatory King III reporting framework (Deegan and Gordon,
1996; Patten, 2002; Wilmshurst and Frost, 2000). In addition to seeking legitimacy from
various classes of stakeholders and the wider public, the likelihood that such businesses
would apply GRI guidelines is because of the framework’s in-depth and multi-layered
approach to measuring and disclosing environmental impacts. This presumption is in
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alignment with Guenther et al. (2007), who also assert that firms from extractive industries
such as mining, oil and gas are more likely to use the GRI as a paradigm to guide their
sustainability disclosures. In broad terms, the GRI (2014) draws various connections
between accounting precepts or principles such as materiality to standard disclosures or
key performance indicators’s such as tracking carbon emissions over time. Therefore, the
GRI guidelines potentially provide some degree of reliability and confidence, at least
symbolically, to the firms’ environmental disclosures. Therefore, we expect that:
H1. Within the South African regulated reporting environment, firms from environmentally
sensitive industries are more likely to adopt GRI guidelines voluntarily.
Independent scoring systems that test for the quality of sustainability disclosures have also
been used by past researchers to draw distinctions between the extent of information
disclosed and its usefulness, depth and validity (Beck et al., 2010; Hahn and Lülfs, 2013;
van Staden and Hooks, 2007). Essentially, the quality of information is essential when
considering the drivers of SR especially because SRs are designed to meet the information
needs of various classes of stakeholders (Manetti and Toccafondi, 2012). Hooks and van
Staden (2011) for instance developed an independent SR quality score and found that such
scores had a significant positive correlation with the number of disclosures provided within
environmental reports. In our study, we use the sustainability data transparency index score
(SDTI) score calculated by the Integrated Reporting (<IR>) and assurance services
company an independent consultancy in South Africa that annually reviews sustainability
disclosures of public South African corporations based on GRI G4 guidelines. We use their
quality scores as a proxy for the quality of sustainability information disclosure provided
within reports. Hence, we hypothesize the following:
H2. The higher a firm’s disclosure quality score, the higher the likelihood is that they use
GRI guidelines.
Unlike the GRI guidelines focused on addressing the multiplicity of needs of various
stakeholders (Barkemeyer, 2007; O’Dwyer and Owen, 2005), the <IR> framework seeks to
provide providers of financial capital with sufficient information to enhance capital allocation
decisions and orient corporate activity toward actions that create value over time (IIRC,
2011; Adams, 2015). Flower (2015) points out that IIRC’s conception of value is for the
investor and not necessarily value for the society, hence, drawing a distinction between the
varying objectives of the IIRC and GRI. Based on institutional theory, we infer that
companies use the <IR> framework because of normative or mimetic pressures to maintain
a certain level of professionalism and as a response to uncertainty respectively (Caravella,
2013). Firms that are highly monitored would be most pressed to follow the framework that
is deemed by investors to be most “appropriate” for improving the information environment.
By using the <IR> framework, these firms provide an image of transparency and
professionalism in their corporate reporting, thus, avoiding potentially negative impacts on
the cost of capital derived from information asymmetry (Healy and Palepu, 2001). Therefore,
we hypothesize the following:
H3. The higher the analyst following a firm has, the higher the likelihood is that they have
adopted the <IR> framework.
3. Method
Hypotheses are evaluated through a logistic regression analysis. Two equations were used
with dependent variables that capture the use of the GRI guidelines and the <IR>
framework, respectively. Although the hypotheses evaluate association and not causation,
lagged independent variables were used to support a possible causal relationship. In
addition to the independent variables related to the hypotheses, several control variables
are included in both models based on prior research (Jensen and Berg, 2012; Reverte,
2009). The logarithm of total assets and return on assets (ROA) were used to control for the
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greater willingness than larger firms might have to cover the adoption costs. Furthermore,
the current assets as a percentage of current liabilities (LIQUIDITY) to control for the
incentives of firms with low liquidity position to disclose more information their status
(Wallace and Naser, 1995). And finally, the long-term debt as a percentage of common
equity (LEVERAGE) was included to control for the incentive of increasing the level of
disclosure to reduce the stakeholder’s monitoring costs derived from an increase of default
risk (Jensen and Meckling, 1976). H1 and H2 and are evaluated using equation (1) and H3
is evaluated using equation (2).
GRIi ¼ SDTIi þ ENVSENi þ ANALYSTFi þ LIQUIDITYi þ LEVERAGEi þ logðASSETS Þi
þ ROAi þ « i
(1)
IIRCi ¼ ANALYSTFi þ SDTIi þ ENVSENi þ LIQUIDITYi þ LEVERAGEi þ logðASSETS Þi
þ ROAi þ « i
(2)
Where,
GRI is a dichotomous variable that gets the value of 1 if the firm’s report issued in 2014 uses
GRI guidelines according to GRI’s sustainability disclosure database.
IIRC is a dichotomous variable that gets the value of 1 if the firm was included in the IIRC
database.
ENVSEN is a dichotomous variable that gets the value of 1 if the firm’s industry is included in
the top test list of most environmentally sensitive industries as categorized by Deegan and
Gordon (1996).
ANALYSTF is the number of analyst following the firm at the end of financial year (FY) 2014.
SDTI is the SDTI score calculated independently by the
Assurance Services (IRAS).
Integrated Reporting and
ROA is the standardized value of ROA calculated by dividing net income by total assets.
LIQUIDITY is the ratio of the current assets by current liabilities at the end of the FY-2014
standardized by sector.
LEVERAGE is the long-term debt as a percentage of common equity at the end of the FY2014 standardized by sector.
SIZE is the logarithm of total assets at the end of the FY-2014 standardized by sector. This
variable controls for the size effect.
3.1 Description of sample
The total population of firms for this study consisted of a total of 388 publicly listed
companies on the JSE as at 5 August 2016 (JSE, 2016; African Markets, 2016). First we
divided companies into GRI and non-GRI conformant entities. We used GRI’s sustainability
disclosure database, the GRI reports list, annual, sustainability and integrated reports to
divide companies accordingly. The grouping was based as follows:
As one of the predictors of GRI conformance is an independent SDTI, we only consider
companies that had been awarded a score by IRAS (2014) for the year ended 2014. The
final sample of companies are 174 as shown below:
3.1.1 Findings. Table III shows the results of the logistic regression of equation (1). H1
asserts that firms listed on the JSE from environmentally sensitive industries were more
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likely to adopt the GRI guidelines in addition to the King Report. On the other hand, H2
states that the higher a firm’s disclosure quality score, the higher the likelihood is that they
use GRI guidelines. As per Table I, the coefficients of both ENVSEN (p-value 0.035, one-tail)
and SDTI (p-value: 0.000, one-tail) are positive and statistically significant. Therefore, the
null hypothesis is rejected for each of them.
Table IV presents the results of equation (2). H3 asserts that firms listed on the JSE with a
high analyst following were more likely to adopt the <IR> framework in addition to the King
III Report. The coefficient of ANALYSTF in Table III is positive and statistically significant (pvalue: 0.005, one-tail). Therefore, the null hypothesis is rejected.
4. Discussion
This paper contributes to research on sustainability and integrated reporting by shedding
light on the differences between the incentives for using either practice. Although with large
Table I Number of companies using IR and SR guidelines
GRI guidelines
IIRC guidelines
None GRI/IIRC
77
202
109
Table II Sample of companies analyzed by sector
Industry
No. of firms
GRI
IIRC
6
8
16
32
9
39
5
59
174
4
4
11
5
2
22
3
22
73
4
2
9
13
1
20
2
24
75
Telecommunications
Technology
Consumer goods
Consumer services
Financials
Basic materials
Health care
Industrials
Total
Note: Industry ranking is based on the Industry Classification Benchmark used by JSE and FTSE
Source:GRI Sustainability Disclosure Database (2014)
Table III Logit regression. GRI as dependent variable
Variables
Cons
ENVSEN (H1)
SDTI (H2)
ANALYSTF
LIQUIDITY
LEVERAGE
SIZE
ROA
Log-likelihood
Number of obs
LR chi2(7)
Prob > chi2
Pseudo R2
Coef.
Std. err.
z
p-value
2.927
0.733
2.555
0.375
0.145
0.042
1.245
0.501
0.689
0.403
0.703
0.649
0.638
0.599
0.929
0.623
96.45
174
43.79
0
0.185
4.25
1.82
3.64
0.58
0.23
0.07
1.34
0.80
0.000
0.035
0.000
0.282
0.410
0.472
0.090
0.211
(95% Conf. interval)
4.2766
0.0580
1.1786
0.8981
1.1061
1.2170
0.5761
0.7195
1.5777
1.5233
3.9324
1.6474
1.3964
1.1323
3.0652
1.7206
Notes: Sig. code (one-tail): p < 0.01; p < 0.05; p < 0.10
VOL. 16 NO. 5 2020
j SOCIAL RESPONSIBILITY JOURNAL j PAGE 621
Table IV Logit regression. IIRC as dependent variable
_cons
ANALYSTF (H3)
SDTI
ENVSEN
LIQUIDITY
LEVERAGE
SIZE
ROA
Log-likelihood
Number of obs
LR x 2(7)
Prob > x 2
Pseudo R2
Coef.
Std. err.
z
p-value
3.410
1.753
2.314
0.599
0.111
0.080
2.079
0.372
0.786
0.683
0.744
0.458
0.721
0.672
1.018
0.706
80.34
174
77.22
0
0.3246
4.34
2.57
3.11
1.31
0.15
0.12
2.04
0.53
0.000
0.005
0.001
0.095
0.439
0.453
0.021
0.299
(95% conf. interval)
4.9501
0.4149
0.8554
0.2976
1.5237
1.3973
0.0838
1.0114
1.8708
3.0905
3.7733
1.4962
1.3009
1.2366
4.0735
1.7562
Notes: Sig. code (one-tail): p < 0.01; p < 0.05; p < 0.10
differences in their maturities, both sustainability and integrated reporting research streams
have explored similar questions individually. The quasi-regulated (“apply or explain”)
adoption of the King III reports in South Africa allowed for the analysis of incentives for
voluntarily adopting the GRI’s guidelines and the <IR> framework in addition to the local
normative that is King III. The results suggest that the adoption of both the GRI’s guidelines
and the <IR> framework is associated with an incentive to meet the information needs of
various stakeholders. However, firms adopting the <IR> framework have an additional
incentive derived from capital markets as proxied by the level of analyst following. This latter
incentive could be explained by normative institutionalism: firms with a high level of passive
monitoring were more likely to adopt the <IR> framework.
Additionally, this paper adds to the findings of Steyn (2014) by explaining the heterogeneity
in <IR> quality found by Ahmed Haji and Anifowose (2016). Steyn’s (2014) survey
suggests that a firm’s motivation for issuing integrated reports stems from a motive to
maintain a positive reputation. In addition, the information provided within the integrated
report is also better aligned to the needs of the investor. The estimate of analyst following
from Table III, a proxy of the firm’s level of the information environment, confirms this
incentive. Therefore, the results of this paper suggest a possible explanation for the
differences in the <IR> adoption quality in South Africa. Those firms with more incentives
for a high information environment prepare reports based on the <IR> framework, which
usually results in a high quality integrated report. Contrarily, those firms with less pressure
from the capital markets prepare “combined” reports to comply with the JSE’s requirement,
resulting in poor connectivity between financial and non-financial information.
In addition to its contribution to the literature, this paper has implications for the IIRC, stock
exchanges and the GRI. Firstly, the IIRC and stock exchanges interested in endorsing its
framework can learn from the South African adoption and encourage a more homogenous
adoption. If they decide to replicate an “apply or explain” adoption model, they should
generate incentives for companies with less pressure from the capital markets. For
example, they could leverage on the potential internal benefits of <IR> framework, namely,
integrated thinking and forward-looking decision-making (IIRC, 2013). Secondly, the
coincidences in incentives related to transparency and legitimacy with stakeholders for
adopting each of the reporting frameworks suggest that an integrated report could displace
the stand-alone sustainability report in the long run. Specific alterations in the G4 version of
the GRI’s guidelines suggest that the GRI has already anticipated this possible trend,
positioning its guidelines as complementary to the <IR> framework. Additionally, the
Integrated Reporting Council, which is a voluntary association that develops, promotes and
conducts research on integrated reporting and integrated thinking in South Africa,
PAGE 622
j SOCIAL RESPONSIBILITY JOURNAL j VOL. 16 NO. 5 2020
endorsed the <IR> framework in 2014. The new King code of corporate governance
(King IV) released in November 2016, also applies definitions for integrated reporting and
value creation used by the <IR> framework. Thus, there appears to be a convergence of
integrated reporting and SR guidance.
5. Conclusion
Thus, we can conclude that there are key differences between the determinants of
integrated versus SR. SR practices as described by several researchers (Bowers, 2010;
Dilling, 2010; Junior et al., 2014) and the GRI guidelines is intended for a wide audience of
various categories of stakeholders. Integrated reporting on the other hand as discussed by
the IIRC is based on the concept of value creation over time, particularly for investors
(Flower, 2015; IIRC, 2013; Serafeim, 2015). There is, however, alignment between both
practices when it comes to levels of transparency as measured by the transparency index
score (SDTI). In the review of literature, we also illustrate how differing conceptions and
definitions of integrated reporting may be a hindrance toward convergence of the practice
on a global scale. Perhaps further research, particularly qualitative research is necessary to
bring out core differences and similarities between how investors, stock exchanges,
companies and other stakeholders understand and apply integrated reporting practices.
King III’s definition of integrated reporting seems to lean heavily on corporate governance
disclosures and the inclusion of sustainability information within annual reports to create a
holistic integrated report. Specifically, integrated reporting as described by King III seems
almost indistinguishable from SR, the key difference being that all the disclosures are
combined in one single report. This approach differs considerably from the recommendations
made by the IIRC. However, we now see a clear convergence and adaptation of international
integrated reporting guidelines. The underlying reasons driving the convergence of locally
developed standards to international guidelines could also be explored further by future
research. This paper is limited in that we only considered one FY-2014 and that the South
African firms analyzed were further reduced owing to the availability of the transparency
scores (SDTI scores) provided by the IRAS in 2014. Additionally, company characteristics
have been used as the core determinants of both models provided. Further research into
similar contexts with mandated sustainability or integrated reporting traditions such as in Brazil
and Hong Kong could provide a basis for cross country comparisons and the use of country
level determinants. Notably, the European Parliament issued a new directive titled “Directive
on disclosure of non-financial and diversity of information by certain large companies” in
December 2014. The directive required companies to incorporate ESG information within their
annual reports from 2017. Hence, future research could explore if the differences observed in
this study also hold for European entities.
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Corresponding author
Mumbi Maria Wachira can be contacted at: mumbimaria.wachira@gmail.com
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PAGE 628
Approach
Definition of the
framework
Definition of the report
Aim
Intended audience
Means of reporting
Reporting effectively about the
goals and strategies of the
company and its performance
in economic, social and
environmental issues, also
serves to align the company
with the legitimate interests and
expectations of its stakeholders,
and at the same time, obtain
stakeholder buy in and support
for the objectives that the
company is pursuing
Help reporters prepare
sustainability reports that
matter, contain valuable
information about the
organization’s most critical
sustainability-related issues,
and make such SR standard
practice (p. 3)
Benefit all stakeholders
Integrated
reporting can take
the form of a single
report or dual
reports
The report should cover
Aspects that: . . .
substantively influence
the assessments and
decisions of
stakeholders (p. 17)
Different report
formats: be they
standalone
sustainability
reports, integrated
reports, annual
reports, reports that
address particular
international norms,
or online reporting
(p. 3)
King III (King Report on
Governance for South
Africa, 2009, Chapter 9)
A holistic and
integrated
representation of the
company’s
performance in terms of
both its finances and its
sustainability
The integrated report
should be prepared every
year and should convey
adequate information about
the operations of the
company, the sustainability
issues pertinent to its
business, the financial
results, and the results of its
operations and cash flows
GRI (G4 Sustainability
Reporting Guidelines,
2013)
Guidelines useful to all
organizations (even
NGOs) to report the
aspects that reflect the
organization’s
significant economic,
environmental and
social impacts. (p. 3,
17)
Not necessarily a standalone sustainability report
as the guidelines can be
used in different means
(even <IR>).
A sustainability report
conveys disclosures on an
organization’s impacts – be
they positive or negative –
on the environment, society
and the economy (p. 3)
(continued)
Appendix
j SOCIAL RESPONSIBILITY JOURNAL j VOL. 16 NO. 5 2020
Table AI Frameworks for sustainability and integrated reporting
Table AI
Approach
IIRC, 2013 Guidelines
(The International <IR>
framework, 2013)
Definition of the
framework
A process founded on
integrated thinking that
results in a periodic
integrated report by an
organization about
value creation over time
and related
communications
regarding aspects of
value creation (p. 33)
VOL. 16 NO. 5 2020
Source: Adapted from Dumay et al. (2016, p. 183)
Definition of the report
Aim
Intended audience
Means of reporting
A concise communication
about how an organization’s
strategy, governance,
performance and
prospects, in the context of
its external environment,
lead to the creation of value
in the short, medium and
long term (p. 33)
<IR> aims to:
Improve the quality of
information available to
providers of financial capital
Communicate the factors that
materially affect the ability to
create value
Enhance accountability and
stewardship for the broad base
of capitals
Support integrated thinking,
decision-making (p. 2)
Primary: providers of
financial capital
Secondary: other
stakeholders (p. 4)
. . . may be either a
standalone report
or be included as a
distinguishable,
prominent and
accessible part of
another report or
communication.
(p. 4)
j SOCIAL RESPONSIBILITY JOURNAL j PAGE 629