How firms are moving the needle on integrated reporting
How firms are moving the needle on integrated reporting
In the past few years, the gradual emergence of integrated reporting has presented an alternative to the usual stand-alone corporate sustainability reports filed by the vast majority of companies.
Integrated reporting aims to provide comprehensive disclosure of a company's finances, governance, strategy and prospects while reflecting the commercial, environmental and social context in which it operates. While only a relatively small cohort of companies has so far issued such reports, its size is growing steadily.
What are the current best practices used by these early pioneers of integrated reporting? That's what my colleagues and I wanted to find out when we undertook a study of the state of integrated reporting as it is being tested and applied by industry leaders in order to gauge progress in the field. The full research paper is available at our site.
To get a sense of how companies are interpreting and approaching this new frontier on their own terms, we reviewed a sampling of current reports self-declared by their issuers as "integrated." We intentionally did not focus on participants in the important International Integrated Reporting Council Pilot Programme Business Network, although one company in our sample, National Australia Bank, does participate in that initiative.
To construct our sample, we began with 193 reports in the GRI Sustainability Disclosure Database published by large companies between 2011 and 2012 that were self-identified as integrated. Winnowing this group down by applying various criteria, one of which was inclusion on Fortune's Global 500 list, we ultimately arrived at a group of 12 that are seen as leaders in their industries and reasonably can be expected to have operations, impacts and reach that is typical for large companies in similar sectors.
The approaches and degree of integration in our sample varied greatly, which is not surprising for a new disclosure format that as of yet has no fully codified or commonly accepted guidelines. A couple displayed genuinely integrated thought and discussion, a few others included fairly limited references to financial performance in an otherwise mostly conventional sustainability report, and the rest were distributed along the middle of the bell curve, showcasing a variety of experiments in correlating sustainability and financial performance.
We scored each of the reports in our sample on a common set of criteria that drew on both the IIRC's guiding principles and key content elements and our own experience helping companies develop sustainability strategy and reporting.
Ultimately, we applied nine criteria — such as discussion of environmental, economic and societal context; financial linkages; and connectivity between past, present and future performance — which we grouped into three categories:
• Strategic focus and forward-looking orientation.
• Connectivity of information.
We should note that our scoring reflects the degree of integration within the reports studied, not a judgment of their overall quality as reports, which was high in many cases. We also believe all companies should be commended for their experimentation and commitment in engaging this new practice, which supports the development of the field as a whole.
We found the most integrated reports typically applied a set of best practices that included:
• Explicitly incorporating environmental, social and governance considerations into the overall strategy and risk analysis of the business.
• Clearly explaining the strategic importance to the business of material ESG issues.
• Describing robust stakeholder engagement.
• Exhibiting forward-looking orientation.
• Describing economic, environmental and societal trends.
• Presenting financial and ESG key performance indicators together.
• Delivering comprehensive and interdependent information.
• Summarizing material issues, KPIs and future targets with easily understood visuals.
While we were encouraged by these practices, it was also clear that much remains to be defined and implemented for integrated disclosure format to reach its full potential. There are several aspects in which most of the reports in our sample are weak and will require further development and experimentation:
• Clearly describing the process by which material issues are identified.
• Quantifying the financial impacts of ESG performance.
• Measuring and reporting supply chain impacts.
As investors and analysts increasingly recognize the interdependence of financial and ESG performance in a resource and talent-constrained world, it seems clear that the demand for integrated data and planning will only grow. Indeed, these days just one impactful event can raise significant financial questions for a company, region or entire sector, as illustrated by Hurricane Sandy, the droughts that reduced 2012 profitability of major apparel companies, and the discovery of horse meat labeled as beef in the U.K. and beyond.
As one example of the growing information appetite among investors, Bloomberg's ESG data service has seen substantial uptake since being introduced in 2009, with more than 34 million indicators being accessed on that platform in just one six-month period, according to a 2011 study by Robert Eccles and George Serafeim.
At the same time, much uncertainty remains in this practice. It's clear that the dissemination of new standards for assessment and disclosure by groups like the IIRC and the Sustainability Accounting Standards Board is greatly needed in order for companies to achieve the greatest value via their disclosure practices. It would also be helpful for the GRI to issue guidance on when a report should be self-declared "integrated" for purposes of classification on its database.
Our experience and that of other practitioners suggests that a company's integrated reporting has a dynamic relationship with its development and implementation of integrated thinking, strategies, metrics and operation. By this we mean that extensive strategic preparation for such reporting can be useful, but the process of simply engaging in comprehensive reporting conscientiously can itself support the identification and development of the needed strategies and mechanisms.
Given the time, expert support and trial and error required to achieve integration, now is the time for companies to begin or escalate that work in order to be prepared for when an integrated presentation of performance is a fundamental expectation rather than a bold experiment.
To learn more and act
• Attend the Integrated Reporting: On-the-Ground Perspectives webinar we will host on March 27 to discuss approaches, tools and learnings with corporate practitioners and IIRC representatives involved in developing integrated reporting.
• Review and comment on the discussion draft of the IIRC reporting framework to be released in April.
• Help pioneer sustainability standards for your industry by registering for a SASB industry working group. The group for technology and communications kicks off May 1.
• Attend or monitor the 2013 GRI Conference on Sustainability and Reporting being held May 22 to 24. Expect ample discussion of the new G4 framework and its relation to integrated reporting.
Image by Yuttasak Jannarong via Shutterstock.