How to advance corporate reporting and performance with the IIRC’s <IR> Framework
By Dr Cornis van der Lugt
Senior International Associate, ACCSR and Senior Associate, BSD Consulting Switzerland
As corporate reporting continues to evolve, Integrated Reporting or <IR> is crucial in understanding and communicating the links between sustainability strategies and investment decision-making. It leads to better understanding of the factors that materially affect an organisation’s ability to create value over time, better decision making within an organisation, effective disclosures for investors and improved communication for an organisation’s stakeholders.
Launched by the International Integrated Reporting Council (IIRC) in 2013, the <IR> Framework is for use by any organisation that wants to improve its corporate reporting. While commercial players dominated its early development, the IIRC network today includes a Public Sector Pioneer Network that is examining new ways of accounting for value creation in their context.
Businesses world-wide who piloted the <IR> Framework over recent years have reported breakthroughs in understanding value creation, greater collaboration within their teams, more informed decision making and positive impacts on investor relations. Importantly, the process of reporting has been more inclusive in engaging diverse departments internally. In many instances, the process has been overseen by the Chief Financial Officer (CFO). This reflects a growing sense among CFOs that they need to come to grips with the environmental, social and governance (ESG) agenda and a new understanding of value creation.
So what is integrated reporting or <IR>?
The <IR> Framework defines Integrated Reporting as a “process founded on integrated thinking that results in a periodic integrated report by an organisation about value creation over time and related communications regarding aspects of value creation”. What “value” and “integrated thinking” means is debated in a series of IIRC-approved trainings that the IIRC is currently rolling out world-wide through its Training Partner organisations.
While the <IR> is meant to be a concise document that builds on and complements annual financial and sustainability reporting, it is more than just an executive summary of information found elsewhere. Rather, it is meant to make explicit the connectivity of information to communicate how value is created. One of the guiding principles of <IR>, “connectivity of information” refers to “a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organisation`s ability to create value over time”.
What is the ideal type of integration that a quality enterprise is expected to display? One can highlight the following types of integration at stake:
- Organisational integration: displaying integration in the internal value chain through collaboration and alignment between different departments, or in the external value chain through various degrees of integration with partners upstream (suppliers) and downstream (e.g. clients, customers).
- Issue integration: displaying a balanced, systematic and holistic approach to a range of sustainability (ESG) issues, able to deal with trade-offs (e.g. the water-energy-food nexus) and seeking to optimize mutually supportive economic, social and environmental outcomes.
- Financial Non-financial integration: displaying an ability to make the connection between financial and non-financial information, having aligned business financial and sustainability accounting systems that facilitate the translation of sustainability performance metrics into financial performance metrics.
- Strategic integration: displaying integration of relevant sustainability and financial information into core business planning and strategy, including the business model and value chain approach pursued by an enterprise.
Understanding and quantifying different types of capital is an essential component of <IR>. These include Financial and Intellectual Capital as well as Human Capital, Social Capital and Natural Capital. In coming years, many companies will be asking themselves how the overall stock and flow of capitals impacts their ability to create value in the short, medium and long term – as required by the <IR> Framework.
The IIRC recognises the complexities of these developments, and the dilemmas that possible trade-offs between the capitals or their components may pose businesses. It also recognises that much of the capital involved may be unpriced and/or fall beyond the ownership or control of a business. Yet if material (directly or indirectly), key trends in its availability, quality and affordability need to be reported. This forms part of what some are starting to call multi-capital accounting.
The debate on integrated thinking also illustrates how financial and sustainability accounting is converging. Pressed on the business case, managers in a commercial enterprise will always need to compile in as far as possible quantitative information and translate these into financial values. This does not imply an obsession with short termism. Any decent financial analyst will admit that a key performance indicator of a healthy enterprise is not short-term profit, but rather sustainable cash flows in the longer term. Furthermore, integration between financial and sustainability metrics is not the sole criteria but certainly one of the decisive factors in the making of longer-term value generation. We need to see more of this type of connected information in integrated reports. It is one of the challenges we will discuss during our forthcoming <IR> trainings in Sydney and Melbourne.
To view my recent article from the IIRC London conference, click here.
About Dr Cornis van der Lugt
Dr Cornis van der Lugt will present for the first time in Australia the IIRC-approved two-day training workshop Integrated Reporting, Strategy and excellence in performance in Melbourne: 21-22 March and Sydney: 27-28 March. Read more about this wonderful event
The two-day course will help investment managers, analysts and corporate reporters understand and apply Integrated Reporting, and use it in combination with other sustainability frameworks, and promote excellence in sustainability performance.
The training is being held under the auspices of ACCSR in partnership with Swiss-based global consulting group BSD and hosted by IAG.