Setting the Context
The stars are fast aligning for integrated reporting to be the next best thing in corporate disclosure. Sustainability reports were the missing piece in the puzzle, but they have been taken care of thanks to a long-drawn pandemic and a rise in adverse climate incidents. It is clear to the corporate world that interference with the natural order in the name of value creation is bound to have consequences. The time is ripe to start creating value, keeping in mind the best interests of the environment, society, and every stakeholder. With financial and sustainability reports catering to the varied needs of a business audience, it makes sense to create integrated reports which provide a holistic view of the value an organization strives to provide.
Integrated reports will cater to the information needs that financial and sustainability reports cannot independently satisfy. While the realization that financial reports are too narrow in their scope to offer a complete perspective has paved the way for sustainability reports, the need now is for a single document that combines key aspects of an organization’s financial and non-financial performance and offers a forecast of its future value. The global body at the forefront of this upcoming trend is the International Integrated Reporting Council (IIRC).
Frameworks for Integrated Reporting
In the wake of the 2008 financial crisis, the International Integrated Reporting Council (IIRC) developed the International Integrated Reporting Framework or the <IR> Framework to fulfill the following aims…
- Improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital
- Promote a more cohesive and efficient approach to corporate reporting that draws on different reporting strands and communicates the full range of factors that materially affect the ability of an organization to create value over time
- Enhance accountability and stewardship for the broad base of capitals (financial, manufactured, intellectual, human, social and relationship, and natural) and promote understanding of their independencies
- Support integrated thinking, decision-making, and actions that focus on the creation of value over the short, medium, and long term.
The <IR> Framework is currently the only standard helping companies prepare integrated reports. However, with the International Sustainability Standards Board (ISSB) integrating the Value Reporting Foundation (VRF) – which itself consolidates the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) – it remains to be seen to what extent the ISSB standards incorporate elements of the <IR> Framework.
Benefits of Integrated Reporting
Integrated Thinking Within Organizations
Integrated reporting represents a philosophy of looking holistically at both the financial and non-financial aspects of a business. For integrated reporting to work, an organization must first adopt integrated thinking. While the assessment of financial performance comes naturally to business professionals because of the need to show constant growth, they must change tack in the face of investor and regulator demands for information on the value locked up in non-financial aspects. The benefit of integrated thinking and reporting is a better view within the organization of the true value it provides to society at large.
Holistic View of Business Performance
Integrated thinking and reporting can bring greater clarity to organizations on the issues that affect their business and performance. Both organizations and their stakeholders can come to an agreement on what really matters and how to meet the desired aims. Neither financial issues nor sustainability matters must be viewed in isolation as they together have a bearing on business performance and value creation. A holistic approach can bring the best out of an organization’s employees and management.
Efficient Reporting for Stakeholders
Integrated reporting can make the process of corporate disclosure more efficient by helping organizations succinctly communicate every aspect that has an impact on their profitability. It will not be left to the stakeholders to examine the implications of how an organization performs on financial and non-financial metrics. The integrated report will contain all the information stakeholders need to form an opinion on the organization’s general performance. Both the users and preparers of integrated reports stand to benefit from the bargain.
Improved Reputation and Relationships
Organizations that try to provide their stakeholders with a clear, concise, and honest view of where they stand will benefit from an improved reputation and relationships. Reports that are easy to digest and offer just what the readers need are bound to be viewed favourably. Organizations can also go the extra mile and engage their stakeholders to ensure that their efforts to create value are communicated in the right way. The most effective integrated reports will also help organizations improve their employee engagement.
Best Practices for Integrated Reporting
How do organizations ensure their integrated reports are effective and give the best bang for the buck? Here’s how…
Go Digital at the Outset
Digital reports prepared using machine-readable standards are all the rage in the corporate reporting world. Multiple global regulators require companies to produce financial and sustainability reports in the digital XBRL format, which makes business documents more accessible, and easier to analyze and compare. Organizations would benefit from creating digitally integrated reports as these are more likely to be picked by analysts, investors, credit rating agencies, banks, and others.
Set up the Right Process
Organizations must set up a process and identify the teams that would be involved in creating an integrated report. The integrated report would need just as much rigour as is attached to the creation of financial and non-financial reports. In fact, once integrated reports become more common, stakeholders might prefer to read them first, to get a holistic picture, before moving on to the financial and sustainability reports.
Know your Stakeholders
Organizations must understand their stakeholders’ information needs before trying to create integrated reports. These information needs can be as varied as the kinds of stakeholders an organization has. What investors need might not be the same as what analysts, banks, and credit rating agencies need. The only way to understand these specific needs is to engage and communicate with the stakeholders.
Be Open to Feedback
Organizations today need to be open to feedback from various stakeholder groups, and this includes non-governmental organizations and activist groups – especially when it comes to issues that concern the environment, human rights issues, employee issues, gender representation, etc. Organizations cannot shirk the social responsibilities that come along with the need to create value for their investors.
Keep it Clear and Concise
The integrated report needs to be a clear and concise document that is well-written and communicates just what the stakeholders need. The integrated report must be a well-designed marketing document that defends an organization’s financial and non-financial position beyond all doubt.