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

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. 

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.

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:

• Superstar reporters: A major company with a lot of influence in the market supporting integrated reporting could go a long way in shaping investors’ and other reporters’ attitudes toward IR as the preferred framework.
  
• Active managers: Despite recent trends toward passive investing, active managers continue to influence companies and can create a “pull” demand for more integrated reporting.
  
• Accounting standard setters: Voluntary reporting is a real trend that has an impact on investing, but to change the system, the capitals need to be included in financial statements.
  
• Integrated reporting guidance: Reporters are still learning and testing the IR framework; guidance on how to do it right will ease the transition.
  
• Superstar advocates: Powerful investors – think public pension and sovereign wealth funds – have a history of influencing corporate behavior and could accelerate the adoption of the IR framework through shareholder engagement.
  

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.      

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.

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.

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.

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.

1. Make data points work for you. Stakeholders expect to see some data behind your performance year over year, but companies shouldn’t be afraid to continue to improve and adapt them. Nessing said measures around carbon emissions, for instance, may stay the same, but metrics related to continuous improvement in employee decision-making, and diversity and inclusion have changed over the years.
   
2. Use transparency to your advantage. The shift in the energy industry away from fossil fuels has bottom line impacts – both positive and negative. AEP’s sustainability team turned increased interest from investors on environment-related strategy into an opportunity to push integrated reported with senior leadership and the board of directors.  
   
3. Put the IR in <IR>. Nessing encouraged reporters to begin their integrated reporting journey at the Investor Relations (IR) department. AEP’s sustainability and IR teams work side-by-side developing the annual Accountability Report and in ongoing conversations with investors. For integrated reporting to have an impact, both teams need to be well versed in how to speak to investors about the financial impacts of environmental and social performance.
   
4. Quantify impact with investors. Sustainability reporters often know they have a financial impact on the company but struggle with delivering the proof points. Nessing said she calculated the ownership of investors she was in conversations with to show how her team’s work contributed to hundreds of millions in share value.
   
5. Go where the analysts go. Analysts and investors will continue to get data about companies from multiple sources – no matter how good your integrated report is. Nessing recommends talking to your investors and finding out where they get their data so you’re best prepared for conversations with them.
   

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.