You are here
Integrated Reporting- What, Why and How!
A sustainability consultant writes about the meaning, need and status of integrated reporting i.e. representation of the financial and non-financial performance of a company in a single report.
What is integrated reporting?
Integrated reporting refers to representation of the financial and non-financial performance of a company in a single report. This helps in providing a greater context to the non-financial data such as how the company performs on environmental, social and governance (ESG) parameters, how sustainability is embedded in the core business strategy etc.
For many years, investors and other stakeholders have felt the limitations in the current form of annual reporting – as indicated by South Africa’s King report III, the current form of annual financial reporting takes a short term approach and is perceived as inadequate to meet the needs of investors and other stakeholders who would like to have a holistic view of the company’s performance and the ability to connect financial and sustainability performance. The primary objective of integrated reporting is to help stakeholders analyze and assess the company’s ability to create and sustain value in the medium and long term.
Some companies like BASF, Phillips, Novo Nordisk, United Technologies Corporation (UTC) and American Electric Power (AEP) produce integrated reports.
It is important to note that integrated reporting doesn’t only mean merging financial and sustainability reports into one report. Its true meaning is to link sustainability strategy to business strategy and help the company and its stakeholders identify the non-financial priority areas.
Why have one report?
Releasing one integrated report which illustrates the financial as well non-financial performance of a company is beneficial as it can help:
- demonstrate that the company is serious about incorporating sustainability into its core business
- communicate the impact of a company’s operations on environment and community and illustrate a company’s commitment to mitigating the effects
- correctly identify ESG related risks and opportunities and help provide a competitive edge over its peers in the long term – in several cases, this can help lower the cost of capital
- a company make informed decisions and improve its overall performance
- -identify cost savings by analyzing financial and non-financial metrics together
- -increase internal collaboration between different departments and create a more streamlined organization
- increase engagement with internal and external stakeholders through consistent and balanced reporting
- address reputational risk as integrated reporting provides a medium to communicate strategy and identify gaps, thus helping build trust amongst stakeholders
- increase brand value and customer loyalty
Investors are an important stakeholder group and desire greater transparency in disclosure by companies. There is an increasing group of investors who believe that non-financial metrics such as those related to environmental, social and governance have an impact on the economic value of a company. This is proven by the fact that UN Principles for Responsible Investment signatories have approximately USD 440 billion assets under management.
Drivers for integrated reporting
Drivers for adoption of integrated reporting comprise of both pull and push factors. Stakeholder groups such as investors, customers etc can demand greater level of disclosure and encourage companies to adopt integrated reporting. On the other hand, regulations and compliance standards such as those by stock exchanges, government regulatory bodies etc can act as another driver for adoption of integrating reporting.
Considering the current state of financial and sustainability reporting, it is said that integrated reporting framework is built on the concept of capital stewardship. Harvard Business School paper, ‘The landscape of Integrated Reporting’ defines capital stewardship as “the preservation and enlargement of multiple forms of capital, all of which contribute to long-term value creation by the firm.” Various forms of capital would include intellectual, natural, financial, organizational and social capital.
- Intellectual capital (patents, software etc) would include reporting issues such as expenditures on sustainability-related R&D, monitoring of sustainability related targets etc.
- Natural capital (clean air, land, water, forests, biodiversity etc) would involve reporting issues related to company’s understanding of scarcity of these natural resources, climate change strategy, carbon emission, water consumption and recycling etc
- Financial capital (funds owned or borrowed) would consist of reporting issues like financial risks and liabilities associated with government regulations, stock markets etc
- Organizational capital (systems and processes that enable smooth operations) would comprise of reporting issues such as existence and performance of occupational health and safety systems, compliance with established norms and code of operation etc
- Social capital (employees, community, customers) would include reporting issues related to employee well-being such as adoption and enforcement of human and labour rights, community engagement programs etc.
Integrated reporting will help analyze company’s level of control and influence on various forms of capital and whether its activities serve to increase or decrease the stock of various forms of capital.
Challenges of integrated reporting
Though a beneficial concept, integrated reporting has many challenges associated with it, especially considering the fact that very few companies across the world have actually adopted sustainability reporting. GRI, an internationally accepted standard on sustainability reporting, had less than 450 registered sustainability reports from companies across the world in 2010. Collating sustainability and financial reporting has challenges like:
•Assurance – the big question
The biggest challenge facing integrated reporting is the question of providing assurance for the reported data. There are multitudes of well- established agencies who provide assurance for financial reporting. However, the search is still on for third party agencies which will provide assurance for sustainability/non-financial reporting.
•Standards yet to be established
Currently there doesn’t exist any internationally accepted standard/framework for integrated reporting. The International Integrated Reporting Committee (IIRC) is one such body which is working towards creating “a globally accepted integrated reporting framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format”. IIRC plans to release a discussion paper on integrated reporting in mid-2011 for public consultation. Post the consultation period, it plans to put forth its proposals at the time of G20 meeting in the latter half of 2011 and help in promotion and adoption of the framework.
Measuring and quantifying non-financial metrics and then integrating them with financial performance are complex and daunting tasks.
-Financial reporting is much more mature and comparatively easier to capture.
-Data sources for sustainability reporting are diverse, inconsistent and systems for consolidation and reporting are less automated.
All disclosure indicators may not be material for all firms. Materiality will differ depending on the industry the company operates in.
Both financial and sustainability reporting serve multiple and diverse stakeholders such as investor, employee, government, community etc. Though some of these stakeholders overlap, integrated reporting may not appeal to all stakeholders.
Current status across the globe
Some countries have introduced regulations which mandate the adoption of integrated reporting by companies of certain size. South Africa and other developed economies such as Denmark, France, UK etc. lead the pack.
Adherence to The King III Code on Governance which is part of the requirements under the Johannesburg Stock Exchange (JSE) listing requirements requires all listed companies to produce an integrated report with effect from March 1, 2010.
A law adopted in December 2008 makes it mandatory for publicly listed companies, state-owned companies and institutional investors to include information on non-financial metrics such as corporate social responsibility (CSR) in their annual financial reports.
The Grenelle II Act adopted in July 2010 requires companies with 500 employees and more to produce environmental and social report along with their financial report.
In the end, one can say that Integrated reporting offers additional value to stakeholders, builds trust by increasing transparency and may help in integrating sustainability to core business strategy and allows for a balanced performance appraisal of companies. However, some challenges still plague the concept and more needs to be done to promote its adoption.
The author, Aparna Khandelwal is a Senior Associate cKinetics, a sustainability consulting firm.