What is Integrated Reporting and why does it matter?
Fiona Robertson explains the far-reaching benefits of integrated reporting.
Integrated reporting (IR) is the latest development in a long line of proposed reporting innovations that have sought to improve the usefulness of corporate reporting. The failure of these initiatives to engage effectively with organisations, investors and regulators motivated the International Integrated Reporting Council (IIRC) to launch IR as a global framework in December 2013.
What is IR?
IR is backed by the IIRC, a powerful global coalition of regulators, investors, companies, standard setters, the accounting profession and non-government organisations who share the view that better communication about value creation should be the next step in the evolution of corporate reporting.
IR aims to build on reporting developments to provide a more holistic form of reporting the value created by a business, by considering non-financial resources such as human, social and intellectual capitals as well as financial capital.
Active consideration of how these capitals impact on the business, and on society generally, requires integrated thinking to ensure all business functions (e.g. sustainability, strategy, human resources, operations), not just the finance function, are involved in identifying and collecting data for these capitals, and looking at their connectivity – and how value creation affects the business now and in the future.
Greater clarity on links between the capitals helps address the challenge of demonstrating their place in strategic decision-making.
The 'value creation' process
An essential concept of the value creation process is the proposition that companies should expand their reporting beyond the stewardship of financial capital, to include all the resources they use as inputs to their business activities. The IIRC uses the term "capitals" to denote these various resources, with six capitals identified: financial; manufactured; intellectual; human; social and relationship; and natural.
Rather than the traditional approach of thinking in silos, integrated thinking involves greater collaboration between organisational members, from different functions and backgrounds, to achieve strategic objectives. This process ensures that management connects internal and external information on relevant capitals to identify issues that are material to value creation over the short, medium and longer term. It creates the potential to significantly alter investor and company mindsets on how companies operate.
This creates a shift in focus from meeting short-term financial goals, to developing a long-term business strategy, which not only makes a commitment to social and environmental issues, but also to sustainable businesses and society.
Who is using IR?
IR has gained considerable prominence since the inception of the IIRC in 2010. It is practised on a mandatory basis in South Africa and Brazil, and research provides evidence of momentum towards IR in other countries, including the UK, the Netherlands, Australia, Spain, Singapore, Japan and the USA. In the UK, the IIRC database shows that 20 per cent of FTSE 100 companies refer to, or are influenced by, the International IR Framework.
Many organisations think they are already producing an integrated report. However, IR is more than just another corporate report, it relies on a series of underlying activities. IR is defined as a process, founded on integrated thinking, which results in a periodic integrated report, and related communications that highlight value creation.
Evidence from South Africa, the first country to mandate IR, suggests that mandatory compliance was the primary driver for the take-up of IR. However, while, as this research identifies, most UK FTSE 100 companies get some way towards integrated reporting, driven by regulation through the strategic report, the IIRC warns that where there is a 'compliance only' mindset, business benefits are missed and stakeholder understanding is affected.
Studies in South Africa, where IR is more advanced, suggest early adopters have gained several benefits from IR, including enhanced reputation, more effective decision-making and the breaking down of internal silos. Siloed thinking was identified in this research through lack of linkages between reports.
IR adoption in the UK
My research, based on analysis of 22 UK FTSE 100 annual and sustainability reports, and interviews with 10 senior UK executives, sought to investigate the likely adoption of IR by investigating factors that either help or hinder the diffusion of IR, in addition to highlighting the limitations of current reporting practices.
Less than one-third of those companies sampled demonstrated high degrees of linkages between their annual and sustainability reports. This limits the reports' usefulness, as lack of clear links hampers decision-making. In line with a PwC survey, most companies sampled were, at a broader level, starting to address some of the main issues of IR. This may have been facilitated by the introduction through UK legislation of a strategic report, which contains similar qualitative characteristics and content to IR. Most senior executives interviewed were supportive of IR but perceived that several issues were likely to impact on the diffusion of IR.
There is a need to set out clearly how IR fits in with the plethora of guidance from other standard setting bodies. This is being addressed by the Corporate Reporting Dialogue, set up by the IIRC in response to market calls for greater coherence, consistency and comparability between corporate reporting frameworks, standards and related requirements. Participants include significant standard setting bodies such as IASB, GRI and FASB.
By adopting IR, UK organisations can demonstrate good reporting practices, achieve greater influence internationally, and help deliver a more coherent evolution of corporate reporting globally.
Fiona Robertson is a member of the ICAS Corporate Reporting Committee and has held several senior finance positions spanning 30 years She is currently doing a PhD in Integrated Reporting at Leeds Beckett University and works there as a part-time lecturer.
Read the full version of this article in the September 2015 edition of The CA magazine.