28 Nov WHAT IS AN INTEGRATED REPORT
WHAT IS INTEGRATED REPORTING?
Integrated reports have been around for over a decade. While most major corporates are expected to produce integrated annual reports, smaller companies and even NGOs are also cottoning on to this approach. What is integrated reporting and how can you implement it?
wHAT IS AN INTEGRATED REPORT?
A concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium, and long term.
In essence, it is a communication tool that demonstrates how a company is performing in both financial and non-financial terms. While an annual report might focus mainly on financial statements and the numbers that outline its financial performance, the integrated report brings in other ‘value’ elements, such as environmental and social sustainability. For example, Apple generates large annual profits, but the brand suffered reputational losses when allegations of child labour, poor working conditions and human rights violations came to the fore. The purpose of the integrated report is to show the trade-offs between different value elements.
What’s missing from the financial statements?
- The organisation’s innovation and technological know-how
- The changing quality of a product and service
- A company’s leadership calibre
- The quality and morale of employees
- The strength the organisations relationships with customers, suppliers, and other stakeholders
- The organisations’ supply chain management practices
- Brand and corporate reputation
What is the purpose of an integrated report?
Its primary purpose is to explain to providers of financial capital (usually shareholders) how an organisation creates value over time. The report should help them to make sound decisions as to where and how they invest their money. For this reason, having a solid integrated report is mandatory for companies listed on the Johannesburg Stock Exchange (JSE) in South Africa, as stipulated by the King Code of Governance.
However, the report can be useful to other stakeholders too, including employees, the media, government, and the community, because the value that an organisation creates extends beyond just profits and shares. The IIRC’s <IR> Framework defines ‘value’ in terms of six categories: financial, manufactured, intellectual, human, social and relationship, and natural capital. Another broad framework that companies report on is known as ESG: Environmental, Social, and Governance. However you choose to showcase the value you create, the integrated report does not merely show your profits and losses.
What is the difference between an annual report and an integrated report?
Annual reports tend to be more numbers oriented, with financial statements showcasing performance in terms of financial metrics. The integrated report goes beyond that. It may include the financial statements (and so become an Integrated Annual Report), but it will also illustrate how broader value is created, including non-financial metrics. Of course, the use of the non-financial terminology is not as clear-cut in practice – terms are often used interchangeably. For example, some organisations may find it more authentic to report on ‘Our people’ rather than ‘Human Capital’.
The integrated report should not be about ticking socially acceptable compliance boxes, though. The six capitals identified by the IIRC are not equally relevant or applicable to all organisations. While most organisations interact with each capital to some extent, these interactions might be relatively minor, or so indirect that they do not need to be discussed in the integrated report. Understanding shareholder value creation is an outcome, not a purpose. The integrated report is intended to be used a tool, a means to an end – NOT the end itself.
Ultimately, the integrated report should showcase how you have achieved the integrated thinking that is a unique fit for your organisation.
What is integrated thinking?
Integrated thinking is achieved when you actively define yourself and your success within the context of your environment, your various functions, and all the resources you use. In other words, you are not just seeing dollar signs and reporting compliance. You see the value that you create in terms of the environment, the people you touch, and proper governance. Integrated thinking is about connecting performance with purpose.
You are also not just chasing short-term profits. You create value for yourself and your environment in the short, medium, and long term.
Modern organisations operate in a complex world with a multitude of internal and external drivers, interdependencies and trade-offs that influence the process of decision making, the promises that these decisions entail, and the expectations of a variety of demanding stakeholders. Choices are varied, complex, and demanding.
These choices inevitably involve tensions — what appears to be a trade-off in which the choosing of one option precludes another attractive option. Or using one resource renders that resource unavailable to others. Organisation leaders are increasingly required to navigate through these challenges by implementing a comprehensive approach to planning, measurement, and reporting.
This connected thinking needs to permeate your entire organisation. It can’t just be a compliance exercise, and it can’t simply fall to the public relations department to spin it. It takes a lot of effort.
Why go through all the effort?
How do you showcase value with your integrated report?
Reports will look different depending on your organisation’s structure, industry, and size. However, most integrated reports will include some or all of the following elements:
- An overview of your organisation and why it exists
- Messages from the key leadership team (usually at least the CEO and Chairman), providing strategic insight into the company and its performance
- Insight into your corporate governance
- Your inclusive business model, presented as a system that transforms inputs, through your business activities, into outputs and outcomes that fulfil strategic priorities and create value over time
- A 360o scan of risks and opportunities
- A synopsis of the most material matters that could substantively affect your organisation’s ability to create value over the short- medium- and long-term
- Your strategy, and how this aligns to resource allocation
- Your performance, both in financial and non-financial metrics
- Your future outlook
You want to find the most effective way of positioning your organisation and your mission within the context of the broader environment.
Where do you stop?
Looking at all of these elements, you might be wondering where to apply the brakes with your content. What stops an organisation from publishing hundreds of pages’ worth of marketing fluff?
There are several fundamental ‘rules’ that underpin the integrated reporting process:
- Materiality: What is important should be in there. What is not important, shouldn’t. If the content does not demonstrate how you create value, showcase strategy implementation or substantially impact on your performance, leave it out.
- Conciseness: Get to the point as quickly as possible.
- Truth: What really happened? If the company performed well, fantastic. If it performed badly, that should also be in there and the spade should be called a spade. Your report must be reliable.
There are a few other guidelines for the report as well, as outlined in the Framework:
- Strategic focus: Not all metrics and activities are equally important. What is your organisation’s strategy in the short, medium, and long term? How does this strategy infuse every aspect of your report?
- Stakeholder relations: Part of your environment is the people you engage with, and you should showcase who they are, how well you engage with them, and how you consider their interests when you make decisions.
- Consistency and comparability: You should be able to compare the information in your reports over time, instead of chopping and changing them completely with each edition. Additionally, you should be able to compare them to other organisations’ reports if, for example, there are industry standards to measure yourself against.
- Interconnectedness: Your organisation, industry, and business landscape are complex systems, notwithstanding the complicated social and cultural context that impact on it. Your report should provide a holistic view of how these elements interrelate and impact on your ability to create value.
This is where integrated reporting becomes a skill and an art. How do you balance conciseness with a holistic approach, for example? Which issues are strategic, and which information is material? There is no cookie cutter to standardise your report. However, if integrated thinking with a stakeholder focus and a strong strategic intent is part of every aspect of your organisation, it will guide you in your reporting.
Have some questions about integrated thinking, integrated reports, or how to showcase your true value in practice? Get in touch! You will benefit from our 20+ years of experience in integrated and sustainability reporting. Email email@example.com.