The development of integrated reporting
Jonathan Labrey, chief strategy officer at the International Integrated Reporting Council (IIRC), discussed integrated reporting at the recent Evolution of the Annual Report conference.
The IIRC has identified six types of capital which can be employed or transformed by companies; financial, manufactured, intellectual, human, social and relationship, and natural. Under the IIRC’s framework, companies should consider and explain how these capitals are used to create shareholder value over the short, medium and longer-term, rather than focusing on short-term financial performance.
Whilst this may appear radical, Jonathan stated that today 80% of corporate value in the S&P 500 is already accounted for by intangible assets such as brand, reputation, intellectual and human capital, compared with less than 20% in 1975. Intangible assets (which would be captured by the six capitals) are already, therefore, vital to future value creation but the ways in which they are measured and managed must be enhanced.
He stressed that companies first need to develop “integrated thinking” to ensure these capitals are incorporated into the business. Consequently the move to integrated reporting is a long process which normally takes around three reporting cycles. Goldfields is one example he gave of a company that has adopting integrated reporting and as a result has changed its approach to business. Safety is now the top priority for their business as integrated thinking has encouraged them to think about the issues that affect long-term value creation.
Furthermore, we also see evidence of a changing approach to business more widely in a recent report by the UN’s Environment Programme which looks into how countries and regulators are increasingly incorporating sustainability concerns into their policies, systems and regulations. This change is also encouraging businesses to integrate sustainability metrics into their financial reporting and management systems. The report found that “Concepts such as natural wealth and the circular, green economy have moved from the margins to become the substance of economic strategies and policies for businesses and nations.”
More information on integrated reporting is available on the IIRC’s website: http://integratedreporting.org/
Whilst the UNEP report can be found here: http://web.unep.org/inquiry/publications