Investor engagement

Integrated reporting? You may be closer than you think

SB: Let’s start with the basics. What is integrated reporting?

AS: In summary, an integrated report explains how an organisation creates value in the long term. It recognises that a business relies not just on financial and manufactured capital, but also on broader resources and relationships, such as human capital – its employees. An integrated report brings together in one place information about your strategy, governance, performance and prospects across the whole commercial context, in addition to the social and environmental aspects of what you do. I believe it’s common sense that you consider all this in a holistic way.

Companies which simply bolt a corporate social responsibility (CSR) report onto their annual report may not be giving consideration as to how broader social and environmental factors are embedded into their overall strategy, or to what information is material to the primary user of the report – the investor. Stakeholder relationships are at the heart of integrated reporting, so you need to provide an insight into their nature and quality, how you consider the needs of the various stakeholders and how those needs shape your business model.

SB: What are the benefits for companies of embracing integrated reporting?

AS: I think, primarily, integrated thinking, which underpins integrated reporting. Writing an integrated report would be a challenge without integrated thinking. This means all areas of the business will be talking to each other. In itself, this means the business will be more efficient and agile if risks surface, opportunities arise or the market changes. Better connections and integrated thinking lead to better decision making. This, in turn, may attract investment, as it better reflects the competence of the management team. Additionally, it offers a new lens on the business, and may well build more trust with shareholders and wider stakeholders. Non-financial capital does, ultimately, affect financial success. So integrated reporting promotes stakeholder engagement.

SB: So, what are the challenges to adopting integrated thinking? And what comes first, integrated reporting or integrated thinking?

AS: Some say integrated thinking must come first, so you can then report more easily on your activity in an integrated manner. However, there is a view that it is the desire to report in an integrated manner which can lead to thinking in an integrated way. With the adoption of the strategic report in the UK, many companies have been moving in the direction of integrated reporting as a consequence, and hopefully their thinking is now more integrated, too. Both the IIRC and the FRC consider the strategic report as being very aligned with the aims of integrated reporting. So, many businesses may already have the integrated thinking element – looking at the connectivity between factors, the resources and relationships they make use of, how they respond to the external environment and to key stakeholder needs, and what their risks and opportunities are. If an organisation is considering all of these things, they are well on their way to writing an integrated report. The challenge is to get all areas of the business talking to each other regarding the business strategy and model, and embedding social and environmental factors within those. It requires common understanding and, of course, buy-in from all concerned. This may be the crux of the matter, the major challenge. It depends where an organisation is in the process, but it can be an iterative process where, each year, the business identifies gaps in its reporting and addresses them.

SB: Do you think investors understand the benefits of integrated reporting?

AS: There are ‘enlightened’ investors who do, but also some more traditional ones who don’t. Then there are ESG investors who will specifically filter out investments that don’t meet their criteria regardless of the reporting style. But impact investing, where investors assess the positive impact a business can make, is emerging strongly and integrated reporting neatly fulfils such investors’ needs and expectations.

SB: Based on your latest research, are UK companies continuing to adopt integrated reporting?

AS: Because we have the strategic report in the UK, we are slightly different from other countries in that a lot of our annual reports are already very good. They might not claim to be an integrated report, but many of them reflect the attributes of one. In our annual report Insights project, we examined 100 reports across the FTSE. This year, six companies said they were producing integrated reports, while a few more said they were reporting in an integrated way. But these numbers don’t necessarily reflect the reality, as ‘tick-box’ exercises to create an integrated report might not actually produce as holistic a story as a very good report which doesn’t mention the integrated reporting framework. For example, 32 of the companies we looked at were clearly considering the integrated reporting notion of capital in their business model. Over 70 of the companies talked in some way about their broader resources and relationships, and over 60 discussed creating value for other stakeholders. So the figures are very encouraging.

SB: Finally, where should a company start on its journey to adopting the IIRC’s framework?

AS: I would start from the premise that you need integrated thinking first, so your initial questions might be: What is our company purpose? Who are our key stakeholders? What are their needs? What relationships do we rely on? What are the other inputs into our business? Is CSR integrated into our strategy? Following that, you’d need to ensure you had the right processes in place to understand all this and to produce the data you need, and that you’d identified the right KPIs – that is, you are measuring the things that matter. But, practically, and to insert a ‘mental bullet point’ at the start of the list above, the very first thing would be getting buy-in from those around the organisation.

The Luminous view

Many of our clients are on the integrated reporting journey already, and it really is a journey worth taking. We wholeheartedly agree that stakeholder engagement is fundamental to the process – there is a clear link between the ability of a company to create value for itself and the value it creates for others. For companies starting out, we recommend getting buy-in from their C-suite, ideally the CEO or FD; integrated thinking is very much a top-down process. Conduct a gap analysis of your existing report against the Integrated Reporting framework and then put a clear plan in place over the next three to five years of how your business will fully adopt integrated thinking and, by extension, integrated reporting. Lay this road map out as part of your next annual report and invite your investors and wider stakeholders on the journey, too.

To find out more about the latest thinking around Integrated Reporting, please get in touch.

[email protected]

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