Use Integrated Reporting & Aligned GRI for Best Outcomes

As corporate reporters in Australia and elsewhere prepare their next financial, sustainability and integrated reporting cycle, the inevitable question crops up: How does the new version of the Global Reporting Initiative Guidelines, G4, and the proposed framework for integrated reporting, (IR), compare? How do they complement each other?

A new comparative analysis (click here – Comparative Table) highlights requirements from the G4 that logically link with the latest core requirements by the International Integrated Reporting Council (IIRC). It illustrates that producing a quality integrated report requires having a quality sustainability reporting system in place.

The comparative analysis has a key message for reporting experts: Used in combination, IR and G4 can have significant impact in measurement and disclosure by companies worldwide. Yet used non-aligned, and perceived to be competing, years of work on non-financial reporting and corporate sustainability may be lost.

On next steps in alignment

Linking the requirements of IR and G4 needs to advance the efficiency and effectiveness in reporting practices that the recent MoU between the IIRC and GRI refers to as ‘common purpose’. First steps in this direction could be:

• Aligning the reporting principles of the two Frameworks, setting out and explaining how they differ yet complement.

• Grouping GRI indicators, notably empirical ones, in terms of the six capitals of integrated reporting, making it easier for users to consider where sustainability reporting data should feed into IR planning.

• Having mapped GRI indicators against the six capitals, consider what gaps remain and how related, commonly used indicators on e.g. manufactured and financial capital – found in annual financial statements – fill these gaps.

• Explaining difference and complementarity between their respective materiality and content determination processes, helping reporters to erase areas of duplication.

The IR G4 Comparative Table shows substantial areas of overlap, some necessary and some signaling duplication where the IR framework may well be refined to make its unique content more explicit. Furthermore, a note of caution should be added: The GRI Amsterdam Conference in May 2013 showed again how different stakeholders (from different disciplines and backgrounds) use the same concepts but mean different things. Obvious examples of this are the terms "strategy", "value" and "materiality".

Right business model, wrong product?

Two key concepts for the two Frameworks are “business model” and “supply chain”.  On business model the IIRC explains an input-output model with the value creating use of resources, turning resource (capital) inputs into valuable outcomes. The center of attention is the reporting company and its providers of financial capital. With its broader supply and value chain focus, the GRI is putting a wider network of players at the center of attention. This reflects their difference in target (reader) audience that both standards acknowledge.

IR asks about the “resilience” of the business model. One wonders: could a company have the right business model but the wrong (unsustainable) product? G4 asks e.g. – related to indirect economic impacts – about the impact of the use of products and services. This looks further downstream in the value chain at the sustainability of the product or service as such.

The strategic focus of the IR probably deserves some elaboration on this.  On the business model IR does refer to key outcomes in terms of, among others, social and environmental effects. Applying this to products as such implies the sensitive topic of whether some product ranges or industrial sectors are by definition less sustainable than others. There are new entrants, as well as old products and industries that need to be on the way out.

Boxing, auditability and assurance

Requirements by the GRI may leave the impression of a mechanistic (tick the box) approach, whereas the IIRC has a more strategic approach – some would say philosophical, others would say business logical. For some this is about “sustainability strategy”, for others “business strategy”. Both IIRC and GRI refer only to “strategy”. The IR does tend to speak more broadly in terms of “objectives”, whereas G4 tends to go into the details of “targets”. Yet the manner in which reporting organizations and stakeholders interpret “strategy” is up to their own preference. Both frameworks refer to the “short, medium and long term”, so both provide for the forward-looking dimension.

On stakeholder engagement as principle area, the GRI e.g. asks about “how the organization identifies”, “how the organization responds” and how information is “accessible to stakeholders”. The IR framework on the other and asks about the “quality of the organization’s relationships with its key stakeholders”. On governance the GRI e.g. asks “describe the governance structure” whereas IR asks “how does governance structure support value creation”. The G4 approach lends itself to a more detailed, auditable approach, whereas the IR approach provides for the more brief, strategic description one would expect in a concise integrated report.

Trade-offs and dilemmas

Both frameworks provide for a discussion on “trade-offs”, “dilemmas” or “conflicting requirements”.  In the case of G4 this relates to, for example, conflicting requirements by different stakeholder groups. The latter implies also the possibility of trade-offs between different capitals, which is of special interest to IR. The IR framework raises the issue of trade-offs between different time frames (e.g. short versus long term), as well as trade-offs between the company’s capitals and those of others. The latter – our capitals versus those of others – imply issues such as externalities, which GRI captures as e.g. environmental and social impacts.

IR provides for the possibility of any of the six capitals being seen as “immaterial” given the company’s circumstances. It is hard to imagine any company deciding any of the capitals being immaterial: e.g. “human capital is not material to our operations”?

Risks and opportunities cut both ways

Guidance on risks and opportunities make clear that G4 is covering both “impacts and dependencies” – and not merely impacts as the IIRC Capitals Background Paper accuses sustainability reporting of doing. G4 e.g. asks for a description of risks and opportunities in terms of (i) impacts on sustainability and effects on stakeholders as well as (ii) impact of sustainability trends, risk and opportunities on the long-term prospects and financial performance of the (reporting) organization.  Its steps for determining content (materiality) address the significance of impacts on the reporting organization as well as on its stakeholders. So both Frameworks cover impacts and dependencies (e.g. on Natural Capital) well.

Materiality and report content

Both G4 and IR recommend processes with steps for determining materiality, report content and boundaries. IR describes it in terms of three steps: determining relevance, importance and finally prioritization. G4 describes it in terms of four steps: identifying relevant topics, prioritizing them, validating the result with reference to completeness (scope / range of topics considered) and eventually doing a review when preparing for the next reporting cycle.

Considering the GRI’s love of due process, the detailed description of the process is expected. It is however strange to see IR ask for disclosure of “the organization’s materiality determination process”. One would expect the more concise IR to leave that description to sustainability reporting, with the IR only reporting the results of the process. Surely, that is what really interests investors?

The deadline for public comments on the Consultation Draft of the IR Framework is 15 July.

Dr Cornis van der Lugt is a Geneva-based independent consultant and researcher, providing strategic analysis, advisory services and executive education in Social Responsibility, the Green Economy and Business Performance. He is a Senior International Associate of ACCSR and visited Australia in June to conduct workshops in Melbourne, Sydney and Perth on Valuing Natural Capital.