Integrated reporting needs integrated thinking and strategy

Integrated reporting without the company actively building its integrated thought and strategic processes into the entire operations means the tail wags the dog. 

King IV Project Lead Ansie Ramalho says the integrated reporting initiative kicked off without the concepts of integrated thinking and strategy being fully developed for most companies. Integration should be done at strategic level and reporting is then a logical outflow of this process. Otherwise it is an exercise in reverse engineering which is not reflecting the reality of the business.  

Integrated reporting, now an international phenomenon, was first raised in South Africa through King III, issued in 2009. The notion of IR recognised that the focus on historic financial performance is no longer suitable in a world where some businesses wield more economic power that many countries. The wider impact of these businesses, positive and negative, needs to be accounted for.  

According to the International Integrated Reporting Council (IIRC) a global coalition of regulators, investors, companies, standard setters, the accounting profession and non-governmental organisations, companies use integrated reporting to communicate "a clear, concise, integrated story” that explains how all of their resources are creating value. 

The story involves sharing in the IR the suit of resources which the company uses to manufacture or provide its products and services. It furthermore discloses through what processes these resources are put to derive output (products and services) and what the outcomes (impact) of these are.  

Ramalho says the council uses in its IR framework the six "capitals” model to explain the wider range of resources that the company employs which includes financial capital, but then also identifies human, intellectual, social, manufactured and environmental capital.  

The extent of the reliance of a company on each of these capitals will depend on the nature of the business and where the company is in its lifecycle. It is also true that the various capitals affect one another and are inter-related. For example if a business neglects the development of intellectual capitals it depletes its ability to innovate which in turn will affect its financial bottom-line.  

It is said that if shareholders had paid heed to the transgressions of safety regulations by BP in the years preceding the oil spill in the Gulf of Mexico, they would have been able to foresee the high probability of the disaster that eventually did occur. 

"Therefore, reporting on financial performance only provides a fraction of the information. In order to provide a holistic picture to stakeholders of the company’s performance and its ability to sustain value-creation in future, it must report on how it has enriched or impoverished each of these different capitals,” she says.  

A storyline that tells the tale of a continual depletion of any of the six capitals points to a business that is operating in an unsustainable manner.  A company cannot ultimately succeed in a society that fails as the World Business Council for Sustainable Development stated years ago. 

"We understand reporting in relation to financial and manufactured capital, but because it is difficult to put a price tag on the other capitals, the understanding and therefore the reporting on them are lacking,” says Ramalho. 

Ramalho says companies who have recognized the need to integrate their thinking and strategy into their reporting are shaping their own futures. "These companies already see the opportunities to which others remain blind. They are better at risk management because they are in touch with the triple context (economic, social and natural environments) in which they operate,” she says. 

Ramalho says that many regard business development to be at odds with sustainable development. Integrated thinking (which leads to integrated reporting) means that both can be obtained through innovation and product development. 

Discovery, which started as a small health insurer, is a South African company which has had great success with developing its business while ensuring a sustainable future. Ramalho says similar success stories are those of multinational consumer goods company Unilever and healthcare company Novartis.  

Unilever has set itself three big goals to reach by 2020. It includes helping more than a billion people to improve their health and well-being, halve the environmental footprint of their products, and source all their agricultural raw materials sustainably.  

Novartis, which means new skills in Latin, has been at the forefront in finding a business model for affordable medicines that can prevent and cure killer deceases such as cancer and malaria.   

Nestle has learned the hard way about sustainable growth. Five years ago a Greenpeace campaign against its procurement of palm oil from a company, which was found to be destroying peatlands and rainforests in Indonesia, was forced to mend its ways. In 2012 Nestle reported that it had directly engaged with suppliers responsible for 90% of its palm oil volumes, that 40% of its volume could be traced back to at least the mill in the country of origin and by September 2012 about 13% of its volume was traceable RSPO certified oil. 

* (RSPO certification is an assurance to buyers of palm oil products that the standard of production is sustainable.)