What Are the Benefits of Integrated Reporting?

Integrated reporting moves beyond a silo approach of information gathering and reporting toward a more comprehensive assessment and presentation of a company’s value and performance. This offers various benefits, such as giving organizations a more holistic view of information relevant to their strategies, business models, and abilities to create and sustain value in the short, medium, and long term.

More specifically, potential benefits are:

• greater access to and transparency of information from a wide range of both internal and external information sources, through integrated processes and the standardization of information;
  
  
• streamlined and better-connected reporting through more reuse of reporting elements, transparency, and collaboration on reporting;
  
  
• more relevant and understandable information available for management and stakeholders to enable better decision making;
  
  
• better allocation of capital and other resources;
  
  
• better access to capital markets and business partners;
  
  
• competitive advantage through cost savings, operational efficiencies, and differentiation.

However, the roadmap to realizing such benefits is not necessarily a simple one. It requires a comprehensive approach: understanding the company’s strategy drivers, identifying key stakeholders and their specific expectations, and implementing processes to obtain the information necessary for an integrated approach to managing the business.

The integrated model set out below highlights the scope of the information that needs to be considered when assessing the information demands of an organization, including the connectivity between the various areas – external, strategic, business, and performance. Regarding external drivers, companies might ask: What is the market and regulatory landscape like today, and how is it changing? What are the megatrends that are changing society now, and how will they impact markets in the future? With a view to the business model, relevant questions include: Are the business model and supply chain designed to withstand the impacts of climate change, technology failures, and natural disasters? What assumptions have been made regarding the availability of resources?

Answering these questions within an integrated approach will give companies a much clearer picture of their industry, markets, and broader environment as well as how to change products and services, business models, and positioning to remain successful.

Q: Is integrated reporting an external reporting phenomenon or does it have wider ramifications?

Even though the International Integrated Reporting Council (IIRC) discussion paper, which has triggered the current discussion about integrated reporting, initially provides a framework for external reporting, its aim is much higher. The idea of integrated reporting is focused on making some real changes to the existing corporate reporting model, both to external reporting as well as to internal decision making. An integrated report is merely intended to be one output of integrated reporting, which should reflect – and will depend upon – integrated thinking within an organization. It is about understanding the relevance of various factors – financial as well as non-financial – and its connectivity to the company’s business model, as well as about considering the insights formed with such a comprehensive approach in strategic and operational decisions. Ultimately, it is a topic with implications for the management, steering, governance, and culture of an organization.

Q: A status quo analysis based on the outcome of such questions may be the first step on the road to implementing an integrated reporting approach. Which standards have to be applied?

Despite increasing attention on and application of integrated reporting, there is still no common mandatory reporting standard. The only exception so far is South Africa, where companies listed on the Johannesburg stock exchange have to provide an annual integrated report – or explain why they have not – according to the King III Code of Governance Principles. The IIRC consultation draft, published in April 2013, offers fundamental principles for a new corporate reporting framework, including content elements and guiding principles as well as the “six capitals” approach in order to describe value creation. Furthermore, the IIRC issued three background papers on materiality, business model, and capitals, providing preparers with a clear idea of how a good integrated report should look. Maybe the final standard to be published in December 2013 will become mandatory one day. Nevertheless, we think that the principles of good reporting included in the IIRC framework can be applied regardless of specific regulation. In addition, we already see various reporting examples that reflect the ideas of integrated reporting very well and thus offer organizations that are aiming to move toward integrated reporting a foundation to build upon.

Q: Is an integrated report a “one size fits all” solution?

In essence, an integrated report should tell the story of the company. This includes historical financial information as well as information that is forward-looking, explains the company’s strategic direction, and discusses targets, risks, and opportunities to be addressed. The structure and length of the report thus depend on the complexity of the company’s business. However, the report should focus only on the matters that the organization considers most material for its value creation. This again leaves room for a different understanding of the scope of reporting and will lead to diversity in integrated reporting practices. Therefore, the development of supplementary guidelines for a consistent application of the IIRC framework will be crucial to assure comparability among preparers.

Q: Is an integrated report an additional document that organizations need to produce?

According to the IIRC framework, the main output of integrated reporting seems to be a single report that the IIRC anticipates will become an organization’s primary report. Due to the numerous existing regulatory reporting requirements, it is currently not realistic to call for replacing existing regulated information with an integrated report in the short term. Therefore, the IIRC rather refers to adding this information. However, as one of the goals of integrated reporting is the reduction of current reporting, preparers, users, and standard-setters should find alternative reporting solutions, such as including information required by the IIRC framework into existing reporting, and additionally making use of the online environment, thereby reducing clutter in the so-called primary report.

Q: When is my company ready for an integrated report?

In theory, every company can get ready at any time. However, depending on the size and complexity of an organization as well as the maturity of its reporting, a move toward integrated reporting may need longer preparation. Fortunately, many companies will not need to start the process from scratch, because they already publish a transparent, investor-oriented annual report, sustainability information, KPIs, and other information required for integrated reporting. However, such information is often not linked to their strategy and business model. Therefore, moving toward integrated reporting will mean restructuring the underlying reporting and internal processes. In some organizations, the structures may be so complex and fragmented that companies may even consider establishing a new structure with processes designed specifically for integrated reporting.

Given the developments and the potential benefits of integrated reporting, organizations should consider moving toward integrated reporting in anticipation of regulatory requirements. It may help them to make a difference as first movers and thus give them a valuable competitive advantage. For those who do not yet report on non-financials, integrated reporting can be an opportunity to move to a more comprehensive and meaningful reporting that meets future requirements from the outset.