Integrated Reporting Concepts And How To Get Started

Recently, numerous companies have been forced to shut down, resulting in widespread layoffs across the corporate world. These layoffs not only impact employees but also disrupt families and upset the social balance. Moreover, many businesses are expanding without regard for the environmental damage they cause. Unfortunately, these pressing issues are often overlooked in traditional annual reports.

While an annual report serves as a comprehensive document providing stakeholders with insights into a company's performance, financial health, and management strategy, it primarily focuses on quantifiable data. A detailed examination of the financial statement reveals information such as the annual return, number of board meetings, and directorial responsibilities, mainly related to financial performance and legal compliance.

However, a thorough analysis of the annual report may not shed sufficient light on the company's value creation process, particularly its impact on the environment, society, and governance. There is a glaring absence of non-financial information and an inadequate exploration of the interconnectedness between financial and non-financial performance metrics and their contributions to overall value creation. This gap highlights the need for a more holistic approach to reporting that integrates both financial and non-financial aspects to provide stakeholders with a comprehensive understanding of a company's true value proposition.

An integrated report addresses the concept of value creation. The primary purpose of an integrated report is to explain to providers of financial capital how an organization creates, preserves, or erodes value over time. An integrated report benefits all stakeholders interested in an organization’s ability to create value over time, including employees,customers, suppliers, business partners,local communities, legislators, regulators, and policymakers. It is generally a principal-based approach to reporting.

Seven Guiding Principles underpin the preparation and presentation of an integrated report, informing the content of the report and how information is presented.

The guiding principles are

1. Strategic focus and future orientation
2. Connectivity between various pieces of information
3. Conciseness: The report should not be too elaborate.
4. Materiality
5. Stakeholder relationship
6. Consistency and comparability
7. Reliability and completeness

Categories and descriptions of capital

For the purpose of the integrated reporting framework, the capitals are categorized in the following manner:

• Financial capital: the capital available for the production of goods or provisions of services. This is generally obtained through financing, such as debt, equity, or grants, or generated during the process of operations.
• Manufactured capital: This capital is available to an organization for use in the production of goods or the provision of services, which includes buildings, equipment, and infrastructure.
• Intellectual capital: These are an organization's knowledge base intangibles, including intellectual property such as patents, copyrights, software, licenses, etc.
• Human capital: people’s competencies,capabilities, and experiences, and their motivations to innovate in an organization. It also includes loyalties and motivation for improving the processes and their ability to lead, manage, and collaborate.
• Social and relationship capital: the institutions and relationships within and between communities, groups of stakeholders, and other networks; and the ability to share information to enhance individual and collective well-being.
• Natural capital: all renewable and non-renewable environmental resources and processes that provide goods or services that support the past, current, or future prosperity of an organization. It includes air, water, land, minerals, forests, biodiversity, and ecosystem health.

The concept of materiality

Materiality is important, as the integrated report should disclose information about matters that substantially affect the organization's ability to create value in the short, medium, and long term.

Method of determining the materiality

1. Identification of the matters based on their ability to affect value creation
2. Evaluating the importance of relevant matters in terms of their known or potential effect on value creation
3. Prioritizing the matter based on its relative importance
4. Determining the information to disclose about material matters

How to get started

Embarking on the journey of integrated thinking demands a comprehensive strategy to pave the way for long-term, sustainable value creation. Integrated thinking, coupled with integrated reporting, emerges as a pivotal force empowering organizations to navigate, govern, and communicate in a holistic manner. The imperative of integration extends beyond functional silos; it encompasses the entire hierarchical structure, forging symbiotic relationships among governance bodies, executives, and management tiers.

An organization can only truly create value over time and assess the value it potentially erodes across the various capitals if the Integrated Thinking Principles are addressed.

• Level 1 Principles: In this level, those charged with governance should discuss and come up with solutions to some penetrating questions to assess how widely each principle has been adopted.
• Level 2 Assessment: This level investigates how deeply the principles have been embedded into the organization through a series of statements responding to the penetrating questions from Level 1. The responsibility at this stage lies with executive management.
• Level 3: Operationalizing the Principles: This level consists of probing questions covering strategic management tools, practices, and processes, which are key to integrated thinking. The responsibility at this level lies with senior and middle management.

There is a 5-step approach to integrated thinking that results in integrated reporting.

• Step 1: Assess and identify your organization’s desired outcomes, which include establishing connectivity, building awareness, and embedding holistic decision-making.
• Step 2: Plan: Select a suitable approach, define the governance with the help of those charged with governance, and understand the cross-functional activities.
• Step 3: Engage: Engage people by informing them regarding the approach, asking and sharing information across various functions of the organization, listening to the perspective of the executive management team, and determining with senior management which activities to focus on and prioritize.
• Step 4: Execute and Monitor Have kick-off meetings to implement and conduct regular training programs. Monitor the process through regular or quarterly meetings to ensure continuous engagement and commitment across the functions involved.
• Step 5: Review and Improve: Assess the results against the desired outcome, detect areas for improvement, and engage those charged with governance for results.