The real meaning of integrated reporting
Integrated reporting is more than only aimed at informing interested stakeholders about performance achieved against targets, the vision and strategy adopted to serve the stakeholders’ interests, and other factors that can influence business performance in future.
Clearly regulations require companies to exercise transparency. However, a more fundamental reason for reporting lies in accountability: a company needs to account for the impact it has on the stakeholders it relates to. Not exercising such transparency would impose serious risks, including high financing costs to compensate for a lack of transparency or governance or, ultimately, losing the license to operate. By contrast, a transparent approach would not only improve reputation, but also would bind stakeholders such as employees to the company’s objectives.
In today’s world companies play a significant role in shaping the future of society. Awareness of this has risen significantly over the last decades, resulting in changed attitudes towards the role business is expected to play.
It also resulted in changes in the views of business leaders about the role they want to play.
Business these days is seen more than ever as the agent of a wide group of stakeholders. Unlike the old paradigm that ‘the business of business is business’, companies accept wider accountability in current times towards the stakeholders whose interests they impact – no longer can companies focus only on the interests of those with a financial interest.
This wider accountability implies that companies have to fulfil the (information) needs of those who provide them with other economic resources such as labour, space, air or natural resources and those who enter into transactions with the organization such as customers. Therefore a company’s current performance and future ability to continue operations and achieve business growth needs to be evaluated on the basis of a comprehensive set of factors that influence these.
In the context described above, the environmental and social aspects of business conduct will influence the business future (including the value of the company) as will the financial performance. Therefore elements such as environmental impact, labour rights, health and carbon emissions logically deserve a space in reporting on total business performance. This is the moment integrated reporting comes into play.
CSR (Corporate Social Responsibility) reports
By the end of the last century trendsetting companies started to explain their impact on the environment and wider society in CSR (Corporate Social Responsibility) reports and a growing number of companies are now following their example.
Finally, regulatory and other reporting initiatives are embracing the concept of integrated reporting. The EU Directive on Transparency requires companies to report on relevant CSR information. The Global Reporting Initiative and sustainable investors associations such as EUROSIF are also supporting the concept. XBRL reporting incorporates other-than-financial business-impacting information into the model and frameworks are being developed to connect annual reporting and CSR reporting.
The basic assumption behind these initiatives is that reporting on CSR performance should be part of mainstream reporting, as a logical outcome of the integration into daily business.
“Integrated reporting is part of the shift in business responsibility”
The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard setters, the accounting profession, academia and NGOs. Together, this coalition shares the view that communication about value creation, preservation or erosion is the next step in the evolution of corporate reporting.
Integrated reporting is part of an evolving corporate reporting system. This system is enabled by comprehensive frameworks and standards, addressing measurement and disclosure in relation to all capitals, appropriate regulation and effective assurance. Integrated reporting is consistent with developments in financial and other reporting, but an integrated report also differs from other reports and communications in a number of ways. In particular, it focuses on the ability of an organization to create value in the short, medium and long term, and in so doing it:
- Has a combined emphasis on conciseness, strategic focus and future orientation, the connectivity of information and the capitals and their interdependencies
- Emphasizes the importance of integrated thinking within the organization.
Integrated thinking is the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects.
Integrated thinking leads to integrated decision-making and actions that consider the creation, preservation or erosion of value over the short, medium and long term.
Integrated thinking takes into account the connectivity and inter-dependencies between the range of factors that affect an organization’s ability to create value over time, including:
- The capitals that the organization uses or affects, and the critical inter-dependencies, including trade-offs, between them
- The capacity of the organization to respond to key stakeholders’ legitimate needs and interests
- How the organization tailors its business model and strategy to respond to its external environment and the risks and opportunities it faces
- The organization’s activities, performance (financial and other) and outcomes in terms of the capitals – past, present and future.
Seven Guiding Principles underpin the preparation and presentation of an integrated report, informing the content of the report and how information is presented:
- Strategic focus and future orientation. An integrated report should provide insight into the organization’s strategy, and how it relates to the organization’s ability to create value in the short, medium and long term, and to its use of and effects on the capitals
- Connectivity of information. An integrated report should show a holistic picture of the combination, inter-relatedness and dependencies between the factors that affect the organization’s ability to create value over time
- Stakeholder relationships. An integrated report should provide insight into the nature and quality of the organization’s relationships with its key stakeholders, including how and to what extent the organization understands, takes into account and responds to their legitimate needs and interests
- Materiality. An integrated report should disclose information about matters that substantively affect the organization’s ability to create value over the short, medium and long term
- Conciseness. An integrated report should be concise
- Reliability and completeness. An integrated report should include all material matters, both positive and negative, in a balanced way and without material error
- Consistency and comparability. The information in an integrated report should be presented: (a) on a basis that is consistent over time; and (b) in a way that enables comparison with other organizations to the extent it is material to the organization’s own ability to create value over time.
Integrated reporting: what it isn’t
Integrated reporting is different from simply combining the annual report with (selected) CSR information. This would not do justice to a company’s business approach from strategy to performance management that is such a key element of meaningful integration into the heart of the business.
Integrated reporting is also different from one (annual) report. The one report concept assumes that all relevant stakeholders can fulfil their information needs with this single report. Although this may be the case for certain groups of stakeholders (e.g. shareholders or professional business partners), it
could hardly be expected that this would apply for all groups.
As a result it is essential to view the decision about integrating reporting from two perspectives that ideally fuse together: management and communication, i.e. to let it follow on from strategy and targets set (management perspective) while ensuring that it meets the information needs of relevant stakeholders (communication perspective).
Considerations and benefits of integrated reporting
Each company will have its own right moment to start integrating financial with other business-impacting information.
Therefore starting to integrate reporting without a clear vision and commitment to sustainability does not seem to make sense. Furthermore, as the Accounting For Sustainability Report also explains, sustainability should be embedded in target setting and performance measurement. As this can only be done on the basis of reliable measures and credible information, robust systems to report and monitor performance on key aspects are another indispensable condition for external integrated reporting that can add to a company’s credibility, trust and reputation.
Key considerations for the integrated reporting decision
Here now are key considerations that are believed to be important for a decision maker when considering to integrate CSR reporting, other business-impacting information and financial reporting.
Integrated business conduct
Reporting in an integrated manner provides the message to the readers of a report that CSR is an integrated part of daily business conduct. This incorporates not only the business strategy, but also continuous decision-taking at lower management levels in the organization – leading to a balanced decision with regard to the financial profit and the wider impact on society.
Furthermore, reporting on such aspects of business in an integrated way assumes you are able to deliver the information at the same level of reliability as financial information – or to disclose it when this is not the case – on the basis of a closed management cycle.
The key message conveyed was that one should not start integrating reporting in the absence of an integrated CSR approach in business conduct.
Reaching relevant user groups
An integrated report can be seen as a ‘one size fits all’. As outlined above the key objective of reporting relates to reaching stakeholders who want to take decisions on the basis of the information reported. It is of key importance therefore to consider whether integrated reporting will let a reporting entity achieve this objective. As participants outline, specific user groups can get lost or confused when the decision results in ‘one report for all’. Considering this in more detail from the communications perspective can be of help in solving this issue.
The current practice of a separate CSR report (regardless of the medium used) from the annual report leaves freedom in reporting in terms of the associated legal risks. An annual report comes with specific reporting requirements, external oversight and legal accountability towards parties with a financial interest in the company. Therefore, if integrated reporting is approached as integrating CSR information (and other business impacting information) into the annual report, additional legal risks can appear that a reporting entity would rather avoid.
Robust information and monitoring systems
Reporting in an integrated form comes implicitly with an additional obligation: to report on the CSR and other business-impacting information at the same level of quality as for financial information – or to disclose it if this is not the case. This obligation relates to the information and monitoring systems that need to be in place to ensure that performance information is reported reliably. However, it also relates to the narrative information.
The company should also have processes in place to ensure its quality, including controls to balance positive and negative information and to collect the information in a structured and complete way – to ensure a fair picture is provided of business aspects that are not regulated and defined to the level that financial information is.
Readiness to go beyond combining reports
As mentioned earlier integrating is more than combining two reports into one. Starting with integrated reporting should be based on a planned and comprehensive road ahead in terms of communication strategy and media available to disseminate the company’s message to stakeholders and, just as important, in terms of a vision towards integrating other business-impacting information into every part of the organisation’s conduct.
The benefits of integrated reporting
The road to integrated reporting can be challenging, as it entails more than the communication perspective. However, once a reporting entity has set out on the integration road, a number of benefits can be created.
Proof of integration in business conduct
Reporting in a fully integrated way demonstrates to the users of your reporting that you are ready to think about business performance in terms of a comprehensive strategic framework that is supported by demonstrable quality of information and performance management. Thus it positions the company as a leader in the field of business thinking – connecting all relevant information throughout business conduct.
Wider view of company’s impact beyond financials
A benefit closely linked to the previous point relates to the fact that everyone faced with an integrated reporting approach will obtain a wider view automatically, as it includes information and parameters that go beyond normal financial information. Such a view can reveal valuable opportunities for value enhancement, sometimes from unexpected perspectives.
Increased internal awareness about corporate social responsibility
From general experience it shows that the road to corporate social responsibility can be bumpy, not least because convincing the internal world is as important as communicating with the external world.
A top management approach to internal and external reporting that focuses on a comprehensive set of business-impacting information will by definition raise internal awareness about the importance of this – in the first place out of managers’ self-interest in the light of performance management.
Thus reporting can contribute to changing company’s behaviour and profile.
Professionalization of integrated performance management
Whereas increased awareness is one benefit, this needs to result in additional business value to make sense. A loop of management reporting that integrates business-impacting information in the broadest sense will form the basis for improved performance management. This means learning and innovation to help improve business performance on the basis of the information reported as well as the model to reward managers for their contribution to total stakeholder value that also impacts the long-term health of your organization and its license to operate.
Educating specific stakeholder groups
In the current marketplace a number of stakeholder groups are in the process of learning about the added value of evaluating companies’ performance more comprehensively. These include investors and customers. For these, and possibly for other groups, there is a case for raising awareness and educating them about the value of also evaluating performance from other business-impacting perspectives.
Reporting in an integrated way can be used as a tool to assist in this process, as a start for further discussion about the entity’s vision, achievements and challenges in this regard.
Increased trust by transparent reporting about the full societal impact
As we know from the latest financial crisis, trust is of key importance for a company’s value and existence. It can be deduced that trust follows on from credibility and that credibility is based, amongst others, on transparency as perceived by relevant stakeholders.
This is where integrated reporting can support building trust: practising transparency by providing a full (and honest) picture about your company’s achievements and challenges will help ensure that those addressed put faith in a company’s report and performance.
The way to integration
The considerations and potential benefits as explained earlier could form the basis for a decision to take the road of integrating strategy and reporting for your company. The decision about integrated reporting should be assessed from two perspectives simultaneously. On the one hand, reviewing the level of integration of sustainability in the organization is of relevance as a basis for credible, reliable and solid reporting. This is called the management perspective.
On the other hand, the level to which you are able to respond to stakeholders’ information needs with effective communication means is of key importance to assess whether integrated reporting would let you control or mitigate reputation risks and improve relations with stakeholders. This is referred to as the communication perspective.
Key steps to be taken
Without necessarily being complete given the nature of this narrative, here is a suggested approach to decide about the integration road.
The management perspective
Starting the road to integration should not start without anchoring sustainability in the business strategy.
Therefore a first key step is a fair and honest assessment of the level of integration of sustainability in the business strategy. As this would not be effective without a strong commitment to the theme by board members, this should be taken into account as well.
If these conditions are met, it would then be our advice to review the embedding of the key sustainability issues in the full management cycle.
This would entail embedding it in all primary processes of the company, from R&D to sourcing to the sales process. This should be followed by a review of the internal management reporting and control cycle – as this would be an important basis to monitor and improve performance.
The availability of metrics to measure progress and the quality of related information systems is another aspect for review in light of the decisions to be taken – however in our view you can start integrating reporting whilst simultaneously bringing these to the appropriate level.
Finally, assessing whether sustainability is integrated sufficiently into performance management systems (or has the opportunity to be integrated in the short term) should inform your decision whether, from the management perspective, the integration road could be taken.
In evaluating all these aspects it is key to assess whether these are effective for all relevant levels and parts of the organisation – for business lines as well as products.
The communication perspective
The most compelling argument to integrate reporting from the communication perspective would be if it would meet the needs of those who use reporting for decision-taking.
This is the most important and most challenging part of the communications perspective: (the process for) assessing stakeholders’ needs. As part of its evaluation, it is of relevance to review whether this process covers all relevant issues, whether stakeholder interaction mechanisms (such as panels, forums, polls, et cetera) are in place to communicate on a continuous basis and whether the stakeholder process is sufficiently robust to manage and meet their expectations.
On this basis it appears to be appropriate to evaluate the organization’s readiness with respect to communications – which involves assessing whether you have developed a proper vision about integrated reporting, whether your organization is equipped to deal with the different communications channels and means that are needed and whether connections between those involved in reporting are sufficiently established.
Design of the integration road
So but there is not a single best road towards integrated reporting.
Relating the two perspectives as described above can assist in deciding the next step and the direction to take.
As can be seen from this model, if the conclusion is that the company does not seem to be sufficiently ready for an integrated report (i.e. when sustainability is not integrated in the management cycle and/or communications are not ready to deal with the challenges of integrated reporting), either the road of prioritizing management first or the route of focusing on communications before further improving management control can be taken.
Ultimately either route would result in an integrated reporting approach, where management attention would be maintained at a high level as part of the integration of sustainability in business conduct.
The decision to integrate comes with a number of other decisions to be taken: frequency, format and design, stakeholder groups, communication channels and assurance all deserve careful consideration on the road to integrated reporting.
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