The way companies report on their financial status has changed little since corporate accounting standards were first created 80 years ago. Yet the world they operate in, and the risks and opportunities they face, have changed almost beyond recognition.
Global population has soared from two to seven billion, with human and manufactured capital now in abundance. Natural capital, on the other hand, has become scarcer and more precious. Once-plentiful forests, food, water, wetlands, minerals and metals are in short supply, creating supply chain and operational risks.
Today, a global coalition of regulators, investors, companies, and accounting organizations launched a new integrated reporting framework in six major cities, which aims to address this gap. The draft framework from the International Integrated Reporting Council (IIRC), based on input from 85 pilot companies and more than 50 investors, represents a much-needed milestone in the evolution of corporate reporting.
Integrated Reporting: A New Approach to Accounting
Integrated reporting does exactly what its name suggests. It presents, in one document, a concise, joined-up presentation of everything material to a company’s present and future performance - including financial, management, governance, and sustainability information, which are commonly reported separately. It also looks at a company’s relationship with six key forms of capitals - financial, intellectual, manufactured, social, human, and natural.
As a result, investors and other stakeholders get a more complete picture of a company’s health, the risks it faces, and its ability to create and sustain value over time (see table).
Integrated Reporting in Action
While integrated reporting is still in its infancy, the 85 companies piloting early versions of the IIRC’s framework are showing us the way forward. Among those taking part around the world are household names such as Coca-Cola, Unilever, Volvo, Danone, Hyundai, Marks & Spencer, Microsoft and Novo Nordisk. The IIRC’s final draft model, released for consultation today, draws on lessons they learned. And some pilot companies have already responded by shifting their thinking and reporting methods. For example:
Sasol, an energy and chemicals company, identified climate change in its integrated report as a top risk to its operations growth strategy and earnings. Its report described four risk management strategies it plans to pursue: use of low-carbon and renewable energy, energy efficiency, and carbon capture and storage.
Chemicals company AkzoNobel launched an integrated strategy linking sustainability performance to business results, in part by using as few resources as possible. The company has also set a target to generate 20 percent of revenue from resource and energy light products by 2020.
A survey of 43 companies piloting the model suggests that integrated reporting could have a major impact on how companies operate and plan for the future. Ninety eight percent believed that integrated reporting would improve understanding of how their company creates value over time, while 93 percent agreed that it improved working processes across teams and functions. Almost three in 10 reported already seeing significant benefits at the Board level.
Benefits to Business and Society
Beyond making companies smarter, integrated reporting will bring overdue benefits to wider society. The narrow focus of today’s financial reports ignores the scale of change taking place in our global economy and society, including the interconnected risks posed by financial instability and unsustainability.
In 1975, for example, approximately 83 percent of the market value of the U.S. S&P 500 could be found in company accounts. In 2010, financial statements captured only 20 percent of a company’s market value, according to risk management company Deloitte. Without a wider focus on all forms of capital, investors and corporate leaders simply do not have the full picture needed to make rational decisions that benefit people and planet as well as profit.
It’s too early to tell whether integrated reporting will take hold among leading global corporations, or how much of a material difference it will make. Many of the early reports have simply combined the contents of a sustainability report with an annual report, rather than selectively presenting the most material information to a company’s present and future health. There is no doubt, though, that the IRRC model is a big step in the right direction.
In this warming, crowded, and resource-scarce world, business as usual no longer exists. Companies that embrace integrated reporting will be better informed and prepared to navigate the turbulent waters ahead.