Is Integrated Reporting just a passing fad?

Posted
3 June, 2015

Sarah Grey, Markets Director, IIRC sums up an <IR> Business Network debate, held to coincide with the first IIRC Council meeting of 2015.

The <IR> Business Network debate asked the question, “Is Integrated Reporting just a fad? Or is it here to stay?’ Eight senior panellists – a mixture of large multinational business representatives and senior analysts and investors – were unanimous in their conclusion: <IR> is here to stay.

Participants saw Integrated Reporting as an important way for organizations to show how they are creating value in a wider context, and in the process building trust with providers of financial capital and other core audiences.

Investor views

Investors involved in the debate argued that <IR> helps give them confidence in the likely ability of management to deliver on the business strategy. They pointed out, for example, that <IR> principles foster better alignment of risks and reward, improved engagement around the purpose of the company, as well as greater focus on outcomes (rather than just outputs), and the long-term viability of the business.

‘Authenticity’ became a buzz word in the debate as investors explained how critical this is in business communication with stakeholders, particularly when explaining how the business is being managed. They also called for greater leadership and bravery by companies to give broad insight into their businesses and not just churn out a traditional historical financial perspective.

Business perspective

Business representatives at the debate said that <IR> gives them a really useful framework to tell the full story about how they create value and why their business models are sustainable over time.

They agreed that Integrated Reporting is an outcome of ‘integrated thinking’ – it has to come from integrated management and the information it generates needs to be genuinely useful to management to run the business. Several participants gave examples of how their journey towards <IR> had improved their internal processes and brought benefits such as: improved data for management and board decisions, better employee understanding of how they contribute to achieving the business strategy; and clearer understanding of the ‘outcomes’ of their business activities.

Business and investors agreed that new societal pressures on business have made a new approach to reporting not only necessary, but also inevitable. Whether driven by financial stability issues, concerns about short-termism (the ‘tragedy of horizons‘ as Mark Carney calls it) or other factors, the move towards <IR> is a reflection of other forces, that are driving essential innovation in the way businesses are being managed.

<IR>, they concluded, is a market driven framework that is in the right place at the right time – it is here to stay because it is flexible and helps with new ways of thinking about all the capitals that are critical to business success in the current challenging and changing environment. Intellectual, social and relationship, human and natural capital are often very ‘material’ to businesses today, as well as financial and manufactured capital – and <IR> enables business to explain that value in the most relevant way.

Many challenges still

Participants agreed that there are still many challenges to overcome before <IR> becomes mainstream. Materiality, connectivity, consistency and conciseness – key <IR> principles – were running themes during the debate and participants warned against allowing ‘broader reporting’ to become a mass of meaningless disclosure. There were calls for better implementation of the <IR> materiality principle, as well as really clear articulation of what the business model is and how risks are being managed.

Forward-looking information is another challenge – investors continue to ask for it and companies are still grappling with how to provide it in a way that doesn’t make the market jumpy. One participant called on investors to focus more on the agility of companies to respond to new circumstances and less on their ability to forecast.

Panellists and guests remained optimistic that more and more businesses will overcome these challenges, and will be able to benefit from <IR> to the fullest extent. There was widespread support for action on this agenda to support sustainable growth and appropriate allocation of capital – as one participant said: “Let’s get on with it!”

The investor panellists at the debate

  • Claudia Kruse – Managing Director, Head of Governance & Sustainability at APG Asset Management
  • Professor Christian Strenger – Supervisory Board Member, Deutsche Bank Asset & Wealth Management
  • Leon Kamhi – Managing Director, Head of Governance & Sustainability, Hermes Fund Managers Limited
  • Peter Elwin – Deputy Head of European Equity Research at J.P. Morgan

The business panellists at the debate

  • Charles Nichols – Group Controller, Unilever
  • Russell Picot – Group Chief Accounting Officer, HSBC
  • Jeanne Chi Yun Ng –  Director, Group Sustainability, CLP (China Light & Power)
  • Rowland Hill, Sustainability Team, Marks & Spencer