Integrated reporting: tips for organizations
Key components of an integrated report
We look at the key components of an integrated report including: the business model; capitals (tangible and intangible); key performance indicators; risk and opportunity management; materiality; and accounting for value.
The business model
The definition of the business model lies at the heart of the integrated report. It defines the essence of the organization and maps out the processes by which sustainable value is created.
When describing the business model in an integrated report we recommend considering the following questions:
- How does the organization define value?
- What are the organization’s mission and vision?
- What’s the organization’s environment?
- How does the organization define its strategy and what resources does it use?
- What are the main opportunities and challenges faced by the organization?
- What indicators are meaningful in terms of measuring the extent to which the organization achieves its stated value creation goals?
The multiple capitals model
A central tenet of integrated reporting is a belief that sustainable development requires a balance between economic progress, social advances and environmental protection. This requires an approach that distinguishes between different kinds of capitals and accounts for both tangible and intangible assets.
The IIRC identifies six capitals:
- Social and relationship
Prevailing accounting regulations seriously limit the ability to recognize internally generated intangible assets on the balance sheet. Integrated reporting aims to track how the various capitals are used, how they relate to each other and the trade-offs the organization makes.
The business model and strategy will articulate how capitals will translate into value creation and can be measured by the use of key performance indicators (KPI).
Strategy and key performance indicators
The strategy should describe the process and tools earmarked for value creation for shareholders and other key stakeholders such as customers, suppliers, employees and society as a whole. We recommend that it also:
- Articulate a balance between short-term financial performance and sustainable value creation over the longer-term
- Discuss the choices to be made when consuming resources and show how resources are used as efficiently as possible
- Explain how intangible assets relate to strategy and the value the assets have
- Focus on the issues that have a clear material impact on the business
KPIs allow for quantification of value. They also provide a means for tangible and intangible assets to be measured, other than just monetary.
When senior management determines the appropriate indicators, management can focus on monitoring strategic and material matters, while investors can assess value creation. This also allows organizations to understand how to minimize negative impacts and maximize positive ones.
Risk and opportunity management
Effective risk management is crucial to ensuring the viability of the value creation process and achieving the strategic value creation targets. This requires incorporating risk management into the organization’s decision-making process as well as strategy, then aligning it with prevailing industry circumstances.
The goal is to reduce uncertainty with respect to the organization’s performance and future resilience. It’s important to explain risk management processes in the integrated report as they are a clear indicator of likely long-term value.
It’s also important to explain the scope of the integrated report.
A materiality assessment is crucial to ensure that the report focuses on the factors that significantly impact value creation now, and performance over the longer term. Determining what should be disclosed can be based on:
- Relevance: Matters that have already impacted the organization’s strategy, business model or strategic capitals, or may do so in the future
- Significance: An assessment of a matter’s significance and probability of occurrence
- Prioritization: People charged with the organization’s governance need to prioritize the material matters based on their relevance and significance to investors.