In recent years, companies have faced mounting regulatory and societal pressure to weave sustainability into the fabric of their business plans and processes. Broadly speaking, the goal of these environmental, social, and governance (ESG) initiatives is to ensure that humanity can meet its present needs without sacrificing the future on the altar of profitability.
To assure internal and external stakeholders that they are, in fact, practicing what they preach, many companies have begun to adopt an integrated reporting framework, combining sustainability reporting with financials. This tool provides a holistic view of an organization’s strategy, governance, performance, and prospects through a sustainability lens by considering the totality of a company’s value creation over the short, medium, and long term.
But how does the international integrated reporting (IR) framework differ from traditional financial reporting? What are its key principles? And why should a business consider adopting this system?
Read on as we discuss integrated reporting in detail.
What is integrated reporting: A deep dive
In 2010, the International Integrated Reporting Council (IIRC) was established by GRI, the International Federation of Accountants, and The Prince of Wales’s Accounting for Sustainability Project. This international coalition consisted of investors, business leaders, regulators, academics, and other relevant stakeholders—all banding together to confront the global threat of climate change.
Since then, IFRS formally consolidated the Value Reporting Foundation (VRF) and the Climate Disclosure Standards Board (CDSB) into the International Sustainability Standards Board (ISSB) in 2021. Together, they sought to establish a framework that businesses could use to develop and implement integrated thinking and reporting into their corporate model and thus produce actionable ESG reports that were informative, concise, and relevant to stakeholders. Their stated objectives included:
- Providing stakeholders with quality information about the long-term ramifications and the social impact of decision-making to foster more productive capital allocation.
- Highlighting the links between ESG initiatives and economic value.
- Establishing a universal framework organizations could use to report how environmental and social factors impact decision-making.
- Shifting emphasis on performance from short-term gains to long-term value creation.
- Encouraging regulatory agencies to promote the adoption of this framework.
The VRF’s integrated reporting is designed to provide a more complete picture of a company’s performance within the context of an easy-to-read report. To that end, it redefines “value creation” beyond the traditional constraints of quantifiable financial metrics to also encompass non-financial factors, which also matter deeply to an organization and its stakeholders.
In other words, integrated reporting recognizes that a company’s value creation cannot be solely measured by financial returns.
Now, it’s best practice for companies to report value through a broader context—one that considers the organization’s impacts on the economy, society, and the environment. Doing so paints a clearer picture of a business’s performance, strategies, and ability to create long-term value.
What are the principles of integrated reporting ESG?
Integrated reporting has seven guiding principles that companies should consider as they prepare, report, and present this information:
- Strategic focus and future orientation – Provides detailed information into the business strategy as it relates to the creation of both immediate and long-term value.
- Connectivity of information – Offers a holistic view of the various webs connecting a company’s strategies, risks, and opportunities—all of which contribute to an organization’s ability to create value over time.
- Stakeholder relationships – Discusses the nature and quality of a business’s relationships with relevant stakeholders, including how a company accounts for and responds to their needs and interests.
- Materiality – Discloses information that’s materially relevant to the company’s ability to create value over the short, medium, and long term.
- Concise – Covers all of the necessary information in a succinct manner.
- Reliability and completeness – Uses accurate, up-to-date, and reliable information—including both negative and positive—without bias.
- Consistency and comparability – Presents the report and information in a consistent manner over time, so stakeholders can compare current to past performance or compare performance with its competitors.
Benefits of integrated reporting for companies and stakeholders
Integrated reporting enhances how organizations can think about, plan, or report their business activities. Performing this process creates several tangible benefits to both the business itself and its stakeholders, including:
For companies
- Enhanced decision making – Integrated reporting helps build a more thorough and collective understanding of the company’s performance, risks, and opportunities, which leaves them better positioned to make decisions that will support its long-term viability and resilience.
- Increased trust and credibility – Modern stakeholders and consumers increasingly favor businesses that don’t just provide the necessary goods or services but do so in a way that conserves natural resources. IR reports provide transparency stakeholders need to build greater trust.
- Improved performance – By considering factors beyond financial performance, companies can identify potential activities or areas that could generate long-term value for the business.
- Maximized valuation – Taking a more comprehensive approach to value creation and organizational performance enables a company to sell at a higher price because would-be buyers have a deeper understanding of the company’s future prospects and growth potential. A number of studies show companies that lead on sustainability outperform their peers.
For stakeholders
- Efficient reporting – Integrated reporting ensures that stakeholders are no longer left to examine a company’s performance on their own, especially with regard to non-financial metrics.
- Greater transparency – Integrated reporting provides interested parties with a better picture of the company’s long-term prospects and sustainability initiatives, thus enabling them to make wiser financial decisions.
- Better engagement – Businesses that participate in this process are encouraged to engage with and consider the opinions and needs of relevant stakeholders. Improved stakeholder engagement can foster brand reputation and loyalty.
The role of integrated reporting in SEC regulations
Currently, integrated reporting is not mandated by the Securities and Exchange Commission (SEC) and is only conducted on a voluntary basis.
However, recently, the SEC has championed regulatory changes that encourage non-financial reporting and prioritization of ESG initiatives. And in March of 2022, it proposed the SEC climate disclosure rule changes, which would:
“Require registrants to include certain climate-related sustainability disclosure in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.”
While these climate change disclosures are not yet set in stone, in Europe, there are already rules in place, like Sustainable Finance Disclosure Regulation (SFDR) that stipulate ESG-related transparency requirements for financial participants.
How integrated reporting can meet SEC requirements
Even if integrated reporting, or a similar ESG reporting standard, isn’t required as of now, it very likely will be mandatory in the near future.
The SEC’s Regulatory Agenda for 2023 suggests that these types of sustainability initiatives are top of mind. As such, forward-thinking businesses can use the integrated reporting framework as a reference point for future disclosure practices, thus giving them a valuable headstart over competitors.
Moving toward this framework in anticipation of future regulatory requirements will force businesses to restructure and optimize existing—and often fractured—corporate reporting and internal processes. Done properly, this empowers businesses to:
- Implement a meaningful corporate sustainability reporting system that is robust enough to meet future requirements from the time they’re enacted into law.
- Identify and disclose sustainability risks and opportunities material to investors.
- Demonstrate how sustainability is integrated into their brand strategy.
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What types of companies should prepare for disclosures?
Although practically any company that sees the competitive advantage in sustainability would find value in adopting integrated reporting, certain industries are more likely to be compelled to participate in this type of disclosure, including:
- Energy and natural resources
- Financial services
- Consumer goods
- Healthcare
- Technology
Examples of integrated reporting in practice
In the U.S., several leading businesses have taken the first steps down this path, including American Electric Power, United Technologies Corporation, Clorox, and Southwest Airlines, to name a few. Each of these companies has embraced integrated reporting, combining financial and ESG performance into a single, comprehensive report.
By taking the lead, these businesses have established themselves as ESG trailblazers in their respective sectors. And, should new disclosure regulations come down the pipeline, they’ll be well-equipped to quickly and effectively comply.
How companies can implement integrated reporting
Wondering how your business can start implementing integrated reporting? Here’s what you need to know:
Steps to developing an integrated report
Implementing this reporting system requires a systematic and comprehensive approach. For that, follow these steps:
- Form a cross-functional integrated reporting team that includes both financial and sustainability professionals to lead this effort.
- Review existing reporting processes and integration levels.
- Define the business model by considering all relevant performance capitals.
- Conduct materiality analysis to identify the most pressing ESG issues to the company and stakeholders.
- Establish a plan that applies fundamental concepts and identifies reporting boundaries and gaps.
- Identify informational needs and sources.
- Develop a strategy for integrating financial and non-financial information.
- Assess the existing system and controls and review stakeholder engagement mechanisms.
- Continuously improve the integrated report over time.
Best practices for integrated reporting
If you want to ensure that the integrated report is impactful, consider the following advice:
- Keep the report concise and on point.
- Tailor the report to your intended audience.
- Use clear and simple language.
- Highlight the company’s performance and its creation of long-term value.
- Set a staggered reporting schedule.
The future of integrated reporting and the SEC
American companies aren’t yet compelled to abide by integrated reporting standards. But that could shift overnight, seeing as the SEC has already proposed regulatory changes to that effect. Companies would be wise to embrace the trend of integrated reporting now, rather than be caught flat-footed.
At Sustain.Life, our ESG reporting software provides the ESG data-driven tools and regulatory expertise you need to future-proof your business. We make it easy to measure, manage, and report your sustainability initiatives as you embark upon the path to net-zero.
If you’re ready to start making that positive change, schedule a demo with our team.
Sources
1. UNEPFI, “International Integrated Reporting Committee Q&A for Steering Committee members,” https://www.unepfi.org/fileadmin/investment/IIRC_QA.pdf Accessed on March 20, 2023
2. EY, “Value Creation Background Paper,” https://www.integratedreporting.org/wp-content/uploads/2013/08/Background-Paper-Value-Creation.pdf Accessed on March 20, 2023
3. Integrated Reporting, “International Integrated Reporting Framework, January 2021,” https://www.integratedreporting.org/wp-content/uploads/2021/01/InternationalIntegratedReportingFramework.pdf Accessed on March 20, 2023
4. Reuters, “Positive ESG performance improves returns globally, research shows,” https://www.reuters.com/business/sustainable-business/positive-esg-performance-improves-returns-globally-research-shows-2022-07-28/ Accessed on March 20, 2023
5. SEC, ”SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors,” https://www.sec.gov/news/press-release/2022-46 Accessed on March 20, 2023
6. American Electric Power, “2022 Corporate Sustainability Report: ESG Reports & Policies,” https://aepsustainability.com/performance/esg-reports/ Accessed on March 20, 2023
7. GreenBiz, “Clorox Becomes Latest Firm to Adopt Integrated Sustainability Reporting” https://www.greenbiz.com/article/clorox-becomes-latest-firm-adopt-integrated-sustainability-reporting Accessed on March 20, 2023
