Companies that do integrated reporting vary in how effectively they implement it. But those that have got it right say it has improved the way they operate
This article was first published in the June 2017 international edition of Accounting and Business magazine.
The concept of integrated reporting (IR) has been gaining ground. Promoted by the International Integrated Reporting Council (IIRC), IR attempts to address weaknesses in traditional financial reporting and help business develop resilient operations for the medium and long term.
Rather than focusing solely on their use of financial capital, companies applying the IIRC’s International IR Framework also report on other forms of capital – manufactured, intellectual, human, social and relationship, and natural. The approach recognises that companies’ success depends on many factors, including the expertise of their people, the intellectual property they develop through research and development, and their interaction with the environment and societies in which they operate.
Since the release of the framework in December 2013, IR adoption has steadily increased. From 2018, the IIRC intends IR to enter a ‘global adoption phase’ and take up a position at the centre of corporate governance and reporting. Almost 2,000 entities already participate in IR networks worldwide, while the IIRC’s IR Business Network – its flagship programme for organisations committed to adopting the framework – now has over 80 members.
So how successfully are the adopters incorporating the ideas behind IR and producing integrated reports? What helpful advice could their experiences provide for others interested in applying IR concepts for the first time? A recent ACCA report considers these questions, building on a 2016 review of 41 corporate reports issued by IR Business Network participants and drawing on detailed interviews with a sample of those reporters.
The report, Insights into Integrated Reporting: Challenges and best practice responses, found that organisations encounter a range of barriers when adopting IR. These can include difficulties in aligning key stakeholders (including senior management) behind IR, finding sufficient dedicated resources, addressing concerns about the legal liability of directors in relation to future-orientated discussion, and overcoming prescriptive regulatory requirements.
Nevertheless, IR Business Network participants are making good progress in some areas of IR. For example, 71% were considered to have provided a good insight into the organisation’s strategy, with 64% highlighting what gave them a competitive edge. The vast majority of companies reviewed (88%) included information on the range of capitals used or affected by the organisation, with 63% thought to have ‘communicated well’ across the capitals that were material to them. Two-thirds of the reports explained well (at a high level) how the organisation creates value for itself and others.
Could do better
But there is also room for improvement. Companies could, for example, do better at talking about risks and opportunities in the context of value creation over time, and in linking their performance to the capitals. Demonstrating value creation is complex because entities struggle to find measures that convey the full impact of their actions. How do you measure the value of employment, for example?
Interviewed for ACCA’s report, Susanne Stormer, vice president of corporate sustainability at Novo Nordisk, the global healthcare company headquartered in Denmark, says that thinking and practice are still ‘immature’ in relation to quantifying or articulating the value that organisations derive from non-financial capitals. ‘You can have a narrative about how you use intellectual capital and the value created by constantly educating your employees so they can keep their employability, but you don’t really have metrics for it,’ she says.
IR Business Network participants also face challenges in relation to IR’s underpinning principles – in particular, connectivity of information, materiality, conciseness, reliability and completeness, and consistency and comparability.
Interviewee Mikkel Larsen, managing director and head of tax and accounting policy at DBS, a financial services group in Asia, says the next step in developing IR for his organisation will be to improve linkage between risks and the P&L – ‘linking through from our strategy to the differentiators, into our risk section, into our resources, and over to when those resources transform themselves into financial resources’. Better quantification is another goal – to improve understanding of how resource value translates into financial value. ‘Because if we build up a heck of an innovation team, at some point hopefully that translates into financial value,’ Larsen says.
Although materiality is a familiar concept to the accountancy profession, the IR framework requires its application in relation to matters that affect value creation. One of the challenges is to reconcile the needs of different stakeholders when determining materiality – an issue may be more material to one stakeholder than another. Companies may also be using different materiality definitions under different reporting frameworks, which can be confusing.
The principle of conciseness is also challenging for many integrated reporters. Only 41% of the IR Business Network participants reviewed had produced concise reports. Many found it hard to be concise while also producing integrated reports that satisfy the reliability and completeness principle.
Despite the challenges of IR, companies are making progress, as shown by the examples given in ACCA’s report. The research among IR Business Network participants also offers encouragement for organisations thinking of embracing this form of corporate reporting. In their interviews, company reporters identified many benefits of IR, including more integrated thinking and management across their organisation, greater clarity on business issues and performance, improved corporate reputation and stakeholder relationships, more efficient reporting, enhanced employee engagement and improved gross margins.
For example, José Miguel Tudela, organisation and corporate responsibility director at Spanish natural gas transmission company Enagás, says the company has strengthened its relationships with finance providers as a result of IR. ‘Providers of financial capital have a better understanding of our strategy and performance as well as a greater confidence in the long-term viability of our business model,’ he says.
‘Our interviews with participating companies found passionate support for the aims of IR and a strong belief in the benefits it can bring,’ says Yen-pei Chen, corporate reporting subject matter expert at ACCA and one of the report’s authors. ‘Our interviewees have found many challenges in the process of applying the framework but see this as a long-term journey towards better reporting and the creation of value by their businesses over time. We hope that the practical advice in the report will give more people the confidence to start their integrated reporting journey.’
Sarah Perrin, journalist
"The benefits of IR include more integrated thinking, greater clarity on business issues and performance, and improved reputation"