🌱Corporate Sustainability Reporting Unit 10 – Integrated Reporting: Creating Value

What's Integrated Reporting?

• Integrated Reporting (IR) combines financial and non-financial information into a single, cohesive report
• Provides a holistic view of a company's performance, strategy, and value creation over the short, medium, and long term
• Focuses on six capitals: financial, manufactured, intellectual, human, social and relationship, and natural
• Aims to improve transparency, accountability, and stakeholder engagement
• Follows a principles-based approach rather than a rigid set of rules
  • Allows flexibility to adapt to different industries and business models
• Developed by the International Integrated Reporting Council (IIRC) in 2013
• Gaining traction globally, with many companies adopting IR voluntarily (Novo Nordisk, Unilever)

Why It Matters

• Traditional financial reporting fails to capture the full picture of a company's value creation
• IR helps investors, stakeholders, and management understand the interconnectedness of financial and non-financial factors
• Promotes long-term thinking and sustainable business practices
• Enhances risk management by identifying and addressing material issues
• Improves decision-making by providing a comprehensive view of the company
• Attracts long-term investors who value sustainability and responsible business practices
• Aligns with the United Nations Sustainable Development Goals (SDGs)
• Responds to increasing demands for corporate transparency and accountability

Key Components

• Organizational overview and external environment
  • Describes the company's business model, strategy, and operating context
• Governance
  • Outlines the company's governance structure and how it supports value creation
• Business model
  • Explains how the company creates, delivers, and captures value
• Risks and opportunities
  • Identifies key risks and opportunities that affect the company's ability to create value
• Strategy and resource allocation
  • Describes the company's strategic objectives and how resources are allocated to achieve them
• Performance
  • Reports on the company's performance against strategic objectives and key performance indicators (KPIs)
• Outlook
  • Provides insights into the company's future prospects and challenges
• Basis of preparation and presentation
  • Explains the process used to determine material issues and prepare the integrated report

Value Creation Process

• IR focuses on how a company creates value over time
• Value creation involves the interaction of various capitals (financial, manufactured, intellectual, human, social and relationship, natural)
• Inputs
  • Resources and relationships used by the company (raw materials, employee skills)
• Business activities
  • Actions that transform inputs into outputs (manufacturing, research and development)
• Outputs
  • Products, services, and waste generated by the company
• Outcomes
  • Internal and external consequences of the company's activities (employee satisfaction, environmental impact)
• Value creation is not limited to financial returns but includes positive and negative impacts on all capitals
• IR helps companies identify and manage trade-offs between different capitals
• Encourages a stakeholder-inclusive approach to value creation

Challenges and Criticisms

• Lack of standardization and comparability across integrated reports
• Difficulty in measuring and quantifying non-financial information
• Potential for "greenwashing" or selective disclosure of positive information
• Resistance to change from traditional financial reporting practices
• Increased costs and resources required for data collection and report preparation
• Limited assurance and verification of non-financial information
• Skepticism about the relevance and usefulness of integrated reports for investment decisions
• Concerns about the credibility and reliability of self-reported information

Real-World Examples

• Novo Nordisk
  • Danish pharmaceutical company known for its integrated reporting practices
  • Aligns its business strategy with the SDGs and reports on progress annually
• Unilever
  • Multinational consumer goods company with a strong focus on sustainability
  • Uses IR to communicate its "Sustainable Living Plan" and value creation story
• Sasol
  • South African chemicals and energy company
  • Provides a comprehensive view of its business model, strategy, and performance through IR
• Garanti BBVA
  • Turkish bank recognized for its integrated reporting and sustainability practices
  • Demonstrates the link between financial and non-financial performance
• Itaú Unibanco
  • Brazilian bank that has adopted IR to enhance transparency and stakeholder engagement
  • Highlights the interconnectedness of its business activities and value creation

Implementation Tips

• Obtain buy-in and support from senior management and the board of directors
• Establish a cross-functional IR team with representatives from finance, sustainability, and other key departments
• Conduct a materiality assessment to identify the most relevant and significant issues for the company and its stakeholders
• Engage with stakeholders to understand their information needs and expectations
• Align IR with existing reporting processes and systems to avoid duplication of efforts
• Use technology and data analytics to collect, manage, and report on financial and non-financial information
• Provide training and guidance to employees involved in the IR process
• Continuously improve and refine the IR process based on feedback and best practices

Future of Integrated Reporting

• Increasing adoption of IR globally, driven by investor demand and regulatory requirements
• Potential for IR to become the new norm for corporate reporting
• Integration of IR with other reporting frameworks (GRI, SASB, TCFD)
• Development of industry-specific IR guidelines and standards
• Greater emphasis on the role of technology and data analytics in IR
• Increased focus on the SDGs and how companies contribute to their achievement
• Growing importance of external assurance and verification of integrated reports
• Potential for IR to drive better decision-making and long-term value creation