What will integrated reporting actually look like?

What will integrated reporting actually look like?

Despite constant discussion at nearly every plenary and breakout session during the 2013 Global GRI Conference, integrated reporting -- combining financial and non-financial/sustainability reporting into one integrated report -- seems to be mired in a state of profound confusion.

Integrated reporting seems to be the Holy Grail of corporate reporting: Both the current president of GRI and the former chairman of its board emphasized its importance and noted that G4 was designed to provide the underlying support for integrated reporting. The overarching message is that we are moving toward a new reporting regime -- yet the practical aspects of when, how, what that will look like remain very nebulous.

For example, panelists in one session reported that about 25 percent of GRI registered reports are self-described as "integrated." In practice, these reports are all very different from each other: some are traditional sustainability reports with no link to financial performance, others draw a connection between sustainability and financial performance. The vast majority are "one-cover" reports, where the annual report and sustainability report are sandwiched together, under one cover, with no real integration -- more like a combination or compilation.

Why create an integrated report?

The question that must first be answered is "what is the objective of integrated reporting?" At its core, an integrated report should be a concise communication aimed at providers of financial capital, and one that demonstrates how an organization creates and sustains value both in the short and long term. We heard many times that financial analysts increasingly want to be able to consider a company's sustainability performance in their analyses, but that they are also facing information overload.

The many information streams that companies currently provide do not allow analysts to efficiently extract the information they want. Therefore, an integrated report should seamlessly describe a company's most material issues in terms of their likely positive or negative impacts on value creation and financial performance.

That said, it seems that integrated reporting will not replace sustainability reporting, but that the two will support each other. The integrated report will provide concise information for analysts, while the sustainability report will be the vehicle through which the company conducts the underlying analysis that feeds the integrated report.

Shuffling cards photo by Surkov Dimitri on Shutterstock.

Additionally, the sustainability report will continue to be the vehicle through which companies continue to provide more detailed information of concern to other stakeholder groups (content that won't make the cut into an integrated report).

3 key elements of a truly integrated report

It seems clear that any report (financial, sustainability, or integrated) must consider the needs of the target audience and the company's ability to meaningfully meet those needs. For integrated reporting to be meaningful, a number of things must occur.

1. Value Creation: Companies and investors must reshape their view of what creates value. Data points like 80 percent of the value of a company is derived from intangibles are being thrown around. Yet fundamentally, financial reporting seems mostly to consider short term drivers. Until value is seen to be derived from long-term initiatives and sustainability-related programs and performance, sustainability and financial reporting will remain at odds.

2. Materiality: Companies must understand what their material issues are. Many companies have expressed an interest in a tighter set of guidelines that tells them exactly what to include in an integrated report. But what this might indicate is that companies do not understand what matters. This comes back to the underlying theme of the entire GRI conference, companies must understand their material issues and where they exist in their value chain before they can report on anything. Interestingly, one of the biggest changes from G3.1 to G4 is the emphasis on the materiality assessment process and identified material issues.

3. Data and Assurance: Companies must have a solid data set and confidence in their reporting systems. Jeanne Ng from China Light & Power stated that her company would not have been ready to provide accurate nonfinancial data for inclusion in its integrated report without the many years of experience it had with sustainability reporting. During the conference, a number of people voiced concern about the uneven quality of third-party sustainability report assurance practices (including comments on the podium by plenary speakers!). How will the movement toward integrated reporting impact the sustainability assurance field? The U.S. already significantly lags other countries in the use of third party assurance.

As part of the North American delegation attending the conference, it was interesting to learn of the progress (as well as ongoing confusion) in this area; the uptake of integrated reporting from U.S. companies currently reporting against GRI appears lukewarm at best. Many experienced sustainability reporters we talked with said they couldn't imagine it in the next five years, others said they couldn't imagine it in their careers. The landscape is further complicated by the Sustainability Accounting Standards Board (SASB) initiative to standardize the material issues and associated metrics that companies should be addressing on a sector by sector basis.

Most interestingly, it became apparent that the concept of integrated reporting is already well entrenched in some large South African companies as a result of the King III Code on Corporate Governance. This Code makes integrated reporting compulsory for JSE listed companies.

Lessons from the Leading Countries

As a multinational company, ERM was fortunate in that we were able to send practitioners from the U.S., South Africa, Brazil, the U.K., Australia, and the Netherlands. Interestingly, four of these countries are actually leading in the development of integrated reports: South Africa, Australia, the Netherlands and Brazil. More information can be found in "The sustainability content of integrated reports –a survey of pioneers" [PDF] a report available from GRI's resource library.

Our South African colleague was able to share some of the key challenges observed from the South African experience.

The first is about how to effectively integrate sustainability issues and content throughout the annual report and overcome the mold of the traditional financial reporting process.

Second, the report development timeline for financial reporting is typically much more condensed than that of sustainability reporting. To align the two, companies may need to make significant process changes.

Third, regarding assurance, there is no assurance on the integrated report as a whole, but elements of it are assured as part of a combined assurance model.

Finally, the existing framework for assurance encourages companies to focus on lagging indicators rather than leading indicators, completely overlooking the future element which stakeholders crave. Companies trying to include forward looking statements can run into assurance challenges, as many assurance providers shy away from assuring forward looking statements.

Our Dutch colleague shared the following perspective about the Netherlands' leadership position: First, national and local government requirements regarding sustainable procurement have put pressure on tenderers to prove their sustainability credentials.

In addition, several Dutch companies were early leaders in sustainability reporting, with companies like Shell, Heineken, Philips and AkzoNobel, all reporting since the 1990s. As reporting can be a driver of sustainability in the business, we could surmise that companies in the Netherlands have had longer to develop an integrated approach to sustainability management and reporting.

The final point that both our South African and Dutch colleagues made is that an integrated report will not tell the whole story for all stakeholders. Integrated and stand-alone reports have different audiences, with integrated reports focused primarily on providers of financial capital. As a result, we expect companies will continue to disclose more detailed sustainability information in a separate report or website for the foreseeable future.