Practical vision

In August 2010 the main players in corporate reporting – the International Accounting Standards Board (IASB), the International Federation of Accountants (IFAC), the Global Reporting Initiative (GRI) and the Prince’s Accounting for Sustainability Project (A4S) – created the Integrated Reporting Council (IIRC) as the standards setting body for IR.
On 9 December 2013 the IIRC presented the IR-Framework. The IIRC is there to support companies seeking to take the next step in corporate reporting by communicating their value creation (see Corporate reporting). The stated goal is to anchor integrated reporting in the thinking and practices of public and private-sector organisations; implementation takes place at the level of individual organisations. The idea is for the
IR-Framework to make the breakthrough in practical business by 2017.

Highly topical around the globe

Integrated reporting has become highly topical all over the world. In many countries, including South Africa and Brazil, it is viewed as a requirement for stock exchange listing. In Japan, for example, 130 organisations published an integrated report in 2015. In the UK, companies producing an integrated report account for more than 10% of the companies listed on the most important share index (the Financial Times Stock Exchange FTSE 100 Index).

Switzerland warming to the idea

Switzerland presents a very mixed picture in terms of the adoption of integrated reporting. In 2013 we at PwC conducted a study called ‘Creating value through corporate reporting’, evaluating the 20 companies in the Swiss Market Index (SMI) according to the seven criteria of the IR-Framework. We found that in some areas, Swiss companies were exemplary. Larger Swiss organisations give high or very high priority to key sustainability reporting issues, at least internally. Where they currently stand in terms of implementation is difficult to judge, since IR reports are rarely published in this country.

IR vs GRI-G4

There are certain overlaps between the principles of IR and the fourth edition of the Global Reporting Initiative (GRI-G4). What they both have in common is the notion of materiality. So themes deemed to be material in a sustainability report can also be deemed material for integrated reporting. In both initiatives, the internal process has precedence over the formal report. The formal report, which presents the results verbally and visually, is broader in scope for IR than for GRI-G4. You will find a more detailed comparison of IR and other standards in the article "Non-financial reporting".

A telescope for board and management

Not another report! This is a common response among executives to the question of integrated reporting. They would rather delegate responsibility for producing an IR report to somebody else. But their response is misplaced: integrated reporting belongs on the strategic and operational management agenda. Integrated reporting is an opportunity for both the directors and the management to show where their business creates value and how it deploys financial, human and natural resources. IR helps give the people managing and overseeing an organisation clarity on the value drivers and the impact of strategy, opportunities, risks, potential and controls. This in turn facilitates the process of strategic decision-making. Integrated reporting starts with an analysis of materiality, encompasses the organisation’s understanding of value creation, and ends with an assessment of the extent to which objectives have been met and a panoramic view of disclosure. To this extent, IR is an expression of an integrated approach to business (see Figure 2).

Figure 2: Integrated reporting as part of an integrated approach to business

What investors want

The key to integrated reporting is for an organisation to regularly engage with the issue, especially in dialogue with investors and analysts. From this interaction directors and managers can find out what key financial and non-financial data they should be concentrating on. IR thus has benefits that go way beyond those of mere compliance. When evaluating businesses, investors and analysts concentrate primarily on metrics. To these models and observations they add assessments of industries and markets, their knowledge of the bodies that oversee and manage the business, its strategic orientation, and other information about the company. This makes it all the more important to know what information investors need and present them with the material aspects of business prosperity clearly and understandably.

Figure 3 shows the aspects investors focus on and the importance of different information for reporting. These are the themes addressed in integrated reporting.

Figure 3: The importance and impact of information from the point of view of investors

How important is each of these pieces of information provided by a company for your analysis, and how effective is the information that you currently receive in all aspects of company reporting?

_{On a scale of 0 to 100, where 0 is not at all important}

_{Note: By awarding the score of 100, a respondent rates information as being of maximum importance and maximum efficiency. The term "effectiveness gap" is used to refer to the difference in relation to the declared value, if any.}

Figure 4 shows the sources of information most commonly used by investors.

Figure 4: Sources of information and their importance for investors

Integrating perspectives

An organisation can use integrated reporting to show why, in connection with providing products and services, it pays attention to things like a strong R&D process, stable, long-term trade relationships, the efficient use of resources, or the continuous development of human capital. A broad presentation enables investors to assess more accurately how this type of engagement impacts the value of the business in the long term, and what parameters influence value. Integrated reporting thus makes it easier to procure debt and equity financing.

Content before form

The annual IR report is ‘merely’ the result of or insights from a comprehensive process that go under the banner of financial and non-financial key performance indicators. Ideally an IR report is so straightforward that it can be understood not just by trained experts, but also by private investors and media representatives with no specific technical knowledge. Precisely because it’s prepared in accordance with a framework rather than legal rules and regulations, it can be designed to reflect the priorities, point of view and language of the organisation. It has to show what strategy is to be used to mitigate which risks, what was achieved in the year under review, and how the achievement of these objectives is measured. This should also include mention of initiatives that cannot be quantified or that can only be quantified to a limited extent.

Introducing and establishing integrated reporting

Implementing the integrated reporting process within your organisation starts with defining materiality, and gaining a precise knowledge of value creation and its impact. In practice we recommend a step-by-step approach.

South Africa leads by example

Governance requirements in South Africa have their roots in the country’s history, and are set down in the King Report on Corporate Governance. They are based on the pillars of leadership, sustainability and good corporate citizenship. In a nutshell, they rest on the assumption that responsibility is a socially valuable commodity. The idea was to give a society in the process of being built a corporate governance framework including economic responsibility. On the basis of the King Report, the South African stock exchange (JSE) requires an IR report for listing, and most listed companies publish one. Some private organisations have followed suit by initiating their own internal IR process, or by also publishing an IR report. But IR isn’t yet rooted in companies’ DNA and philosophy; most assume their duty is done with the publication of an IR report. There is no alignment between internal and external reporting. Nevertheless, some companies use IR information as the basis of their internal decision-making process. In South Africa, IR reports are prepared by management. The main focus of their work is on defining target groups – primarily investors – and their needs. This is then enriched with information from discussions with key figures inside and outside the company. The main players in this process are the CFO, the investor relations team and the sustainability managers. The
IR report is signed off by the audit committee. The companies affected take a positive view of the JSE’s requirement, and see IR as a welcome tool for communicating value creation. Investors share their opinion: professionals in the financial business who take a long term view see IR as useful, while those who think in the short term are less convinced.

Article overview