Monday, July 30, 2012

Is Integrated Reporting truly Integrated?

Right on the heels of the GRI G4 Exposure Draft, which rightly avoided getting into any discussion of Integrated Reporting, despite an original intent to create a seamless harmony between these two streams, it looks as though the GRI and the IIRC are having a bit of a language problem. That is, neither is speaking the same one. GRI is talking material impacts. IIRC is talking value creation.

The IIRC recently published a Draft Framework Outline  which is written, I think, in English. This follows the IIRC Discussion Paper which was published in September 2011 and elicited over 200 responses. A summary of the responses can be downloaded here, or you can do as I did, and take a look at all the individual responses submitted by people and organizations here (including mine here). It's worth taking a peek at these. They are very interesting. And sometimes rather amusing!

The purpose of the Integrated Reporting Draft Framework is to keep stakeholders informed. The Draft for Public Consultation will not be issued until 2013, with a Version 1.0 for implementation by end 2013.

The Integrated Reporting Draft Framework describes the elements that the Framework is expected to contain when it is actually a Framework and not a Draft. It has two parts: the concepts that are likely to be included in the Integrated Reporting approach,  and the expected elements contained in the route to preparing one.

The Draft framework refers to a "principles-based approach rather than focusing on specific KPIs or rules for measurement or disclosure of individual matters". While the IIRC threatens to issue KPI's or rules for disclosure (in GRI language: Performance Indicators and Profile Disclosures) at some future date, the emphasis is clearly on companies using their own judgment to sort out what's important and what to measure. In this way, the Draft Framework does have some similarity to the elective elements contained in the new G4 Exposure Draft which proposes a more rigorous process to define material issues and disclosures relating to those issues only.

Creating and Preserving Value is a key theme in Integrated Reporting. While one might argue that value is determined by considering all stakeholders, the focus on value rather than impacts moves Integrated Reporting further away from the accountability focus that has been, in my view, a pivotal factor in the development of sustainability reporting.  I think this positioning - value creation versus accountability - is one of the basic differences in perception between financial reporting and sustainability reporting.  The Draft Framework expects to include a definition of value, just to make it clear for everyone - and the implication is that by using the capitals system (see below), the definition of value will be broadened to include value for all stakeholders rather than purely financial value for shareholders. But what I am not sure about is whether there is a loophole that assumes you can create value without being accountable? If Integrated Reporting focuses on value creation, who focuses on accountability?  
The IIRC calls resources and relationships "capitals" of which there are six: financial, manufactured, human, intellectual, natural and social. I don't really identify with this. Why call them capitals when they are actually resources? Almost any definition of capital you look at makes the connection between capital and creating money. If all that the new approach to Integrated Reporting is doing is changing the words we use to refer to creating money, I am not sure we haven't lost the plot.

The Framework is likely to include a set of  guiding principles which should be used to prepare the report.
  • Strategic focus
  • Connectivity of information
  • Future orientation
  • Responsiveness and stakeholder inclusiveness
  • Conciseness, reliability and materiality.
These principles make sense, as I have said before. The aspects of connectivity and future orientation are often very lacking in our current forms of sustainability reports.

The Framework  is likely to prescribe six content elements relating to business model, operating context, strategic objectives, governance, performance, and future outlook. So far, so good. These are the elements that were introduced in the Discussion Paper that was published last year and seem to be the right sort of questions that a company should address.

To what extent this Draft Outline Framework actually moves us further down the track of Integrated Reporting. What exactly is integrated here?
Claudia Kruse writes on the IIRC Blog: "There is still much confusion about the distinction between sustainability reporting and integrated reporting. From an investors’ perspective it is absolutely critical that integrated reporting is positioned firmly within the realm of value creation and in a manner that speaks to the boards and financial (reporting) departments of companies". How integrated is that? I understand the need for investors to seek ESG information. I understand that the financial community is looking for another way to safeguard their cash. So what is this distinction that Claudia Kruse refers to? If all we are doing is moving from Financial Reporting to Value Reporting by adding in a few more ESG context-related content areas, then there is no new distinction. There will be Integrated Reporting and Sustainability Reporting. Just like now. Annual Reporting and Sustainability Reporting.

The state-owned energy Company from South Africa, Eskom, has delivered an Integrated Report which, for the first time, claims to align with the principles of the IIRC Discussion paper, stating,
"Eskom has combined sustainability and financial reporting for a number of years, but this is the first integrated report that aligns with the principles contained in discussion papers published by the International Integrated Report Council and the Integrated Reporting Committee of South Africa. Integrated reporting is a new international initiative that has emerged in response to the shortcomings of traditional reporting, which emphasises financial results without taking account of the broader context in which companies operate, and fails to weave together different reporting strands. Integrated reporting allows for reporting on financial results, governance, sustainability and other material factors in an interdependent manner. It addresses the challenges that companies face, the advantages they enjoy, the external factors that influence them and the way they in turn influence the external environment."

The report appears to present both financial and sustainability information in a comprehensive way. There is a degree of integration in the narrative of social and environmental context.  Eskom lists a set of material issues throughout the value chain. These are typically the sort of issues we might see in a Materiality Matrix of the type that many companies include in Sustainability Reports today. It is certainly a good thing to see this in an Integrated Report and Eskom has made a great pioneering attempt to present a full view of the organization in this 166 page report (of which around 60 pages are pure financials).  

Using Eskom as my test-case, I was interested to see how the principles of connectivity of information and future orientation are reflected in this report. I looked at the material issue Becoming a High Performance Organization which relates to safety as a key issue.  

25 people were killed in the course of duty in Eskom in 2011. The same number as 2010. Eight more people than in 2009. Despite declarations of the unacceptability of this safety record, and several programs in place to improve safety awareness, the fact remains that for three years, the situation has not improved, it has worsened. According to the new report, Sustainability Practices 2012 Edition, the average total annual fatalities in the Bloomberg 3000 for companies in the energy sector globally is 3. Eskom is about 8 times worse.

While Eskom expresses regret, and names the employees who died individually and sympathizes with the families, which shows respect and concern, as an investor, I would be interested to know a few more things:
  • What impact does this level of fatalities have on  business continuity?
  • What is the cost of this safety record (insurance premiums, employee morale, litigation, recruitment potential, work delays etc)?
  • What level of investment is required to improve employee practices?
  • What are the implications for creating and preserving value?  
In the context of future orientation, I would be interested to know more precisely what Eskom will be doing differently to prevent 25 more people being killed in 2012. Eskom describes activities and general frameworks relating to safety management, but a very detailed action plan to prevent fatalities is not included.

In a typical Financial Report, I would not necessarily expect to see these analyses.
In a Sustainability Report, I would expect to see what Eskom has included in this current report - details of the issue, an expression of sympathy and an intent (with a plan) to improve.  
In an Integrated Report, I would expect to see an analysis of the financial (as well as social) impact of this material issue and its connectivity to business performance, continuity and value, together with a detailed future plan (not just a target).

I think the Integrated Reporting discussion still has a long way to go. If it is to be something just more than a Financial Report which contains ESG information, the entire quality of thinking needs to change. If it is to be a tool for investors, then companies need to get better about understanding, measuring and reporting on the impacts of sustainability performance in financial terms. Otherwise, how will investment analysts be able to use this additional information to inform their decisions and calculate long-term risk? If the Integrated Report is to satisfy non-financial stakeholders, it needs to ensure that social and environmental impacts, not just value creation, are transparently disclosed, demonstrating accountability. Finally, if the Integrated Report is to become a document which is of any use to anyone, it needs to be more .. well.. integrated.

elaine cohen, CSR consultant, winning (CRRA'12) Sustainability Reporter, HR Professional, Ice Cream Addict. Author of CSR for HR: A necessary partnership for advancing responsible business practices  Contact me via   on Twitter or via my business website  (Beyond Business Ltd, an inspired CSR consulting and Sustainability Reporting firm)

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