Putting integrated reporting in perspective

by Paul Davies
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What is integrated reporting?
Accounting for value creation sits at the heart of the new integrated reporting framework. An integrated report, if done as the new framework intends, offers investors and advisers a more complete picture a company's overarching strategy, governance, risk management, performance and longer term prospects. It responds to the one dimensional, short term, backward looking disclosures that plague financial reports and limit informed decision-making. In other words, an integrated report should enable business outcomes to be seen through a value ‘lens' that is more readily accessible and meaningful than columns of figures in a financial statement.a

Integrated reporting is about accounting for value changes within a business over the course of a set period, typically a financial or calendar year. At the start of the period the business ascribes value(s)to its key assets (called capitals) that it uses and affects. The business' management model is the means through which it adds (or in some cases, transforms or destroys) value in those capitals in the short, medium and long term. This creation of value depends on how the business senses, understands and responds to a range of internal and external factors. These factors are disclosed in their integrated report.

But despite the fanfare and promise which has accompanied its recent unveiling, integrated reporting presents some fundamental challenges both to reporters and to readers. Even if an organisation can identify and quantify changes in the value of its assets (capitals) over time, how does it know that its strategic or tactical management of those capitals has in fact enhanced or influenced their value? Companies can just have a "good" year, where they've benefited from factors they've neither influenced nor controlled (eg. climatic stability, social trends, political change, economic upturn). But are they likely to admit that in their report? On the other hand "bad" years can be much more easily ascribed to factors "beyond our control".

It could be difficult to assure the legitimacy of such claims made in integrated reports, at least until auditing and assurance systems transform well beyond where they are now.

Is integrated reporting the future "norm" for corporate reporting?
In the introduction to the new framework, the following statement is made: "it is anticipated that, over time, integrated reporting will become the corporate reporting norm". I disagree with this. There is widespread misunderstanding in the marketplace about what actually constitutes an ‘integrated report'. This misunderstanding is creating confusion for both companies and report users about reporting options and directions. There is a commonly held view that integrated reporting is the inevitable successor to sustainability and financial reporting, and that producing an integrated reporting will relieve the organisation from other types of reporting in the future. This sentiment is typified in the following view expressed in a recent GRI research paper: "integrated reporting is the next step in the evolution of financial and sustainability performance in an integrated and transparent way."

Now that we have both the GRI's G4 sustainability reporting guidelines and the final integrated reporting framework available, it's clear that the two approaches are focussed on different outcomes and audiences.

G4 (sustainability) reporting remains primarily focused on providing information for stakeholders wanting to understand an organisation's key social, economic and environmental impacts and how itis managing them. Integrated reporting, on the other hand, is targeted at providers of financial capital seeking information that demonstrates how an organisation creates value across a range of interconnected capitals in a coherent and strategic way.

While the content of these two types of reports is not mutually exclusive, they do have a distinctly different emphasis recognising the needs of their target audiences. As an NGO wanting to know about your company's impacts on biodiversity, my first port of call would be your sustainability report. As an investor I may also want to check out in your sustainability report too, but if my primary interest is in determining whether your business is capable of increasing the value of its key assets over time, then your integrated report is where I'd look first. To some degree these aspects are all interconnected anyway. If my company has a key externality that is going to negatively affect my share value, that information could rightly sit in both reports. If I have had a positive impact on my local community by investing in its growth and prosperity, thus adding social value, then that could also appear in either or both types of report.

The challenge though is that reports are ultimately communication channels, and the best communication channels are those that specifically focus on their key audiences' information needs. Communication efforts that try to do it all end up either compromising the quality of the information and its value to the reader. Why else have many sustainability reports become more useful as door- stoppers than accountability tools? Integrated reporting is promising in what it seeks to deliver, but is yet to see full light of day and will significantly challenge many reporters who really seek to apply it to achieve its true intent. Integrated reporters can also use the G4 approach to broaden their thinking and understanding of sustainability impacts for their business, and how those impacts might be reflected in accounting for value creation by their organisation.

As Robert G. Eccles, Professor of Management Practice at Harvard Business School, notes "I don't think integrated reporting makes sustainability reporting go away, although it may have implications for its format."

Is integrated reporting connected to other corporate value concepts?
Integrated reporting should not be considered in isolation, but as part of a larger picture of businesses as change agents and value repositories. In addition to integrated reporting, another concept called shared value is gaining more attention from companies who are looking at new ways to both think about and account for their direction and purpose beyond profit.

Shared value is about companies looking to build value not just for their business but for broader society as well. It's more strategic than traditional philanthropy and more outcome-focussed than?many current community investment approaches. It looks to identify how the business can align and leverage its core strengths, its expertise and its resources to solve social problems in a way that not only makes a difference, but also makes sense for the business. In other words, shared value exists at the point that someone or something other than the business benefits from the value created by the business.

Both integrated reporting and shared value have a big role to play in transforming business thinking and accountability. Companies looking to apply the concept of shared value should be thinking about integrated reporting as the disclosure tool for that process. Likewise, companies looking at integrated reporting may want to broaden their thinking beyond disclosure and consider whether a shared value approach has a place within their current or future business model. Applying shared value to the concept of integrated reporting means that, as noted by the Shared Value Initiative*, ‘investors can gain insight into companies' future growth and profit potential by understanding how shared value strategies address social issues that directly impact performance'.

This article was first published on http://banarra.com/ (September 2013). Reproduced on www.reportwatch.net by kind permission of Paul Davies. © e.com - ReportWatch 2015.

About Paul Davies

Paul Davies is one of Australia's most experienced and thought-leading accountability professionals. A regular commentator on contemporary accountability issues, he has undertaken over 200 non- financial audits and 40 AA1000-based assurance assignments. He has also authored and contributed to four award-winning sustainability reports and more than 20 annual reports. Paul is internationally sought for his views on delivering more meaningful reporting and assurance standards within and across industries, such as through his international working group involvement in GRI G4 Guidelines and Integrated Reporting.
His personable demeanour and professional communication and negotiation skills make him a most effective project and team leader, trainer and workshop facilitator.

About Banarra
Based in Sydney, Australia, Banarra is best known for its work on the social side of sustainability. This includes impact assessment, human rights, supply chain management, social return on investment, heritage and culture, as well as accountability and business strategy.

What makes us different is the focus we give to understanding our clients and their stakeholders so that our solutions are delivered within their working culture, capability and context, maximising the likelihood that they endure.

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