Integrated Reporting is strategic and forward looking
Interview with Dr Cornis T. van der Lugt, facilitator of the upcoming IIRC-approved courses on Integrated Reporting in Melbourne, Sydney and Zurich. The interview focuses on the background to integrated reporting, why it’s valuable for companies and stakeholders, current trends, and what the future landscape of integrated reporting looks like.
There is still some confusion about integrated reporting, with some people believing it is just the physical integration or lumping together of an annual report and a sustainability report. In your words, what is integrated reporting?
It’s important to note the ‘ing’ in reporting. The process is a key element. For me, integrated reporting is about a process of communicating your business performance and its impacts with business logic and long term perspective. This process builds on and takes content from both sustainability and financial reporting. As a result, it delivers a concise annual report that connects elements of suitability performance and financial performance. It also explains your business logic with a more holistic perspective.
Why is integrated reporting becoming more important?
The key message of integrated reporting is the idea of ‘integrated thinking’. Integration within the enterprise is a decisive part of the process of organisational change. Initially, the idea of producing an integrated report was based on an awareness of the shortcomings of existing annual financial and sustainability reports. With the Global Financial Crisis during the late 2000s, there was a sense that annual reporting increasingly produces a lot of boilerplate text and information overload. Our analysis of sustainability reports in the 2000s also identified the phenomenon of “information carpet bombing”. Reporting is not effectively serving the market by meeting the relevant information needs of for example investors, especially institutional investors with a longer-term perspective. Integrated reporting introduces a type of reporting that is more strategic and targeted. There is a growing awareness that you can’t target all stakeholders with one document. So from a communications perspective, it moves away from a shotgun approach. It moves away from trying to speak to everyone through one document to more targeted communication about organisational performance and quality of management.
What are the benefits of integrated reporting to the company?
Recently I conducted work with Thomson Reuters in which we interviewed reporting companies worldwide about their reporting processes. It was evident that when companies prepare sustainability reports, there is often a process led by the sustainability or communications department with limited involvement of other departments or other parts of the business. Sustainability reporting is often an isolated exercise led by a small unit without broad involvement from the whole enterprise. On the other hand, when a company undertakes integrated reporting, in many cases this process is overseen by the Chief Financial Officer, you have diverse participation across different departments in the enterprise. From an organisational change perspective, the process of integrated reporting is extremely valuable when managers from different departments sit at the table and discuss risks and opportunities related to core business. This also helps these enterprises to transform and improve their performance as they are thinking more clearly about the logical flow between the business model, strategy and related targets and performance indicators that will put them on the right path with a longer-term perspective.
When we look at studies on the value of the integrated reporting process, the results show that there is appreciation coming from investor engagements. Investors see that companies undergoing the process have a better understanding of their business model, the context in which they operate, the risks around different (financial and non-financial) capitals they use and the implications for their business performance. Investors pursuing integrated analysis also appreciate the improved understanding of how companies create value in the longer term. In the discussions on integrated reporting and the IIRC Framework, you will often hear references to the “six capitals” and “creating value”. Value can mean many things. It’s not only about financial value. The benefit of the process also involves having the discussion with investors about how your company generates and creates value within the context of the society within which it operates, and doing that with reference to a short, medium, and long-term time frame.
Can you elaborate on how integrated reporting is valuable to the stakeholders of a company?
With the development of the IIRC Framework, defining the “providers of financial capital” as the primary target audience of the integrated report was an informed decision. A key point here is that disclosing other information on the performance and direction of your enterprise is still relevant in the annual report. Your sustainability reporting still targets various types of stakeholder groups who are not the primary audience of the integrated report. The integrated report is of special value to those user groups who want to see a connection made between sustainability performance and financial performance. This means it’s of special value to the various providers of financial capital. Institutional investors and those committed to responsible investment have a special interest in integrated reports. For them it’s critical that reporting is more strategic and forward looking as opposed to annual reporting which has been backward looking and only focused on narrow corporate financial performance of the last year. Describing the logic of how the enterprise generates income and wealth, where its growth is heading in the longer term, how it uses different types of capital and manages the risks involved is especially relevant to responsible investors in their decision-making.
Beyond investors, can integrated reporting be a useful tool for the broader stakeholder network?
Certainly. I believe that integrated reporting is of particular use for any stakeholder that has an interest in how the longer-term financial performance of the enterprise is connected to its sustainability performance. This means that integrated thinking, planning, reporting and analysis is of special interest to responsible investors and responsible lenders alike, and also to actual or potential employees and regulators. So there are stakeholder groups that go beyond providers of financial capital that have obvious interest in the content of integrated reporting. An integrated report presents a strategic discussion about different types of capital and how to create value in the long run, while being aware of potential risks involved in the ongoing supply of those different types of resources. So while your traditional forms of reporting, such as financial and sustainability reporting, is focused on collecting data on extensive sets of indicators, your integrated report goes beyond presenting side by side, long sets of data. Integrated reporting makes for a more intelligent discussion about the interconnections between the different forms of capital, for example: human, natural, financial, and other types of capital.
About Dr. Cornis T. van der Lugt
Dr. Cornis T. van der Lugt is a Senior Associate with BSD Consulting Switzerland. He has over 20 years of experience in sustainability and reporting including close involvement in the development of the UN Global Compact, GRI and ISO 26000 standards. He is the lead content developer for IR Training provided by BSD as IIRC Global Training Partner. Of South Africa origin, he will among others provide feedback on recent IR developments in South Africa. He leads the accounting working group of the Reporting 3.0 Initiative and his current work is focused on strategy, corporate finance and Integrated Reporting.
Interview by Josh Appelboom, Consultant at ACCSR - the partner company of BSD Consulting in Australia in regards to IIRC-Trainings.