Getting to grips with integrated reporting

As IROs face more demand than ever for corporate disclosure from stakeholders, annual reports and financial statements are beginning to be governed by a patchwork of new regulations and best practices. For many investors, the addition of sustainability data is the most pressing issue. For most firms, that means adhering to new ‘frameworks’; the Global Reporting Initiative, the Prince’s Accounting for Sustainability Project and the International Integrated Reporting Council (IIRC) all have their own, to name just a few.

A recent IR Magazine survey, however, shows that only 20 percent of IROs produce a truly ‘integrated’ report (see Sustaining the global effort, opposite) that sees sustainability as a core feature, while 36 percent say they do not produce any sort of sustainability report. Framework operators, meanwhile, are optimistic that producing integrated reports will soon be second nature to most companies.

The IIRC’s guidelines (see A quick guide to the IIRC framework, below) are increasingly the first port of call for organizations, either followed directly or used as a touchstone for informing their reporting practices. Indeed, the IIRC’s CEO, Paul Druckman, said with optimism in December 2013 that the IIRC had ‘fired the starting gun on a period of global adoption that will begin in early 2014’.

IR Magazine recently spoke to professionals responsible for introducing the trend at their companies to discover the considerations, challenges and advantages involved in adopting a new approach to reporting.

DBS Bank

Short-listed for the best corporate literature award and finishing in third place in the Top 25 rankings at the IR Magazine Awards – South East Asia 2013, Singaporean financial services company DBS Bank is known for its reporting practices. The banking group was the first firm in South East Asia to sign up to the IIRC’s integrated reporting pilot scheme in 2012, joining a number of companies around the world whose feedback later helped form the council’s framework.

Mikkel Larsen, DBS’ managing director and head of tax and accounting policy, took a central role in changing the bank’s reporting structure, but describes the process as a ‘journey’ that still has some way to go. ‘The annual report that year was the first step toward integrated reporting,’ he says. ‘Like many other business network members, we still don’t claim ‘compliance’ with the IIRC framework but we do consider our report to be ‘integrated’ in the sense that it aims to link together our strategy, priorities, risks and performance.’

The company’s business model provides the entire structure of its annual report, supported by DBS’ scorecard and priorities. Each section focuses on a different stakeholder, with sustainability information incorporated throughout. ‘DBS’ long-term management ethos and our focus on serving our five key stakeholders lend themselves well to the IIRC framework,’ notes Larsen. ‘It was a good match for how we wish to be measured and communicate our story.’

Larsen concedes that there are inevitable challenges that need to be met when adopting the practice, most of which center around ‘choosing the right issues to report on – including key performance indicators (KPIs) – without losing focus on being concise’. Providing sensitive information, he continues, is important, too: ‘In an ever-changing industry, choosing meaningful KPIs that link to our strategy and can be reasonably tracked and influenced is critical.’

At the same time, it’s important not to lose sight of what the document is for. ‘An integrated report needs to be concise and focus on its primary audience: investors,’ Larsen asserts. ‘It aims to answer the question of why the organization is viable in the longer term; it is not trying to be everything to everybody.’

Internal challenges, meanwhile, include ‘bringing the right people together across the organization to produce a strong report’ in a DBS-appropriate way – which Larsen says has prompted a notable improvement in how his colleagues collaborate. ‘The less obvious advantage is perhaps that of getting people to speak to each other about how best to articulate our value proposition and performance from a broader perspective,’ he notes.

Though feedback to report authors has been sparse so far, Larsen sees that changing in the near future. It’s of particular interest for investors to recognize those that go ‘the extra mile,’ he adds, and though he has ‘yet to see much evidence that investors grant IR [report] preparers such tangible recognition, I believe this is changing.’ Feedback from shareholders and report writers alike will serve to hone DBS’ report in the future. ‘It’s a mutual learning process,’ Larsen concludes.

A quick guide to the IIRC framework

The IIRC framework, developed with companies that participated in its pilot scheme, provides a series of guidelines that enable companies to produce wholly integrated financial reports. It sketches out seven guiding principles on which content should be presented to investors and how, and encourages an appreciation for a company’s incoming and outgoing resources. These are separated into six ‘capitals’, defined as financial, manufactured, intellectual, human, social/relationship and natural. The framework’s aim, says the IIRC, is to give companies a theoretical basis for understanding and explaining how they create value in different ways. 


British Land

For Sally Jones, IR head at London-based property management firm British Land, the IIRC’s framework isn’t the best fit for the company’s new integrated reports. ‘It doesn’t reflect the way we do things,’ she maintains. ‘We took most of our inspiration from the Financial Reporting Council guidance on strategic reports.’

Said guidance is not as exacting as the IIRC’s framework but does encourage each company to communicate its ‘story’ in its annual, concentrating on strategy, business model, principal risks and challenges the organization has faced. It also requires abiding companies to include information about their human rights approach, gender representation and greenhouse gas emissions.

British Land’s annual report focuses the company’s activities into four main areas – obtaining property in the ‘right places’, customer orientation, capital efficiency and retaining expert employees – and tracks the value that each creates economically, socially and environmentally, with equal billing given to the benefits for investors, property occupiers, suppliers and local communities. Each section is also visually tied to one of the firm’s stated activities. ‘We did it in a way that reflects how sustainability works and runs in our business,’ Jones explains.

This is the first year that British Land’s annual report has appeared in such a form, though Jones says the changed format was not a result of investor pressure but was chosen to better reflect the organization’s own activities. ‘It doesn’t make sense to report on [sustainability] as a separate activity – for example, how we develop buildings,’ Jones reveals. ‘We’ve been working with our sustainability team to bring the reporting together and make it more coherent so the 2014 report is really an evolution from the prior year.’

That said, investors and institutions have expressed their preference for the new report. ‘If you can tell a joined-up story, people are much more likely to believe that it really matters,’ says Jones. The benefits within the company are immediate, too. ‘I think it helps focus organizations and makes them address some difficult questions, including what value these activities are really adding,’ she continues.

The process can present challenges, however, even to a team of IROs used to presenting information in this way. ‘The CSR community is used to a lot of granular information and can tend to think everything is important,’ Jones warns. ‘The key challenge is keeping the reporting in proportion so it doesn’t swamp other data that the average investor may think is more important.’

Novo Nordisk

Specialist healthcare outfit Novo Nordisk was the first company in Denmark to produce an environmental report back in 1994. The firm – which focuses on services surrounding diabetes care, hemophilia treatment and growth hormone disorders – has produced a more formal integrated report since 2004. The decision was made after the company changed the way it fundamentally approached its business.

‘The articles of association were updated by the board to include commitments to take into account financial, social and environmental dimensions when making decisions, which naturally led to integrated reporting,’ says Daniel Bohsen, IR manager at Novo Nordisk. ‘We cannot not do integrated reporting, as otherwise we would be in conflict with these.’

The choice was made partly easier by the company’s inclusion in the UN’s Global Compact in 2002, which holds its members to high standards in several non-financial areas, including human rights and environmental friendliness. ‘It means we only have to produce one report instead of several,’ adds Bohsen.

Novo Nordisk’s annual report does not directly adhere to the IIRC’s guidelines, though it does and will continue to make reference to the content elements and guiding principles the framework lays out. ‘We are working toward adherence to the framework,’ Bohsen explains. For now, it’s used to ‘guide and inspire’ the company’s reporting ethos.

As suggested in the IIRC’s framework, the Danish company offers a holistic view of the company through its reports. ‘ESG information is integrated and located in the annual report, where meaningful, in order to tell the most accurate and complete performance story of Novo Nordisk,’ explains Bohsen. Company accounts are presented as a financial, social and environmental statement, complete with comprehensive notes. According to Bohsen, the key advantage of this format is that investors are presented with a thorough view of Novo Nordisk that aligns with its larger corporate goals, especially given its larger commitment to sustainability.

Feedback from stakeholders has been good, while the annual report itself ‘is generally well perceived’ by the company’s investors. Indeed, Novo Nordisk was short-listed for best financial reporting at this year’s IR Magazine Awards – Europe. In our survey, investors particularly focused on the clarity of the Nordic company’s communications. ‘Everything at Novo Nordisk – from the science to the drugs and the figures – is well explained,’ observed one buy-side professional from the UK.

Such a comment highlights one of the main challenges Bohsen says he and his five fellow team members run into when producing the integrated report. ‘An obvious challenge is to avoid information overload in the report,’ he notes. ‘Key financial information should be easy to find and readable for the standard, non-SRI investor.’

Sustaining the global effort

Though an integrated approach to annual reporting is becoming increasingly central to many companies’ IR, the trend is catching on in some areas faster than others. 

While 20 percent of IROs we surveyed worldwide say they produce an integrated annual report with sustainability considered a ‘core feature’, 36 percent say they do not produce a sustainability report of any sort. 

Enthusiasm seems lower in the US, where 53 percent of IROs do not produce such a report at all, while only 9 percent have what can be considered an integrated report. Conversely, 31 percent of European IR practitioners say they produce an integrated report, while 50 percent say they produce a separate, dedicated sustainability report.

Integrated reporting 
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