Integrated reporting: Show value, build trust

By Gary Anders

One could argue that trust has become even more imperative since the onset of the COVID-19 pandemic, with investors, regulators and other parties wanting companies to provide more transparency around the impacts of the crisis on their operations beyond their mandatory reporting obligations.

Yet, there are already thousands of companies and other organisations globally that are well ahead of the curve in this regard, because they have embedded integrated reporting into their everyday operations.

These include a number of the biggest listed Australian companies and major private businesses, including CPA Australia.

What is integrated reporting?

The International Integrated Reporting Framework (IR Framework) was launched in December 2013. The IR Framework’s objective is to change the communication mindset within organisations globally, so they can better explain to financial capital providers how they plan to create value over time.

Overseen by the International Integrated Reporting Council (IIRC), the IR Framework goes beyond the traditional financial reporting requirements of companies.

The objective is to provide a detailed insight into the resources and relationships that affect corporations in creating value over the short, medium and long term.

The IR Framework encompasses different elements of capital value that will effectively define the activities and outputs of corporations. These elements of capital are financial (the funds available to an organisation), manufactured (plant and equipment), intellectual (systems, patents and licences), human (capabilities, experience and values), social and relationship (community and stakeholder linkages), and natural (renewable and non-renewable environmental resources).

Factoring in the various forms of capital into their broader reporting provides greater clarity around an organisation’s value-creation processes and objectives, and, importantly, builds trust.

Momentum is building, too, with more and more companies around the world embracing the concepts of integrated thinking and reporting, because they fully understand the wider benefits of doing so.

CPA Australia has been a supporter of the IIRC and a user of the IR Framework for the past six years.

Impending changes to the IR framework

The IIRC recently opened a consultation period, seeking feedback on proposed revisions to the existing IR Framework following insights stemming from practical use and wider market developments.

“The conceptual thinking and principles on which the IR Framework was founded are still as relevant as when the IIRC was formed 10 years ago,” Erik Breen, chair of the IR Framework Panel, said in a recent statement.

“We will also use this opportunity to consider what further refinement may be needed in due course.

 

"In an industry in which trust is an essential and sought-after asset, having a repitation for clear, transparent and reliable disclosure cannot be underestimated." 

 

“These are special times. The IR Framework Panel was unanimous in its voice to continue the revision process. If anything, the importance of integrated thinking has been further underlined by this pandemic.”

Nicholas Diss CPA, CFO of CPA Australia and member of the IIRC, says the revisions will amount to fairly minor changes to the IR Framework.

“The original framework has been in place for close to nine years from its draft phase. In November 2019, the council agreed that it was now timely to review the framework and look to where enhancements could be made,” Diss says.

“It won’t fundamentally change the framework, it just makes elements of it clearer for the users.”

Growing corporate momentum

Diss says that while the level of uptake of integrated reporting is lower than originally envisioned a decade ago, it is nevertheless gaining impetus.

“I still think it’s a very positive movement that’s happening in respect to companies actually choosing to be interested in the framework and adopting the framework in part or completely.”

Among the users of the IR Framework in Australia are major companies including AGL, National Australia Bank and BHP. Other adopters include Australia Post, Macquarie Group, Lendlease, Bank Australia and industry superannuation funds such as Cbus. In New Zealand, users of the IR Framework include New Zealand Post, Port of Tauranga and Watercare.

Like CPA Australia, Cbus adopted integrated reporting six years ago. David Atkin, CEO of Cbus, says the impetus was a desire to see the group’s investment partners adopting a long-term approach to building value that aligned with Cbus’s responsible investment approach.

“We were dissatisfied with fund manager outlooks, which were too short term, and which failed to adequately engage with ESG [environmental, social and governance] risks,” Atkin says.

“We believed that adopting integrated reporting would support our ambition and would promote a long-term approach to value creation in our intermediaries and companies we invest in.”

Atkin says Cbus felt it important to behave consistently with the expectations it had of these organisations, and started the integrated reporting process by applying it internally.

“Our integrated reporting journey has seen us significantly mature our application of the framework developed by the IIRC, each year seeing improvement in our approach and outcomes.”

Diss says integrated reporting remains well aligned with the direction in which corporate reporting is heading, and is allowing stakeholders to get a much better picture of what an organisation actually does and the value it creates.

“The adoption is increasing, and it would seem at this present moment that interest is accelerating compared to a few years ago,” he says. “There’s a lot of interest in it, particularly from the larger end of town.”

Much of the push is coming from different stakeholders within organisations, including the CEOs and CFOs, while large accounting firms also see significant potential in integrated reporting.

“CPA Australia sees this as an opportunity for our members to actually really drive their organisations to report in this way, so the opportunity for them broadens,” Diss says. “So we saw it as taking a lead for the profession, as opposed to a lead for companies, to report this way.”

Other advocates for integrated reporting include global investment managers such as BlackRock and Vanguard, which also have investment stewardship teams to engage directly with company boards to ensure they are adhering to the highest corporate governance

Assessing the value

While implementing integrated reporting has been easier for some organisations because of their existing reporting systems and protocols, for others the process could be more extensive and costly.

“The top 100 ASX companies seem to be more interested in the framework than the sub A$500 million turnover businesses, because this does require resourcing,” Diss adds.

“There is a cost to it, so the smaller companies don’t see it as having as much of a value to their stakeholders.”

However, Atkin says he is convinced that any organisation can benefit from implementing integrated reporting a comprehensive reporting framework.

“Moreover, every investor should make a transparent and holistic framework like integrated reporting a requirement for firms they invest in.

“The events of the past few months make integrated reporting even more valuable. Firms rebuilding from COVID-19 lockdowns should give investors a clear report of their strategy, where they are headed and some of the headwinds they are facing.

“In an industry in which trust is an essential and sought-after asset, having a reputation for clear, transparent and reliable disclosure cannot be underestimated. Cbus often receives positive responses from key stakeholders about the quality of our annual report.

“We have won awards, we have succeeded in luring high-talent candidates, attained a strong reputation with international pension funds and received more favourable ratings off the back of our integrated reporting.”

CPA Australia's gold award-winning 2019 integrated report

CPA Australia’s 2019 Integrated Report was judged Integrated Report of the Year and presented with a Gold Award in the general category at the 2020 Australasian Reporting Awards (ARA) presentation on 24 June 2020.

Tang Lien, managing director of Malaysia-based annual report agency Nova Fusion, presented the award, which was introduced by the ARA in 2013 to support the integrated reporting initiative and its evolution.

“From 2010, there has been growing interest and increased activity around the world in integrating the reporting of financial performance with other information such as strategy, governance, prospects and risks to enable organisations to better communicate their ability to create value over time,” says Lien, adding that CPA Australia’s 2019 Integrated Report had been praised by the judges for taking “a major step forward” in terms of its “reliability and completeness”.