The 6 Capitals of integrated reporting and its guiding principles
Oct 4, 2022
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Integrated reporting aims to intertwine financial elements with non-financial elements to present the stakeholders with a comprehensive outline of the workings of the company. It takes into account the functioning of the company in its entirety – straight from its strategies, environmental and social impacts to its risk management policies.
An integrated report helps provide the stakeholders of organisations with a different perspective. It enables them to look at the company’s overall performance and forecast its future performance based on the 6 different capitals that are required to be reported therein. It also enables corporates to gain insights into their own businesses and understand the value they are actually creating.
With its first framework released back in 2013 by the International Integrated Reporting Council (IIRC), the significance of this reporting has been growing at an increasing pace for companies and investors alike. As per IIRC integrated reporting helps “to build trust and confidence between companies and their investors – and between markets and society as a whole”.
The 6 capitals
The IIRC looked over and above a company’s financial capital and recognized additional kinds of capital owned by the company that should be reported on for complete disclosure.
Natural capital – Organisations are heavily dependent upon scarce natural resources that form the foundation of all economies. These include things like food, fibre, water, energy, timber and climate security. Reporting on how much of these resources the company has utilized and intends to utilize in the near future will help the company address its exposure to risk from natural-resources constraints. It will also help stakeholders understand the company’s dependency on these resources.
Social and relationship capital – This section covers the relationships that the company holds with its stakeholders, including communities, governments, suppliers and customers. This is an intrinsic part of businesses and reporting on this will help address community needs, create employment opportunities, partner with local vendors, procure better-quality goods and services and visibly develop societies.
Intellectual capital – Companies should also report on the intangible assets they possess like patents, copyrights, organizational systems and procedures. Apart from these variables, the brand image and reputation that they have built overtime should also be reported on. This will help lay out the intellectual wealth of the company thereby giving a clear picture to all its stakeholders.
Human capital – The skills, expertise and competency of the company’s workforce should also be published. Also, the sense of belonging that engulfs a company’s human resources along with their motivation and commitment to the company’s goals are all factors that have a bearing on the company’s long-term productivity. Clearly outlining this will help the company establish more credibility and gain stakeholder confidence.
Financial capital – The age-old measure of performance, financial capital, is the economic well-being of the company. Calling out key performance indicators will help increase the transparency with which the company functions and enable potential investors to make informed decisions.
Manufactured capital – This includes all tools and equipment owned by the company, like buildings, machines, vehicles and production facilities. This will give clear insights about the wealth of the company to its stakeholders.
The guiding principles
Along with the 6 capitals, the IIRC has specified an integrated reporting framework to ease its preparation and presentation. This framework comprises 7 guiding principles;
Strategic focus and future orientation - An Integrated Report should provide insight into the organisation's strategy, how it relates to the organisation's ability to create value in the short, medium and long term, and to its use of and effects on the capitals.
Connectivity of information - An Integrated Report should show a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organisation's ability to create value over time.
Stakeholder relationships - An Integrated Report should provide insight into the nature and quality of the organisation's relationships with its key stakeholders, including how and to what extent the organisation understands, takes into account and responds to their legitimate needs and interests.
Materiality - An Integrated Report should disclose information about matters that substantively affect the organisation's ability to create value over the short, medium and long term.
Concise - An Integrated Report should be concise.
Reliability and completeness - An Integrated Report should include all material matters, both positive and negative, in a balanced way and without material error.
Consistency and comparability - The information in an Integrated Report should be presented:
a) on a basis that is consistent over time; and
b) in a way that enables comparison with other organisations to the extent it is material to the organisation's own ability to create value over time.
This framework was developed after a 3-year testing programme was run by the IIRC, during which over 100 businesses from the world over experimented with this concept and tried out different reporting concepts. The final framework was put in place only after the experience and views of these businesses were incorporated and 2 rounds of public consultation were undertaken, wherein other stakeholders could comment.
Why can’t most organizations carry this out effectively?
While the 6 capitals of integrated reporting and its guiding principles sound straightforward, many organisations struggle to get this right. This is because it is challenging to measure qualitative variables in a quantifiable manner. What is even more daunting is to be able to effectively draw out connectivity between these variables in a clear and concise manner that is easy for stakeholders to understand.
Integrated reports have the power to disrupt industry standards and build sustainable competitive advantages. However, drafting a report which impactfully conveys a company’s strategy in a visually appealing manner requires a definite level of prowess, which only specialized business design agencies possess.
One such design agency is Report Yak which has expert content and design teams that can guide companies through their report-creating process and produce the results they want. Feel free to check out our work here or get in touch with us to discuss your next report!