Integrated reporting is emerging as a powerful tool for businesses to present how a company is integrating environmental and social thinking into its business.
Businesses over time have realised that the conventional reporting is too complex, lacks relevance and wasn’t enabling the sufficient communication between businesses, stakeholders and investors. Traditional reporting has evolved to be more for regulators than for business itself. Integrated reporting has transformed the approach to reporting on a larger scale. It not only communicates the plan, and future of the business but also acts as a medium of value creation for everyone associated with the business. Integrated reporting is an advanced step in communicating the ways in which a company manages its long-term value creation, by taking an integrated approach to both traditional risks and sustainability risks. Integrated reporting goes beyond financial, employee, environmental and social data as :-
- It showcases the bigger risks and opportunities the company can integrate into its long-term strategy and risk management framework, operational policies and processes.
- Integrated reporting brings together information that remains in different silos and presents a bigger picture of value created by the company. Integrated reporting is an outcome of integrated thinking which starts with a thorough understanding of the business model within the context of the external environment. Traditional business thinking focusses on relatively short term financial outcomes, while integrated thinking helps in holistic, long-term, risk and impact based decision making by organisations. Integrated reporting is outcome of integrated thinking and the emphasis is on concise, future orientation and a firm focus on strategy, the business model and value creation. Hence the CEO and the Board are key to adoption of integrated reporting.
Here is a quick list of top 6 things that CEOs and Boards must know about Integrated Reporting.
- IR is here to stay
On February 6, 2017, the Securities and Exchange Board of India (SEBI), the apex body to regulate the share market and ensure investor protection, issued a circular, wherein the top 500 listed entities of India have been mandated the submission of a Business Responsibility Report (BRR). The rationale as provided by SEBI is that:
“Today an investor seeks both financial as well as non-financial information to make a well-informed investment decision. An integrated report aims to provide a concise communication about how an organisation’s strategy, governance, performance, and prospects create value over time.”
For long the Institute of Chartered Accountants of India’s (ICAI) has pushed for adoption of Integrated Reporting as “it helps the company manage processes and activities in a more effective way and, most importantly, build awareness of the heterogeneous capitals, resources, and relationships used and affected” Integrated reporting helps in understanding value creation and the complex relationships between various stakeholders which enhance business decision making.
India is one of the fastest growing economies in the world, with Indian companies becoming globally influential, it has become imperative for top Indian companies to adopt integrated reporting framework in their approach.
- It’s truly integrated: Integrated reporting is about integrated thinking.
The basic question is about the business model itself. And therefore, in this context:
- What is the purpose of the business – for whom and what value do you bring to them?
- What is the business model?
- What are the resources needed to carry out the business? – Inputs – primarily the 6 capitals and not just the financial capital.
- Along the way – in doing business how does it impact the 6 capitals – positively and negatively
- Which inputs are most material for the organisation?
- Who needs to know about all the above? – Key stakeholders
- Where are they? Inside or outside?
- And therefore, this is how the IR disclosure looks like.
The above essentially questions the fundamental premise of traditional business thinking, in terms of moving away from only financial led linear thinking to a very integrated holistic value encompassing thinking. This change in thinking needs to be top down. As companies are adopting to integrated reporting, some approach it from environmental sustainability perspective (Puma), some from human capital (eg. Infosys) and some from a governance perspective.
- Voluntary is the new Mandatory
As we know, some countries have adopted IR as a voluntary reporting requirement, while others have made it mandatory. The South African – Johannesburg Stock Exchange has mandated integrated reporting, while in India, SEBI guidelines are voluntary. While we may argue which one is better, a mandatory regulation would have caused Indian companies a lot of difficulty. Companies in India have a bottoms-up, tick box approach to sustainability reporting. Trouble with the tick box approach is that you cannot defend or stand behind the data being represented by the report. In the age of a globally connected economy that’s a risk. It’s a risk to stakeholders and it’s a risk to the commitments you have made. The voluntary nature of the SEBI instructions is therefore an opportunity for forward-looking, strategic thinking CEOs to internalise integrated thinking, processes and reporting within their companies as a competitive differentiator.
As Indian businesses are doing business on a global scale ‘Integrated Reporting’ can no longer be optional. So “Voluntary” is now the new “Mandatory.”
- Role of Technology
Since we use bottoms up approach in India, our approach to adoption of tools and technology, or automation is negligible. Which results in companies using archaic excel based systems which are both hard to understand and maintain. Plus they are extremely limited at automating the data gathering, data analytics and presentation processes. To create an integrated view, sustainability performance management products play a huge role as data for integrated reporting exists in silos.
We need technology to enable the next generation reporting. At the heart of IR is understanding value creation across all capitals. Increasingly data driven decision making is being used by C-level to get a better grasp on ESG issues that impact business. The connectivity of information enabled by technology will help to improve final facts available for decision making. This will lead to a more efficient and productive allocation of capital, both between businesses and within businesses.
In doing so, what we need to monitor is the performance in context of value creation. As ESG data lies in various departments like environment, health and safety, HR, finance, procurement etc across the enterprise, standalone systems with manual data entry will not be able to fulfil the need of integrated reporting. An integrated technology enabled system capable of seamlessly mining data into relevant correlated ESG indicators that will be leveraged for decision making will become a norm. “Silos” of information need to be transcended to understand the “connectivity” of information across all capitals. Data driven insights from systems that pick up relevant granular information from asset level to less frequent HR information in an integrated fashion will be another key requirement for Integrated reporting.
The CEO in tandem with CFO and CIO need to harness technology in the context of organisational strategy, reporting, operations and controls in order to overcome data siloes.
- Changing nature of performance indicators:
With evolving frameworks on sustainability, enterprises can no longer be sitting pretty after identifying its material issues and key performance indicators.
So, if data is at the heart of decision making we need to understand the changing nature of indicators
- Evolving indicators due to newer ESG requirements (voluntary and regulatory in nature).
- In integrated reporting “correlated indicators” takes the center stage – indicators which show correlations/relevance in the context of business. These indicators are the ones which show the performance of the companies’ value sheet.
- And most importantly the “Integrated indicators” – indicative of tangible and intangible values, or supply chain ESG performance integrated into the context of company performance.
Operationalising this by defining the “integrated performance indicators” is key to the success of integrated reporting process.
The empowered CEO essentially then uses this “integrated dashboard” for the decision-making process.
- ESG risks – Data driven approach
Essentially for a CEO, ESG risks become the starting point of all strategic decisions. Investors are using all different types of tools to support their investment decisions. Multi-capital thinking has now percolated the investment community. So, companies will lose control on how their performance data will be used – due to independent companies analysing information for peer comparison using big data and NPL. Sharing of ESG performance data with stakeholders will be through multiple channels – mostly digital, and available not in annual cycles but shorter time spans.
Using data driven approach for identification of ESG risks will become a norm. Therefore, the forward-looking CEO will harness data driven tools to get a better picture of risks. In order to knit a tighter picture together for the C-level decision maker, these risks will have to be viewed in the context of current issues/KPIs being monitored/tracked in the performance system.
Keeping these 6 important points in mind will help CEOs guide their Integrated thinking and reporting approach within their organisations. Integrated reporting from Indian companies’ perspective can help enterprises gain a good reputation internationally. Integrated reporting not only helps in overcoming the concerns about corporate governance and demonstrates responsible leadership but also showcases the way an organisation is creating value for internal and external stakeholders, society and environment. Integrated reporting can put organisations at the core of the current international debate about maintaining trust in business, and also act as a competitive differentiator.
Dr. Sunita Purushottam, the author is the Head of Consulting at Treeni Sustainability Solutions, an organisation committed to helping Indian companies reimagine and embrace sustainability. Her core area expertise is in the area of air quality and GHG emissions. Monitoring, Emission Inventory Quantification, Modelling, Verification and Model Validation have been a part of her repertoire. Sunita possesses a strong meteorological background with understanding of Climate Change Science and Adaptation.
Views of the author are personal and do not necessarily represent the website’s views.
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The CSR Journal Team