A “more is more” mindset is necessary but not sufficient. The big need: context.
By Brendan LeBlanc
Over the last 20 years, investor reporting expectations have evolved. In addition to traditional financial performance measurements, companies are being asked for more complete non-financial performance metrics and measurements, such as those associated with environmental and social challenges. To properly understand an organization’s true value, amid tremendous complexities, investors require ever more sophisticated and intelligible reporting, which contextualizes financial and non-financial information and goals alongside company strategies with short-, medium-, and long-term stewardship of material environmental, social, business, and economic issues.
This change in reporting can be attributed to two principle causes. First, it reflects a paradigm shift in market evaluation, where for many companies their intangible value now constitutes the major part of their market value.
Secondly, modern business has become increasingly complex because of increased business interdependencies, the speed and reach of communications networks, and the heightened global visibility into environmental and social challenges.
In a rush to satisfy and comply, many companies have responded by disclosing more and more detailed non-financial data in an increasing number of reports. These include environmental, social, and governance data, in addition to traditional financial disclosures.
This “more is more” disclosure response is problematic. First, it creates reporting fatigue among internal resources while simultaneously confusing investor and stakeholders with disconnected information. More importantly, these numerous reports often fail to provide clarifying connections amongst financial (reporting management and measurement) and non-financial (operational, structural and risk management information) information and material environmental, social, business and economic agendas.
Investors need a reporting framework that does more than merge best practices from financial and non-financial reporting.
Enter integrated reporting. Through coherent and concise communication, an integrated report can highlight the information that is most pertinent to the direct creation and preservation of value. This includes a company’s material financial and non-financial value drivers, tangible and intangible assets, material financial and nonfinancial capital risks, strategic focus, sustainability agendas, and future goals. Integrated reporting gives investors a comprehensive picture of short-, medium- and long-term company value.
For investors, condensing and linking nonfinancial and financial information can be very helpful. Moreover, tremendous benefits for the company using integrated reporting are possible.
First, integrated reporting helps distinguish the organization in the eyes of investors and other stakeholders. This is crucial helping ensure that both financial and non-financial disclosures are appreciated and more easily accessed by investors. Various exchanges, finance terminals, independent sustainability reports and other reporting channels now routinely highlight non-financial information and reports alongside financial data, news, and reports.
Second, integrated reporting does more than simply window dress reporting information. Effective integrated reporting requires companies to synthesize a holistic view of a their short-, medium-, and long-term value before the publication of the report. And it aligns business practices, tangible and intangible assets, and material financial and nonfinancial capital risks with a company’s strategic focus, sustainability agendas, and future goals. This reporting prerequisite, namely the collection of material information across business departments, which are often in silos, requires thorough connectivity across every level of the business and provides a foundation to embed sustainable business practices.
Deemed “integrated thinking,” this strong internal network of communication, collaboration, and process efficiencies has the potential to provide lasting benefits that improve brand value and viability, company policy, and the financial bottom line. Moreover, beyond attracting investor capital and stakeholder approval, benefits from integrated reporting and integrated thinking can drive and sustain added value across the organization through various elements:
• Better financial and non-financial linkages across business silos,
including improved cross-functional alignment;
• More sophisticated company governance and strategic oversight,
including collective empowerment on key organizational issues;
• Enhanced understanding of convergent financial and non-financial
risks and opportunities that directly affect capital;
• Refined strategic environmental, social, and financial
• Additional opportunity for innovation of new revenue streams; and
• Increased investor and stakeholder interaction.
Currently, there is no globally accepted framework for integrated reporting. However, a global organization, the International Integrated Reporting Council (IIRC) has been formed with the support of The Prince’s Accounting for Sustainability Project, the Global Reporting Initiative (see page 52), the American Institute of CPAs and the International Federation of Accountants, as well as leaders from business and academia worldwide. The IIRC aims to develop a globally accepted framework that will define emerging risks, communicate new value drivers, satisfy current and anticipate future transparency and other demands from investors, and ensure consistency of reported information and present complete pictures of organizational value. More than 70 global companies have agreed to be pilots for the IIRC framework.
For other companies looking to explore integrated reporting, they do not have to wait for a fully baked framework. To get started, here are four initial steps to consider:
1. Define your desired state. Determine what integrated reporting means to your company. Frame your business goals, vision, and environmental and social objectives with capital opportunities and risks.
2. Assess material issues. Complete a thorough materiality analysis to determine what integrated reporting risks and opportunities are important to company leadership and investors. Prioritize their responses to determine the material issues and related business strategies.
3. Compare the current state against integrated reporting definitions. Evaluate integrated reporting practices, and select the methods that best fit your organization. Mirror the quality, processes, and controls of these leading companies and organizations.
4. Create a road map. Prioritize reporting on the environmental, social, and fiscal activities and projects that further an organization’s ability to create and preserve value. Design and implement robust processes and controls that support credible, high-quality reporting. Further, engage leadership and investors to prioritize projects that best ensure ROI and communicate successes with an external audience.
Remember, integrated reporting is more than the merging of financial and non-financial reporting information—it can focus and help develop company strategies to manage both financial and non-financial capital. Moreover, integrated reporting can help prepare a company to meet 21st-century business challenges by building integrated communication processes and efficiencies throughout the company, driving short-, medium- and long-term financial and non-financial value and engaging existing and potential investors.
Brendan LeBlanc is executive director of the Ernst & Young LLP climate change and sustainability services practice. The views expressed herein are those of the author and not necessarily those of Ernst & Young LLP