Now that most of the 2018 annual reports have been published, we are noticing a clear trend towards Integrated Reporting. Financial and non-financial information are integrated in one report. It is clear that it is more than just adding a 'corporate social responsibility' chapter. It is even about more than just reporting, but about an integrated process and an integrated strategy.
Long-term vision of the value chain
Integrated reporting is a way for a company to offer its stakeholders a holistic view of the financial and non-financial business impact. In essence, with integrated reporting, a company looks in the mirror and asks itself the following questions:
- What does the future look like?
- How does my business strategy position itself in this regard?
- How can I create maximum added value for all stakeholders in the long term?
More concrete, for example, it is about the impact of the future scarcity of raw materials on the company's activities. Or how a company can respond to demographic evolutions or the mobility challenge.
The traditional approach to financial reporting is more about looking back on the basis of figures. Non-financial information is already being published by various companies in a separate sustainability report (whether or not as a chapter in the annual report). In this report there is usually no link to the financial information.
Both approaches (based on financial or non-financial information) do not give a complete picture of a company. After all, a company is not only dependent on financial capital, but also on other resources, such as employees, natural resources and relationships with stakeholders.
Corporate social responsibility has long been a combination of charity and reputation management, without making major changes in the way business is done. Today, sustainable business is increasingly becoming the essence of the business strategy. And that evolution also translates into the annual report.
Reporting is not a goal in itself. It is a means to monitor and improve performance. In addition, it remains of course a way to communicate with stakeholders about achievements and future visions.
'The numbers tell the tale'. More insight into the non-financial aspects leads to concrete, operational changes. Good reporting establishes the link between the business strategy and the activities. An example: a life cycle analysis at product level gives a company insight into which phase of the chain actions must be taken to reduce the environmental impact.
If this knowledge is elevated to a strategic level, then producers in the electronics sector can, for example, succeed in reducing the energy consumption of their products in the usage phase. Or even: food product companies can use this information to reduce the sugar content of their products.
The EY report Is your nonfinancial performance revealing the true value of your business to investors? confirms the worldwide trend of increasing interest in non-financial information among investors. Non-financial performance plays a crucial role in the investment decisions of most investors (and this number has continued to increase during the past years). The study cites integrated reports and annual reports as the most useful sources of non-financial information for making investment decisions.
More than reporting
An integrated report shows how a company views its strategy, governance, performance, risks and prospects in the long term. An integrated report can only be prepared thanks to an integrated process that is based on integrated thinking.
Integrated reports describe the company through a so-called 'value creation model'. In addition to traditional capital (financial and raw materials), a company uses and realizes intellectual, human, social and natural capital. The model asks the following questions:
- What capital does a company use?
- What capital does it create?
It is interesting that the model clarifies interdependencies. For example: a company can increase the financial capital at the expense of natural or human capital.