11.2 Integrated reporting framework
7 min read•august 19, 2024
Integrated reporting is a holistic approach to corporate reporting that combines financial and non-financial information. It aims to provide a comprehensive view of an organization's process over time, focusing on the connectivity between various factors affecting its ability to create value.
The integrated reporting framework is built on the value creation process, , and guiding principles. It includes content elements like organizational overview, governance, business model, risks and opportunities, strategy, performance, and outlook. This approach enhances decision-making, risk management, and stakeholder engagement.
Integrated reporting definition
- Integrated reporting is a holistic approach to corporate reporting that combines financial and non-financial information in a single report
- Aims to provide a comprehensive view of an organization's value creation process over the short, medium, and long term
- Focuses on the connectivity and interdependencies between various factors that affect an organization's ability to create value (financial, manufactured, intellectual, human, social and relationship, and natural )
Benefits of integrated reporting
Improved decision making
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- Integrated reporting provides a more comprehensive and connected view of an organization's performance and prospects
- Enables better-informed decision making by management, investors, and other stakeholders
- Facilitates a more long-term and strategic approach to decision making by considering the interrelationships between different capitals and stakeholders
Enhanced risk management
- Integrated reporting helps organizations identify and manage a broader range of risks and opportunities
- Encourages a more proactive and integrated approach to risk management by considering the interconnectedness of different types of risks (financial, operational, reputational, environmental, social, etc.)
- Promotes greater and in risk management processes
Greater stakeholder engagement
- Integrated reporting fosters greater engagement and dialogue with a wide range of stakeholders (investors, employees, customers, suppliers, regulators, local communities, etc.)
- Provides a platform for organizations to communicate their value creation story and respond to stakeholder concerns and expectations
- Enhances trust and credibility with stakeholders by demonstrating a commitment to transparency and accountability
Integrated reporting framework
Value creation process
- The value creation process is at the core of the integrated reporting framework
- Describes how an organization creates value over time through its business model, strategy, and resource allocation decisions
- Considers the inputs (six capitals), business activities, outputs, and outcomes that contribute to value creation
Six capitals
- The six capitals represent the resources and relationships used and affected by an organization in its value creation process
- Includes financial capital (funds available), manufactured capital (physical infrastructure), intellectual capital (knowledge-based intangibles), human capital (people's competencies and capabilities), social and relationship capital (stakeholder relationships), and natural capital (environmental resources)
- Integrated reporting recognizes the importance of all six capitals in driving long-term value creation
Guiding principles
- The integrated reporting framework is based on a set of guiding principles that underpin the preparation and presentation of an integrated report
- Includes and future orientation, , stakeholder relationships, , conciseness, reliability and completeness, and consistency and comparability
- These principles ensure that integrated reports provide a balanced and meaningful representation of an organization's value creation story
Content elements
Organizational overview and external environment
- Provides an overview of the organization's mission, vision, values, and operating context
- Describes the external environment in which the organization operates, including macro-economic conditions, market trends, regulatory landscape, and stakeholder expectations
- Sets the context for understanding the organization's strategy, business model, and performance
Governance
- Explains the organization's governance structure, including the role and composition of the board and its committees
- Describes how governance supports the organization's ability to create value in the short, medium, and long term
- Discusses key governance matters, such as leadership, remuneration, and ethical behavior
Business model
- Describes the organization's business model, including its key inputs, business activities, outputs, and outcomes
- Explains how the business model creates value for the organization and its stakeholders
- Identifies the key resources and relationships (six capitals) that underpin the business model
Risks and opportunities
- Identifies the key risks and opportunities that affect the organization's ability to create value over time
- Explains how the organization is managing and mitigating these risks and capitalizing on opportunities
- Discusses the potential impact of risks and opportunities on the organization's strategy, business model, and future performance
Strategy and resource allocation
- Outlines the organization's short, medium, and long-term strategic objectives and how these support value creation
- Explains how the organization is allocating its resources (six capitals) to implement its strategy and achieve its objectives
- Discusses the key performance indicators used to measure progress against strategic objectives
Performance
- Provides a balanced and integrated view of the organization's performance, covering both financial and non-financial aspects
- Discusses the organization's performance against its strategic objectives and key performance indicators
- Explains how the organization's performance has been impacted by its external environment, risks and opportunities, and strategic choices
Outlook
- Provides a forward-looking view of the organization's future prospects and challenges
- Discusses the potential implications of the organization's strategy, business model, and performance on its future value creation capacity
- Identifies the key uncertainties, assumptions, and sensitivities that could affect the organization's future performance
Basis of preparation and presentation
- Explains the process and methodology used to prepare and present the integrated report
- Discusses the materiality determination process and how it has been applied in the report
- Identifies any significant frameworks, standards, or guidelines used in the preparation of the report
Integrated thinking
Integrated thinking definition
- is the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects
- It is the foundation of integrated reporting and underlies the value creation process
- Integrated thinking involves a holistic and multi-dimensional approach to decision making and management
Relationship to integrated reporting
- Integrated thinking is a prerequisite for effective integrated reporting
- It enables organizations to understand and manage the complex interrelationships between their various capitals, stakeholders, and value creation processes
- Integrated reporting is the external manifestation of integrated thinking within an organization
Challenges of integrated reporting
Lack of standardization
- There is currently no globally accepted standard for integrated reporting, which can lead to inconsistencies and comparability issues between organizations
- Different jurisdictions and industries may have varying requirements and expectations for integrated reporting
- The lack of standardization can make it difficult for stakeholders to assess and compare the performance of different organizations
Difficulty measuring certain capitals
- Some of the six capitals, particularly intellectual, human, social and relationship, and natural capitals, can be difficult to quantify and measure
- There is a lack of well-established metrics and valuation methodologies for these capitals
- This can make it challenging for organizations to report on these capitals in a meaningful and comparable way
Resistance to change
- Implementing integrated reporting requires a significant shift in mindset and approach from traditional financial reporting
- Some organizations may be resistant to change due to concerns about additional costs, resources, and disclosures required
- There may also be cultural and organizational barriers to adopting integrated thinking and reporting practices
Integrated reporting vs sustainability reporting
- Integrated reporting is a broader and more holistic approach than sustainability reporting
- Sustainability reporting focuses primarily on an organization's environmental, social, and governance (ESG) performance and impacts
- Integrated reporting encompasses sustainability issues but also considers the connectivity between ESG matters and an organization's strategy, business model, and financial performance
- Integrated reporting aims to provide a more complete and balanced view of an organization's overall value creation story
Integrated reporting vs financial reporting
- Financial reporting focuses primarily on an organization's financial performance, position, and cash flows
- It is based on generally accepted accounting principles (GAAP) and is primarily intended for investors and other capital providers
- Integrated reporting goes beyond financial reporting by considering a broader range of capitals and stakeholders
- It aims to provide a more forward-looking and strategic view of an organization's value creation process, rather than just historical financial performance
- Integrated reporting complements and enhances traditional financial reporting, rather than replacing it
Examples of integrated reports
- Novo Nordisk (pharmaceutical company) - recognized for its comprehensive and balanced approach to integrated reporting, covering all six capitals and demonstrating strong linkages between strategy, performance, and value creation
- Sasol (integrated chemicals and energy company) - provides a clear and concise integrated report that effectively communicates its value creation story, supported by relevant performance metrics and targets
- Unilever (consumer goods company) - offers a best-practice example of integrated reporting, with a strong focus on sustainability and long-term value creation for multiple stakeholders
Future of integrated reporting
- Integrated reporting is expected to become increasingly prevalent as more organizations recognize its benefits and stakeholders demand greater transparency and accountability
- There is a growing momentum towards the development of a global standard for integrated reporting, led by the
- The adoption of integrated reporting is likely to be driven by regulatory requirements, investor demands, and a broader societal shift towards sustainable and responsible business practices
- Integrated reporting has the potential to become the corporate reporting norm, providing a more meaningful and holistic view of an organization's value creation story
Key Terms to Review (20)
Accountability: Accountability refers to the obligation of individuals or organizations to report on their activities, accept responsibility for them, and disclose the results in a transparent manner. This concept is crucial in ensuring that stakeholders can trust and rely on the information provided by entities, impacting decision-making processes, governance, and performance assessments.
Capitals: In the context of integrated reporting, capitals refer to the different resources and relationships that organizations draw upon to create value over time. These capitals encompass various forms of wealth such as financial, manufactured, intellectual, human, social, and natural capital, each contributing to an organization’s sustainability and ability to operate effectively in the long term.
Change management: Change management refers to the structured approach to transitioning individuals, teams, and organizations from a current state to a desired future state. It involves methods and practices to help manage the human side of change, ensuring that transitions are smooth and that people are supported throughout the process. This is crucial when integrating new acquisitions or restructuring an organization and in establishing an integrated reporting framework that aligns various stakeholder interests and information systems.
Connectivity of information: Connectivity of information refers to the seamless integration and relationship between different pieces of data, allowing for a holistic view of an organization's performance and impacts. This concept emphasizes the importance of linking financial and non-financial information, ensuring stakeholders can understand how various elements interact and contribute to value creation over time.
Financial disclosures: Financial disclosures are formal statements that provide details about a company's financial performance, position, and cash flows, often required by law or regulations. These disclosures are essential for transparency, enabling investors, stakeholders, and regulators to make informed decisions based on accurate and comprehensive financial information. They encompass a range of reports including annual reports, quarterly earnings statements, and notes to the financial statements.
Global Reporting Initiative (GRI): The Global Reporting Initiative (GRI) is an international independent organization that provides a comprehensive framework for sustainability reporting, helping businesses and organizations communicate their environmental, social, and economic impacts. By promoting transparency and accountability, the GRI enables organizations to improve their sustainability performance and stakeholder engagement, making it crucial for integrated reporting and assurance processes.
Integrated thinking: Integrated thinking is an approach that promotes the consideration of a company's strategy, governance, performance, and prospects in a holistic manner, connecting financial and non-financial factors. This way of thinking encourages organizations to understand how their operations impact broader environmental, social, and economic contexts, leading to more sustainable decision-making. Integrated thinking is central to integrated reporting, as it aims to provide a comprehensive view of an organization's value creation process over time.
International Integrated Reporting Council (IIRC): The International Integrated Reporting Council (IIRC) is a global coalition of regulators, investors, companies, standard setters, accounting professionals, and NGOs that aims to promote and develop integrated reporting as a means of improving the quality of corporate reporting. The IIRC focuses on helping organizations communicate their value creation process in a clear and concise manner, enhancing the understanding of the connections between financial performance and broader social, environmental, and governance factors.
International Integrated Reporting Framework: The International Integrated Reporting Framework is a set of principles and guidelines that organizations use to create integrated reports, which communicate the value an organization creates over time. This framework emphasizes the connection between financial and non-financial information, promoting transparency and accountability while enhancing stakeholder engagement. By providing a holistic view of an organization’s strategy, governance, performance, and prospects, this framework helps stakeholders make informed decisions.
Ir framework: The IR Framework, or Integrated Reporting Framework, is a comprehensive framework developed to improve the way organizations communicate their value creation over time. It focuses on the interconnectedness of financial and non-financial information, emphasizing the importance of sustainability and long-term performance in decision-making processes. This framework guides businesses in presenting a holistic view of their strategy, governance, performance, and prospects.
Key Performance Indicators (KPIs): Key performance indicators (KPIs) are measurable values that demonstrate how effectively an organization is achieving key business objectives. They serve as a benchmark for success and are critical in assessing progress towards specific goals. In the context of integrated reporting, KPIs help communicate the organization's performance across financial and non-financial dimensions, enhancing transparency and accountability. In sustainability reports, KPIs provide stakeholders with quantifiable data on environmental, social, and governance performance, allowing for informed decision-making.
Materiality: Materiality is a concept in accounting and financial reporting that refers to the significance of information that could influence the decision-making of users of financial statements. This principle helps determine what information should be disclosed and how it should be presented, ensuring that stakeholders receive all relevant information for informed judgments.
Non-financial disclosures: Non-financial disclosures refer to the information reported by organizations that is not directly related to financial performance, such as environmental, social, and governance (ESG) factors. These disclosures provide stakeholders with insights into a company’s sustainability practices, ethical standards, and overall impact on society. They play a crucial role in integrated reporting, where both financial and non-financial information is used to present a holistic view of an organization’s performance and long-term value creation.
Reporting processes: Reporting processes refer to the systematic methods and procedures used by organizations to collect, analyze, and disseminate financial and non-financial information to stakeholders. These processes ensure that the information is accurate, timely, and relevant, allowing stakeholders to make informed decisions. Effective reporting processes contribute to transparency, accountability, and ultimately support the organization's strategic objectives.
Six capitals: The six capitals refer to a framework that identifies the different types of resources and relationships that organizations use to create value. These capitals are financial, manufactured, intellectual, human, social and relationship, and natural capital. Understanding these capitals helps organizations in their integrated reporting by providing a holistic view of how they leverage different resources to achieve sustainability and long-term success.
Stakeholder inclusiveness: Stakeholder inclusiveness is the principle that organizations should consider the interests and needs of all stakeholders when making decisions and reporting outcomes. This approach emphasizes transparency, accountability, and collaboration, ensuring that diverse perspectives are taken into account to foster trust and enhance decision-making processes.
Strategic focus: Strategic focus refers to an organization's clear and defined direction that guides its decision-making, resource allocation, and overall operations. It emphasizes the importance of aligning the company's goals with its long-term vision, ensuring that all actions contribute towards achieving those objectives. This focus is crucial in integrated reporting, as it helps stakeholders understand how a company's strategy supports its performance and value creation.
Sustainability metrics: Sustainability metrics are quantifiable measures used to assess an organization's environmental, social, and economic performance regarding sustainability goals. These metrics help organizations understand their impact on the planet and society while promoting accountability and transparency in reporting. By utilizing these measures, organizations can better communicate their sustainability efforts and progress to stakeholders.
Transparency: Transparency refers to the clarity and openness with which organizations communicate their financial and operational information, allowing stakeholders to understand and evaluate their activities and decisions. This concept is essential in fostering trust, accountability, and informed decision-making among investors, regulators, and the public.
Value creation: Value creation refers to the process through which organizations enhance their worth and generate value for stakeholders, including shareholders, customers, employees, and society at large. It involves integrating financial performance with non-financial aspects, emphasizing sustainable practices and long-term impacts. In today’s business environment, value creation goes beyond just profit-making; it incorporates social responsibility, environmental stewardship, and effective governance.