Integrated Reporting: Old Wine in New Bottles?

This contribution strives to answer the following questions: Why do we need to realign corporate reporting? Is it old wine in new bottles or does it contain revolutionary ideas about corporate reporting? What is the additional value of integrated reporting and what does EnBW’s path toward integrated reporting look like?

In times of globalization and economic and financial crises, organizations are faced with a myriad of challenges. They have to reinvent their business models and implement new, innovative structures. Like many other organizations, EnBW has been affected as well, in addition to issues relating to the government-prescribed energy system transformation (Energiewende) in Germany. EnBW is one of the largest energy companies in Germany and Europe. In 2012 EnBW employed a workforce of about 20,000. These employees generate, trade, transport, and sell energy. Decentralized energy solutions, renewable energies, and low-carbon production are what the business focuses on. In these turbulent times in the global economy – and in the utility sector in particular – EnBW has decided to implement the idea of integrated reporting.

In the last decade, the global economy has suffered under the worst financial crisis since the 1930s – a crisis that was in part driven by individuals and organizations focusing on short-term profits and rewards, irrespective of their long-term sustainability. The crisis has underlined the need for capital market decision-making that reflects long-term considerations and implications. Furthermore, it has questioned the extent to which corporate reporting disclosures – as they exist today – reveal systematic risks to business, and whether this is sufficient and transparent. For years, corporate reporting became more voluminous and complex. Business reports are therefore equally exposed to fundamental criticism and used less as a primary source of information. At the same time, the number of stakeholders as well as their expectations over the years have grown considerably. Therefore, some companies produce “Sustainability” or “Environmental, Social and Governance” reports that consider these factors. Sustainability reports do not sufficiently address the risks and opportunities associated with the business strategy and model, nor are they well-known and relevant within companies. More reports and more information do not imply better reporting.

As a result, discussions have been carried out for several years as to whether the published corporate information should be realigned and in parts condensed, made more transparent, and formulated in a more understandable way. New concepts for reporting are necessary and go beyond the existing traditions and legal requirements. The idea of integrated reporting is considered a viable alternative.

All observers are aware that, as with all good ideas, a common and consistent understanding of integrated reporting is highly necessary to gain acceptance in markets, politics, and across society. Nevertheless, until recently, no standards or principles for integrated reporting had been set. The International Integrated Reporting Council (IIRC) was founded with the support of HRH Prince Charles with the Prince’s Accounting for Sustainability project in August 2010. It was intended to fill this gap by developing an internationally binding framework that supports companies in preparing an integrated report. With a number of draft papers, the IIRC proposed a framework for combing financial core elements with environmental and social information, as well as aspects of corporate governance, in a distinct, precise, consistent, and comparable format. The Council is composed of representatives from the most relevant organizations that have shaped financial reporting in the past and who come from the sciences, for example: companies such as EnBW, auditing firms, and organization such as IASB, IOSCO, and the World Bank, as well as leading organizations in the field of sustainability, such as the Global Reporting Initiative. As one of the leading actors in developing corporate reporting, the European Union is also being closely followed with great interest concerning current developments in integrated reporting.

The IIRC Consultation Draft, presented in April 2013, is a principle-based and not a rule-regulated approach. From a continental European point of view, this constitutes a less precise approach while containing fewer mandatory requirements.

At the heart of the Consultation Draft is the value concept as well as the concept of materiality, which has a great effect on the process of integrated thinking within the company and the assessment and the comprehensibility of connecting financial and non-financial KPIs. The Consultation Framework defines integrated reporting as a process that results in communication by an organization, most visibly a periodic integrated report about value creation over time. The most visible result of integrated reporting is the integrated report, which, according to the suggested framework, is described as: “a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.”

Four main elements of integrated reporting can be highlighted:

1. The concept of integrated reporting, with its guiding principles and content elements, represents not only an evolution but also a revolution in corporate reporting that increase the quality and the information value of corporate reporting according to the motto “Less is more.”
   
   
2. The concepts of integrated thinking and integrated reporting are supposed to reflect the management capability to monitor and to manage the complexity of the corporate value creation process. Following this logic, the actual integrated report is at the end of the process chain.
   
   
3. Integrated reporting is a holistic approach that connects classical financial reporting with non-financial information (such as sustainability issues, risk management, and corporate governance aspects). It merges all material information about strategy, corporate governance, and performances, and thereby mirrors economic, ecological, and social contexts within which a company is operating.
   
   
4. The concept of integrated reporting is not only a communication instrument in terms of report optimization, but also a steering tool that is used to measure financial and non-financial objectives through a corporate performance system with KPIs and target values.
   

It is the declared objective to communicate the internal management view externally, thereby enabling external observers to have a better and more comprehensive picture of the company.

To test the practicality of the concept, the IIRC started a pilot program for companies and investors in 2011. Since then, about 100 international companies have been engaged in this pilot program, which has the goal to further develop the framework by adding practical advice from companies and investors – one of the main goals of the IIRC. In April 2013 the IIRC Draft Consultation Framework was launched. Pilot participants as well as all interested parties have the possibility until July 15, 2013, to comment on the framework and thereby simultaneously participate in the realignment of corporate reporting. In December 2013 the first version of the IIRC framework will be released.

In 2011 EnBW embarked on a journey to integrated reporting. The direction of this journey is already known, but the path it takes, together with its internal and external stakeholders, has yet to be determined. In order to do justice to future markets as well as political and social demands, EnBW has put a clear focus on its strategic targets. Long-term and responsible thinking and action, including economic, ecological, and social aspects, are thereby necessary prerequisites. EnBW’s path is signposted by a continual convergence process that includes many internal stakeholders in different working groups. EnBW’s integrated report is adapted on a homoeopathic dosage level so as not to overburden the reader with this new form of reporting.

As an interim result, EnBW has published a combined report for fiscal year 2012. EnBW consciously uses the term “combined report” – in other words, a combination of the sustainability and business reports – because not all central concepts of integrated reporting have been implemented yet. This report was created based upon an optimized sustainability strategy and it already combines key aspects of the business and sustainability reports to a major degree. In addition, first steps were made to reduce the amount of facts provided to limit the report to the most crucial information.

EnBW’s path encompasses at its heart a company-wide project that was set up by the EnBW Board of Directors to implement the idea of integrated reporting across business units. The project is under the leadership of one employee from the finance branch and one employee from the sustainability branch (both authors). This step is an important signal for a change from internal “silo thinking” – irrespective of what degree this situation is present in a company – to an integrated approach. For achieving the project goals, a close mesh of all relevant business units is crucial, therefore they are all integrated into the project team. This means that various representatives from the fields of strategy, communications, investor relations, corporate accounting, legal affairs, controlling, environmental protection, human resources, and sustainability are involved throughout the process of the project.

Although significant progress has been made in a number of fields with regard to content elements and guiding principles, some questions remain unresolved. It still needs to be clarified whether integrated reporting is a renunciation of the traditional shareholder value reporting. In the Consultation Draft, investors are described as the main addressees, but at the same time the concept fosters the idea of a stakeholder orientation, which is advocated by many companies. There are different opinions out there as to whether integrated reporting is more than pure report optimization – in terms of reducing and trimming business reports. Corporate experience will highlight whether an integrated governance concept has to be at the heart of a process that addresses corporate steering components for assessing the main corporate objectives as well as presenting the company strategy and performance results in a new address-orientated format. In addition, a number of national particularities will have to be resolved. In Germany, there are discussions as to whether the German management report (Lagebericht) already fulfills the recommendations of the Consultation Framework on integrated reporting. The initial view that there are no major changes in comparison to the requirements of the German management report (s. DRS 20, German Accounting Standard, a regulatory standard for the group management report in Germany) has to be taken into consideration. But upon closer examination, significant changes can be identified when compared to the current legal requirements. These affect the accuracy of the report, the expectations of the linked representations, stakeholder-oriented reporting, and future orientation.

These and other questions are being discussed on a regular basis together with other German pilot program companies (SAP, Munich Airport, BASF, and Deutsche Bank) at the German IIRC Round Table. It is the objective of the Round Table to have regular exchanges of experiences concerning the central question of implementing IIRC recommendations.

Integrated reporting can definitely not be classified as “old wine in new bottles.” It constitutes a new approach for company reporting as well as for corporate governance. This new approach has led – and will lead – companies in the near future to alter their approaches to collecting, linking, and preparing financial and non-financial information and to external reporting. In comparison to compliance with rule-based approaches, it has the potential. The discussion entails the promise that, in the future, corporations can gain more trust and confidence in the reporting of its stakeholders through more clarity, conciseness, and transparency in their main communication tool.

By introducing integrated reporting, companies can achieve reputational advantages with key stakeholders by using a precise, transparent, and representative form of reporting.