11.3 Integrated Reporting and Non-Financial Disclosures
3 min read•august 9, 2024
combines financial and non-financial information to show how companies create value over time. It uses a framework that considers six types of capital and emphasizes long-term for stakeholders, going beyond short-term financial performance.
Non-financial disclosures complement traditional reporting by covering environmental, social, and governance factors. This approach, known as ESG reporting, helps organizations balance financial goals with social and environmental responsibilities, enhancing and stakeholder trust.
Integrated Reporting Frameworks
The Framework and Value Creation Model
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Integrated Reporting Framework developed by the (IIRC)
Provides a holistic approach to corporate reporting by combining financial and non-financial information
Value creation model forms the core of the Framework
Illustrates how an organization creates value over time
Considers inputs, business activities, outputs, and outcomes
Emphasizes long-term value creation for stakeholders (investors, employees, customers)
Encourages organizations to think beyond short-term financial performance
Six Capitals and Their Interconnections
Framework identifies six types of capital crucial for value creation
Financial capital encompasses monetary resources available to the organization
Manufactured capital includes physical assets used in production (buildings, equipment)
Intellectual capital comprises intangible assets (patents, copyrights, organizational knowledge)
Human capital represents skills, experience, and motivation of employees
Social and relationship capital involves stakeholder relationships and brand reputation
Natural capital encompasses environmental resources and processes (air, water, biodiversity)
Capitals are interconnected and can transform into one another (financial capital invested in human capital through training programs)
Connectivity of Information in Integrated Reporting
Connectivity principle ensures coherent presentation of information in integrated reports
Links different elements of the report to provide a holistic view of the organization
Demonstrates relationships between financial and non-financial performance
Incorporates forward-looking information to show future prospects and strategies
Utilizes cross-referencing and visual aids (diagrams, charts) to enhance connectivity
Enables stakeholders to understand the organization's value creation process comprehensively
Non-Financial Disclosures
ESG Reporting and Triple Bottom Line
ESG reporting focuses on Environmental, Social, and Governance factors
Provides insights into a company's performance and risk management
Environmental factors include carbon emissions, water usage, and waste management
Social factors encompass employee relations, diversity, and community engagement
Governance factors cover board structure, executive compensation, and ethical practices
Triple bottom line concept expands traditional financial reporting
Considers People (social impact), Planet (), and Profit (economic impact)
Helps organizations balance financial goals with social and environmental responsibilities
Types and Importance of Non-Financial Disclosures
Non-financial disclosures complement traditional financial reporting
Include information on sustainability initiatives, corporate , and risk management
Mandatory disclosures required by regulations (Sarbanes-Oxley Act, EU Non-Financial Reporting Directive)
Voluntary disclosures provide additional transparency (sustainability reports, integrated reports)
Key performance indicators (KPIs) used to measure and report non-financial performance
Benefits of non-financial disclosures:
Enhanced stakeholder trust and engagement
Improved risk management and decision-making
Attraction of socially responsible investors
Materiality in Integrated Reporting
Materiality determines which information is significant enough to include in integrated reports
Considers both financial and non-financial factors that influence value creation
process:
Identify potential material issues
Prioritize issues based on importance to stakeholders and business impact
Validate and review the materiality matrix
Materiality thresholds may differ for financial and non-financial information
Requires ongoing stakeholder engagement to identify evolving material issues
Challenges in determining materiality for non-financial information:
Lack of standardized metrics
Difficulty in quantifying certain impacts
Balancing short-term and long-term materiality considerations
Key Terms to Review (18)
Accountability: Accountability refers to the obligation of an organization or individual to account for its actions, accept responsibility, and disclose results in a transparent manner. This concept is vital in fostering trust among stakeholders and ensuring that businesses operate ethically and sustainably.
Auditing of non-financial information: Auditing of non-financial information refers to the systematic examination and verification of data that does not relate directly to financial statements but is crucial for assessing a company's sustainability, social responsibility, and overall performance. This type of auditing enhances transparency and credibility in integrated reporting by ensuring that non-financial disclosures, such as environmental impact, labor practices, and governance, are accurate and reliable. It also supports stakeholders in making informed decisions based on a broader understanding of an organization's practices beyond just its financial health.
Environmental Impact: Environmental impact refers to the effect that an organization's activities have on the natural environment, including aspects like resource depletion, pollution, and biodiversity loss. This concept emphasizes the importance of considering ecological consequences alongside economic and social factors, highlighting the interconnectedness of people, planet, and profit. Understanding environmental impact is crucial for organizations striving for sustainability and accountability in their operations.
Esg (environmental, social, and governance): ESG stands for Environmental, Social, and Governance, and it represents a framework that helps evaluate how an organization manages risks and opportunities related to environmental sustainability, social responsibility, and effective governance practices. This concept is becoming increasingly important as stakeholders look beyond traditional financial metrics to understand a company's overall impact and long-term sustainability. ESG factors are crucial for integrated reporting and non-financial disclosures, providing transparency to investors and consumers about how companies address these critical issues.
Global Reporting Initiative: The Global Reporting Initiative (GRI) is an international organization that provides a comprehensive framework for businesses and organizations to report on their economic, environmental, and social impacts. GRI guidelines help organizations communicate their sustainability efforts and performance, fostering transparency and accountability in business practices.
GRI Standards: GRI Standards are a set of guidelines designed to help organizations report on their economic, environmental, and social impacts in a transparent manner. These standards provide a framework for integrated reporting and non-financial disclosures, enabling companies to communicate their sustainability performance and impacts to stakeholders effectively.
Impact Investing: Impact investing refers to investments made with the intention to generate positive social and environmental impacts alongside financial returns. This practice aligns closely with the goals of responsible business, as it seeks to create solutions for pressing global challenges while still ensuring profitability.
Integrated reporting: Integrated reporting is a holistic approach to corporate reporting that combines financial and non-financial information into a single, cohesive document. This type of reporting aims to provide stakeholders with a comprehensive view of an organization’s strategy, governance, performance, and prospects, thereby enhancing transparency and accountability. By integrating both financial and non-financial metrics, integrated reporting helps businesses communicate their value creation process more effectively and aligns with the growing demand for responsible business practices.
International Integrated Reporting Council: The International Integrated Reporting Council (IIRC) is a global organization that aims to promote and develop integrated reporting as a means of improving the accountability and transparency of organizations. It encourages businesses to combine both financial and non-financial information into a single report, allowing stakeholders to gain a holistic view of an organization’s performance, sustainability, and value creation over time.
ISO 26000: ISO 26000 is an international standard that provides guidelines for social responsibility, helping organizations operate in a socially responsible manner. It emphasizes the importance of ethical behavior, sustainable development, and transparency in business practices, impacting various aspects such as corporate governance and stakeholder engagement.
Materiality Assessment: A materiality assessment is a process used to identify and prioritize the most significant environmental, social, and governance issues that could impact a company’s performance and stakeholder perceptions. This assessment helps businesses focus their sustainability efforts on what truly matters to stakeholders, enhancing transparency and accountability in reporting practices.
Social responsibility: Social responsibility refers to the ethical framework that suggests individuals and organizations have an obligation to act for the benefit of society at large. This concept emphasizes the importance of balancing economic growth with the welfare of people and the environment. It encourages businesses to not only focus on profits but also to consider their impact on stakeholders, including employees, customers, communities, and the planet.
Stakeholder inclusiveness: Stakeholder inclusiveness is the principle that organizations should engage and consider the interests of all relevant stakeholders in their decision-making processes. This involves identifying stakeholders, understanding their needs and expectations, and ensuring their perspectives are reflected in the organization's activities and reporting. By fostering stakeholder inclusiveness, organizations can enhance transparency, build trust, and improve overall accountability, which is crucial for integrated reporting and non-financial disclosures.
Sustainability: Sustainability refers to the ability to maintain or improve environmental, social, and economic systems over the long term without depleting resources or causing harm to future generations. This concept is vital for responsible business practices as it emphasizes balancing profit with social responsibility and environmental stewardship.
Sustainability Accounting Standards Board: The Sustainability Accounting Standards Board (SASB) is an organization that develops and maintains sustainability accounting standards to help public corporations disclose material, decision-useful information to investors. By focusing on financially relevant environmental, social, and governance (ESG) factors, SASB aims to enhance the transparency and comparability of sustainability reporting across industries. This standardization supports integrated reporting and non-financial disclosures, enabling stakeholders to assess a company's sustainability performance alongside its financial metrics.
Transparency: Transparency refers to the openness, clarity, and accessibility of information within an organization, allowing stakeholders to understand its operations, decisions, and practices. This concept fosters trust and accountability by ensuring that information is readily available and communicated effectively, impacting various aspects of responsible business practices.
UN Global Compact: The UN Global Compact is a voluntary initiative that encourages businesses worldwide to adopt sustainable and socially responsible policies, aligning their operations with universal principles in areas such as human rights, labor, environment, and anti-corruption. This initiative not only helps companies to act responsibly but also serves as a framework for them to contribute positively towards global goals like the Sustainable Development Goals (SDGs). By participating, organizations commit to integrating these principles into their strategies and operations, impacting CSR strategies, sustainability reporting, and non-financial disclosures.
Value creation: Value creation refers to the process by which businesses generate worth or benefit for their stakeholders, including customers, employees, investors, and the broader community. This concept is central to understanding how companies can thrive sustainably while also considering social and environmental impacts. It encompasses both financial metrics and non-financial factors that contribute to long-term success and stakeholder satisfaction.