The Six Capitals of Integrated Reporting

Dec 20, 2022
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The Six Capitals of Integrated Reporting | Blog | Report Yak

When the International Integrated Reporting Council (IIRC) took steps to widen the corporate reporting framework, the International Integrated Reporting <IR> Framework came into being. IIRC believed that corporate reporting needed to evolve to present a complete picture to the stakeholders.

In June 2021, IIRC joined hands with the Sustainability Accounting Standards Board (SASB) to form the Value Reporting Foundation. The purpose of this merger was to put in place a comprehensive corporate reporting framework that encompassed financial and non-financial information.

Integrated reporting blends a company’s value creation process with that of its financial disclosures into one corporate report. Further, as organizations inculcate the concept of integrated thinking within their processes, they become more aware of the relationship between their operating and functional units, which leads to better decision-making, enhanced analytical capabilities, and increased transparency.

The voluntary adoption of Integrated Reporting

Although, integrated reports are not mandatory (currently), many companies are undertaking integrated reporting to reap the benefits that come with it. As per a KPMG survey, 22% of the largest 250 global companies (by revenue) prepared an integrated report in 2020 as compared to just 15% in 2015.

The advantages of adopting integrated reporting are manifold and some of them are:

1. The organization can clearly showcase its strategies deployed, targets achieved, and future goals.
2. It promotes an integrated way of thinking within the organization which enables holistic decision-making.
3. It enables the organization and its stakeholders to develop a link between financial and non-financial information increasing the possibility of business growth.
4. An organization with an integrated report, which clearly states its business objectives and explains its business operations in depth, is a lot more attractive to the providers of financial capital.
5. It enhances the ability of the organization to analyze risks, opportunities, and threats and thereby devise strategies that are more in line with the business requirements.

The requirements of Integrated Reporting

For an integrated report to be in accordance with the <IR> framework, there are certain requirements it should fulfill. Firstly, it should be identifiable communication labeled as an integrated report and secondly, it should contain all of the information that is presented in the guiding principles and the content elements in the <IR> framework.

However, if the company cannot comply with the information disclosure, it would need to specifically state any information that has been omitted, explain the reason for such omission and pinpoint the steps that it is undertaking to obtain the information and the time within which it can do so. Acceptable reasons for the omission of information can be its unavailability or the competitive harm that the company would have to face post-disclosure.

Further, an integrated report should include a statement from those charged with governance regarding their responsibility of ensuring the integrity of the report and their opinion on the extent to which their integrated report is in line with the <IR> framework.

The seven guiding principles

The guiding principles in the integrated reporting framework lay the foundation for the preparation and presentation of the integrated report. The seven guiding principles, that all integrated reports should embrace, are:

1. Strategic focus and future orientation
2. Connectivity of information
3. Stakeholder relationships
4. Materiality
5. Conciseness
6. Reliability and completeness
7. Consistency and comparability

The eight content elements

An integrated report contains eight content elements that are linked to each other and help with complete disclosure. These are:

1. Organizational overview and external environment
2. Governance
3. Business model
4. Risks and opportunities
5. Strategy and resource allocation
6. Performance
7. Outlook
8. Basis of preparation and presentation

The six capitals of Integrated Reporting

A company’s capital is made up of its stakeholders’ investments and is the foundation upon which its success depends. The <IR> framework seeks to provide insights into how the external environment affects the organization, the resources it consumes, and the relationships it builds. This is why the six capitals serve as a very important tool for integrated reporting – they provide a complete check on the company’s inputs and outcomes.

1. Financial Capital – This refers to the monetary pool that is available to the organization for the use of production of its goods or provision of its services. Financial capital is usually obtained from debts, equity, grants, or generated through operations or investments.

2. Manufactured Capital – These are tangible, manufactured objects that the organization depends upon for carrying out its operations. They are used in the production of goods and provision of services and some examples include buildings, equipment, and infrastructure. The manufactured capital includes factories, plants, buildings, and products manufactured by the reporting organization, be it with the intention of sale or for its own use.

3. Intellectual Capital – This is an intangible form of capital and consists of the knowledge base prevalent within the organization. This includes intellectual property, such as patents, copyrights, software, rights, and licenses. It also includes organizational capital such as tacit knowledge, systems, procedures, and protocols.

4. Human Capital – While intellectual capital is the intangible result of the mental processes carried out, human capital refers to the strength of the organization’s workforce. It includes the competencies, capabilities, and experiences of the people and their motivations to innovate. It also encompasses the personnel’s alignment with and support for their governance framework, risk management approach, and ethical values. Their loyalty and motivation for improving the current processes and operations are also accounted for under this capital.

5. Social and Relationship Capital – This capital considers the relationships the company has built within and between communities, groups of stakeholders, and other networks and their ability to exchange information which will eventually enhance their individual and collective well-being. This capital accounts for shared norms, common values, behaviors, and key stakeholder relationships along with the reputation of the brand and the organization’s social license to operate.

6. Natural Capital – This encompasses all renewable and non-renewable environmental resources and processes that provide goods or services that support the past, current, and future prosperity of the organization. It includes air, water, land, minerals, forests and biodiversity, and ecosystem health.

The significance of each of these capitals varies from company to company – while almost all organizations interact with all the capitals to some extent, these interactions may not be material enough to report on. Another interesting thing to note is that all these capitals, though distinct in nature, are interlinked with each other.

Organizations create value by increasing, decreasing, or transforming their capitals, and because the value is created over different time horizons and for different stakeholders the maximization of one capital while disregarding others is not advisable – for this strategy is unlikely to be beneficial in the long term.

Integrated reports can help companies set new reporting benchmarks with enhanced transparency. However, publishing an integrated report that impactfully conveys a company’s strategy in a visually appealing manner requires a definite level of prowess, which only specialized communication 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. In addition to content and design services, we also offer consultation services for the application of the Integrated Reporting framework. Feel free to check out our work and get in touch with us to discuss your next report!