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Integrated reporting to walk more than the bottom line

Boards will need to be ‘six-capital literate’ in order to assess performance, identify risks and develop strategy. Shutterstock

Paul Druckman, the CEO of the International Integrated Reporting Council (IIRC), recently led the coalition’s global charge on corporate reporting changes to Australia, where he bolstered support and talked uptake turkey with business leaders and officials.

“We’re not about more reporting, we’re about better reporting,” Mr Druckman told The Sustainability Report.

The council’s Integrated Reporting initiative has the potential to change the relationship between business, society and the environment by changing the way accountants and boards, in particular, think about business success and strategic-decision making.

Climate change and scarce natural resources, for example, all have an impact on the long-term success of a business and Integrated Reporting would bring this into focus.

Until now, corporate reporting has primarily focused on bottom-line dollars. Integrated Reporting requires organisations to also report on their governance and strategy in the context of their internal and external environments - including their workers and environment.

The initiative has high-profile backers, including regulators, the accounting profession, investors, standard-setters and non-government organisations concerned with social and environmental stakeholders.

However, the consultation draft of the international Integrated Reporting framework released in April is already causing concern among directors, with the Australian Financial Review quoting directors worried about the prospect of being sued if disclosures on future strategies and business models don’t come true.

Anticipating resistance, the consultation draft states: “…the banner of commercial sensitivity is not to be used inappropriately to avoid disclosure”. In fact, Integrated Reporting can help directors in their governance of risk-management processes and their decisions about strategy. It requires the development of processes to identify issues that materially affect strategy, the business model or the ability to create value. Such processes will improve risk management – thereby reducing director risk. It makes good business sense.

Corporate changes

The key issues on which Integrated Reporting is set to change corporate thinking are:

  1. Longer-term strategic planning

Integrated Reporting stands out from other reporting frameworks with its emphasis on long-term thinking. The requirement to provide information on an organisation’s strategy will encourage senior executives and boards to think long term.

This is a win-win for the environment, society and business. Short-term thinking has contributed to significant negative environmental impacts that have damaged business reputations. There are ample examples of companies plundering the environment and abusing human rights to make a quick buck.

  1. Focus on the ‘six capitals’

    The ‘six capitals’ concept is a key innovation. These are: financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital, and natural capital. In preparing an Integrated Report, a business recognises that they are all play a role in creating value.

    Natural capital includes water, land, minerals, forests, biodiversity and ecosystem health. The maintenance of natural capital is seen as fundamental to long-term business success and organisations would be required to report its importance to the business, how the company affects it, and steps taken to maintain it.

    Integrated reporting promotes an understanding of the trade-offs that are made across the six capitals in the process of creating value for providers of finance. This will improve decision-making. Boards will need to be ‘six-capital literate’ in order to assess performance, identify risks and develop strategy.

  2. Creating value

    The concept of creating value by working with a broad range of stakeholders such as workers, customers, local communities and regulators encourages senior executives and boards to think about performance more broadly than the financial bottom line so that value creation is long term and considers the effect on the other capitals.

The process of developing an Integrated Report has many benefits:

  • ‘integrated thinking’, which involves collaboration across functions to consider the business model and identify trade-offs in the development of strategy

  • a future focus on strategy

  • identification of risks to the continued availability, quality and affordability of all six capitals, which are required to fulfil the strategy

  • development of systems and processes that will capture a broader set of information needed to make sound decisions.

Issues are defined as material if they could “change the assessments of providers of financial capital with regard to the organisation’s ability to create value”. This style of reporting relies on providers of capital having an understanding of what creates value, being concerned about the long term and communicating this to business. Reporting on social, environmental and economic sustainability performance will remain important for informing investors and others where value is depleted as well as enhanced.

The Integrated Reporting Consultation Draft mentions stakeholders in terms of their potential to affect the ability to create value – but not their concerns about organisations depleting value.

However, organisations ignore stakeholders at their peril. Stakeholder engagement is critical to challenging organisational thinking and making this change.

According to Mr Druckman, such engagement will be an ongoing process.

“The more that mature organisations are doing integrated reporting, the more they understand that they’re on a journey,” he told The Sustainability Report. “Integrated Reporting should be flexible enough that as societies’ objectives change, as investors’ objectives change, as the company changes its strategy and philosophy, that Integrated Reporting should change and mature at the same time. I don’t think there is a destination.”

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