Integrated Reporting

Integrated reporting is a framework that enables an organisation to explain how its strategy and business model create value over the short, medium and long term. Companies are encouraged to tell a clear, concise story about future prospects, taking into account all the resources and relationships used by the business, not just the financial capital.

What is an integrated report?

It is a relatively concise report with a strategic focus and future orientation that demonstrates integrated thinking through connectivity of information and value creation/impact across a range of resource capitals.

The underlying philosophy

Where a standard annual report can take whatever form you deem appropriate (within compliance constraints), the Integrated Report (<IR>) is a distinct way of thinking, a set of principles rather than a set of tick-box rules. It can incorporate sustainability and more rules-based components such as GRI, ESG, TCFD and IFRS if you so wish.

One of the most striking differences is that an integrated report is for multiple stakeholder audiences whereas an annual report is primarily addressed to an investor audience. This simple change to your frame of reference will have a noticeable affect on how you approach the report, from content selection to tone of voice.

There’s no doubt that Integrated Reporting has become the standard that most corporates are well advanced on deploying. But even companies that have decided that <IR> isn’t appropriate for them are gradually incorporating elements of the Framework.

With the alignment of <IR> under the parentage of IFRS, this global standard setter now provides both financial and non-financial reporting frameworks along with their SASB common industry sector reporting tools. And incorporating TCFD (Taskforce on Climate-related Financial Disclosures).

Consider GRI as the standard for compiling your sustainability component, either as a standalone report alongside your standard annual or as a component within your integrated report framework thinking. And if ESG (Environment, Social, Governance) is confusing you, as a starting point consider it as just sustainability or corporate responsibility under a different name. There is more to it that that though, so to get a clearer understanding of the differences, dig deeper here.

Let’s make one thing crystal clear before we go any further. A common misconception is that you need to choose between the Integrated Reporting Framework and the various other formats. Not true. Most other types of reporting can be readily incorporated into an integrated report as component parts if you wish. The only decision you really need to make is whether to elevate your reporting approach to adopt integrated reporting principles.

A common misconception is that you need to choose between the Integrated Reporting Framework and the various other formats. Not true. Most other types of reporting can be readily incorporated into an integrated report as component parts if you wish. The only decision you really need to make is whether to elevate your reporting approach to adopt integrated reporting principles.

The advantages of integrated reporting

There is much to commend the <IR> framework. With only 20% of companies’ market value found in the tangible assets in the financial statements, it is no wonder companies around the world are increasingly using the <IR> Framework to support integrated thinking and help understanding of the 80% of their market value that is created by ‘pre-financial’ factors, such as intellectual capital, relationships, human capital and environmental stewardship.

This shift in thinking, when applied to how you communicate to your stakeholders, will broaden its appeal to a wider audience, and improve what you report, making it more meaningful, believable and future focused because it prompts your company to think about your reporting in a ‘joined up’ manner. 

But perhaps the greatest benefit is that it drives board and management to look at their whole business through this much more integrated and holistic lens. They’re finding that this can lead to stronger cross-functional communications, more productive dialogue among employees at all levels across business activities, and more meaningful dialogue with external stakeholders. 

In our view, the integrated thinking part is actually more valuable than the integrated reporting part. Get the former right and you have a more robust business – and the reporting of it becomes a lot easier.

In our view, the integrated thinking part is actually more valuable than the integrated reporting part. Get the former right and you have a more robust business – and the reporting of it becomes a lot easier.

How to apply integrated reporting in practice

Whether your report is ‘integrated’ or not, the following four megatrends are now baked in to all your audiences’ expectations: non-financial information; dot-joining; future focus; and value creation. It’s now, simply, what Annual Reporting means. And all four have a powerful common denominator: opening a window to the future. They form a sort of backbone to the guiding principles of integrated reporting:

1. Non-financial information

For today’s reader, the financials only tell part of the story – and it’s a backward looking part. So they have severe limitations. Even IFRS ‘acknowledge that general purpose financial reports are not designed to show an entity’s value’ and ‘users need other sources of information to make their assessments’.

So what’s missing? ‘The organisation’s intangibles: strategy, business model, the external environment - competition, regulation or economic environment for example – in which a company operates. Generally, users seek more forward-looking information and broader information than the financial statements provide’.

2. Dot joining

Because every activity your organisation undertakes interacts with other activities, (and the environment beyond your organisation also impacts on the reasons for, and results of, those activities), readers are looking for those connections and inter-dependencies - and evidence that you understand the implications of them. They expect you to be explicit about that connectivity so that a cohesive, big-picture story is told, potential risks are surfaced and mitigations planned for, which provide pointers to your future state. 

3. Future focus

Non-financial activities are better viewed as ‘pre-financial’. They will ultimately pass through the financial statements, although often with a considerable time lag. So connecting your stories to future outcomes demonstrates that your company is actively planning across multiple time dimensions, while assuring readers that your activities are responsible ones today.

It is for this reason that we have seen such permanent and increasing expectations as ESG, TCFD, modern slavery statements, and detailed data measurement on such things as diversity and inclusion, wellbeing and safety, environmental impacts etc. They’re no longer ‘nice-to-have’ disclosures. They’re lead indicators of your long-term resilience, or conversely, of ticking time bombs. And get ready for expectations or even mandates around your te ao Māori policies.

4. Value creation

Again, this speaks to users’ desire to assess futures. But as well as demonstrating your understanding of future risks and opportunities, it also shows that you really understand your business drivers, how your business model makes money, the impacts you have on the resources you employ, and how you’re competing effectively – for capital, for talent, for distribution, for consumers.

Another key to good integrated reporting is telling your story clearly. The framework guidelines talk about both qualitative and quantitative information being important. So don’t just focus on regurgitating data believing that transparency alone creates an integrated report. Storytelling is central.

Fully-fledged Integrated Reporting requires Integrated Thinking to be a deeply understood mindset permeating the core philosophy of the organisation, because it prompts companies to think about themselves in a ‘joined up’ manner. However, that journey can take some time and expectations are that embarking on the journey is more important than reaching the destination in a hurry.

But here’s the thing: the Integrated Report is not an absolute. Start by using the framework to guide your approach. This is a game you can’t master overnight, so our advice is to just get on the bus and get better over time. Don’t aim for perfection. It’s like getting on a roundabout. Doesn’t matter where you get on or where you are on the ride, but that you’re actually on board and have changed your perspective as a result.

And, before we go any further, let’s clear up a common misconception: ‘integrated’ refers to the holistic story the report is telling, not implying that you should necessarily only produce one document that includes everything. For organisations with a lot of data to disclose, publishing a linked suite of documents can make your story a lot more accessible.

Guiding principles

You’ll see the above megatrends making their presence felt in the Guiding Principles of the Integrated Reporting Framework which inform the content of the report and the presentation of the information. These are:

  • Strategic focus – insight into your strategy and how it relates to value creation.

  • Future orientation – awareness of risk factors and opportunities. Looking ahead and planning mitigation or ways to capitalise.

  • Connectivity of information – a holistic picture of the interrelationships and dependencies between the factors that affect your ability to create value over time.

  • Stakeholder relationships – insight into the nature and quality of your relationships with key stakeholders, including how and to what extent you understand and respond to their needs and interests.

  • Materiality – identifying the factors that have the greatest impact on the various resources you employ and that are the most important to your stakeholders, and you.

  • Reliability and completeness – your report should include all material matters, both positive and negative, in a balanced way.

  • Consistency and comparability – information should be presented on a consistent and comparable basis over time.

  • Conciseness - by narrowing reporting scope to only the most material issues and reducing the need for repetition by interconnecting information.

As well as the Guiding Principles, the framework recommends some Content Elements (see below), central to which is the Value Creation Model.

The Value Creation Model

How your organisation creates value is fundamental, but a lens that has only really been brought into focus by the Integrated Reporting Framework.

It’s a compelling lens on your business because it succinctly captures how your work affects all your stakeholders. It focuses on how you utilise your input resources to create value from them, and how the result of your activities impacts on those same input resources. It’s an enlightening process to go through even if you never actually publish it in a report. It throws a spotlight on things you may never have consciously considered and will certainly make you think about your organisation quite differently.

The inputs are referred to in the framework as the various capitals you employ: e.g. financial capital, human capital, natural capital, social and relationship capital, intellectual capital and manufactured capital. (We believe that in New Zealand a seventh capital should be considered for many companies - cultural capital). So how does your business model increase, preserve or erode the value of important resources such as your people, your community, your capital providers and the environment? And what are the various interdependencies and trade-offs between them?

We explain the Value Creation Model in considerable detail in the short video below.

The content elements

Organisational overview – what does your organisation do?

External environment – what are the circumstances under which you operate?

Governance - How does your governance structure support your ability to create value in the short, medium and long term?

Business model – What is your organisation’s business model?

Risks and opportunities - What are the specific risks and opportunities that affect your  ability to create value over the short, medium and long term, and how are you dealing with them?

Strategy and resource allocation - Where does your organisation want to go and how does it intend to get there?

Performance - To what extent have you achieved your strategic objectives for the period and what are your outcomes in terms of effects on the capitals?

Outlook - What challenges and uncertainties are you likely to encounter in pursuing your strategy, and what are the potential implications for your business model and future performance?

Basis of preparation and presentation - How does your organisation determine what matters to include in the integrated report and how are such matters quantified or evaluated?

Thinking about an Integrated Report? Let’s plan it together.