Author's note: This article was originally posted as a guest expert blog on the Value Reporting Foundation website. The version posted here is modified slightly to include conclusions for a US-based reader.

• Three ways to get to integrated thinking: lessons from Australia

  Alex Gold, Head of ESG at BWD Strategic

  Integrated reporting is a means to an end – and the end is not necessarily the publication of a single performance report that combines financial reporting and sustainability disclosure. Rather, the process that sits behind integrated reporting is meant to instill integrated thinking within a business. Integrated thinking supports decision-making and sustainable resource allocation by encouraging an organization to consider how it uses and affects financial and nonfinancial resources in its operations. Integrated thinking is borne from integrated reporting because developing an integrated report requires an organization to consider not only how it has created financial value, but also how it has created, preserved, or eroded other forms of value (human capital, natural resources, business relationships, intellectual capital, and the like). As a resource for integrated thinking, see the Value Reporting Foundation’s recently published Integrated Thinking Principles.

  The Integrated Reporting Framework (<IR> Framework) is the flagship resource for organizations looking to embark on integrated reporting. Anyone who has managed an integrated reporting process will tell you that integrated reporting is a journey, and an organization should not expect to achieve full compliance with the <IR> Framework immediately. Instead, the <IR> Framework guidance can be used flexibly to accommodate the particular circumstances of an organization.

  Several jurisdictions around the world have recognized the value of integrated reporting and the <IR> Framework. In Australia, the ASX Corporate Governance Principles and Recommendations (Fourth Edition) state that the principles of integrated reporting can be used by companies when preparing existing statutory reports. Furthermore, Australian excellence in integrated reporting has been recognized by the Australasian Reporting Awards, which has presented a Special Award for Integrated Reporting for several years.

  Buoyed by regulator and industry encouragement, several listed companies in Australia have begun their integrated reporting journey. The rest of this article steps through ways that Australian companies have used the <IR> Framework to instill integrated thinking and meet expectations for stronger connectivity between financial reporting and sustainability disclosure.

  Visualize how your business creates value

  An integrated report all starts with the company’s business model – which according to the <IR> Framework can be defined as “its system of transforming inputs, through its business activities, into outputs and outcomes that aims to fulfil the organization’s strategic purposes and create value over the short, medium and long term”. Articulating a business model can be a complex task, however, even before considering how it relates to its external environment. In fact, one-third of reports reviewed by the Alliance for Corporate Transparency didn’t disclose a business model at all.

  Australian examples have tackled the business model challenge by creating visualizations that map out the logic of their activities and their relationships with financial and nonfinancial resources:

• The National Roads and Motorists' Association’s business model visualization in its 2021 Annual Report positions the business within the context of its environmental externalities, while illustrating the connection between inputs, outputs, and value creation outcomes
• CPA Australia’s business model visualization in a supplemental document to its 2020 Annual Report shows the logic of how its strategic goals link to outcomes according to the IR Framework’s six capitals, while also showing societal impact through the UN Sustainable Development Goals
• Dexus’s business model visualization in its 2021 Annual Report shows how the business “transforms” its inputs into value for itself and its stakeholders, and also identifies “value drivers” for each value creation outcome – such as waste management for environmental outcomes and professional development for human capital outcomes.

• Structure the report by stakeholder outcomes

  The six capitals of the <IR> Framework – financial, manufactured, intellectual, human, social and relationship, and natural capital – are useful for categorizing the types of financial and nonfinancial value that a business should consider. To the unaccustomed reader, however, referring to the “six capitals” may sound opaque and academic. Furthermore, it may cause confusion for readers accustomed to the primacy of financial capital.

  Australian integrated reporters have overcome this challenge by translating the six capitals into more accessible outcome categories. Furthermore, they often structure the contents of their integrated reports by these outcomes. As the outcomes often relate to stakeholders themselves (e.g. “employees” stand in for “human capital”), the report structure ends up speaking to the outcomes generated for each stakeholder group.

  AGL Energy’s 2021 Annual Report, for example, relates their business value drivers to the six capitals as per the table below. The ensuing report structure provides a clear articulation of how the business creates value across the six capitals, thus meeting the intent of the IR Framework while using more everyday language.

  <IR> Framework six capitals	AGL Energy business value driver
  Financial	Finance
  Manufactured	Infrastructure
  Intellectual	Systems and Processes
  Human	People
  Social and Relationship	Customers Communities and Relationships
  Natural	Environment

   

  Assurance against integrated reporting principles

  Demands for independent assurance over sustainability disclosure are becoming more common, with jurisdictions such as the EU moving to require such assurance. To date, those companies obtaining independent assurance usually opt for assurance over specific data points, such as greenhouse gas emissions data or diversity breakdowns of the workforce.

  Assurance of specific data points can be contrasted with principles-based assurance, which is a qualitative endeavor that seeks to confirm how a reporter has complied with reporting principles as published in frameworks such as AA1000, GRI, or the IR Framework itself. Select Australian examples have applied principles-based assurance to their use of the <IR> Framework:

• Stockland’s 2020 reporting was independently assured against the IR Framework principles of materiality, stakeholder responsiveness, reliability and completeness
• Dexus’s 2021 Annual Report was independently assured against the Content Elements of the IR Framework
• CPA Australia’s 2020 Annual Report was independently assured to be in accordance with the IR Framework in its entirety

Assurance against <IR> Framework principles can help a business confirm that the integrated reporting process is supporting integrated thinking. The <IR> Framework principles guide how a business determines material matters, how it describes its business model, and how it engages stakeholders, among other topics. Successful application of these principles requires an organization to understand its external environment, identify factors that influence its capacity to create value (material matters) and articulate how it has incorporated these factors into its operations. Obtaining principles-based assurance not only confirms the existence of integrated thinking internally, it also sends a strong signal to the market that the business understands sustainability risks and opportunities.

Conclusion

These Australian examples are instructive because they demonstrate how companies can draw on elements of the <IR> Framework to move toward integrated thinking, no matter where they start. Furthermore, companies need not try to apply the <IR> Framework to their financial reporting immediately. There are several pathways that a company can take, including applying the <IR> Framework to voluntary reporting, as outlined in the Value Reporting Foundation’s Transition to integrated reporting: A guide to getting started.

Applying the IR Framework to voluntary reporting may be particularly appealing for US companies who recognize the need to move from CSR to integrated thinking, but who may be hesitant to overhaul their existing regulatory disclosure. The practices described in this article – visualizing the business model, structuring the report by value creation outcome, and principles-based assurance – could be deployed by any company looking to start its integrated reporting journey right now.

EFRAG has published a Discussion Paper​ on different possible approaches for better information on intangibles. EFRAG is asking constituents whether preparers can provide better information on intangibles, and if so, how. Comments are welcome by 30 June 2022.​ Read more here. 

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Professional accountants have an active role to play in determining the way climate change information is reported in the upcoming 2021 reporting cycle and is enhanced in future years. In a new statement released today, IFAC continues to advocate and support the profession’s role in enabling climate action by providing transparency and insights on the financial impacts of climate change. 

In this statement, IFAC: 

·       Summarizes the information concerns of investors, regulators, and policy makers. 

·       Reviews current standard-setter responses. 

·       Recommends how, and the extent to which, companies and accountants can address these concerns in the 2021 reporting cycle. 

Read the statement.  

As an increasing number of businesses around the world implement integrated reporting as a route to long-term value creation and sustainable development, the demand for assurance services on such reports is expected to rise accordingly.

To help meet this demand, and to increase confidence in integrated reporting, the International Federation of Accountants (IFAC) and the International Integrated Reporting Council (IIRC) today are launching a new joint initiative, Accelerating Integrated Reporting Assurance in the Public Interest.

The initiative, which will be rolled out in installments, is designed to heighten awareness of key issues, drive constructive conversation with and among key stakeholders, and encourage providers and users of assurance services in particular to lend their voices to the effort.

Find out more and read the first installment here: https://bit.ly/2NA6CYY

In this podcast Accountancy Europe speak to Vic Petri, CEO and Founder of Performance Innovations and former Partner at PwC, to learn about how to maintain motivation and drive. He was a global lead on human capital, focused on resolving mental health issues to guide teams to better performance and a healthier work environment. He discusses how to face mental health issues during an ongoing worldwide pandemic and also how the accountancy profession must embrace change to be ready for the future. He urges a fundamental shift in the leadership paradigm, where the leader serves the team, not the other way around. 

This article provides a comprehensive summary of the status and prospects for sustainabillity reporting in the EU: https://www.allianceforcorporatetransparency.org/news/countdown-reform.html

In the latter part of February we expect to see the final report from EFRAG to the European Commission setting out recommendations on possible EU non-financial reporting standards in a revised Non-Financial Reporting Directive. Read more here: https://www.efrag.org/About/Governance/44/European-Lab-PTF-on-preparatory-work-for-the-elaboration-of-possible-EU-non-financial-reporting-standards--PTF-NFRS#:~:text=European%20Lab%20PTF%2DNFRS%20Chairman&text=He%20became%20President%20of%20Mazars,President%20of%20the%20Mazars%20Group 

On January 13th, 30 community members gathered virtually to discuss what the merger of the International Integrated Reporting Council (IIRC) with the Sustainability Accounting Standards Board (SASB) means for the Integrated Reporting U.S. community.

Although not affected directly by the change, the merger presents an opportunity to think about what the community’s role might be in this new context. Two questions guided the discussion: 1) what does the merger mean for the integrated/multi-capital approach, and 2) what should the community do in the face of this change?

Background on the Community

Mary Adams opened the conversation with background on the IIRC-US community. This grassroots effort was launched in 2017. While not officially part of the IIRC, the IIRC has been supportive by funding costs of the community’s web platform. There are over 450 people of the US community’s mailing list, including corporate leaders, academics, investors, and nonprofit organizations. Since its establishment, the community produced 35 educational programs to shine a light on practices companies use to promote integrative thinking and multiple capitals reporting in their firms. Videos of these sessions are posted on YouTube. Another role has been to create a forum for kindred spirits to get together, learn, and share their experiences and questions about Integrated Reporting.

Impetus for the Merger

Framing the discussion were published comments from Charles Tilley, CEO of the IIRC. He described the importance of achieving a global structure for climate-related and other relevant disclosures that connect relevant societal and environmental factors to core business and capital market decisions in ways that are both rigorous and meet stakeholder demands for transparent standardized information. He views the merger as a stepping stone to bring cohesion and simplicity to the corporate reporting system.

Group Discussion

1. In response to the first question, what does the merger mean for the integrated/multi-capital approach, key themes were:

Benefits

• Merger is generally seen as favorable, recognizing the need for a unified approach to make things easier for organizations trying to meet stakeholder expectations about reporting, and for report users who analyze and use the information for investment decision making.
• SASB has good brand recognition in the US, that can help elevate IIRC and Integrated Reporting.
• Some described the merger as long overdue. It breaks down silos and will help get quicker global traction to value creation reporting. Provides a stronger and louder voice.
• Enables potential for having greater impact on the investor community and putting some pressure on investors to recognize the importance of non-financial disclosures. It also allows for better engagement between investors and their portfolio companies.
• From a macro ESG perspective, the merger may improve enterprise-level awareness in ways that bubble up to the macro community and country level.
• There seems to be a lot of openness about how to make the merger be meaningful.

Concerns

• Potential for dilution of multiple capitals approach. May prioritize environmental, social, governance, and human capital while marginalizing intellectual capital and strategic side of manufactured capital.
• Seems to favor quantitative over qualitative assessments of value creation, potentially losing the cohesive storytelling aspect of qualitative approaches that help report readers understand the connections and interdependencies between the different measures.
• How to guarantee the numbers that firms are reporting? A couple of people shared examples where data coming out of some countries seemed questionable compared to US firms with similar scopes. If numbers don’t have assurances behind them, what do the data really mean? Workplace safety is another example--until you can come up with definitions and measures that everybody is using in the same way, the numbers are not necessarily that meaningful.
• Potential for diminished integrated thinking. IR’s emphasis on connectivity provides a systemic perspective that may get lost by prioritizing quantitative measures.
• Concern that a standards-based approach does not capture the circular nature of resources flows, such as IR’s octopus model that depicts how a firm’s resource outputs can cycle back to become new inputs through strategic business model design.
• Potential for greater disconnect between reporting, strategy, and business model design. Ideally, reporting should be a tool that is equally useful to managers looking to innovate and create more effective practices for value creation. Instead, management often sees non-financial reporting as an added burden. How to structure reporting so that it insightfully informs management decision making rather than being seen as an non-value adding task?
• Need to generate common understanding of materiality. The IFRS consultation paper has a section on materiality and a view that we need to convert the definition for both parties. The idea here is the first two words of the definition are, ”if omitted.” Think about it, so if omitted, would that make a difference? That's kind of an interesting way put-- It's a way to keep people, to warn them that if omitted, consequences ensue.
• Devil is in the details. How does the meter move as a result of the merger?
• There was also a question, where does this leave GRI in the model?
• A standards-based approach may erode innovation. Many of the companies featured in the IIRC-US webinars take very different approaches, using more of a principles-based approach that gives them room to apply the principles in ways that make sense for their context and goals. That could get lost if reporting standards are imposed.
• IR does a good job capturing internalities, how the capitals are put to work internally to create value creation capacity. Standards-based approaches seem to overlook this internal dimension of value production.

Opportunities

• How to align global coverage? IIRC has big following in Asia, Africa, and Europe. SASB has made larger inroads in the North American market.
• Harmonizing terms, definitions, and frameworks is critical to create consistency. GRI has three dimensions, SASB has five, IR has six capitals, and TCFD has four pillars. World Economic Forum (WEF) has new metrics. How can these various dimensions map together? How do we erase the barriers to be able to utilize these in a more harmonized way?
• What is the funding going to be and how do you ensure that it’s the right mix? How do you align  jurisdictions, e.g., IFRS with US GAAP SEC into global reporting?
• How to bring companies along? They can’t become victims who are prescriptively told what to report. It must be useful to them. They must be brought in to help inform a unified reporting model. You can't tell the assurers what to do at the end of the day.
• IIRC is a framework without detailed standards and the SASB has detailed standards without a cohesive overall framework. How to align these?

2. In response to the second question, has the IIRC-US community outlived its usefulness? Did we do our job? Is there a role for us? What should the community do in the face of this change?

• 63% of participants today said, "There is a role for our community going forward”.
• Remaining participants were unsure what community should be doing. The operating committee* has been grappling with this question as well.
• No participants thought the community should disband.

Question: Do we need to remain as a distinct group, or just be part of the processes that are going on in the new organization and other initiatives?

Potential Roles

• SASB philosophy: the more information, the better. They have an open culture, are welcoming of other viewpoints. Our community members could weigh in with them individually. But it's probably more effective to engage as an organized constituency.
• SASB standard-setting board agenda is on the website, showing what it’s working on, including some revisions to standards and some new standards. A portion of each board meeting is public, you're able to listen in. Would be good to keep attuned to that and weigh in.
• Important to have a voice and keep the unification dialogue moving.
• Need to remain active to ensure that intellectual and human capital dimensions don’t fall by the wayside.

o  Could align with SASB’s human capital working group to forge together a

stronger human capital component in the new model.

o   When US SEC issued their change, many companies said, "What does this mean to me? What might I report?" Look at that interim paper as a guide.

o   Many of the individual SASB standards across the different industries relate to human capital. So using human capital as an aligning approach could be a good focus. At the standard-setting board level, people absolutely believe in the importance of human capital and its essential role in creating value, or destroying it if you don't do it right.

• With the IFRS initiative, it would be very good to have knowledgeable, engaged people, particularly those with sustainability interest and expertise.
• Keep momentum of group going. Any time you have a group of dedicated, interested people on a subject, there is value. Perhaps assist going forward in the merger for issues that might need input and dialogue, like a focus group or some sort of vetting of ideas.
• Continue at least for another year to ensure that connectivity and integrative thinking don’t get lost. IR provides a systematic framework to help people make sense of how strategy, business models, internal assets/processes, and reporting connect.
• Keep the companies at the forefront. How can we be of service to them in this transition? They're the ones struggling with all this. We can find ways to help them cope with the changes we're talking about.
• Engage college, community, college and graduate schools.                                      o   This foundation is very important for college students graduating in these different times. Integrative approach helps them to be and become the leaders the world needs. 
•   The integrated model can be a theoretical foundation that helps explain how all the non-financial and financial, internal, and external pieces fit together.

Next Steps

• Summarize and share today’s points with community members.  Video recording of meeting is available at https://youtu.be/BE86cdKWHFg
• Regroup with IIRC-US operating committee.
• For those interested in helping to organize a program or get us connected with somebody that is using integrated thinking or reporting, it would be great to hear from you. Please reach out to Mary at adams@smarter-companies.com.

* Operating committee members include Mary Adams (Smarter-Companies), Elizabeth Castillo (Arizona State University), Lisa French (IIRC), Maureen Kline (Pirelli Tire LLC), Bob Laux (SEC Institute), Brad Monterio (CalCPA and IMA), Niki Shah (Columbia University), Paul Thompson (European Federation of Accountants and Auditors for SMEs), and Kenneth Witt (Association of Certified Professional Accountants).

Thanks to all who participated in our session on June 24 to provide feedback to the revision process for the Framework. The final report from our meeting is available here:

U.S. Community Framework Feedback Summary.pdf

In case you want to delve further, here are the background materials provided for the meeting:

• CONSULTATION-DRAFT_May-21_IIRC.pdf
  
• COMPANION-DOCUMENT__May-21_IIRC.pdf
  
• Framework Feedback Questions.docx

WANT TO MAKE YOUR OWN SUBMISSION?

You can do so here before August 19: 

www.integratedreporting.org/2020revision

On 24 June A Plus magazine published this article The Storyteller summarizing an interview with the IIRC's CEO Charles Tilley: https://aplusmag.goodbarber.app/topics/c/0/i/47516021/storyteller

This feedback analysis paper by Accountancy Europe follows up on the Cogito* project Interconnected standard setting for corporate reporting (December 2019). 41 leading European and global organisations responded to the call for feedback. This follow-up paper:

o   analyses the feedback received in writing and through events

o   provides an update on the latest EU and global developments

o   reflects on a way forward on the NFI standard setting agenda

Various key takeaways are drawn from the 41 comment letters received. Read more here.