The Art of Business Strategy. Is Integrated Reporting a continuation of strategy by other means?

The integrated report or following Robert G. Eccles and Mike P. Krzus’ designation – One Report – is essentially “a single report that combines the financial and narrative information found in a company’s annual report with the nonfinancial (such as environmental, social and governance issues) information.”

Despite the fact that there is a rising urge for the adoption of integrated reporting in companies’ business practices, this does not mean that companies need to produce only one report. The discourse points to the necessity of a holistic view of the company’s financial and nonfinancial assets; this view should be presented neatly in a single document – usually a PDF file – but it should not limit the company to issuing solely the integrated report. The company’s webpage is another platform where the integrated report can gain visibility and be presented in a very interactive way so that the reader/user remains engaged. Companies such as Vodafone and SAP have interactive website versions of their annual integrated reports showcasing the practicality of the web platform.   

Integrated reporting is about integrated thinking, by which we imply considerations about the short, medium and long term outlook of the company. Integrated thinking is forward thinking that also takes into account the past performance of the company, but unlike corporate reporting (extensively backward-looking financial statements), it emphasises perspectives on strategy and decision-making that are forward-looking.Research has shown that companies that have established the practice of integrating financial and nonfinancial information in their strategic decisions will have higher performance in the future. The concept of materiality is of particular significance in this discussion since by identifying material issues, the organization has the opportunity to revise its strategy - according to established material issues as a result of the conducted materiality analysis - and integrate these issues in its strategic decisions. And moreover, we all know that nowadays transparency is the sin qua non and the more disclosure and accountability, the better. However, we should caution that only meaningful disclosure of the way financial and nonfinancial information impact one another will serve the purpose.  

Even though intuitively a company’s integrated report is primarily targeting investors, a comprehensive account of the company’s financial and nonfinancial assets should accommodate the needs of a wide range of stakeholders, not solely the investor community. The inherent idea behind integrated thinking is that it seeks to address the needs of the whole spectrum of major stakeholders – from investors to communities – and that is why the information captured is holistic in nature. Ultimately, integrated reporting is not intended to inform only financial models in an investment analysts’ spreadsheet.

The current state of integrate reporting is that -  apart from a few companies - the majority of the corporate world is still far from reaching that mature state of reporting that would inform and guide strategy and integrate financial and nonfinancial considerations into the decision-making process and the company’s business model. Some of the most pressing obstacles to reaching the coveted mature state of integrated reporting include but are not limited to uncertainty around what information to report on, difficulty in identifying material issues to the organization, lack of clarity with regards to reporting frameworks and the common problem of measurement (specifically associated with nonfinancial data).

On the positive side, there is a growing adoption of already established frameworks and guidelines that serve to assist companies in their journey towards issuing the One Report. Some of these include the International Integrated Reporting <IR> Framework and the Global Reporting Initiative (GRI) – allegedly the most widely adopted guidelines on reporting nonfinancial information. On the negative side, however, the already established guidelines and frameworks prove to be inadequate to provide the necessary basis for companies to meet the requirements of the ‘ideal type’ of integrated report. A major issue is that unfortunately, already established guidelines such as the GRI fall short to address the needs of one of the most important users of integrated reports – the investor community. Additional obstacles to integrated reporting include:

  • lack of connectivity of information
  • inability to identify material issues
  • lack of conciseness
  • obscured strategic focus
  • predominantly information on past performance
  • unreliability of the information

Evidence shows that there is a consensus that nonfinancial information is important and a recent research project The value of extra-financial disclosure. What investors and analysts said’* reveals some very interesting points outlined below that reaffirm this claim:

  • More than 80% of investors (mainstream and SRI) and analysts surveyed deem nonfinancial information important for their decisions regarding investments.
  • In terms of ease of comparability, financial information, followed by governance information is the most unproblematic; on the other hand, the survey showed that social and environmental information appears to be difficult to compare due to the lack of universally followed guidelines and/or standards.
  • There is a widespread notion that integrated reporting could bring the necessary platform for resolving the problem of comparability of nonfinancial information.
  • A large majority of investors and analysts surveyed find the connectivity of information – both financial and nonfinancial, inclusive of strategic considerations, ESG issues and other – very important or important for making investment decisions.
  • Overall, investors and analysts appreciate the merits of integrated reporting and have a firm belief in its relevance for investment decisions.
  • By far the most important feature of integrated reporting identified by the respondents is the great potential of integrated reporting to bring clarity on the ways nonfinancial performance affects financial performance.
  • Almost all of those surveyed expressed the view that standards and guidelines would bring greater value to both financial and non-financial information.
  • The GRI Sustainability Reporting Framework is most popular among the investors and analysts partaking in the survey – 70% admit using the Framework.
  • There is almost a 10% gap between analysts and investors in terms of their likelihood to use the GRI Framework; investors, even with a confident 65% of the respondents, seem less willing than analysts to rely on GRI guidelines.

*The sample size of the conducted surveys is 34 investors and 35 analysts.

Even though a growing number of investors admit taking nonfinancial data into consideration in their decision-making process, they still emphasize on the importance of financial information – data that can be easily compared, assured and is most importantly reliable. We cannot say the same about nonfinancial information. There is no clear consensus on how to approach comparability due to the absence of established benchmarks, and investors and other stakeholders duly view nonfinancial information less reliable (which can be attributed to the lack of universal or sector-specific benchmarks, frameworks and guidelines). With regards to assurance, there are further complications primarily related to the level and scope of assurance and there is also the emerging question of the role of internal audit in integrated reporting.

Despite all positive developments, frameworks such as the GRI (even though helpful) have, to a certain extent, failed the expectations of investors for comprehensive standards and guidelines on nonfinancial data together with information on how to inform on the linkages between financial and nonfinancial performance. Another issue worth mentioning is the fact that the discourse around integrated reporting and sustainability reporting targets predominantly large corporations. However, if we are to genuinely embrace integrated reporting as a universal practice, there should be at least a dialogue about the needs and prerequisites of SMEs to adopt integrated reporting.

Some might argue that these comments are harsh considering the evolving status of integrated reporting. Still, it is important to foster the discourse around the challenges organizations face in producing an integrated report and to bring up the most pressing issues that need further refinement and improvement.