A pilot Integrated Reporting <IR> database created by Assistant Professor Elizabeth Castillo at Arizona State University, and populated by students in her OGL 260 course, revealed that on average, US companies are not yet embracing the language of capitals in their reporting. The intent of the database is not to “name and shame,” as Castillo said, but rather to help reporters map where they are on their reporting journey and have better insight on how to progress.
In the long run, Castillo hopes the database will raise awareness
of <IR> in the US and encourage more integrated thinking within companies. First though, the database needs to be scaled and the criteria refined. For the purposes of building the beta version, Castillo asked students to rank financial reports on a scale of 1 to 4. The scoring took into account how many capitals companies reported on, whether the report used metrics or narrative only and if the reporting covered multiple years. Companies that scored a 1, for instance, reported only three capitals in narrative format.
The average report score in the database was 1.5 with the highest score a 2.5. Companies generally reported financial, human, manufactured and intellectual capital, with little reporting of natural capitals. Castillo noted that due to the length of the course (one semester), students were only able to review annual financial reports and could not also consider CR or sustainability reports.
In some cases, the reports covered material related to intangibles or certain capitals but weren’t named as such. Attendees of Castillo’s presentation were split on whether the scoring should allow for discussion of different types of value creation or whether the use of capitals as a term signaled a significant shift in thinking. The goal of reports, attendees urged, is to make them relevant and interesting, using language that appeals to their audiences.
For Castillo, populating the database and increasing awareness of it within reporting circles is only part of her goal. She also wants her students to fundamentally rethink corporate resources and valuation. By moving away from the traditional syllabus and course books, students can think beyond the balance sheet toward social accounting. “They become integrated thinkers,” said Castillo.
Join us for the next integrated Reporting Conversation with Etsy Inc. on September 12, 2018 at 2 pm ET by registering here.
Post authored by Rachel Riccardella of Kite Global Advisors, a thought leadership advisory firm helping clients shape the debate on the issues that matter most to them.
Ask any US-based corporate reporter where they look to innovate and experiment with their annual reporting, and there’s a high probability they won’t say, “Our 10-k filing.” Largely viewed as a compliance document, the 10-k is slowly earning a new reputation thanks to pioneers like GE and Intel who have literally thrown out the usual SEC form and replaced it with an engaging and visually compelling annual report.
On a recent <IR> US Community conversation, Intel reporting executives Erika Kelly, external reporting controller, and Sam Roberts, financial reporting controller, walked through their 2017 annual report and how it reflects the company's business evolution
“In the same way we’re transitioning our company, we’re transitioning how we report,” said Sam, adding that the 2017 annual report is the product of a multi-year process and will continue to change over the coming years.
Erika stressed that Intel wanted to tell “one story” spread across the company’s different reports, including an annual CSR report. That’s reflected in the reports’ content as well as the similar design treatments, underscoring that a singular strategy connects the activities. Human capital, corporate responsibility and sustainability also feature early in the annual report and quite visibly compared to standard 10-k form treatments.
Bringing the Intel story to life visually meant highlighting data even if the performance fell short of goals or expectations. Erika and Sam admitted that internally it took convincing to take a more graphic-heavy approach but that most stakeholders see the value of it now. In fact, the graphics give Intel a chance to talk about financial performance in a new way, which may be helpful in down years to explain what happened and how the company plans to address issues.
Beyond the investor relations and financial teams, each business unit also had a three-page spread in the annual report and opportunity to show how they contribute to Intel’s success. Small changes, like switching from paragraphs to bullet points had big impact on improving readability and providing snapshots of performance.
The new treatment allows readers to understand Intel’s financial performance for the year, while also learning about the business overall and how its products and services fit into the bigger picture. Traditional 10-k filings often assume the reader has that knowledge or can seek it out easily elsewhere. “It’s hard to tell the transition that’s happening in our business in the previous format,” said Sam. “We had to make what was going on in our business more alive.”
There’s a creation myth familiar to global companies in the integrated reporting world. It goes something like this: Integrated reporting starts in European operations and then is slowly adopted in other territories, once the benefits become evident; the U.S. is among the last take it up.
But not every company fits that narrative. Beth Spurgeon, USA Corporate Responsibility Manager for ArcelorMittal, joined the monthly <IR> U.S. Community spotlight series on May 9, 2018 to talk about how the global steel giant’s reporting has evolved. For them, the story begins in the United States, not in Europe. (Technically, it started in South Africa, where integrated reports are mandatory, but it’s in the U.S. where the practice really picked up steam.)
At ArcelorMittal, global reporting comes out of headquarters, in Luxembourg. But they realized that country-level reports were needed, in order to address stakeholders’ material needs within each country. In the U.S., local reporting started with a separate financial “fact book,” principally for the U.S. workforce, and it progressed into a full-fledged integrated report in 2015. Now, they think of their U.S. report as equal parts sustainability report, fact book, GRI report and IRRC report. The 2016 report (the 2017 report was due to be published a few weeks after the <IR> U.S. Community call) includes a downloadable PDF and executive summary, five years of interactive data and videos.
The report’s connection with strategy really comes through. “In pursuing an integrated report, ArcelorMittal acknowledges how the six capitals model pioneered by the International Integrated Reporting Council (IIRC) connects directly to our business strategy,” the report says. “By integrating these capitals into our business strategy, we work to create a balanced business model that emphasizes outcomes beyond just our financial sustainability.” Through a concise table, the company illustrates the integration of the six capitals with strategy.
The clarity of the connection between reporting and strategy doesn’t mean that measurement difficulties have been solved. Spurgeon conceded that they’re still firming up kpis. However, she stressed, it was important to see the connection with strategy and to start communicating with stakeholders, even before the kpis were in place.
Those stakeholders are clearly top of mind for ArcelorMittal, mentioned 96 times in the 120-page report. This table summarizes the engagement approaches that are integral to strategy.
ArcelorMittal continues to advance its integrated reporting and, importantly, the connections it makes between reporting and strategy. This was a topic of great interest to the <IR> US Community members on the call.
Corporate reporters on the call also got to hear Spurgeon detail interesting experiences developing the report. The functions that supported the effort from within the organization, for example, would surprise many. There were other conversations on the importance of sustainability for talent development and, of course, some candid thoughts on how natural resource scarcity fits into the steelmaker’s vision of sustainability.
Join us for the next <IR> U.S. Community spotlight to speak directly with other practitioners in integrated reporting.
In what might turn out to be a seminal moment in the Integrated Reporting (IR) journey, two pioneers in reporting conducted an experiment earlier this year. Bob Eccles and Mike Krzus, co-authors of One Report in 2010, read all the different reports published by Exxon Mobil and compiled their own “integrated report” with the information already disclosed. They published a working paper in March where they discuss the results and speculate about whether an artificial intelligence (AI) bot could be trained to replicate their work.
On April 11, Mike Krzus joined the <IR> US Community to talk about the experiment. He observed that less than 0.5% of companies in the United States are publishing an integrated report. Why is it so hard? Indeed, companies are already disclosing so much information in different places. Wouldn’t it take only a marginal increase in effort to put out an integrated report?
They drew upon seven different reports published by Exxon Mobil pertaining to 2016. And, in about 40 hours, they cobbled together an integrated report, covering all six capitals in the <IR> framework, that Krzus described as “decent.” Krzus added, “If someone did this as their first report, it wouldn’t win any awards. But people would say it’s a pretty good start.”
To Krzus, the exercise disabused the notion that an integrated report is too complex or too costly to produce. “We did this in 40 hours. How hard could it really be for a Fortune 500 company to create an integrated report?” He also noted that every word in the report is already in the public domain, so the report itself doesn’t create additional litigation risk, which is a common point made by those who resist.
Roughly 30 members of the <IR> US Community joined the call. Some feedback focused on just how “decent” the report really was. Did it provide the information needed to make long-term investment decisions? Maybe not, Krzus conceded, but he pointed out: “We had no contact with the company and don’t know that much about the industry.” Any company that wanted to produce its own integrated report would have access to quite a bit more nuance and detail about how they invest in the six capitals. So if Exxon Mobil were to do an integrated report on its own, it would look quite different.
As for the idea that an AI could replicate the human process and produce an integrated report from existing disclosures, there was some doubt over whether a bot would create more noise than signal, by pulling in the wrong data, for example. Krzus said the AI would merely be a means to an end. “The tools would be a best approximation, at best,” he said. “I don’t want anybody to think that what we did or that the prospect of a tool is the answer. The answer is to get the companies to do it for themselves.” The AI might be a means of convincing more companies to act, when they see the results for themselves, see that investors are reading it, and decide that “decent” is not good enough for them.
As the Integrated Reporting US Community has come together, we’ve mostly engaged one another online or through video conference. But communities are strengthened through a variety of interactions, including in person. So when Richard Howitt, CEO of the International Integrated Reporting Council (IIRC), came to Boston on March 28, the US Community met more formally – and more personally – over a town hall lunch.
Over 25 members came by, some traveling to Boston specifically for the event. They came from organizations across the investment value chain, from ESG asset managers and audit firms, to NGOs working to improve reporting and consultants who help reporters.
Richard Howitt first gave an overview of the history of the IIRC. He stressed that the intent of integrated reporting isn’t to create a box-ticking compliance exercise. Rather, it’s to change managers’ mindsets away from short-termism, to make them think differently about how they might deploy all six capitals of the <IR> framework for long-term value creation. In the end, companies have to work out materiality on their own, and report on the six capitals the way they feel will best convey materiality to the capital markets.
The IIRC has evaluated progress of reporting annually and found that reports are getting more precise, and the <IR> framework more widely adopted. It’s already the predominant framework in Japan, for example, and the Securities and Exchange Board of India has asked the top-500 companies to voluntarily start reporting using the framework. And the framework isn’t sitting still: The IIRC is working on integrating IR with the UN’s Sustainable Development Goals (SDGs).
With all that said, adoption of the framework is lagging the most in the United States. Bob Laux, the North American lead for the IIRC, provided his own thoughts on trends in the markets. Generally speaking, he noted, the idea of focusing capital for the long-term is gaining traction and CEOs are frustrated with the short-termism of quarterly guidance. Thus, an influential group of companies and their chief executives believe they can lengthen the time horizon of their guidance. Echoing Howitt’s comments, Laux also noted that <IR> helps internal decision-making first; external reporting naturally follows. Lastly, he noted that there are many groups working on more specific metrics that can add comparability to the use of the <IR> framework.
Overall, Laux said he was pleasantly surprised with the success of the US Community. Indeed, the growing interest in, and strength of, the community became evident after the panel discussion, when community members shared their own thoughts on the development of <IR> in the US. For example, they cited recent research conducted by Mary Barth at Stanford and others which demonstrated that transparency leads to lower cost of capital. But business leaders have a hard time internalizing that research enough to break from their entrenched habits, beliefs and processes.
The momentum behind the US Community was also reinforced after the town hall, when attendees sought each other out for more dialogue. Indeed, this was perhaps the surest sign that the community is coming together and ready for takeoff.
Thank-you to all companies who took part in our ‘Town Hall’ in Boston & then virtual ‘Town Hall’ with companies from Arizona to San Francisco, Washington to Philadelphia, Seattle to New Hampshire - all part of our valued #US Community developing #integratedreporting in the USA. pic.twitter.com/zPdjgMRNnX— Richard Howitt (@richardhowitt) March 28, 2018
Thank-you to all companies who took part in our ‘Town Hall’ in Boston & then virtual ‘Town Hall’ with companies from Arizona to San Francisco, Washington to Philadelphia, Seattle to New Hampshire - all part of our valued #US Community developing #integratedreporting in the USA. pic.twitter.com/zPdjgMRNnX
For many integrated reporters, the journey of reporting is as compelling as the output. That’s certainly true for Jones Lang Lasalle (JLL), a publically traded real estate and investment management firm with operations in more than 80 countries. The company began its journey by asking itself what it means to be sustainable – not just from an environmental perspective, but also to thrive over time and successfully navigate the stumbling blocks that trip up even the most seasoned of companies.
Mark Ohringer, executive vice president, general counsel and corporate secretary, admits the journey to integrated reporting at JLL wasn’t a straight line. Reporting at JLL had focused mainly on its 10-K filing, which is a legal requirement and, as in most companies, was used only to communicate with a very narrow audience. But it also encapsulated the information that spoke to JLL’s approach to broader sustainability. The challenge was how to make the content compelling enough for stakeholders to want to read.
Mark points to integrated reporting leaders like SAP and Novo Nordisk as early inspiration for JLL’s transition to using the <IR> framework, and he says JLL still has work to do to achieve that level of reporting. But he also said the reporting process and <IR> has helped the company think much more holistically about its risks and approach to mitigating them. The company conducts a materiality survey annually, and its results help inform the reporting content, such as publishing ethics training and investigation performance.
JLL’s reporting motivations aren’t purely internal, though. While Mark said most mainstream investors still aren’t pushing for data beyond financials, he noted that Al Gore’s sustainability conscious Generation Investment Management is one of JLL’s largest shareholders. Customers, too, are increasingly inquiring about JLL’s environmental and social performance. “It’s a requirement now in our business,” said Mark. “Clients want to know who they’re dealing with.”
JLL’s integrated report is essentially a web portal that connects together diverse sources of information using the <IR> Framework as a roadmap. The company also publishes a separate sustainability report, which describes further the company’s approach to ESG issues. This includes recognition of JLL’s commitment to the UN Sustainable Development Goals and how the company plans to do its part to help meet them, an area where most U.S. companies are lagging. Mark acknowledged that two-thirds of JLL’s revenue is from outside the U.S., and the company needs to be responsive to stakeholders worldwide, including in Europe where sustainability is a more mature practice. Over time, the sustainability report has also included more financial and performance data, demonstrating increased integrated thinking in the organization.
Boston-based reporters and community members are encouraged to join the Integrated Reporting U.S. Community luncheon on March 28 at 12 pm at Workbar Back Bay. Click here to register.
For Jason Voss, content director at the CFA Institute and former portfolio manager with Davis Selected Advisers, investors have two primary responsibilities: to see the world for what it is, not what they would like it to be, and then to be decisive. In a regulated industry like financial services, two rules for investors seems straightforward and simple. The reality, of course, is anything but.
According to Jason, that’s partly because most investors don’t have the information they need to see the world for what it is and then act on it. Traditional financial statements, he says, are really a list of a company’s stakeholders – from shareholders to employees to governments – but they don’t tell the full story. Integrated reporting, through its focus on capitals, enables companies and their investors to have a much broader discussion about value.
Intellectual capital is one of the most recognized forms of capital that is left off balance sheets. But for some companies and industries, it’s integral to the proper valuation of an organization. Jason also cited the grocery industry as an example of when accounting statements fail to provide a clear view of financial health. Considering how labor intensive the industry is, investors need more human capital data – like employee turnover rates and cost of training -- to make a sound decision about its value.
But integrated reporting isn’t just a better tool for valuation; it moves companies toward a systems-thinking approach that impacts the management of the organization. To do that right, Jason says, requires change beyond the report preparer level. He points to five ways we can collectively catalyze this evolution:
This was a powerful conversation about how to move forward as a community. Join us to continue the conversation at our next Integrated Reporting conversation with Jones Lang Lasalle on February 7 at 3 pm EST.
Purpose is a concept increasingly used by companies to convey a sense of meaning to their work beyond short-term profit. But few companies today have a purpose that dates back 140 years like Prudential Financial. Believing that financial security should be within everyone’s reach, Prudential Financial links its purpose to its sustainability commitments, reinforcing the inherently long-term nature of its business: retirement savings and insurance.
Suzanne Klatt, Director of Environment and Sustainability at Prudential Financial, provided an inside look at how purpose fuels the company’s sustainability commitments and reporting at a recent <IR> US Community spotlight series, available here:
In its long-form sustainability report, Prudential Financial uses the IIRC framework and the six capitals as a guide in building its content. The capitals underpin the four pillars of its sustainability governance and reporting: customer focus, responsible impact, talent focus and financial strength. Suzanne shared that these pillars – and the capitals – serve as a means of connecting the content within the sustainability report as well as the Chairman and CEO’s letters in the company’s annual report and proxy statement. Rather than reporting on all of the company’s sustainability performance, the team chooses the stories that best support the pillars, trying every year to trim the report for greater readability.
That means developing a greater understanding of what audiences want to know and organizing the report to make it easily available to them. Suzanne explained that Prudential has had to increase its disclosure comfort level gradually but that starting small can lead over time to robust reporting processes and structures. In its 2016 report for instance, the company included “Prudential By the Numbers,” an at-a-glance performance scorecard highlighting data like employee diversity, product performance and women in management positions.
Performance is only a part of the Prudential Financial sustainability reporting story, though. Employees are a key audience for the report, and the pillars help provide a narrative around the company’s purpose – to power the ambitions of people, organizations and communities – they can relate to and connect with in their jobs. The report also serves to unite employees across the firm’s many, and quite distinct, business units by revealing how they each contribute to the same purpose and the impact it has on customers and communities.
The <IR> U.S. Community will turn from reporters to audiences with its next series on Wednesday, January 10 at 2 pm EST to hear the investors’ view on sustainability performance data and reporting.
This week, the <IR> US Community kicked off its Integrated Reporting spotlight series with a tour of American Electric Power’s (AEP) Accountability Report and candid conversation with Sandy Nessing, Managing Director, Corporate Sustainability, AEP. Attendees included US-based sustainability reporters who have already embarked on integrated reporting or are transitioning from traditional corporate responsibility reporting, investors, accountants, consultants and key professional associations. The goal of the series is to bring experienced and novice reporters together to share best practices and cultivate a safe space for addressing the barriers—internal and external—to integrated reporting in the US.
The program kicked off with a virtual tour of the AEP Accountability report, available in this video:
AEP has nearly a decade of integrated reporting experience, and Nessing asserted that the company’s report is always evolving and she looks to other reporting leaders to learn about new approaches. But integrated reporting has clearly caught on at AEP, where one executive referred to its Accountability Report as the “AEP bible”.
The virtual tour was followed by an open discussion with attendees. Successful reporting is often the result of dedicated managers pushing internally for deeper and more thorough disclosure – and that’s true for AEP, too. But Nessing shared several insights from her experience with integrated reporting that can apply to companies in any industry and at different stages of the IR journey.
Next month, the <IR> Spotlight will feature Prudential Financial on Wednesday, December 13 at 2 pm EST to explore the opportunities and challenges of integrated reporting in the financial services industry.
Post authored by Rachel Riccardella of Kite Global Advisors, a thought leadership advisory firm helping clients shape the debate on the issues that matter most to them.
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