Integrated Reporting Framework – Origins, Principles and Examples
Dec 12, 2022
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Integrated Reporting – The Origins Story
The business world has gone through multiple paradigm shifts over the years, usually as a response to explosive events, with the most recent being the Global Financial Crisis (GFC) of 2008.
The catalyst of the Global Financial Crisis, discovered through investigations, showed that greedy bankers overplayed their hands in the credit swap market, leading to a total collapse of the U.S. housing market. This resulted in millions becoming homeless, bankrupt, and in many cases, unemployed. The GFC also led to the shutting down of multiple banks, including renowned and ‘trusted’ brands such as Lehmann Brothers, with some personnel behind bars. The crisis then went global.
From the smoldering ashes of the global economy, came a renewed and in-depth look at the world’s idea of ‘capitalism’. It was clear to all who followed the immediate events following the GFC that the avarice, gluttony, and excess of the ‘profits-at-all-costs’ approach were no longer acceptable or sustainable.
Nobody was naive enough to believe that underhanded practices – predatory lending to low-income groups or unjustified risk-taking by banks – would end. However, there was a dire need to put in place structures and frameworks that would mandate large corporations to disclose information related to their financial and non-financial performances. This concept of relooking at how companies ‘report’ their activities had the added benefit of encouraging reporting organizations’ to act responsibly regarding capital utilization. The result was the Integrated Reporting Framework.
Beyond the salience of factoring in non-financial performances, stakeholders (governments, businesses, and people) realized the need to reassess capital utilization. Therefore, although the efficient allocation and use of financial capital remained a top priority, there was a global acknowledgment that companies needed do more. This was essential in order for them to become sustainable in their value-generating potential over the short-, medium- and long term.
Indeed, up until that point in time, there was a restricted understanding of the term ‘capital’, which was largely associated with money or finance. However, the GFC and its impact led to organizations, governments, and experts taking a deeper look into the use of other forms of capital such as natural resources, people, and intellectual property. This led to a trend where investors were looking for companies that reported on multiple capitals which in turn led to the need for a newer, more efficient form of business reporting.
Establishing a New Reporting Framework
In 2009, the first steps toward the establishment of a new reporting framework were taken. Then Prince of Wales – now King Charles III – congregated with stakeholders including investors, standard setters, businesses, accounting bodies, and UN representatives in addition to the Prince’s Accounting for Sustainability Project, International Federation of Accountants (IFAC), and the Global Reporting Initiative (GRI). The end product of this high-level meeting was the establishment of the International Integrated Reporting Committee (IIRC) which had the remit of overseeing the creation of the Integrated Reporting Framework or the <IR> Framework.
In 2011, the IIRC has renamed the International Integrated Reporting Council with the prototype of the Integrated Reporting <IR> Framework being released in 2012. Eventually, the council released the Consultation Draft of the international <IR> framework in 2013. From that point onwards, the rise of integrated reporting was rapid and by the end of the decade, over 2500 companies in 75+ countries with over 40 stock exchanges were referring to the <IR> framework guidelines.
While there have been multiple mergers and consolidations, the most recent was the Value Reporting Foundation (VRF). However, in August 2022, the organization known as VRF consolidated with the International Financial Reporting Standards (IFRS), as per the commitments made at COP26. This would involve the consolidation of staff and resources for leading global sustainability disclosure initiatives. This will support the work done by the IFRS foundation’s new International Sustainability Standards Board (ISSB), with the goal of developing a comprehensive and global benchmark of sustainability disclosures.
To achieve this, the VRF’s SASB Standards will be used to develop the IFRS Sustainability Disclosure Standards while the <IR> framework helps connect financial statements and sustainability-related financial disclosures.
The Guiding Principles of Integrated Reporting
To begin with, let’s get a basic understanding of what is integrated thinking. As per the formal definition: Integrated thinking leads to integrated decision-making and actions that consider the creation, preservation, or erosion of value over the short, medium, and long term.
Integrated thinking would, therefore, be a company-wide activity or shift in culture and approach to business. To help implement integrated thinking, the integrated reporting organization has developed guiding principles.
There are 7 guiding principles of integrated reporting that buttress every good report. The goal of these principles is to ensure higher quality, better readability, and enhanced comparability between reports. Additionally, the guiding principles work to encourage integrated thinking across the reporting organization.
The guiding principles are as follows:
- Strategic Focus and Future Orientation
- Connectivity of Information
- Stakeholder Relationships
- Reliability and Completeness
- Consistency and Comparability
While expounding on each principle, we look at the reasons, benefits, and outcomes of implementing the 7 guiding principles while creating an integrated report.
Strategic Focus and Future Orientation - An integrated report should give insights into an organisation’s strategy and the business's ability to generate value in the short-, medium- and long term. This is done via the disclosure of data and information on each of the 6 Capitals and their associated impacts and outcomes.
The kind of information that a reporting organization would reveal may include risks, opportunities, and dependencies while elaborating on the market position and the business model.
Connectivity of Information – An integrated report should draw for the reader, a holistic picture of the combination, interrelatedness, and dependencies between the material factors that affect the business's ability to create value over time.
This connectivity of information would be between (a) content elements (b) past, present, and future activities (c) the capitals and associated interdependencies or trade-offs (d) financial and related information (e) quantitative and qualitative information that showcase the ability to create value over time (f) management and board information (g) information from the organization’s other reports that enhance consistency in the company’s approach to reporting.
Stakeholder Relationships – An integrated report should provide in-depth insights into the nature and quantity of the organisation’s engagement and relationships with its stakeholders. This must express details such as the organization’s understanding of its stakeholders, in addition, to showcasing its openness to take into account the concerns and legitimate interests of concerned parties.
A good integrated report will prioritize stakeholders, disclose activities undertaken and elaborate on the number of engagements and responses to material issues raised by any or all stakeholder groups.
Materiality – An integrated report should disclose the salient issues that impact the organisation’s ability to create value over the long term. These material issues will vary from one organization to the next and from one industry to another.
Materiality, in many cases, may include the reporting organization hiring an external 3rd party consultant to do an assessment and therefore, get a balanced view of the most pertinent or material factors. Further, ‘materiality’ also includes evaluating the importance of issues, prioritizing based on importance, and determining the scope and boundaries of the integrated report.
Conciseness – An integrated report is judged based on how concise it is. The end goal of the reporting organization should be to create an integrated report that provides all material information and enhances readability and accessibility while also holding the reader’s undivided attention.
Although there is a potential conflict with the last principle – consistency, and comparability – conciseness is about balance while including information such as the organization’s strategy, governance structures, performance, and prospects while reducing redundancy in the report.
Reliability and Completeness – It is of crucial importance that an organisation’s integrated report is reliable and complete. That infers that the information disclosed should include both the positive and negative, presented in a balanced manner and without material errors.
Organizations must put in place mechanisms for robust internal control, reporting systems, stakeholder engagements, internal audits, and external assurance. When combined, these enhance the reliability of information and data that is disclosed in the integrated report.
Consistency and Comparability – This principle is key and requires reporting organizations to have consistency over all their business reports over a period of time. Further, a level of standardization is required to enhance comparability with other business reports and therefore showcase the company’s ability to create value over time.
Examples of Integrated Reports in India
An important element of the <IR> framework is its alignment with other international reporting standards. A widely used standard, such as the GRI Standards, which is the most popular international standard for sustainability reporting is aligned with the <IR> framework.
JSW Energy, Maruti Suzuki, Wipro, TCS, and Reliance Industries are examples of some corporations setting benchmarks in reporting by disclosing data according to the <IR> framework while aligning to the GRI Standards.
Is it easy to create an integrated report? No, but the benefits of doing so far outweigh the effort involved. To ease an organization’s journey to integrated thinking and reporting, Report Yak – a specialized design agency with expertise in integrated reports, annual reports, sustainability reports, and impact reports – can help and has won multiple awards for conceptualizing, designing, and creating content for business reports of top corporations. You can check out our work and we would be happy to get on a call and discuss your next integrated report!