Insights into Integrated Reporting
Yen-pei Chen | May 11, 2017 |
Integrated reporting promotes more sustainable investment and management by encouraging companies to report on how they create value in a broader sense. From 2018, the International Integrated Reporting Council (IIRC) plans for the International <IR> Framework to enter its “global adoption phase,” aiming to firmly position it at the center of corporate governance and reporting.
At this crucial juncture, ACCA has published a new research report that takes a practical look at how organizations implement integrated reporting. It asks the question: How are the concepts of integrated reporting and integrated thinking getting through to those preparing company reports?”
Insights into Integrated Reporting: Challenges and Best Practice Responses draws on findings from a review of 41 corporate reports (for accounting periods ended on or before March 31, 2016) produced by organizations in the IIRC’s <IR> Business Network. These observations are then supplemented with interviews with nine integrated reporters around the world at different stages of integrated reporting implementation.
The report finds that implementing integrated reporting can be challenging, and requires commitment from the very top of adopting organizations. Barriers can include difficulties in aligning key stakeholders and senior management behind integrated reporting, finding sufficient dedicated resources, addressing concerns about the legal liability of directors in relation to future-orientated discussion, and overcoming prescriptive regulatory requirements. However, those who have undertaken the challenge have reaped real benefits: improved management information, better stakeholder relationships, more efficient reporting processes, and increased employee engagement.
<IR> Business Network participants are making good progress in applying some aspects of the Framework within their integrated reports. For example, 71% provided insight into the organization’s strategy, with 64% specifically highlighting what differentiates them to give them a competitive edge. The vast majority of companies reviewed (88%) included information on the range of capitals used or affected by the organization, with 63% thought to have communicated well across the capitals that were material to them. Two-thirds of the reports explained at a high level how the organization creates value for itself and others.
However, there are a number of areas where reporting can be improved. In each of these areas, the researchers interviewed preparers to understand specific reporting challenges and to identify best practice.
Priority Areas for Improvement
- Value creation
- Challenge: Many reports included good discussions in relation to each integrated reporting content element, but over half fail to link the content elements to value creation. Organizations often struggle to identify what their stakeholders perceive as “value.” Further, many seasoned preparers are still on a quest to find the most effective way of articulating how non-financial value is created or destroyed—qualitatively or quantitatively.
- Good practice ideas: Implementing a robust stakeholder engagement process, and referring to existing frameworks and sector-based guidance on non-financial reporting, can all help.
- Challenge: Reviewers found almost half of the reports reviewed could do better at showing the connectivity of information. Companies identified this as one of the biggest challenges with implementing integrated reporting—it required breaking down silos within the organization and changing existing data collection processes.
- Good practice ideas: Web-links and cross-references can be used effectively to direct readers to connected information within the integrated report and elsewhere, including online reports. Some are also working to join up management information, boardroom discussions, and priority topics relevant for investors and other stakeholders.
- Challenge: Only 46% of the reports reviewed were found to have explained the materiality determination clearly. Many organizations did not use the value creation lens in determining materiality, but instead applied the Global Reporting Initiative model. Preparers found it challenging to reconcile the needs of different stakeholders.
- Good practice ideas: Identifying the primary audience of the integrated report from the outset would help. Whatever materiality determination approach is adopted, the integrated report will be more credible if it explains how material matters are evaluated and prioritized.
- Challenge: Nearly half of the integrated reports reviewed ran over 150 pages. Preparers are finding it difficult to reconcile conciseness and meaningful communication with stakeholders.
- Good practice ideas: Seasoned preparers apply robust materiality determination process to filter out matters that are not material to value creation. Cross-references to supplementary information outside of the report, including online, can help address wider stakeholder information needs.
- Reliability and completeness
- Challenge: Only 51% of the reports reviewed were judged to achieve a balance in reporting positive and negative material matters. Preparers need to know what “good” looks like in order to implement appropriate internal control processes and engage external assurance.
- Good practice ideas: Board oversight and sound internal controls over reporting content are key. Identifying the applicable reporting standards and frameworks, and explaining why particular Key Performance Indicators are used, will help enhance the report’s credibility.
- Consistency and comparability
- Challenge: For 12 out of 41 reports reviewed, the reviewers were unable to assess consistency and comparability because no basis for comparison was provided. The comparatives provided were often inconsistent, and few reports gave bases for comparison with other organizations. Most preparers prioritized internal consistency over allowing for comparisons with other companies.
- Good practice ideas: Experienced integrated reporters review new performance measures rigorously before using them to ensure that they can be applied meaningfully from one year to the next. Prior year comparatives should be disclosed whenever they are available. Further, reviewing the reports of comparable organizations can yield inspiration for relevant measures.
Integrate reporting is a long evolutionary process, and even the most mature reporters are still seeking improvements year on year. However, seasoned integrated reporters offer the following advice for quick wins.
- Identify integrated reporting champions who can bring the project to life in the company. The CEO and CFO need to be committed as well.
- Take a multidisciplinary approach: Committed individuals from across the business can help to break down silos and encourage integrated thinking.
- Clarify the audience: whether the focus is on shareholders, potential investors, or wider stakeholders explain who is being addressed and why.
- Determine materiality: decide which topics are most relevant to the audience. Explaining materiality decisions gives credibility and accountability.
- Activate the data by bringing numbers to the fore. Companies should provide targets and carry on disclosing them even if they are missed.
- Use appropriate language, avoiding technical and organizational jargon.
- Demonstrate board commitment, perhaps by the CEO discussing what he or she hopes to achieve with integrated reporting.
- Set expectations by being clear that the integrated report will evolve over time.
Integrated reporting is about much more than reporting—it’s also about integrated thinking across organizations. Nevertheless, integrated reports need to be of high quality if financial capital providers and other stakeholders are to value them.
Our interviews with participating companies have found passionate support for the aims of integrated reporting and a strong belief in the benefits it can bring. The interviewees have found many challenges in the process of applying the Framework, but see this as a long-term journey toward better reporting and the creation of value by their businesses over time. It is hoped that more organizations will be encouraged to begin their own integrated reporting journey, drawing on the insights and advice shared by the companies leading the way.