A Quick Primer on Integrated Reporting

May 10, 2013

If you follow the monthly, weekly, daily, and sometimes hourly news feeds on sustainability like I do, you will likely have noticed the recent influx of information on integrated reporting.  From my review of several leading reports and news articles, I have summarized key findings below:

What is Integrated Reporting?
Integrated reporting (IR) is a way of reporting that utilizes a deeper process of assessing business strategy and performance in the context of its relationship with many aspects of business—namely, but not exclusively: Social, Environmental, and Governance factors. In addition, IR links financial business performance to non-financial performance, capturing the connectedness of a business with the world around it. According to Deloitte, the responsibilities of a company are changing, and expectations are shifting rapidly: “Integrated reporting, which encompasses elements of traditional financial reporting, sustainability reporting, and governance reporting within a single presentation, represents a growing trend that represents these new expectations.”

Definition of Integrated Reporting is Not Standardized
IR is in the early stages of development. Thus, there is no standardized definition, but key components are emerging.

Key Tenets of Integrated Reporting
Based on Integrated Reports (or partially integrated) from several companies, key tenets of IR include:

* Sustainability becomes integrated into overall business

* IR is more of an outcome of that process

* Sustainability goals become inextricably linked into overall business goals.  They are no longer a subset, separate department, or stand-alone report

* Sustainability is incorporated holistically into operations, strategies, and values, not merely environmental performance

* Non-financial indicators show a direct correlation financial performance.  SAP, for example, can show that an increase in the Employee Engagement percentage and Business Health Culture Index directly adds Net Income to the bottom line. According to SAP, “When we report our employee engagement scores, we don't say simply that our employees are important. We say that engagement is one of our four company-wide objectives because it drives our financial performance and innovation. In fact, this linkage between financial and non-financial measures is at the heart of an integrated report.”

* IR speaks to everyone—internally and externally

* IR explains how sustainability serves individuals’ goals and the organizations’ goals. It speaks to HR (attraction and retention), Sales and R&D (new products and innovation), managers and management (productivity), the CEO & Board (long-term strategy, growth, and sustainability).

* IR encompasses existing sustainability reporting and tends to have several key focus areas that are material and deeply strategic to the company. For example, P&G delivers clean drinking water, which aligns with their humanitarian mission and the fact they manufacture water purifying products.

* Most IR reports contain a direct cross-reference section to GRI indicator disclosures and some also add Global Compact indicators.

Integrated Reporting is Today’s Leading-Edge
 “Forward-thinking companies are putting integrated reporting on their agendas now.”  
- Integrated Reporting: A Better View? by Deloitte

“60% of respondents expect to be using integrated reporting within three years – a substantial shift.”
- Corporate Citizenship Reporting

Most IR adoption is currently from international companies. South Africa has mandated IR. However, several leading U.S. companies are using IR to show the alignment of non-financial performance with financial performance, uncover inefficiencies, differentiate themselves in the marketplace, find growth opportunities, and position the company for sustained competitive advantage long-term.
Here are a few examples:

* SAP has emerged as a sustainability leader as a result of their comprehensive, forward-looking IR.
   
* P&G, while not a fully-integrated report (sustainability is a stand alone section), ties goals to sell more innovative,       environmentally-focused products with top-line growth, shows drastic environmental performance improvement over 10 years with bottom line savings, and aligns the health of children around the world with their mission and core business of selling     cleaning-type products.

* PUMA developed an Environmental Profit & Loss (EP&L) Statement to determine the cost to the ecosystem as a result of their supply chain (costs that have not been internalized). The EP&L is a precursor to an integrated report, where PUMA can now more     clearly see where its holistic strategy can have the most impact on the environment and people.

Benefits of Integrated Reporting
 “An integrated report signals that the business landscape has changed, and it is no longer possible to separate sustainability from the core of how we operate and what we deliver to customers. It is also a significant step towards truly integrated thinking, the precursor to developing a strategy and actions that ensure our future success, relevance and viability.”
- SAP Sustainability Officer, Peter Graf

“The unprecedented PUMA Environmental Profit and Loss Account has been indispensable for us to realize the immense value of nature’s services that are currently being taken for granted but without which companies could not sustain themselves.”
- Jochen Zeitz, Executive Chairman of PUMA and Chief Sustainability Officer of PPR.
   
Integrated reporting can bring extensive benefits to an organization and its stakeholders by helping to hone strategy, drive efficiency, mitigate risk, and improve competitiveness.  Deloitte’s most recent report on IR shows a model where sustainability has become an integrated strategy resulting in competitive advantage.

Indeed, that is the vision espoused by most sustainability professionals—a world where all business has sustainability fully integrated across the company.

 

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