Non-financial performance - Are your non-financial KPIs useful
Around the world it is common for large listed companies to disclose non-financial information in the narrative section of their annual reports (KPMG, 2017). Non-financial information generally refers to “information which is included in the corporate report other than information in the financial statements” (ICAS, 2016, p.5), although some use the term more narrowly to refer to sustainability, corporate responsibility or Environment, Social, and Governance (ESG) information. This project focuses on a sub-section of non-financial information, namely non-financial key performance indicators (KPIs), disclosed in the narrative section of annual reports. The objective is to evaluate the comparability and breadth of these non-financial KPIs disclosed by listed companies across a number of countries where International Financial Reporting Standards (IFRS) are used.
Such an evaluation is relevant in the prevailing corporate reporting climate given the growing interest in non-financial KPIs by investors, stock exchanges and regulators, voluntary and mandatory standard setters, as well as a wider sphere of other stakeholders, including employees, suppliers, and non-governmental organisations.
The project is important in light of the apparent confusion and discontent expressed by some report users, report preparers and standard setters relating to the comparability and usefulness of non-financial performance reporting. For example, while investors profess interest in non-financial performance for investment decisions (Blackrock, 2016, 2018; EY, 2017), they often do not use non-financial performance information due to a perceived lack of comparability. This is highlighted in an EY investor survey where 42
percent of the respondents believe that “non-financial information is often inconsistent, unavailable or not verified” and that “non-financial measurements are seldom available for comparison with those of other companies” (EY, 2017, p.7). Many attribute the lack of comparability to the myriad of non-financial regulations and frameworks emanating from governments, stock exchanges, and mandatory and voluntary standard setters
(Amel-Zadeh and Serafeim, 2017; KPMG, 2017) that report preparers need to navigate.
Given the increasing expectations of stakeholders regarding non-financial KPIs and the uncertain non-financial reporting environment for companies, this project investigates the current disclosure practices and offers insights into best (and worst) practice, as well as country and industry sector differences and commonalities. The project provides both fine-grained analysis at the individual KPI level, as well as higher levels of examination of non-financial KPI reporting. A comparison of disclosure in 2013 and 2016 is also provided for a sub-sample of companies.
The evidence from the project offers insights for preparers and users of company reports, standard setters, the International Accounting Standards Board (IASB) and national regulators. An analysis of non-financial KPIs disclosed in annual report narratives can also inform the broader debate contemplating a more holistic consideration of corporate performance and calls for a global framework for non-financial performance reporting (ACCA/CDSB, 2016; Blackrock, 2016; Accountancy Europe, 2017).