What Is Integrated Reporting?
Integrated reporting is a contemporary approach to corporate reporting that provides a concise communication about how an organization's strategy, governance, performance, and prospects, in the context of its external environment, create value in the short, medium, and long term. This framework moves beyond traditional financial statements by incorporating qualitative and quantitative information on various "capitals" a company uses or affects, such as financial, manufactured, intellectual, human, social and relationship, and natural capital. The goal of integrated reporting is to foster "integrated thinking" within an organization, leading to better internal decision-making and more holistic external disclosure for a broader range of stakeholders. By connecting financial and non-financial data, integrated reporting aims to present a complete picture of an entity's capacity for value creation over time.
History and Origin
The concept of integrated reporting emerged in response to the growing demand for more comprehensive and forward-looking corporate disclosures that reflect a company's full impact and dependencies beyond purely financial metrics. The International Integrated Reporting Council (IIRC), a global coalition of regulators, investors, companies, and standard setters, was instrumental in developing the International <IR> Framework. The IIRC released its foundational Integrated Reporting Framework in 2013, with revisions published in January 2021 to enhance decision-useful reporting. This framework has since been adopted and encouraged globally by various bodies. In August 2022, the Value Reporting Foundation, which was formed from the merger of the IIRC and the Sustainability Accounting Standards Board (SASB), consolidated into the IFRS Foundation. The IFRS Foundation, responsible for International Financial Reporting Standards (IFRS), now actively encourages the continued adoption of the Integrated Reporting Framework, aiming to connect sustainability-related disclosures with financial reporting through the work of its International Sustainability Standards Board (ISSB) and International Accounting Standards Board (IASB).5, 6, 7, 8
Key Takeaways
- Integrated reporting connects an organization's financial and non-financial performance, strategy, governance, and prospects.
- It aims to provide a holistic view of how an organization creates, preserves, or erodes value over time, considering multiple forms of capital.
- The framework encourages "integrated thinking" within companies, breaking down silos between departments.
- Integrated reports are designed to be concise and strategic, offering a broader understanding for investors and other stakeholders.
- The IFRS Foundation now stewards the Integrated Reporting Framework, promoting its global adoption alongside financial and sustainability standards.
Interpreting the Integrated Report
An integrated report offers a cohesive narrative that links various aspects of an organization's performance. When interpreting an integrated report, users should look for clarity on the organization's business model, its external environment, and how its strategy is designed to create value using different capitals. This includes understanding the company's approach to risk management and its corporate governance structures. The report should articulate how financial performance is intertwined with the company's impact on and use of natural, human, and social capitals. It also highlights the organization's future outlook and strategic objectives, providing context for past performance and future potential.
Hypothetical Example
Consider "GreenBuild Co.," a hypothetical construction company. Traditionally, GreenBuild's annual report focused on revenue, profit margins, and project completion rates. With integrated reporting, GreenBuild's latest report presents not only these financial metrics but also details on its intellectual capital, such as patents for sustainable building materials, and its human capital, including employee training hours in green construction techniques.
The report also outlines GreenBuild's impact on natural capital, showing reduced waste generation on construction sites and increased use of recycled materials. For social and relationship capital, it details community engagement projects and satisfaction rates among supply chain partners. The integrated report explains how these non-financial factors contribute to the company's long-term profitability and market position, illustrating a comprehensive approach to strategic planning and performance measurement.
Practical Applications
Integrated reporting is increasingly adopted by companies worldwide as a means of enhancing transparency and accountability. In capital markets, investors use integrated reports to gain a more holistic view of a company's long-term viability and resilience, beyond what traditional financial statements alone might convey. For instance, Royal Philips, a global health technology company, publishes an annual report that integrates financial and sustainability information, showcasing how their innovations contribute to improving lives and achieving sustainability goals.2, 3, 4 This approach helps companies to articulate their Environmental, Social, and Governance (ESG) performance and demonstrate how these factors are integral to their business model and overall sustainability.
Limitations and Criticisms
While integrated reporting offers significant benefits, it also faces challenges and criticisms. One limitation is the lack of universal adoption and standardization across all jurisdictions, which can make comparability difficult. Another challenge lies in quantifying and verifying certain non-financial information, leading to potential concerns about the reliability and consistency of data. The subjective nature of defining "materiality" for non-financial disclosures can also vary between organizations. Furthermore, the process of implementing integrated reporting requires significant internal coordination and a shift in organizational culture, which can be resource-intensive. Critics sometimes argue that while integrated reporting aims for conciseness, the breadth of information it seeks to cover can still lead to complex reports, particularly when dealing with extensive non-financial reporting requirements. Ensuring high data quality for both financial and non-financial metrics remains a key concern for companies engaging in this form of reporting.1
Integrated Reporting vs. Sustainability Reporting
Integrated reporting and sustainability reporting are related but distinct concepts. Sustainability reporting, often guided by frameworks like the Global Reporting Initiative (GRI), primarily focuses on a company's environmental, social, and governance (ESG) performance and its impact on the planet and society. It provides detailed disclosures on specific sustainability metrics, such as carbon emissions, water usage, labor practices, and community engagement.
In contrast, integrated reporting is a broader concept. While it incorporates sustainability information, its core purpose is to show the connectivity between a company's various forms of capital (financial, manufactured, intellectual, human, social and relationship, and natural) and how they collectively create value. Integrated reporting aims for a concise, strategic overview that links these capitals to the organization's overall strategy and financial performance, rather than just presenting a comprehensive list of ESG data. It emphasizes "integrated thinking" as a driver for both internal decision-making and external communication, seeking to present a single, coherent narrative of value creation to shareholders and other stakeholders.
FAQs
What is the primary goal of integrated reporting?
The primary goal of integrated reporting is to provide a concise, holistic view of how an organization creates value over time by connecting its financial performance with its strategy, governance, and performance across various capitals (e.g., human, natural, social, intellectual).
Who benefits from integrated reporting?
Both internal and external stakeholders benefit. Internally, it promotes "integrated thinking" and better decision-making. Externally, investors, lenders, employees, and communities gain a more complete understanding of the organization's long-term viability and its impact on broader society and the environment.
Is integrated reporting mandatory?
Integrated reporting is not universally mandatory. However, its principles are increasingly being incorporated into regulatory requirements and best practices for corporate reporting in various jurisdictions, often driven by investor demand for more comprehensive ESG-related information.
How does integrated reporting differ from a traditional annual report?
A traditional annual report primarily focuses on financial performance and compliance. An integrated report, while including financial data, extends its scope to encompass non-financial information, such as sustainability efforts, human capital, and intellectual property, demonstrating how these elements contribute to the organization's overall value creation.
What are the "capitals" in integrated reporting?
The Integrated Reporting Framework identifies six categories of capital: financial, manufactured, intellectual, human, social and relationship, and natural. These represent the resources and relationships an organization uses or affects to create value.