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Integrated Reporting, or <IR>, is a principles-based framework for corporate reporting. The aim of the framework is to institutionalise integrated thinking and timely reporting about the value created over time by the reporting organisation. The resulting integrated report is a “concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.”
<IR> may be a solution to different demands that make corporate reporting more burdensome for both the preparers and users of corporate reports:
- A demand for greater corporate disclosure of both financial and non-financial information;
- A demand for more comprehensive annual reports for an increasingly broad set of stakeholders, including regulators, investors, consumers and the public; and
- A demand for an increasingly complex patchwork of regulations, reporting frameworks and best practices.
The Integrated Reporting Framework sets out to improve corporate reporting and foster more “efficient and productive capital allocation that act as a force for financial stability and sustainability”. The Framework consists of a set of seven “guiding principles” and eight “content elements” to govern corporate reporting:
Guiding principles Content elements Strategic focus and future orientation Organisational overview and external environment Connectivity of information Governance Stakeholder relationships Business model Materiality Risks and opportunities Conciseness Strategy and resource allocation Reliability and completeness Performance Consistency and comparability Outlook Basis of preparation and presentation
The IIRC (2013): “The International Integrated Reporting Framework”, p. 2.
Integrated Reporting is about communicating, rather than reporting. Where reporting has become a compliance-driven exercise, Integrated Reporting enhances the ability of companies to communicate their value creation story in an effective manner. This provides organisations with the opportunity to differentiate themselves from their competitors.
By disclosing a holistic overview of the organisation’s performance and future outlook, including improved reporting on strategy, risks and opportunities, the company can better explain how it creates value to its stakeholders. Integrated Reporting also emphasises communicating in a manner that shows the connectivity of the different components of the report and reporting what is material to the organisation’s ability to create value.
There are two main categories of benefits from Integrated Reporting -- Internal Benefits, and External Benefits
Internal benefits from Integrated Reporting
The main benefit of adopting <IR> is not necessarily the report itself, but rather the integrated thinking behind it. <IR> involves reporting on broader aspects of the organisation than traditional corporate reporting. Therefore, the senior management team of the company needs to be actively involved in the reporting process.
As a result, <IR> can break down silo thinking and improve communication between departments. With better communication, the company can set performance targets that are better aligned with the overall strategy of the organisation. Improved communication also enhances the checks and balances within the organisation and helps anchor the organisation in its mission and strategic plan.
Over time, <IR> may also help remove clutter and unimportant information from corporate reporting. Over the years, corporate reporting has grown in scope, with new sections included in increasingly lengthy reports. As a result of <IR>, greater emphasis on a collaborative reporting process and sharpened focus on connectivity can counteract the tendency.
External benefits of Integrated Reporting
The external benefits from <IR> stem from moving away from just “report and comply” towards “communicate and add value”. <IR> enhances the ability of the company to answer the question “why are we doing what we are doing?” for its stakeholders.
With <IR>, the company may attract increased investor interest by becoming better at explaining strategic direction, risk management and competitive advantages to its stakeholders. Better communication to its stakeholders may increase the visibility of the company as investment analysts and other stakeholders now understand the company’s business model and performance better than before.
Effective communication is indicative of an effective board and good business practices. As <IR> improves external communication, a company may be recognised for “good reporting” as reflective of a “good organisation”.
A study of listed companies on the Johannesburg Stock Exchange (JSE) also found a positive correlation between Integrated Reporting and firm valuation, providing empirical evidence that providers of financial capital value Integrated Reporting. The study provided evidence that equity investors do value <IR>.
For most organisations, Integrated Reporting is embedded within an existing report, such as the annual report. The main audience for their Integrated Reporting, just like the traditional annual report, is capital providers. Sustainability reports often target a broader range of stakeholders, including the general public.
Because the audience of Integrated Reporting and sustainability reports are often different, there are different perceptions of what is material. For example, the sustainability report audience may be interested in events and activities that do not have a material impact on the ability of the company to create value – such as anecdotal evidence of the impact of charitable events, or the overall “goodness” of the company.
The Integrated Reporting Framework does not compete with other reporting standards, including frameworks for sustainability reporting and corporate social responsibility (CSR) reporting. It does not compete or replace other forms of reporting, but rather provides a framework for improving overall corporate reporting and disclosure. Existing reporting standards can be included in Integrated Reporting. For example, an organisation may adopt the Global Reporting Initiative (GRI) standard for sustainability reporting and ensure that the sustainability portion of their IR complies with the GRI standard.
For specific issues, such as material disclosure and stakeholder engagement, the International Integrated Reporting Framework is very similar, for example, to the GRI framework for sustainability reporting:
International Integrated Reporting Framework
The materiality determination process applies to both positive and negative matters (e.g., opportunities and risks, and favourable and unfavourable results or prospects for the future), and to financial and other information. Such matters may have direct implications for the organisation itself or relate to the organisation’s effects on the capitals owned by or available to others.
Material matters require disclosure. The nature and extent of disclosure in an integrated report will be influenced by the nature of the matter and the application of all the Guiding Principles. The materiality determination process is required to be disclosed in an integrated report to enable the intended report users to understand how decisions to include or exclude matters were made.
For each Aspect, report the Aspect Boundary within the organisation, as follows:
- Report whether the Aspect is material within the organisation
- If the Aspect is not material for all entities within the organisation (as described in G4-17), select one of the following two approaches and report either
o The list of entities or groups of entities included in G4-17 for which the Aspect is not material or
o The list of entities or groups of entities included in G4-17 for which the Aspects is material
- Report any specific limitation regarding the Aspect Boundary within the organisation
An integrated report should provide insight into the quality of the organisation’s relationships with its key stakeholders and how and to what extent the organisation understands, takes into account and responds to their legitimate needs, interests and expectations.
- Provide a list of stakeholders engaged by the organisation
- Report the basis for identification and selection of stakeholders with whom to engage.
- Report the organisation’s approach to stakeholder engagement, including frequency of engagement by type of stakeholder group, and an indication of whether any of the engagement was undertaken specifically as part of the report preparation process.
- Report key topics and concerns that have been raised through stakeholder engagement, and how the organisation has responded to those key topics and concerns, including through its reporting. Report the stakeholder groups that raised each type of key topic and concerns.