When it comes to integrated reporting, first think ‘integrated thinking’April 2014
Wiebke Flach, head of advisory services at Business in the Community, explains the integrated approach to reporting.
In the simplest terms, integrated reporting is when a company communicates the full range of factors that contribute to long-term value creation over time. Integrated reporting is an approach to corporate accounting which recognises the interdependence of commercial, social and environmental performance as part of one strategy. It enables businesses to demonstrate that sustainability has been integrated into strategy and long-term decision-making, and indicates that a business is thinking beyond short-term targets or short-lived profits.
Of course, integrated reporting is more than just a new way to produce a report. It reflects a fundamental shift in how value within a business is determined and communicated.
An integrated report is therefore the output of ‘integrated thinking’, the approach that must come before integrated reporting.
Why adopt integrated thinking?
We know from recent conversations with Business in the Community member companies that 9 out of 10 chief executives believe they have a greater social purpose than simply returning profit, and more than 70% of them think too much attention is given to short term business goals. Companies tell us that the majority of investors regard shorter-term financial indicators as the main metric of business success.
An integrated approach will improve decision making and deliver a report that clearly communicates to stakeholders, including these investors, the added value that sustainability delivers, in a language that they understand.
What questions should integrated reporting answer?
An integrated report should be a better report because it enables investors to clearly understand the answers to some key questions:
• What does the organisation do and what are the circumstances under which it operates?
• How does the organisation’s governance structure support its ability to create value in the short, medium and long-term?
• What are the specific opportunities and risks that affect the organisation’s ability to create value over the short, medium and long-term and how is the organisation dealing with them?
• Where does the organisation want to go and how does it intend to get there?
• What is the organisation’s business model and to what extent is it resilient?
• What challenges and uncertainties is the organisation likely to encounter in pursuing its strategy, and what are the potential implications for its business model and its future performance?
• To what extent has the organisation achieved its strategic objectives and what are its outcomes in terms of effects on the capitals?
All organisations depend on various forms of interdependent capital for their success.
For example, an organisation’s financial capital is increased when it makes a profit, and the quality of its human capital is improved when employees become better trained or more engaged.
The IIRC framework comprises six capitals: financial, manufactured, intellectual, human, social and relationship and natural. These help businesses to consider a full range of their inputs, how they add value in and through them, and then, how to communicate with their stakeholders on this.
The Integrated Reporting Framework has been developed by IIRC, an organisation founded by The Prince’s Accounting for Sustainability Project. Globally, many companies have started to embrace the concept (which is now a legislative requirement in South Africa), and within the UK companies taking part in the IIRC pilot programme come from a range of sectors – from support services and banking, to retail and real estate.
As a first step, we suggest you have conversations at the most senior level to understand how global trends such as population growth and resource scarcity affect you, and what risks and opportunities they present today and in the medium and long-term. This enables the parameters and capitals most relevant to your business to be determined.
Then, the IIRC recommends an integrated report follows these guiding principles:
• Strategic focus and future orientation: Provide insight into the organisation’s strategy, and how that relates to its ability to create value in the short, medium and long term and its use of and effects on the capitals.
• Connectivity of information: Show, as a comprehensive value creation story, the combination, inter-relatedness and dependencies between the components that are material to the organisation’s ability to create value over time.
• Stakeholder responsiveness: Provide insight into the quality of the organisation’s relationships with its key stakeholders and how and to what extent the organisation understands, takes into account and responds to their legitimate needs, interests and expectations.
• Materiality and conciseness: Provide concise information that is material to assessing the organisation’s ability to create value in the short, medium and long-term.
• Reliability and completeness: Include all material matters, both positive and negative, in a balanced way and without material error.
• Consistency and comparability: Present information on a basis that is consistent over time and in a way that enables comparison with other organisations to the extent it is material to your organisation’s own value creation story.
Since conventional forms of CSR reporting on relevant performance and management processes already indicate a strong positive correlation to financial returns , it is clear there is business value in adopting an integrated approach.
We are encouraging businesses to move towards integrated thinking and reporting, and the Integrated Reporting Framework has great potential to enable companies to develop and present a more holistic view of business - and guide more sustainable management and value creation into the future.
To find out more about Integrated Reporting Framework, see here.
*Business in the Community research showed that companies which consistently manage and measure their corporate responsibility outperformed their FTSE 350 peers on total shareholder return in seven out of the last eight years – and they recovered more quickly in 2009 compared with their FTSE350 and FTSE All-Share peers
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