The way business is being run is changing and integrated reporting is fast becoming part of normal business practice. Integrated reporting and integrated thinking are the next steps in our journey to sustainable business.
Integrated reporting quantifies this journey meaningfully. In the face of climate change, a dwindling supply of raw materials, loss of biodiversity, poverty, and inhumane labor conditions, the need for changing business practices has never been more urgent.
Mervyn King, chairman of the King Committee on Corporate Governance in South Africa, speaking at the Finance Indaba Africa on 14 October 2016, says “Business is shifting from thinking about short-term profit to focusing on Sustainable Capitalism.” Integrated reporting and integrated thinking underpin sustainable capitalism.
“There have been three major shifts in the corporate world in the 21st century,” explains King. “First of all, we have shifted from silo thinking and silo reporting to integrated thinking and integrated reporting. The second is from a financial capital market system to an inclusive market capital system. And the third major shift is from short-term profit to Sustainable Capitalism.”
Integrated reports are progressive documents. They cover how an organization is creating value in the short-, medium- and long-term. The International <IR> Framework recognizes that long-term sustainability depends on sound management, relationships, a satisfied workforce and the availability of natural resources.
Integrated Reporting is not simply a question of combining financial and sustainability reports. Rather, it seeks to identify the connection between an organization’s financials, its relationships with key stakeholders and how it uses resources in its natural environment. Integrated reporting recognizes that the majority of an organization’s value is in intangible assets.
Dr. Carol Adams, a member of ACCA’s Global Forum on Sustainability writes, “Building strong relationships with stakeholders, building a loyal customer base, developing intellectual capital and managing environmental risks tend to fall off the radar when executives think short-term.” These are critical to long-term sustainability, however, and where integrated reporting’s focus lies.
Boards have to be accountable for all of these aspects, says King. The guidelines for this accountability is contained in the International <IR> Framework, released by the International Integrated Reporting Council – of which King is chairman.
King states, “The only thing worse than being blind is having sight but no vision. You need to focus on what you know and what you ought to know. And what you ought to know is that you live in a resource-deprived world with a greater demand for output that’s going to increase, so there’s going to be a huge change in the way we drive our companies.”
Unearthing value and innovation
Reporting is too often a tick-box exercise, that holds little real value. The <IR> Framework offers a practical way to explain the process of value creation with financial and non-financial capitals. The framework enables companies to make more holistic business decisions, based on integrated thinking, impacting their own performance, and society as a whole, more positively.
“We have reached a tipping point. Civil society and investors have realized that organizations cannot operate with a focus only on shareholders. “There are many stakeholders and companies must have a long-term strategy in a resource-deprived world that would maintain value creation in a sustainable manner,” says King. Additionally, companies that have forged ahead with integrated Reporting are proving that there is value in the process of their composition.
King takes this focus on value a step further by suggesting that CFO’s be repositioned as CVO’s – Chief Value Officers, as the person most responsible for creating and safeguarding value in the business.
Financial reports are easy to compile, compared to integrated reports that take into consideration an organization’s impact across multiple capitals. Social and environmental capitals, for example, are difficult to quantify in monetary terms, but the process of reporting on the social and environmental impact of business has had a number of unforeseen benefits. According to Deloitte, “A growing number of companies prove that learning and increasing their reporting on the social and environmental impact of products and businesses are inspiring sources for new business models, new products, and new partnerships.”
According to Deloitte’s paper, ‘Integrated Reporting as a driver for integrated thinking‘, there is a strong interconnectedness between the issues that businesses face today, and this makes an integral approach the best way to deliver an impact: “Frontrunners in business consider reporting to be more than merely a matter of accountability. They consider transparency to also be a strong driving force for innovation and value creation.”
An integrated report cannot only be compiled on an annual basis to satisfy a compliance requirement. integrated reporting needs to be incorporated into an organization’s strategic objectives and processes to unlock its real value.