The long-awaited framework from the International Integrated Reporting Council (IIRC) was released late last year, offering a set of guidelines to more deeply integrate sustainability into corporate objectives and to holistically account for the value businesses create. Integrated reporting (IR) is on its way to becoming the new norm for reporting.
At the integrated reporting launch in December in London, the Prince of Wales' comment that IR has the potential to "communicate value for the 21st century" echoes this sentiment. As described in an earlier blog post, the framework helps solve a number of problems presented by conventional sustainability reporting, such as the failure to account for all sources of value and impact, the overwhelming length of reports, and the challenge to communicate the important link between sustainability and financial performance to stakeholders.
While the framework is, at the end of the day, just a framework and not a silver bullet solution to all transparency and reporting challenges, its true value may be in its guidance on integrated thinking. Integrated thinking helps companies account for the interdependencies between material issues and bring together corporate and sustainability objectives to be one and the same. Regardless of how companies use the IR framework, if it helps them take an integrated approach to their business and sustainability goals, then it's a significant step toward truly sustainable business practices.
In the coming years, IR and the framework will grow in importance. Therefore, it's a good time to become familiar with the basics of the framework. We've summarized a few key aspects here:
Investors as the audience: The recently released version of the framework maintains its focus on investors as the primary stakeholder audience for integrated reporting. It also highlights investor interests as a key consideration when determining the boundaries, or limits, of what is covered in reporting. Although investors are a significant focus, the IIRC notes that other stakeholder groups also will benefit from integrated reporting.
Valuing the capitals: The IIRC guides companies to assess the capitals that they use or influence in order to ensure that they are considering all forms of value creation. However, a company does not need to adhere to the six categories of capitals the IIRC has outlined — financial, manufactured, human, intellectual, social and relationship and natural — and can report on capitals that are most relevant.
Interconnections: It's not useful to look at material issues in isolation; rather, assess interconnections between issues to understand how they affect each other.
Importance of innovation: The framework highlights the evolving role of product and service innovation to minimize negative social and environmental effects and to anticipate customer demands. The framework also instructs companies to report on how their business model has been designed to adapt to change.
Materiality: Unlike other reporting frameworks, the IIRC highlights the need to connect a company's materiality process with its larger corporate strategy and management processes. The IIRC guides companies to assess material issues based on their likelihood and to prioritize material issues based on their magnitude.
External context: Companies continually should monitor and analyze the external environment and economic condition in the context of their mission and vision.
Format: Balancing flexibility and prescription, the framework takes a "principles-based approach"; it provides a small number of requirements when compared to the extensive key performance indicators and specific disclosures required by the Global Reporting Initiative's guidelines. While the IIRC allows companies to present the integrated report in a variety of formats — a stand-alone report or part of another report — it demands conciseness. Indeed, "clear, concise and comprehensible" were undoubtedly the top words used to describe the goal of the framework at its launch event in London.
These key attributes of the framework can help businesses identify and manage risks and opportunities, inform stakeholders and communicate with investors. In conjunction with our six elements of effective transparency, IR done well provides the right information to investors in a format and frequency that informs their decisions, which in turn will steer capital towards companies effectively managing their progresses towards sustainable strategies. Pressed with an urgent need to communicate their value and equipped with a framework to follow, companies are now better prepared to integrate their thinking and reporting with an eye toward a sustainable future.
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