CHAPTER SEVEN

Integrated reporting

THE TOPIC OF INTEGRATED REPORTING, AND IMPORTANCE, was introduced earlier, particularly in Part II. This section expands on that in providing guidance and understanding as to the related notion and processes, and demonstrates its relevance in association with the preceding sections.

It is appropriate to identify why integrated reporting is worthy of attention. This is best done by relaying the key features and expected outcomes of integrated reporting – see Figure 7.1.

FIGURE 7.1 Integrated reporting.

Source: Adapted from various sources

It is worthwhile reviewing the few points that constitute this presentation. As we can see, there are two main aspects:

• approach to sustainability;
• reporting approach.

As these aspects within a business entity, or any other organisation, rise in terms of collective responsiveness and responsibility, there is greater involvement of key stakeholders, as well as increased integration of strategy and reporting. The overall result of integrated reporting, therefore, is a movement from a position of mere compliance to one of value creation. Additionally, as is also evident at the very base of Figure 7.1, environmental harm is minimised, which is a beneficial outcome.

7.1 INTEGRATED REPORTING <IR>

Integrated reporting is a new approach to corporate reporting that demonstrates the linkages between an organisation's strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, integrated reporting can help businesses to take more sustainable decisions and enable investors and other stakeholders to understand how an organisation is really performing. See www.theiirc.org.

An integrated report should be a single report which is the organisation's primary report – in most jurisdictions the annual report or equivalent. ­Central to integrated reporting is the challenge facing organisations to create and sustain value in the short, medium and longer term. Each element of an integrated report should provide insights into an organisation's current and future ­performance.

Discussion paper

In September 2011, the International Integrated Reporting Committee (IIRC) launched the discussion paper Towards Integrated Reporting –­ Communicating Value in the 21st Century , which sets out the rationale for integrated reporting and proposals for an integrated reporting framework – see www.theiirc.org/about or at theiirc.org/wp-content/uploads/2011/09/IR-Discussion-Paper-2011_spreads.pdf.

In relation to this report, the IIRC has brought together world leaders from the corporate, investment, accounting, securities, regulatory, academic, civil society and standard-setting sectors to develop a new approach to reporting. Integrated reporting will meet the needs of the twenty-first century. It builds on the foundations of financial, management commentary, governance and remuneration, and sustainability reporting in a way that reflects their interdependence. This is reflected in Figure 7.2.

FIGURE 7.2 Interdependence in integrated reporting. Copyright © September 2011 by the International Integrated Reporting Committee. All rights reserved. Used with permission of the International Integrated Reporting Committee.

Source: theiirc.org/wp-content/uploads/2011/09/IR-Discussion-Paper-2011_spreads.pdf

The IIRC aims to forge a global consensus on the direction in which reporting needs to evolve, creating a framework for reporting that is better able to accommodate complexity, and, in so doing, brings together the different strands of reporting into a coherent, integrated whole.

This discussion paper considers the rationale behind the move towards integrated reporting, offers initial proposals for the development of an International Integrated Reporting Framework and outlines the next steps towards its creation and adoption, including the publication of an exposure draft. (Note that the Draft Framework Outline became available in July 2012. The purpose of the draft outline in this document is to keep stakeholders informed of the likely structure and general content of the Framework. A further outline, or prototype with more detail of the technical content, is expected to be released in late 2012, followed by a draft Framework for public consultation in early/mid 2013.)

The purpose of the discussion paper is to prompt input from all those with a stake in improved reporting, including both producers and users of reports.

The contents of this 30-page discussion paper are as follows:

• About this Discussion Paper
• Summary
  • What is Integrated Reporting?
  • Why do We Need Integrated Reporting?
  • An International Framework
  • Future Direction
  • Your Comments Requested
• The World has Changed – Reporting Must Too
• Towards Integrated Reporting
  • Integrated Reporting Defined
  • Building on Developments to Date
• An International Integrated Reporting Framework
  • How is Integrated Reporting Different?
  • Business Model and Value Creation
  • The Building Blocks
  • Guiding Principles
  • Content Elements
  • Towards Integrated Reporting – Innovation in Action
• What will Integrated Reporting Mean for Me?
  • Benefits, Challenges and Responses
  • Reporting Organization Perspective
  • Investor Perspective
  • Policy-maker, Regulator and Standard-setter Perspective
  • Other Perspectives
• Future Direction
• Summary of Consultation Questions
• Acknowledgements and Endnotes

What is integrated reporting?

Integrated reporting brings together material information about an organisation's strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. It provides a clear and concise representation of how an organisation demonstrates stewardship and how it creates and sustains value.

An integrated report should be an organisation's primary reporting vehicle.

Why do we need integrated reporting?

Since the current business reporting model was designed, there have been major changes in the way business is conducted, how business creates value and the context in which business operates. These changes are interdependent and reflect trends such as:

• globalisation;
• growing policy activity around the world in response to financial, governance and other crises;
• heightened expectations of corporate transparency and accountability;
• actual and prospective resource scarcity;
• population growth;
• environmental concerns.

Against this background, more in-depth information is needed to assess past and current performance of organisations and their future resilience than is provided for by the existing business reporting model. While there has been an increase in the information provided, key disclosure gaps remain.

Reports are already long and are getting longer. But because reporting has evolved in separate, disconnected strands, critical interdependencies between strategy, governance, operations and financial and non-financial performance are not made clear.

To provide for the growing demand for a broad information set from markets, regulators and civil society, a framework is needed that can support the future development of reporting, reflecting this growing complexity. Such a framework needs to bring together the diverse but currently disconnected strands of reporting into a coherent, integrated whole, and to demonstrate an organisation's ability to create value now and in the future.

International differences in reporting

Reporting requirements have evolved separately, and differently, in various jurisdictions. This has significantly increased the compliance burden for the growing number of organisations that report in more than one jurisdiction and makes it difficult to compare the performance of organisations across jurisdictions.

The benefits of integrated reporting

Research has shown that reporting influences behaviour. Integrated reporting results in a broader explanation of performance than traditional reporting. It makes visible an organisation's use of and dependence on different resources and relationships or ‘capitals' (financial, manufactured, human, intellectual, natural and social), and the organisation's access to and impact on them. Reporting this information is critical to:

• a meaningful assessment of the long-term viability of the organisation's business model and strategy;
• meeting the information needs of investors and other stakeholders;
• ultimately, the effective allocation of scarce resources.

An international framework

The IIRC is developing an International Integrated Reporting Framework that will facilitate the development of reporting over the coming decades. The core objective of the Framework is to guide organisations on communicating the broad set of information needed by investors and other stakeholders to assess the organisation's long-term prospects in a clear, concise, connected and comparable format. This will enable those organisations, their investors and others to make better short- and long-term decisions. For more details, see theiirc.org/wp-content/uploads/2011/09/IR-Discussion-Paper-2011_spreads.pdf.

Business model and value creation

The overall process and related model associated with integrated reporting is summarised in Figure 7.3, as indicated by the various elements, including input, influence and outcome. Of particular interest here is the inclusion of six types of capital, seen on the left-hand side of the figure:

FIGURE 7.3 Integrated reporting: a business model. Copyright © September 2011 by the International Integrated Reporting Committee. All rights reserved. Used with permission of the International Integrated Reporting Committee.

Source: theiirc.org/wp-content/uploads/2011/09/IR-Discussion-Paper-2011_spreads.pdf

• Financial – being the same as generally understood;
• Manufactured – as per products and fixed assets;
• Human – people;
• Intellectual – communication;
• Natural – mainly owned by the public sector;
• Social – people and communication.

Essential to integrated reporting is the organisation's business model, as presented in Figure 7.3. There is no single, generally accepted definition of the term ‘business model'. However, it is often seen as the process by which an organisation seeks to create and sustain value. An organisation determines its business model through choices that typically recognise that value is not created by or within the organisation alone but is:

• influenced by external factors (including economic conditions, societal issues and technological change) that present risks and opportunities, which create the context within which the organisation operates;
• co-created through relationships with others (including employees, partners, networks, suppliers and customers);
• dependent on the availability, affordability, quality and management of various resources or ‘capitals' (financial, manufactured, human, intellectual, natural and social).

Integrated reporting therefore aims to provide insights about:

• significant external factors that affect an organisation;
• the resources and relationships used and affected by the organisation;
• how the organisation's business model interacts with external factors and resources and relationships to create and sustain value over time.

By describing, and measuring where practicable, the material components of value creation and, importantly, the relationships between them, integrated reporting results in a broader explanation of performance than traditional reporting. In particular, it makes visible all the relevant capitals on which performance (past, present and future) depends, how the organisation uses those capitals, and its impact on them, as illustrated by Figure 7.3. This information is critical to the effective allocation of scarce resources. It will provide a meaningful presentation of the organisation's prospects for long-term resilience and success, and facilitate the informational needs of, and assessments by, investors and other stakeholders.

Importantly, a reporting framework that is centred around an organisation's business model provides a better basis for management to explain what really matters, thereby bringing reporting closer to the way that business is run. For more details, see theiirc.org/wp-content/uploads/2011/09/IR-Discussion-Paper-2011_spreads.pdf.

Pilot Programme

The Integrated Reporting Pilot Programme offers a select group of companies the opportunity to demonstrate global leadership in this emerging field of corporate reporting. The Pilot Programme underpins the development of the Integrated Reporting Framework in 2011 and onwards. Through the Pilot Programme, the principles and practicalities of integrated reporting will be tried and tested, to support the creation of a new global standard in integrated reporting.

Already, more than 60 companies from around the globe have been invited to join the programme and companies from various sectors are securing their participation, including Microsoft Corporation (software and computer services ), HSBC (banks) and Gold Fields (mining).

The programme consists of three phases:

• Dry Run – an initial phase that asks companies to do a walkthrough of IIRC's Framework and to identify the opportunities and challenges of implementation, informing the pilot kick-off conference and discussion paper consultation.
• (Note that the Dry Run is currently completed.)
• Pilot Cycle 1 – the first round of piloting, based on the discussion paper and draft Integrated Reporting Framework for reporting cycles ending between October 2011 and September 2012. The Pilot Cycle kicked off on 17 and 18 October 2011 in Rotterdam, the Netherlands, with a meeting of all programme participants.
• Pilot Cycle 2 – the second round of piloting, which will build on experiences from the first year.

A list of <IR> pilot companies, is presented in Table 7.1.

Table 7.1 IR pilot companies

Note: The above companies have agreed to their names being published. This is not a complete list of all companies participating in the Pilot Programme.

7.2 LANDSCAPE OF INTEGRATED REPORTING

An interesting source of information in relation to integrated reporting is The Landscape of Integrated Reporting – Reflections and Next Steps , edited by Robert G. Eccles, Beiting Cheng and Daniela Saltzman, and published in November 2010 by the Harvard Business School (see hbswk.hbs.edu/pdf/The_Landscape_of_Integrated_Reporting.pdf).

This publication was introduced when addressing ISO in Part II. Here we provide more detail. As the title suggests, this 334-page report is relevant to points raised in the preceding section. The contents appear below to show topics, covered by eminent persons, that are deemed to be pertinent to integrated reporting:

• Foreword – Nitin Nohria
• Introduction: The State of Integrated Reporting Today – Robert G. Eccles
• Part I: The Role of the Corporation in Society
  • Accounting and Accountability: Integrated Reporting and the Purpose of the Firm – Robert Kinloch Massie
  • A CEO's Letter to Her Board of Directors – John Fullerton and Susan Arterian Chang
  • Drivers of Corporate Sustainability and Implications for Capital Markets: An International Perspective – Ioannis Ioannou and George Serafeim
  • Growth, Stuff and a Guinea Pig: Inspired Thoughts from Two Days at Harvard Business School – Terence L. Jeyaretnam
  • Integrated Reporting in a Disconnected World? The Macro Measurement Challenge! – Alan Willis
  • What Should Be Done with Integrated Reporting? – David Wood
• Part II: The Concept of Integrated Reporting
  • The Five Capitals of Integrated Reporting: Toward a Holistic Architecture for Corporate Disclosure – Allen L. White
  • Integrated Reporting: A Perspective from Net Balance – Terence L. Jeyaretnam and Kate Niblock-Siddle
  • Think Different – Alan Knight
  • ISO Standards for Business and Their Linkage to Integrated Reporting –
    Kevin McKinley
  • Toward a Model for Sustainable Capital Allocation – Adam Kanzer
  • Learning from BP's ‘Sustainable' Self-Portraits: From ‘Integrated Spin' to Integrated Reporting – Sanford Lewis
  • Will Integrated Reporting Make Sustainability Reporting Obsolete? – Ernst Ligteringen and Nelmara Arbex
• Part III: Benefits to Companies
  • Integrating Integrated Reporting – Steve Rochlin and Ben Grant
  • Integrated Reporting: The Future of Corporate Reporting? – Paul Druckman and Jessica Fries
  • Integrated Reporting Contributes to Embedding Sustainability in Core Business Activities – Olaf Brugman
  • Six Reasons Why CFOs Should Be Interested in Sustainability – Simon Braaksma
  • Sasol's Reporting Journey – Stiaan Wandrag and Jonathon Hanks
  • One Report: One Message to All Our Stakeholders – Frank Janssen
  • Southwest Airlines One Report Review – Aram Hong
  • Integrated Reporting: Managing Corporate Reputation to Thrive in the New Economy – Hampton Bridwell
  • A Team like No Other – Who Will Own Your Integrated Report? –
    Christoph Lueneburger
  • Will the USA Take a Leap? Barriers to Integrated Reporting – Mike
    Wallace
  • Integrated Reporting in a Competitive World of Cities – Jen Petersen
• Part IV: The Investor's Perspective
  • Some Thoughts on Integrated Reporting and Its Possibilities –
    Farha-Joyce Haboucha
  • Integrated Reporting: What's Faith Got to Do with It? – Laura Berry
  • An SRI Perspective on Integrated Reporting – Peter DeSimone
  • Towards a 21st Century Balance Sheet: The First Three Steps – Toby A.A. Heaps
• Part V: The Importance of Auditing
  • Does an Integrated Report Require an Integrated Audit? – Bruce McCuaig
  • One Audit — Moving towards 21st Century Integrated Assurance – Nick Ridehalgh
  • Auditors at the Crossroads – Keith L. Johnson
  • Sustainability Reporting – Can It Evolve Without Assurance? The Audit Profession Can Help to Build an Assurance Model – Cindy Fornelli
• Part VI: Leveraging Technology
  • The Role of XBRL and IFRS in Integrated Reporting – Maciej Piechocki and Olivier Servais
  • Integrating Sustainability Reporting Frameworks and Financial Reporting into One Report with XBRL – Liv A. Watson and Brad J. Monterio
  • Sustainable Investing and Integrated Reporting: Driving Systematic Behavioral Change in Public Companies through Global Sustainability Rankings, Indexes, Portfolio Screening and Social Media – Michael Muyot
  • Integrated Reporting Enablement – Richard L. Gristak
  • Leveraging the Internet for Integrated Reporting – Kyle Armbrester
• Part VII: Better Engagement
  • The Business Imperative of Stakeholder Engagement – Sandy Nessing
  • Integrated Reporting as a View into Integrated Sustainable Strategies –
    Scott Bolick
  • Integrated Reporting and the Collaborative Community: Creating Trust through the Collective Conversation – Kathleen Miller Perkins
  • Online Co-Creation Communities: A New Framework for Engagement –
    Denis Riney
  • Employee Engagement and the Holy Grail – Kathy Miller Perkins
  • Engagement as True Conversation – Kate Parrot
• Part VIII: Perspectives on an Action Strategy
  • Tomorrow's Corporate Reporting – Patricia Cleverly, David Phillips, and Charles Tilley
  • Push, Nudge, or Take Control – An Integrated Approach to Integrated Reporting – Shelley Xin Li
  • Integrated Reporting: Long-Term Thinking to Drive Long-Term Performance – Mindy Lubber and Andrea Moffat
  • Integrated Reporting: Now What? – Michael P. Krzus
  • Transformative Innovation towards Integrated Reporting Passes through a Hands-on/Transition Phase and Leads to Real Innovation in Management – Livia Piermattei
  • Two Worlds Collide – One World to Emerge! – Ralph Thurm
  • Success Factors for Integrated Reporting: A Technical Perspective – Ralf Frank
• Part IX: Action Strategy Tactics
  • Integrated Reporting: Impact of Small Issuer Challenges on Framework Development
  • and Implementation Strategies – Lisa French
  • Beware of Greeks Bearing Gifts – Partha Bose
  • The Role of Lawyers in Integrated Reporting – Galit A. Sarfaty
  • The Role of Stock Exchanges in Expediting Global Adoption of Integrated Reporting – Christina Zimmermann
  • Integrated Reporting and Key Performance Indicators – Steve Lydenberg and Jean Rogers
  • Developing Key Performance Indicators to Support Integrated Reporting –
    Yoshiko Shibasaka
• Part X: Lessons from Experience
  • Some Thoughts on Advancing the Vision and Reality of International Integrated Reporting – Robert H. Herz
• The French Grenelle II Act:
  • Enacting Integrated Reporting and Further Developments – Patrick d'Humières and Nicolas Jandot
  • Sustainability Reporting: Where Does Australia Stand? – Terence L. Jeyaretnam and Kate Niblock-Siddle
  • Integrated Annual Report Survey – New Zealand's Top 200 Companies: Exploring Responses from Chief Financial Officers on Emerging Reporting Issues – Wendy McGuinness and Nicola Bradshaw
  • The Climate Disclosure Standards Board – Setting a Standard for Realism and Resilience – Lois Guthrie
  • CDP's Lessons from Ten Years of Climate Disclosure – Nigel Topping
• Part XI: Final Reflections
  • Integrated Reporting and the MBA Education – Daniela Saltzman
  • A Proposed Research Agenda on Integrated Reporting – Beiting Cheng

Another publication arose that is worthy of note. ­Particularly, Making Investment Grade: The Future of Corporate Reporting – New Trends in capturing and communicating strategic value, was published in June 2012 by the United Nations Environment Programme, Deloitte and the Centre for Corporate Governance in Africa, This important publication can be obtained at www.unep.fr/scp/publications/details.asp?id=WEB/0169/PA.

The conclusion of this publication, with that part headed ‘The steep learning curve ahead' raises some very relevant points, as are captured by the thought-provoking subheadings, which are:

• Who drives reporting?
• One report or multiple reports?
• What are material issues?
• Who reads the report?
• Who governs reporting?
• Who regulates reporting?
• The way forward

Clearly, improving business reporting has widespread benefits for all stakeholders, and that prompts the need for thoughtfulness as to what can be done to improve current thought processes, as well as business reporting outcomes. The nest section stands upon that ideal, and explores a topic of particular interest to anyone who is keen to see improvement in the usefulness and integrity of business reporting.