Recent revisions to the integrated reporting framework are expected to offer greater accessibility and ease of understanding for companies when communicating to stakeholders.
By Gary Anders
A growing number of companies are using the international framework for integrated reporting to better communicate to their stakeholders how they create capital value.
First launched in 2013 and overseen by the International Integrated Reporting Council (IIRC), the framework goes well beyond the traditional financial reporting requirements of companies.
By using it, companies provide much more detailed insights into how their resources and relationships will affect value creation over the short, medium and long term.
There is a range of different elements of capital value in the framework used to define the activities and outputs of corporations.
These capitals are financial (the funds available to an organisation), manufactured (plant and equipment), intellectual (systems, patents and licences), human (capabilities, experience and values), social and relationship (community and stakeholder linkages), and natural (renewable and non-renewable environmental resources).
The COVID-19 pandemic has further underlined the importance of integrated reporting in the context of how companies report on risks and address issues around value erosion.
The 2021 revisions to the integrated reporting framework to help companies better communicate their business model viability and sustainability across a range of interconnected and interdependent capitals.
Greater accessibility for corporations and regulators
“The changes to the framework are incremental but significant,” says Dr John Purcell FCPA, CPA Australia’s policy adviser for Environmental, Social and Corporate Governance.
“The new international Integrated Reporting [IR] framework is more readily adaptable to developments such as those dealing with climate change risk.
“As we move out of COVID-19, there will be lots of uncertainties and that brings increased pressure on companies to report on what their climate change risks are.”
Purcell says the updated framework is also now better able to reflect developments around other forms of capital which a business relies on, such as intellectual capital and human capital.
“In the time since the framework has been developed, there have been a lot of developments with metrics around intellectual capital and human capital.
“The framework is now more sensitive and able to reflect reliance on natural capital – so, things such as eco services and biodiversity systems as well.”
While the integrated reporting framework has not expanded as such, it has been updated in a way that makes it more understandable and accessible for corporations and regulators.
“I think, importantly, the framework has now become more fit for purpose in terms of how regulators and other policymakers view it,” Purcell says.
“So, from a government perspective, those parties that develop rules and laws in relation to corporate disclosure, audit and the regulation of corporations more broadly, will likely, in the not distant future, view IR as the reporting norm.
“Equally, I think the framework is more fit for purpose in how it interacts with major developments in the non-financial reporting domain.”
The framework remains very principles-based, but there are significant changes in terms of important issues that companies need to address as the world emerges from the COVID-19 economic crisis.
“There is a significant amount of discussion around the embedding of climate-related financial disclosures,” says Purcell.
“That is, this reporting framework takes a more overt view. The centre of sustainability reporting is around value creation. Importantly, the framework does start to address issues around value erosion. It takes very much a holistic view of business reporting embedded in wider economic, social and environment systems.”
Integrated reporting is still gaining traction
Purcell says integrated reporting is gaining “noticeable traction” from corporations and regulators.
For example, it is referred to in such things as the ASX Corporate Governance Principles and Recommendations and the Australian Securities and Investment Commission’s guidance in relation to the preparation of operating and financial reviews.
“You need to draw a distinction between the extent to which companies overtly describe their reports as an integrated report,” Purcell notes, “as opposed to the amount of information in annual reports which is clearly identified as reflecting the ideas of integrated reporting and its underpinning in integrated thinking.
“Hopefully, these revisions to the framework will increase uptake to a degree. But I think it’s also important to say that there is momentum around the evolution of corporate reporting, which will hopefully make integrated reporting the pivotal part.”
The early concerns from some segments of the corporate sector around the inclusion of forward-looking information in integrated reports appears to have subsided.
“I think that the misgivings around risks in relation to what might be put in terms of the integrated report around forward-looking information has, to a degree, lessened after the 2019 update of ASIC’s guidance on operating and financial reviews,” Purcell says.
“There, it says that directors should be able to – with a degree of confidence – make statements around prospects in so much as they are confident about the underpinnings of those statements.
“Realistically, information that you put in an integrated report about future prospects is not terribly much different as to what investors and other stakeholders would reasonably expected of company in relation to narrative disclosures, the scope of which are widening in response to user needs.”