Putting Integrated Reporting in Perspective
14 January 2014 at 9:27 pm
Paul Davies, Principal at sustainability firm Banarra, explores the potential of Integrated reporting for business and the limitations it imposes on both reporters and readers.
What is integrated reporting?
Accounting for value creation sits at the heart of the new integrated reporting framework, just released. An integrated report, if done as the new framework intends, offers investors and advisers a more complete picture a company’s overarching strategy, governance, risk management, performance and longer term prospects. It responds to the one dimensional, short term, backward looking disclosures that plague financial reports and limit informed decision-making. In other words, an integrated report should enable business outcomes to be seen through a value ‘lens’ that is more readily accessible and meaningful than columns of figures in a financial statement.
Integrated reporting is about accounting for value changes within a business over the course of a set period, typically a financial or calendar year. At the start of the period the business ascribes value(s) to its key assets (called capitals) that it uses and affects. The business’ management model is the means through which it adds (or in some cases, transforms or destroys) value in those capitals in the short, medium and long term. This creation of value depends on how the business senses, understands and responds to a range of internal and external factors. These factors are disclosed in their integrated report.
But despite the fanfare and promise which has accompanied its recent unveiling, integrated reporting presents some fundamental challenges both to reporters and to readers. Even if an organisation can identify and quantify changes in the value of its assets (capitals) over time, how does it know that its strategic or tactical management of those capitals has in fact enhanced or influenced their value? Companies can just have a “good” year, where they’ve benefited from factors they’ve neither influenced nor controlled (eg. climatic stability, social trends, political change, economic upturn). But are they likely to admit that in their report? On the other hand “bad” years can be much more easily ascribed to factors “beyond our control”.
It could be difficult to assure the legitimacy of such claims made in integrated reports, at least until auditing and assurance systems transform well beyond where they are now.
Is integrated reporting the future “norm” for corporate reporting?
In the introduction to the new framework, the following statement is made: “it is anticipated that, over time, integrated reporting will become the corporate reporting norm”. This is questionable.
There is widespread misunderstanding in the marketplace about what actually constitutes an ‘integrated report’. This misunderstanding is creating confusion for both companies and report users about reporting options and directions. There is a commonly held view that integrated reporting is the inevitable successor to sustainability and financial reporting, and that producing an integrated report will relieve the organisation from other types of reporting in the future. This sentiment is typified in the following view expressed in a recent GRI research paper: “integrated reporting is the next step in the evolution of financial and sustainability performance in an integrated and transparent way.”
Now that we have both the GRI’s G4 sustainability reporting guidelines and the final integrated reporting framework available, it’s clear that the two approaches are focussed on different outcomes and audiences. G4 (sustainability) reporting remains primarily focused on providing information for stakeholders wanting to understand an organisation’s key social, economic and environmental impacts and how it is managing them. Integrated reporting, on the other hand, is targeted at providers of financial capital seeking information that demonstrates how an organisation creates value across a range of interconnected capitals in a coherent and strategic way.
While the content of these two types of reports is not mutually exclusive, they do have a distinctly different emphasis recognising the needs of their target audiences. As an NGO wanting to know about your company’s impacts on biodiversity, my first port of call would be your sustainability report. As an investor I may also want to check out in your sustainability report too, but if my primary interest is in determining whether your business is capable of increasing the value of its key assets over time, then your integrated report is where I’d look first. To some degree these aspects are all interconnected anyway. If my company has a key externality that is going to negatively affect my share value, that information could rightly sit in both reports. If I have had a positive impact on my local community by investing in its growth and prosperity, thus adding social value, then that could also appear in either or both types of report.
The challenge though is that reports are ultimately communication channels, and the best communication channels are those that specifically focus on their key audiences’ information needs. Communication efforts that try to do it all end up either compromising the quality of the information and its value to the reader. Why else have many sustainability reports become more useful as door-stoppers than accountability tools?
Integrated reporting is promising in what it seeks to deliver, but is yet to see full light of day and will significantly challenge many reporters who really seek to apply it to achieve its true intent. Integrated reporters can also use the G4 approach to broaden their thinking and understanding of sustainability impacts for their business, and how those impacts might be reflected in accounting for value creation by their organisation.
As Robert G. Eccles, Professor of Management Practice at Harvard Business School, notes “I don’t think integrated reporting makes sustainability reporting go away, although it may have implications for its format."
Is integrated reporting connected to other corporate value concepts?
Integrated reporting should not be considered in isolation, but as part of a larger picture of businesses as change agents and value repositories. In addition to integrated reporting, another concept called shared value is gaining more attention from companies who are looking at new ways to both think about and account for their direction and purpose beyond profit.
Shared value is about companies looking to build value not just for their business but for broader society as well. It’s more strategic than traditional philanthropy and more outcome-focussed than many current community investment approaches. It looks to identify how the business can align and leverage its core strengths, its expertise and its resources to solve social problems in a way that not only makes a difference, but also makes sense for the business. In other words, shared value exists at the point that someone or something other than the business benefits from the value created by the business.
Both integrated reporting and shared value have a big role to play in transforming business thinking and accountability. Companies looking to apply the concept of shared value should be thinking about integrated reporting as the disclosure tool for that process. Likewise, companies looking at integrated reporting may want to broaden their thinking beyond disclosure and consider whether a shared value approach has a place within their current or future business model. Applying shared value to the concept of integrated reporting means that, as noted by the Shared Value Initiative, "investors can gain insight into companies’ future growth and profit potential by understanding how shared value strategies address social issues that directly impact performance".
About the author:
Paul Davies is a Principal at Banarra and has worked on numerous reporting, materiality, stakeholder engagement, strategy, community standards and assurance assignments in the property, telecommunications, financial, mining, energy, legal and service sectors.
Davies is a certified GRI trainer, a member of the GRI G4 working group on management approach disclosures and a member of the GRI G4 Practitioner's Network.