In the realm of corporate reporting, there’s a convergence of vision among regulators and standard setters on a common path of integrated reporting.
In the United States, Europe, the UK, and around the world, people are asking for a new way of reporting that combines financial and non-financial information smoothly. This dynamic shift promises a more unified, transparent, and all-encompassing approach to corporate reporting, and in this blog, we’ll delve into the significance and implications of this exciting trend.
ESG (Environmental, Social, and Governance) reporting has become exceptionally significant in today’s corporate landscape, more so than ever before. It’s a global practice now, and 2021 marked a milestone with 96% of the S&P 500 and 81% of the Russell 1000 companies publishing sustainability reports. However, the quality, significance, and practicality of this ESG information have raised concerns.
These reporting efforts have also given rise to separate cost structures within companies, designed to manage sustainability and ESG risks, often in a disjointed manner. Simultaneously, there’s a significant overlap between mandatory, regulated financial reporting and the currently voluntary and unregulated ESG reporting. This complexity translates into added costs for businesses.
The landscape is evolving further with the recent consolidation of leading ESG organizations, notably the International Integrated Reporting Council (IIRC), known for introducing the Integrated Reporting Framework in 2013. Under the umbrella of the IFRS Foundation, the International Sustainability Standards Board (ISSB) has now embraced the role of championing integrated reporting. This shift isn’t solely a reaction to impending regulations but reflects a broader momentum.
Increasingly, businesses are realizing the profound benefits derived from the interconnected relationship between integrated reporting, integrated thinking, and integrated risk management. These elements combine to facilitate informed decision-making and operational efficiencies that drive sustained value creation over time.
Here are three compelling grounds for adopting an integrated strategy to tackle your ESG challenges.
1. Independent Reporting Proves to Be Expensive and Inefficient
Based on research conducted by the IFRS Foundation in 2022, over 2,500 businesses spanning more than 70 countries have already embraced integrated reporting. While this voluntary adoption rate is commendable, most companies continue to issue separate sustainability and financial reports, often in different formats, at different intervals, and sometimes under distinct governance structures.
Unlike financial reporting, which has a history of being regulated, audited, and certified, ESG (Environmental, Social, and Governance) reporting mechanisms generally lack these elements, leaving room for potentially inaccurate, incomplete, or even misleading reporting, including greenwashing. Furthermore, there exists a multitude of over 600 competing ESG standards and frameworks, making it challenging to compare performance across organizations. ESG reporting primarily relies on qualitative data, with insufficient grounding in quantitative information. Consequently, the credibility of ESG reporting is frequently questioned, leaving investors and other stakeholders uncertain about its reliability and utility.
Nonetheless, an expanding array of stakeholders aims to incorporate ESG reporting into their decision-making processes. There is an increasing consensus that ESG reporting needs to transition toward a model resembling financial reporting, which involves greater structure, governance, and verification. This shift underscores the significance of integrated reporting, where both financial and nonfinancial aspects are subjected to the same rigorous processes to ensure their validity, accuracy, and comprehensiveness.
2. ESG Reporting Shifts from Voluntary to Regulated
Making a big change like this needs a little push from outside sources. Right now, rules and regulations are the main things making companies move toward integrated reporting. The following summaries provide insights into how individual regulators are actively promoting the adoption of integrated reporting.
- The IFRS Foundation’s ISSB has released 2 standards, the IFRS S1 and S2, which are to be integrated and disclosed in the company’s annual reports.
- The UK’s Financial Reporting Council (FRC) took a leading role in 2022 by mandating climate-related financial disclosures in annual reports, following the Task Force on Climate-related Financial Disclosures (TCFD) Framework. The UK is also developing a set of sustainability standards based on IFRS S1, S2
- The US Securities and Exchange Commission (SEC) is in the process of developing regulations that will require companies to report climate-related metrics and risk disclosures in their registration statements and periodic reports, though the timeline remains uncertain due to ongoing delays.
- The European Financial Reporting Advisory Group (EFRAG) in the EU adopted the Corporate Sustainability Reporting Directive (CSRD) in 2021. Based on this, the European Sustainability Reporting Standards (ESRS) have been developed and adopted by the European Commission. The ESRS is to be included in the reporting company’s management report, thus emphasizing the integration of ESG in the Annual Reporting process.
3. Success with Integration, Risk Management, and Reporting
Integrated reporting has historical roots that extend beyond recent developments. In 1999, PricewaterhouseCoopers introduced the Value Reporting Framework, which integrated environmental, social, and ethical considerations into a comprehensive approach for evaluating corporate performance. However, it was the establishment of the International Integrated Reporting Council (IIRC) in 2010, prompted by the global financial crisis, that formalized the modern concept of “Integrated Reporting.”
The IIRC’s aim was not just to make a new set of rules but to change how we think about how companies talk about themselves. Instead of only focusing on money and numbers, they want companies to also talk about things like their ideas, people, relationships, and the environment. This way, they can better explain the risks they face and how they create value over time. The Integrated Reporting Framework connects a company’s ability to make money to all these different parts of the company, like its ideas, people, and the environment.
This approach combines various forms of capital information to offer a qualitative comprehension of a company’s strategy and outcomes. It is supplemented with quantitative data that illustrates both achievements and obstacles. The fusion of quantitative and qualitative aspects is where integrated reporting, risk management, and integrated thinking create value.
Integrated reporting is rooted in integrated thinking, which encourages companies to actively contemplate how their operations, functional units, and diverse forms of capital are interconnected and influence each other. This empowers companies to perceive themselves in a more comprehensive manner, facilitating integrated decision-making and the development of strategies that take into account value creation over time.
Integrated thinking facilitates integrated risk management, which examines how financial and non-financial risks are interrelated and interact with each other. Risk is not isolated; thus, a connected view of risk is fundamental to the integrated thinking that assists companies in identifying and expressing risks and opportunities through integrated reporting. This methodology considers the broader implications of integrated risk on operations, stakeholders, and the value creation process.
Integrated Thinking and Risk Management in Action
This explores how organizations implement integrated thinking through the lens of five critical macro areas. These areas act as frameworks for evaluating maturity levels and pinpointing opportunities for enhancement. Each area is accompanied by illustrative activities.
Culture and Purpose
- Aligning corporate purposes with a comprehensive grasp of the value generation process could potentially lead to a reevaluation of purpose, strategy, and the model for creating value.
- Transforming the organizational framework to foster a more adaptable and interconnected workplace.
- Ensuring that organizational values drive internal processes and procedures.
- Implementing disclosure management tools that foster multi-capital transformation in decision-making processes and put financial and nonfinancial information at the center of corporate strategy.
- Using a disclosure Management platform to monitor and foster the effectiveness of the multi-capital transformation process.
Processes and Practices
- Enabling a holistic approach that integrates aspects of sustainability into processes/practices that create cross-departmental collaboration.
- Integrating financial and nonfinancial aspects in decision-making.
Strategy and Business Model
- Integrating sustainability into corporate strategy.
- Gaining insight to anticipate and more quickly act on client needs.
Governance, Risk, and Opportunities
- Driving top-down or bottom-up adoption of integrated thinking and risk management across leadership, the board, and the entire organization.
- Adopting integrated thinking to develop an integrated approach to innovation.
- Assessing value-creation outcomes in defining materiality and financial implications.
Initiating Integrated ESG Reporting: Tips for Beginners
Achieving success in integrated ESG reporting necessitates a methodical and strategic approach. Commencing with an evaluation of your status, gaining insight into best practices for integrated reporting, mobilizing internal support, and accumulating both qualitative and quantitative data, you will set your organization on a course to foster a mindset of integrated thinking, risk management, and ultimately, integrated reporting.
To ensure proficiency in integrated ESG reporting, it’s imperative to follow a structured procedure:
- Current Organizational Assessment – Gain insight into your company’s current position. Are you currently issuing a standalone ESG report, or are you progressing towards integrating it? What are the regulatory requirements and timelines affecting your ESG reporting?
- Explore Best Practices in Integrated Reporting – Educate yourself on established integrated reporting methods defined by the ISSB.
- Mobilize Support and Establish Governance Framework – Unify your leadership team around the cause, illustrating the potential for short-term, medium-term, and long-term value creation. Create both governing and operational leadership groups to champion these efforts, spanning from management to the board of directors.
- Collect Qualitative and Quantitative Data – Evaluate materiality to ascertain the qualitative and quantitative ESG metrics relevant to your organization. Identify one or more ESG frameworks that align with your goals
By executing these actions, you will initiate a shift towards integrated thinking, the effective management of risks, and the practice of integrated reporting.
In conclusion, integrated ESG reporting is a crucial step towards corporate transparency and sustainability. To set your organization apart, consider embracing digital ESG reporting solutions like IRIS CARBON®. This user-friendly platform streamlines the entire reporting process, making sustainability disclosures more accessible and understandable for stakeholders. By adopting such a solution, you can transform your reports into digital, machine-readable documents that enable easy data analysis and comparison with industry peers, ultimately facilitating better decision-making.