Integrated Reporting Demystified
By Jonathan Labrey 10 October, 2013
IIRC's Jonathan Labrey addresses some of the misconceptions around Integrated Reporting, IIRC's Jonathan Labrey addresses some of the misconceptions around Integrated Reporting
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In December 2013 the International Integrated Reporting Council (IIRC) will release its Integrated Reporting framework <IR>, marking a busy year in the field of sustainability reporting. The new <IR> framework will be joining Global Reporting Initiative’s G4 guidelines (GRI), and the planned compulsory accounting standards being created by the Sustainability Accounting Standards Board (SASB).
This proliferation of reporting frameworks has led to suggestions of rising tension around possible competition, particularly between GRI and SASB. However, being a coalition of organisations including the GRI and SASB, is <IR> best placed to navigate these tricky waters? Or, are we as suggested by Ethical Corporation set up for a reporting standards shootout?
China Water Risk (CWR) talks to Jonathan Labrey the Communications Director from the IIRC, and addresses questions around the complementary nature of the <IR> and GRI G4 frameworks. He also attempts to dispel some of the other common misconceptions around <IR>.
CWR: Is <IR> just simply a case of merging the Annual Financial Report with the CSR/Sustainability report?
Jonathan: Integrated Reporting <IR> is a process that results in communication, most visibly a periodic “integrated report”, about value creation over time. An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term. An integrated report should be prepared in accordance with the International <IR> Framework.
“An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term …
… <IR> is not about simply combining existing disclosures into a single report.”
<IR> is not about simply combining existing disclosures into a single report. Financial reporting and sustainability reporting are well developed forms of corporate reporting and elements of both would feature in <IR>, to the extent that the information is material to how an organization’s strategy creates and preserves value.
This requires assessing the connectivity and interdependencies between the organization’s business model (including its strategic objectives and how it is governed), the context in which the organization operates (including the risks and opportunities it faces), and the resources and relationships on which it relies and that it affects.
<IR> aims to catalyse a more cohesive and efficient approach to corporate reporting that draws together other reporting strands and communicates the full range of factors that materially affect the ability of an organization to create value over time. Its objective is to inform resource allocation by providers of financial capital that supports long term, as well as short and medium term, value creation. It promotes integrated thinking, decision-making and actions that focus on the creation of value in the long term, as well as short and medium term. <IR> enhances accountability and stewardship with respect to the broad base of 6 capitals (financial, manufactured, human, intellectual, natural, and social and relationship) and promotes understanding of the interdependencies between them.
CWR: What do you mean by value creation?
Jonathan: Value creation lies at the heart of Integrated Reporting <IR> and has been covered in one of our Background Papers. In this paper we explain value creation as follows: Value is created through an organisation’s business model, which takes inputs from the capitals and transforms them through business activities and interactions to produce outputs and outcomes that, over the short, medium and long term, create or destroy value for the organisation, its stakeholders, society and the environment.
The capitals from which the business model takes inputs, are identified as, financial, manufactured, intellectual, human, social and relationship, and natural capital. The capitals represent stores from which value is released when the capitals are combined, transformed and leveraged through an organisations business activities and interactions in order to produce outputs and outcomes that represent value creation or value destruction for stakeholders depending on their interests and perspectives.
CWR: Is <IR> intended to be a replacement for sustainability reporting and the GRI guidelines?
Jonathan: Not at all, <IR> seeks to catalyse a change in thinking and behaviour which results in a concise communication of value. It does not seek to substitute, nor add to, the disclosures businesses make. Sustainability reporting is a well-developed form of corporate reporting and elements of a sustainability report would feature in an integrated report to the extent that the information is material to how an organizations strategy creates and preserves value.
“The IIRC is working to create the globally accepted framework. Rather than seeking to create new indicators, the framework will …make use of existing reporting standards and guidelines, such as GRI’s Sustainability Reporting Guidelines.”
In February, the Global Reporting Initiative (GRI) and the International Integrated Reporting Council (IIRC) announced an agreement that will see the two organizations deepen their cooperation to transform the future of corporate reporting.
The Memorandum of Understanding (MoU), signed by GRI Chief Executive Ernst Ligteringen and IIRC Chief Executive Officer Paul Druckman, demonstrates the common interest of both organizations to enhance the reach, quality and consistency of global corporate reporting in order to deliver value to investors and other stakeholders.
The IIRC is working to create the globally accepted International <IR> Framework. Rather than seeking to create new indicators, the framework will encourage organizations to make use of existing reporting standards and guidelines, such as GRI’s Sustainability Reporting Guidelines.
CWR: At this year’s Global Conference on Sustainability and Reporting, GRI’s CEO Ernst Ligteringen stated that “before you can integrate, you have to have something to integrate” … seemingly implying <IR> is only suitable for organisations with a history of sustainability reporting. What are your views on this?
Jonathan: <IR> is suitable for any organization that would like to communicate its value creation story.
CWR: Is there a danger that <IR> will be seen as yet another reporting requirement potentially leading to increased disclosure fatigue for reporting companies?
Jonathan: No. What we want is better reporting, not more reporting. The IIRC is a coalition of organizations, including the major reporting and standard setting bodies such as IASB, FASB, GRI, SASB, CDP and CDSB.
“What we want is better reporting, not more reporting.”
Institutionally, we work together towards the common aim of encouraging behaviour that enables the more effective communication of how value is created over time.
There are three main ways in which <IR> is expected to interact with existing reporting practices:
- Existing reporting practices can be used to support <IR>. For example, to the extent that communication about an organization’s creation and preservation of value relies on conclusions or results from existing measurement, management, accounting, governance, reporting and valuation approaches, those conclusions or results should be used or referenced in an integrated report insofar as they are material to the creation and preservation of value.
- Integrated thinking can be applied to the preparation of existing reports so as to communicate more effectively the way in which the organization contributes to the creation and preservation of value.
- The incorporation of integrated thinking into existing management processes is expected to facilitate an evolution in corporate reporting.
CWR: Historically, companies when determining on their own what they see as material to their business often either ignore ESG totally or focus solely on ‘Governance’, barely touching on ‘Environmental’, and ‘Social’ issues. Will <IR> be able to address this?
Jonathan: The Consultation Draft of the Framework states that information provided must be a complete story – i.e. the good news and the bad.
One of the guiding principles of the <IR> framework is around materiality and conciseness. Within the framework guidance is given to companies on how it should determine what is material to the value of the company.
The materiality determination process as described in Section 3D of the Consultation Draft is as follows:
- Relevance– Identify relevant matters based on effect on the organization’s ability to create value over time; considering past, present or future effect on the organization’s strategy, its business model, or the capitals it uses or affects;
- Importance – Assess importance by assessing the magnitude of effect and likelihood of occurrence prioritization; and
- Prioritize – based on importance; if necessary revisit the materiality threshold.
It is also important to remember that in this era of corporate transparency, virtually every aspect of a business’s operations – from the behaviour of its board, through to its supply chain – is visible to stakeholders who have the communications tools available to them to expose any inconsistencies between what a business says and what it does.
If inconsistencies are revealed, this will likely have a damaging effect on the reputation of the business, and its value. <IR> enables the business to change these terms of trade, and to take back control of communicating how it is creating value over the short, medium and long term. As the IIRC pilot companies have stated, <IR> allows us to define ourselves rather than letting others define us.
CWR: Where would a company’s disclosure of their exposure and management of water related risk and opportunity come into the <IR> framework?
Jonathan: Water and all other renewable and non-renewable environmental resources and processes that provide goods or services that support the past, current or future prosperity of an organization are included in Natural Capital, one of the six capitals as defined by <IR>. (financial, manufactured, human, intellectual, natural, and social and relationship)
“Water should be disclosed in <IR> if it is material and relevant to an organizations long term value creation.”
That said, not all capitals are equally relevant or applicable to all organizations. While most organizations interact with all capitals to some extent, these interactions may be relatively minor or so indirect that they are immaterial for <IR> purposes.
CWR: A broad criticism of sustainability reporting historically has been that without widely accepted metrics it is impossible to get any consistency in reporting from company to company, how will <IR> address this?
Jonathan: The specific information in an integrated report will, necessarily, vary from one organization to another because each organization needs to express its own unique value creation story. Nonetheless, addressing the questions relating to the Content Elements, which apply to all organizations, helps ensure a suitable level of comparability between organizations.
Other powerful tools for enhancing comparability (both in an integrated report itself and in the more detailed information that it links to) can include reporting:
- Benchmark data, such as industry or regional benchmarks
- Information presented in the form of ratios (e.g., research expenditure as a percentage of sales, or carbon intensity measures such as emissions per unit of output)
- Quantitative indicators commonly used by other organizations with similar activities, particularly when standardized definitions are stipulated by an independent organization (e.g., an industry body). Such indicators are not, however, included in an integrated report unless they are relevant to the individual circumstances of, and are used by, the organization.
CWR: Is the plan/hope for Integrating Reporting to become mandatory?
Jonathan: The IIRC is and will continue to be a market-led initiative – driven by business for business.
“incorporation of the South African corporate governance code (“King III”) into the Johannesburg Listing Requirements, the 400+ companies listed on the South African exchange must publish an integrated report on a “comply or explain” basis.”
The IIRC has not been encouraging other countries to follow South Africa’s lead in moving towards mandatory <IR> before we publish the Framework. Through the incorporation of the South African corporate governance code (“King III”) into the Johannesburg Listing Requirements, the 400+ companies listed on the South African exchange must publish an integrated report on a “comply or explain” basis. South Africa has pioneered Integrated Reporting, and has done so without a global Framework to support this evolution, the code states that it is committed to move to the IIRC Framework when it is released.
However, a number of national policy developments in other countries, including changes to stock exchange listing requirements and legislation, all point to an evolution in corporate reporting in the direction of <IR>.
The IIRC’s mission is to create the globally accepted <IR> Framework that elicits from organizations material information about their strategy, governance, performance and prospects in a clear, concise and comparable format.
“We support having a continued dialogue and discussion on integrated reporting as we want to participate to help shape the future.”
Magnus Bocker, CEO of the Singapore Stock Exchange
As Magnus Bocker, Chief Executive Officer of the Singapore Stock Exchange, said about <IR>, “We support having a continued dialogue and discussion on integrated reporting as we want to participate to help shape the future.”
The Vice Chairman of NASDAQ, Meyer S Frucher, at the Consultation Draft launch event held at the NASDAQ said, “Given NASDAQ’s position in capital markets, we’re delighted to be part of this evolution and to profile this important initiative. The philosophies underpinning Integrated Reporting are very much aligned with our own.”
Further Reading:
- Since the publication of this interview the IIRC have launched the International <IR> Framework
- Investors Value Full Disclosure – PwC partner, Gayle Donohue argues that existing corporate reporting with undue focus on financial aspects of the business model is outdated, and outlines research which shows fuller disclosure of ESG information could translate into more BUY recommendations
- Latest Developments in Sustainability Reporting – Robert Gibson, of City University of Hong Kong & China Water Risk walks us through the latest developments in the field of sustainability reporting
- Water in Mining: Disclosure Overview – The international mining sector leads the way in water disclosure, but with massive regional variations in the level of reporting and poor current reporting frameworks are investors getting the full picture?
- Water Resilience, Disclosure and Mismatch – CDP’s water co-hosted a webinar with WRI to provide step-by-step guidance. Finally, disclosure made easy? Paul Reig and Tien Shiao from Aqueduct tells us how
- Swire Pacific: Taking Sustainability Mainstream – Philippe Lacamp, Swire’s Head of Sustainability tells us why they have integrated sustainability reporting into their 2011 Annual Report
- In Pursuit of Standardisation – Sophie le Clue reviews the difficulty in standardising disclosure despite investor demand and company questionnaire fatigue
- Disclosure: Where is China? – We look at the differences in water disclosure between the Top 10 Chinese & Global companies on the Fortune Top 100 Socially Responsible List compared with the rest of the world on corporate disclosure?
- Want to find out more about disclosure of water risks? Check out our Disclosure section.
