“Just do it, even if it looks difficult in the beginning”
Annual reports are traditionally dominated by companies’ financial performance measures. In recent years, investors increasingly call for companies to present a more holistic view on their strategic value creation over time. The International Integrated Reporting Council (IIRC) developed a framework, which supports companies reporting on performance using 6 capitals (financial, manufactured, natural, social & relationship, intellectual and human) and explaining each capital’s transformation into value through the business model. Henning Dräger, IIRC, Kiev, Ukraine, leads the IIRC’s global flagship Business Network programme and is responsible for developing innovative solutions across the <IR> Network. FQF talked to him about the framework.
Mr Dräger, the IIRC’s mission is to establish integrated reporting and thinking within mainstream business practice as the norm in the public and private sectors. To reach this goal, the IIRC developed the International <IR> Framework. Could you please point out the framework’s main ideas?
Integrated Reporting (<IR>) is an evolution of corporate reporting, with a focus on conciseness, strategic relevance and future orientation. As well as improving the quality of information contained in the final report, <IR> makes the reporting process itself more connected across traditionally isolated reporting silos e.g. finance, sustainability and governance. <IR> starts with integrated thinking, enabling a better understanding of the factors that materially affect an organization’s ability to create value over time. Value is not created by or within an organization alone but very much influenced by external drivers including relationships with stakeholders and dependencies on various resources. Therefore, it aims to provide insight about the external environment that affects an organization, the resources (“the 6 capitals”) and the relationship used and affected by the organization. An integrated report shows how the organization interacts with the external environment and how the 6 capitals create value over the short, medium and long term.
All organizations depend on various forms of capital for their success. The capitals as aforementioned comprise financial, manufactured, intellectual, human, social and relationship, and natural information. The capitals are stock of value that are increased, decreased or transformed through the activities and outputs of the organization. The overall stock of capitals is not fixed over time; there is a constant flow between and within the capitals. Not all capitals are equally relevant or applicable to all organizations. While most organizations interact with all capitals to some extent, these interactions might be relatively minor or so indirect that they are not sufficiently important to include in the integrated report.
At the core of the organization is its business model, which draws on various capitals as inputs and, through its business activities, converts them to outputs including products, services, process by-products, waste and other environmental impacts. The organization’s activities and its outputs lead to outcomes in terms of effects on the capitals. The capacity of the business model to adapt to changes (e.g., in the availability, quality and affordability of inputs) can affect the organization’s longer-term viability.
When we take a look at the current situation of corporate reporting habits in the world, South Africa takes the lead in <IR>. What’s the situation in other parts of the world and what are the key drivers for integrated reporting?
Indeed South Africa is the only country mandating companies listed on the Johannesburg Stock Exchange (JSE) to report in an integrated since 2011. <IR> in South Africa has its roots in corporate governance disclosure and thanks to the King III code on corporate governance there is now a clear alignment with the <IR> framework.
<IR> has experienced rapid adoption the world with over 5000 companies stating that their reporting is integrated. Currently, it is very interesting to follow the development in some Asian countries. In Japan, for instance over 390 companies have adopted Integrated Reporting thanks to the proactive work and endorsement of several government bodies enabling entities to communicate their long-term value creation strategies.
In Singapore, the Institute of Singapore Chartered Accountants (IRSC) is investing resources to promote and help companies consider and adopt <IR>. In so doing, Singapore is becoming the hub of IR in South-East Asia. The Singapore Stock Exchange is considering developing <IR> guidelines for its constituents and leading businesses such as DBS Bank, City Developments Limited and the Maritime & Port Authority are paving the way towards greater <IR> adoption.
Malaysian government and securities commission have spoken of Integrated Reporting as a tool to enhance the quality of information available to the market. A Corporate governance code to adopting <IR> encourages adoption of <IR>. Over 20 of Malaysia’s largest businesses have made a public commitment.
In Europe, the European Commission describes <IR> as “a step-ahead” of its directive on non-financial reporting. <IR> networks are active in countries including France, Germany, Italy, Netherlands, Turkey, Switzerland and the UK.
Today, about 80 per cent of a company’s value consists of intangible assets, according to the S&P 500 stock market index. That’s why investors call for a holistic presentation of the company’s value creation process. In addition, recent surveys show, that sound sustainability practices boost the stock prize. So, why are so many companies reserved regarding integrated reporting?
Many organizations, particularly SMEs are probably not aware of <IR> let alone the Framework. That’s why the IIRC tries to raise awareness and invite organizations of all sizes and reporting maturity to join our platforms and fora hopefully stimulating dialogue and collaboration. We also try to address the notion that adopting <IR> automatically means significant additional resource use. In our experience this is simply not the case but it will require clarity around the aims and objectives for adopting <IR> which always starts with integrated thinking.
What is your five-point-action plan to enhance companies to take the first steps in the IR direction?
Firstly, all interested stakeholders should visit our website which has many free resources including the Framework, technical papers and reports. (www.integratedreporting.org). I particularly like our “Integrated Reporting Examples Database” section which contains examples of emerging reporting practice illustrating how organizations are applying <IR>. I highly recommend getting inspired by these <IR> practitioners!
Secondly, connect with us. We are just an email (firstname.lastname@example.org) or phone call (+44 207 504 2574) away. Over 2000 organizations already interact with us across our <IR> Networks
Thirdly, if you are ready to dive deeper consider setting up an <IR> task force, ideally chaired by a senior decision maker, representing a diverse cross-section of departments including investor relations, sales, marketing, finance, corporate responsibility, governance, logistics etc. Starting the discussion about the value of <IR>, looking at data gaps and integrating the views of all reporting units is often a very insightful exercise which has progressed many companies’ <IR> journey.
Fourthly, the IIRC Framework is not rigid but principles based leaving reporters amply room to apply suitable elements. If your organization does not feel ready to fully implement the Framework you could just start with the available data e.g. defining and reporting on value creation against the 6 capitals. As you advance your <IR> journey elements including more forward looking information and key performance indicators (KPIs) and Key Risk Indicators (KRIs) for all capitals is a natural progression for many companies.
Fifthly, if you initial analysis of the value of <IR> is positive then just jump in even if it looks complex and resource intensive in the beginning. Start telling readers of your annual report and related stakeholders that your organization is embarking on an <IR> journey. Explaining the difference between <IR> and the current reporting is also a very useful tool to get readers and stakeholders on your side.
Which development do you expect in the years to come?
It will be the best to consider an integrated model and implement it into the corporate strategy. In so doing, organizations will be able to communicate a clear, concise, integrated story that explains how all of their resources are creating value. Integrated Reporting will be helping businesses to think holistically about their strategy and plans, make informed decisions and manage key risks to build investor and stakeholder confidence and improve future performance. I believe that more and more organizations will take this path toward integrated thinking and reporting, but it will take years to complete.
Interview: Sebastian Kaiser
ABOUT HENNING DRÄGER
Henning Dräger is the IIRC’s Global Director for <IR> Business Networks & Innovation. The Business Network is the IIRC’s flagship programme supporting organizations’ ability to communicate their strategic value creation over time.
Henning joined the IIRC in 2013 and spreads the joy of <IR> from his office in Kiev, Ukraine. Over the past 20 years Henning has advised organizations in 22 countries on sustainability, CSR and <IR> matters working for Goldman Sachs, WWF, Friends of the Earth, Philip Morris, ACCA and BDO.
Henning holds 3 Masters Degrees including an MBA in Strategic Sustainability Management from the University of Washington, Seattle and an MSc in Industrial Ecology from the University of Glasgow.
Henning was voted Ukraine’s “Sustainability and Responsible Business Thought Leader” in 2015 and 2016 and holds several societal roles including Chair of the European Business Association’s CSR solutions committee bringing together sustainability and CSR practitioners.