Self-Declared Integrated Reports

Although integrated reporting principles were discussed as early as 2005, the first formal definition with reporting criteria did not appear until the Integrated Reporting Committee of South Africa published its 2011 Discussion Paper (IRC of SA Discussion Paper).⁷ No database exists regarding how many reports fit these criteria. However, Global Reporting Initiative's (GRI's) Sustainability Disclosure Database for the period 2010–2013 provides a useful indicator of the rise in the number of integrated reporting companies, based on self-declared integrated reports.⁸ The number of organizations declaring the publication of an integrated report grew from 287 in 2010 to 596 in 2012.⁹ In 2013, for which we do not have a complete count at the time of this writing, 61% were listed companies; 31% unlisted, for-profit entities; and the remaining 8% were other organizations—like nonprofits and municipal governments.¹⁰ Two-thirds were classified by GRI as “large” and another quarter as “multinationals.”¹¹ While the main focus of the integrated reporting movement is listed companies, these statistics reveal that the idea has broader application—for instance, by cities.¹²

The fact that 51% of the reports came from European organizations, with only 3% from North America (just slightly below the 4% of the comparatively small Oceania region), suggests major differences in awareness of and receptivity to integrated reporting between these two regions. Compared to companies in the European Union (EU), U.S. companies perceive greater litigation risk surrounding voluntary disclosures. Latin America and the Caribbean accounted for 12% of the reports, Asia for 9%, and Africa—predominantly, South Africa—the remaining 21%. Even as many of these declared integrated reports might more aptly be labeled “combined,” the volume of companies publicly declaring themselves to be advocates for integrated reporting is a positive sign of receptiveness.¹³

Trends in Sustainability Reporting

Companies that publish sustainability reports have taken a big step towards voluntary transparency and, in many cases, they have implemented systems to gather nonfinancial performance information. Thus, they represent a pool of candidates that might also be receptive to integrated reporting. At present, most companies that issue an integrated report did so after publishing a sustainability report for some number of years.¹⁴

Though only 1% of the world's 46,000 listed companies were self-declared integrated reporters in 2012,¹⁵ companies producing sustainability reports are more numerous and the number is growing rapidly (Figure 3.2). In 1999, only 11 companies produced a sustainability report using GRI Guidelines. By 2012, the number of reports had grown to 3,704, for a compound annual growth rate of 56.5%. The growth rate in Asia (68.3%) was higher than in Europe (54.0%) and North America (43.5%), indicating a growing interest in sustainability reporting there. According to Peter DeSimone of the Sustainable Investments Institute, while only eight S&P 500 companies issued an integrated report in 2013, 89% (450) engaged in sustainability reporting, up from 76% in 2012,¹⁶ and 43% of the S&P 500 made use of the guidelines, up from 36% in 2012.¹⁷ Even in the United States, the strong growing trend of sustainability reporting could provide momentum for integrated reporting.¹⁸

The Spirit of Integrated Reporting

In 2009, RobecoSAM, the organization that has prepared the Dow Jones Sustainability Indices (DJSI) since 1999, began to look for evidence of integrated reporting.¹⁹ For the 2011 and 2012 annual reports, their Corporate Sustainability Assessment²⁰ of 2,000 of the world's largest companies looked for whether the company had provided data on how environmental and social initiatives have led to cost savings or increased revenues. While not the same thing as a fully integrated report, this is an indicator of companies putting some of the principles of integrated reporting into practice, particularly “connectivity of information” in the <IR> Framework.²¹ Thus, we will take this as signifying the “spirit” of integrated reporting. Reasoning that only data from annual reports' main sections would signify true integration—as putting data in a sustainability section is indicative of a “combined” rather than integrated report—they found that only 12% of the companies provided an example of environmental or social cost savings or revenue generation in 2012. Still, this was up from 8% in 2011, a 50% increase.²² Seventy-four percent of the 2012 examples concerned environmental initiatives split evenly between cost savings and revenue generation. For social initiatives, two-thirds concerned revenue generation and one-third cost savings.²³

Supporting our use of these examples as indicators of the “spirit” of integrated reporting, a far greater proportion of these reporting examples concerned strategic, groupwide initiatives related to the company's core business (72%), as opposed to sustainability programs focused on noncore business activities or activities isolated in a single location (28%).²⁴ Reflecting the difficulty in quantifying these relationships between financial and nonfinancial performance, 60% of the total number of examples were expressed in qualitative terms.²⁵

Regulation

The only accelerating force to invoke the power of the State, regulation changes company behavior directly. It is a double-edged sword, however, whose successful implementation risks relegating integrated reporting to the status of a compliance exercise as companies, constrained in their ability to “tell their own story,” might only adhere to the “letter” rather than the “spirit” of the law. Although only South Africa requires integrated reporting, regulations that support sustainability reporting are increasingly cropping up around the world. In the 2013 report “Carrots and Sticks,” KPMG, the Centre for Corporate Governance in Africa, GRI, and the United Nations Environment Programme considered 180 policies in 45 countries to find that 72% were mandatory, compared with 62% in 32 countries studied in 2010, and 58% in 19 countries studied in 2006.²⁶ Major trends included framing regulation in terms of corporate governance and disclosure requirements, an increasing number of policies based on a “report or explain” basis, a focus on large and state-owned companies (with voluntary reporting by small and medium-sized enterprises), sustainability reporting as a listing requirement on some stock exchanges (discussed more below), and governments striving to harmonize the use of multiple frameworks.²⁷ Consistent with this trend toward mandated sustainability reporting, professors Ioannis Ioannou of London Business School and George Serafeim of Harvard Business School found that government adoption of mandatory corporate sustainability reporting led to positive organizational changes often linked to integrated reporting.²⁸ While integrated reporting and sustainability reporting are distinct practices, the spread of mandatory sustainability reporting and growing evidence of its benefits could encourage governments to consider regulations in favor of integrated reporting—most likely on a “comply or explain basis.”

The latest piece of legislation covering a large geographical territory was initiated when, on April 16, 2013, the European Commission announced proposals²⁹ to amend the Fourth³⁰ and Seventh³¹ Accounting Directives to improve business transparency and performance on social and environmental issues. On April 15, 2014, the plenary of the European Parliament adopted this Directive by a vote of 599 to 55 from its 28 member states: “Companies concerned will need to disclose information on policies, risks and outcomes as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity in their board of directors.”³² The Directive, expected to affect around 6,000 companies, applies to listed companies with 500 or more employees, as well as certain unlisted ones.³³ At the time of the legislation, only around 2,500 large EU companies were disclosing environmental and social information on a regular basis.³⁴ Companies could choose whether to include this information in their annual report (at least leading to a “combined report”) or in a separate report.³⁵ They could also choose among various standards and guidelines for reporting this information, but they were not required to do so.

In a memorandum issued by the European Commission at the time the legislation was announced, the Commission explained its stance on integrated reporting:

The Directive focuses on environmental and social disclosures. Integrated reporting is a step ahead, and is about the integration by companies of financial, environmental, social and other information in a comprehensive and coherent manner. To be clear, this Directive does not require companies to comply with integrated reporting.

The Commission is monitoring with great interest the evolution of the integrated reporting concept, and, in particular, the work of the International Integrated Reporting Council.³⁶

Thus, while the Commission made it clear that the Directive was not calling for integrated reporting, it explicitly acknowledged its existence and that of the International Integrated Reporting Council (IIRC) while positioning the current Directive as a possible step in the direction of integrated reporting. This simple statement conveys substantial institutional legitimacy for both the idea and the organization in the European Union.

Similar to what has been done in some jurisdictions with mandatory sustainability reporting,³⁷ the European Commission planned to develop implementation guidance. The proposal's implementation, however, would be determined by each Member State.³⁸ Steve Waygood, Chief Responsible Investment Officer at Aviva Investors and integrated reporting policy advocate,³⁹ expressed concern about the decision to leave implementation specifics and accountability to each individual country. He felt that if this were the case, “It is realistic to believe that fewer than these 6,000 large companies in the EU will be affected, taking realpolitik into account. Any number of countries may not do it effectively, and another category of countries will try to say the directives are already included in their legislation.”⁴⁰

Two central challenges exist: (1) each nation is responsible for creating its own accountability device for the legislation and (2) if the legislation is “comply or explain,” there is no clear indication of who should be tasked with oversight, to which organizations companies should look to for guidance, and how to explain if they do not comply.⁴¹ In contrast to countries, Waygood viewed the regulation's principles-based approach useful when it came to individual companies in preventing a “tick-the-box” compliance approach. “It would have been a mistake to attempt to create a one-size-fits-all approach that specified one set of key performance indicators for all individual sectors,” he said, observing, “The proposals also recognize the individuality of each firm and give boards the discretion to report on what they believe to be relevant for their sector and explain why they have not included other measures.”⁴² As the proposed legislation does not include any discussion of materiality, companies will have to determine for themselves whether this idea is relevant to their determination of what is “concise, useful information” and, if so, how materiality should be determined. Despite its imperfections, Waygood was clear about the potential benefits of this legislation. “For us and other analysts, it makes more and more pertinent information available that can help us make more accurate valuation assessments for the benefit of end-investors. For the EC, it makes sense as part of the Single Market Act that envisaged creating a more sustainable capital market.”⁴³

Multistakeholder Initiatives

Multistakeholder initiatives change behavior by influencing those who can do so directly (the State) or indirectly, such as a club or industry association that can use moral suasion, membership criteria, and their recommended “best practices” to encourage companies to adopt a practice. Two initiatives particularly important to the integrated reporting movement are the Sustainable Stock Exchanges Initiative (SSE) and the Corporate Sustainability Reporting Coalition (CSRC).⁴⁴

Organizations

Accelerating organizations include entities whose very mission is the adoption of integrated reporting (the IIRC), those whose mission is supportive of and broadly consistent with it (e.g., CDP, the Climate Disclosure Standards Board (CDSB), GRI, and the Sustainability Accounting Standards Board (SASB)), and those whose recommendations carry some weight of authority (e.g., the Financial Accounting Standards Board (FASB), the International Accounting Standards Board (IASB), the Big Four and other accounting firms, and the professional accounting associations). These organizations speed adoption by lending institutional legitimacy to the concept, encouraging companies to adopt it, and by providing them with frameworks, tools, education, and advice.

While a number of NGOs play key roles, we regard the IIRC as the principal accelerator because its explicit mission is global adoption of integrated reporting through its International <IR> Framework. GRI, SASB, CDSB, and CDP, in its role as Secretariat to the CDSB, support its efforts by pursuing missions that involve developing standards and frameworks for the measurement and reporting of nonfinancial information that can be used in integrated reporting. Complementary to the various reporting programs is the Global Initiative for Sustainability Ratings (GISR), whose mission is to accredit sustainability ratings that use as input data to their analytical models information reported according to the standards of the above organizations, as well as other sources. Unlike SASB, both the IIRC and GRI promote standards that are not country-specific. With an appropriate level of collaboration, the difference in jurisdiction and approach between these organizations should be complementary to each other.

The accounting firms Deloitte, Ernst & Young (E&Y), KPMG, and PricewaterhouseCoopers (PwC), and accompanying professional accounting organizations (of which each country has one or more), increase momentum through direct engagement with companies and working with them on materiality. Although the Big Four are primarily concerned with materiality in terms of auditing of financial statements, they and some major accounting associations have addressed it in sustainability and integrated reporting.⁶⁶ PwC has also produced its own “materiality matrix,”⁶⁷ which concept is the focus of Chapter 6.

Global Reporting Initiative⁸⁶

Based in Amsterdam, GRI was founded in 1997 as a joint project of the nonprofits Ceres⁸⁷ and the Tellus Institute.⁸⁸ GRI takes a multistakeholder audience approach in its definition of materiality with the goal of identifying issues important for companies to consider in support of sustainable development. Its success in spreading the practice of sustainability reporting provides a strong foundation on which the integrated reporting movement can build. With 5,980 organizations producing sustainability reports in its database, GRI, like sustainability reporting, today has a much broader reach than integrated reporting.⁸⁹ GRI and the IIRC differ in terms of their primary audience.⁹⁰ Although the latter distinction will likely affect their definitions of materiality, the attention it gives to integrated reporting and the relationship it sees between integrated and sustainability reporting will be, as discussed in Chapter 5, important in adding to the momentum of the movement.

While GRI predates the IIRC by some 13 years, it has smoothly assimilated integrated reporting into its mandate since the IIRC's formation. At its third global conference in Amsterdam on May 26–28, 2010, GRI introduced two strategic propositions that anticipated IIRC sentiments: (1) “By 2015, all large and medium-size companies in the Organisation for Economic Co-operation and Development (OECD) countries and large emerging economies should be required to report on their ESG performance and, if they do not do so, to explain why,” and (2) “By 2020, there should be a generally accepted and applied international standard which will effectively integrate financial and ESG reporting by all organizations.”⁹¹ Importantly, GRI helped support the IIRC's mission by adding a section to its website to demystify the relationship between GRI Guidelines and the IIRC Framework. From GRI's perspective, sustainability reporting and integrated reporting are intrinsically related:

…organizations must identify the material sustainability topics to monitor and manage to ensure the business survives and expands. This step is at the core of the sustainability reporting process provided by GRI's Sustainability Reporting Framework. GRI offers companies guidance on how to identify material sustainability topics to be monitored and managed, and to prepare for the integrated thinking process, which is the foundation for integrated reporting.⁹²

In May 2013, GRI released its G4 Guidelines (G4).⁹³ Nelmara Arbex, former Deputy CEO of GRI, current Chief Advisor on Innovation and Reporting, and member of the IIRC Working Group, views GRI Sustainability Reporting Guidelines (G4) and the <IR> Framework as complementary. “Where sustainability information is material to a company's ability to generate value, it should be included in an integrated report as proposed by the IIRC,” she explained. “G4 provides a basis for executives to understand the link between everyday activities and strategy, offering a globally accepted language to communicate a company's values, governance structure, and critical social and environmental impacts.”⁹⁴

Concurrent with the release of G4, GRI released a report, “The Sustainability Content of Integrated Reports—A Survey of Pioneers,” whose key findings further underline the value of a dialogue between GRI and the IIRC about integrated reporting.⁹⁵

• “Large companies are driving the year-on-year rise in the publication of self-declared integrated reports around the world.
• Leading countries in this sample are South Africa, the Netherlands, Brazil, Australia, and Finland.
• Globally, the financial sector self-declares more integrated reports than any other sector, followed by the utilities, energy, and mining sectors.
• About a third of all integrated reports clearly embed sustainability and financial information together and this proportion is growing year-on-year. In tandem, an increasing number of reports now have the title ‘Integrated report’ and clearly discuss the significance of integration as part of their content.
• About half of all self-declared integrated reports are two separate publications—an annual report and a sustainability report—published together under one cover, with minimal cross-connection.”⁹⁶

Unlike SASB, both the IIRC and GRI promote frameworks that are not country-specific. With an appropriate level of collaboration, the difference in jurisdiction and approach between these organizations should be collective strengths. As Christy Wood, the Chair of GRI, said, “The collective global thinking on sustainability is greater than the sum of its parts. These organizations [GRI, IIRC, and SASB] should be able to work together. If we have a united front, we can expedite and accelerate the uptake of integrated reporting.”⁹⁷

Sustainability Accounting Standards Board ⁹⁸

Based in San Francisco, the SASB was founded in July 2011 by its CEO Jean Rogers, John Katovich,⁹⁹ and Steve Lydenberg¹⁰⁰ as a not-for-profit organization to create industry-based sustainability standards for the recognition and disclosure of material environmental, social, and governance impacts by companies traded on U.S. stock exchanges.¹⁰¹ At the time of this writing, SASB has issued standards for the healthcare, financial institutions, and technology and communications sectors and expects to have completed all 10 sectors by the beginning of 2016. These sectors are composed of more than 80 industries.¹⁰² Because both SASB and the IIRC focus on investors, companies can use SASB's standards for the nonfinancial information they include in their integrated report.

Through evidence-based research; Industry Working Groups¹⁰³ comprised of corporations, investors, and other stakeholders; a 90-day public comment period; and review by an independent Standards Council,¹⁰⁴ SASB has established an exacting process¹⁰⁵ for standard setting. The rigor of its methodology earned SASB accreditation by the American National Standards Institute to establish sustainability accounting standards. Because SASB's process is based on a U.S. context, however, how its standards can be adapted to other countries remains undecided in spite of clear non-U.S. interest. As of May 1, 2014, of the 1,672 downloads of the healthcare sector standards, 991 (59%) were from the United States and 681 (41%) were from 55 other countries.¹⁰⁶ For the more recently released set of standards for financial institutions,¹⁰⁷ the 365 downloads were evenly split between the United States and 33 other countries on that same date. Because interest in SASB's standards outside the United States is high, whether and how SASB expands its industry-based expertise to the international market will have strategic repercussions for both the organization and the movement.

Using the Security and Exchange Commission's (SEC) definition of materiality,¹⁰⁸ SASB's goal is to set standards companies can use to provide information in their SEC filings, such as the Form 10-K (for U.S.-based companies) or Form 20-F (for foreign registrants). In light of this, Bob Herz, former Chairman of FASB, defined this benchmark for SASB's success as SEC incorporation: “The challenge for SASB is whether the SEC will enforce SASB standards based on the rigor of SASB's process and their use of the SEC's definition of materiality. Will the SEC refer to SASB standards when they review, for example, Forms 10-K and 10-Q? A related question is whether companies participating in the SASB process voluntarily begin making sustainability disclosures in their SEC filings.”¹⁰⁹ While inclusion of sustainability performance information in the 10-K or 20-F would not turn these SEC-required documents into an “integrated report” as defined by the <IR> Framework, it would certainly accelerate the meaningful adoption of integrated reporting.

On May 1, 2014, SASB elected a new Chair, Michael Bloomberg (philanthropist, founder of Bloomberg LP, and the 108th mayor of New York City), and a new Vice Chair, Mary Schapiro (former SEC chairman).¹¹⁰ According to GreenBiz, these appointments provide SASB with “two powerful allies who are well-poised to extend its influence within the business and investment communities.”¹¹¹ We concur that these appointments will provide momentum to SASB's mission and, in our personal view, to the integrated reporting movement in general.

CDP¹¹²

CDP (previously the Carbon Disclosure Project) “is an international, not-for-profit organization providing the only global system for companies and cities to measure, disclose, manage and share vital environmental information.”¹¹³ With offices worldwide, its climate change, water, and forest programs are used by thousands of companies in more than 80 countries.

CDP was formed in 2001 after 35 signatories representing $4.5 trillion assets under management (AUM) signed a letter requesting that companies on the Financial Times 500 index disclose their carbon emissions data through CDP. As of the writing of this book, 767 investors who together represent $92 trillion in AUM have now signed this letter. CDP leverages this authority and, more recently, that of more than 60 major multinational purchasing organizations to survey companies on the disclosure and performance of their impacts on the environment and natural resources. According to Nigel Topping, CDP's Executive Director, “Approximately 4,500 companies disclosed climate change information through CDP's global platform in 2013. Of these, approximately 3,500 were listed (publicly traded) and represented about 54% of global market capitalization.” Those remaining were in the supply chain.¹¹⁴

Climate Disclosure Standards Board¹¹⁵

CDP provides the secretariat for the Climate Disclosure Standards Board (CDSB), a consortium of business and environmental organizations formed at the World Economic Forum's annual Davos meeting in 2007. The CDSB was created to “overcome the patchwork of schemes designed to mitigate climate change that has resulted in an unclear disclosure landscape across different countries and aims to specifically harmonize reporting of environmental and sustainability performance and risk by having it included in, or linked to, an organization's financial report.”¹¹⁶

CDSB released Edition 1.0 of the Climate Change Reporting Framework¹¹⁷ in September 2010. The Framework is “a voluntary reporting framework designed to elicit climate change-related information of value to investors in mainstream financial reports. Created in line with the objectives of financial reporting and rules on non-financial reporting, the Climate Change Reporting Framework seeks to filter out what is required to understand how climate change affects a company's financial performance.”¹¹⁸ The CDSB updated the Framework in October 2012 and published “A guide to using CDSB's Reporting Framework in March 2013.”¹¹⁹ A further update is due in 2014 to expand the scope of its Framework to include fossil fuels and stranded assets, forest risk commodities (i.e., the drivers of deforestation), and water.¹²⁰

CDSB views the disclosures contemplated by the Framework as being aligned with the efforts of the IIRC and has stated, “As a Framework that seeks to elicit information that connects the financial, governance and environmental impacts of climate change, CDSB's Climate Change Reporting Framework is on the frontier of how to apply the principles of integrated reporting with respect to reporting on climate change.”¹²¹

Global Initiative for Sustainability Ratings¹²²

While over 140 organizations provide sustainability ratings today, the quality and scope of these ratings varies widely. The degree of transparency about ratings methodologies is highly uneven, and ratings' organizations raise questions of conflict of interest by providing consulting services to the companies they rate. To strengthen the practice of ratings, the GISR was launched in June 2011—one month before SASB's foundation—as a joint project of Ceres and the Tellus Institute. As explained by its founder, Allen White, “The state of sustainability ratings today is comparable to sustainability reporting 20 years ago before the founding of both GRI (1997) and IIRC (2010).”¹²³ GISR's mission is “to design and steward a global sustainability (i.e., ESG) ratings standard to expand and accelerate the contribution of business and other organizations worldwide to sustainable development. GISR will not rate companies. Instead, it will accredit other sustainability ratings, rankings or indices to apply its standard for measuring excellence in sustainability performance.”¹²⁴ In other words, GISR accredits rating methodologies to help drive excellence throughout the global community of rating organizations.

White sees a clear and complementary relationship between GISR and the work of organizations like GRI and SASB. “Raters have a vested interest in seeing high quality, comparable, and rigorous information flowing from various sources,” he elaborated. “At the same time, high quality and credible ratings create incentives to improve companies' sustainability performance, making use of standards from groups like GRI and SASB in doing so.”¹²⁵ Particularly if sustainability ratings evolve into “integrated ratings” of companies and credit, White also sees the potential for a similar self-reinforcing cycle between ratings and integrated reporting. A uniform framework for integrated reporting would enhance the quality of those ratings and those ratings, in turn, would create an incentive for companies to embrace this framework.

Ultimately, White speculated that the major credit rating agencies like Moody's and Standard & Poor's might incorporate sustainability issues more systematically into their ratings. Given the global bond market's size, which McKinsey estimated to have a value in 2010 of nearly three times that of the global equity market,¹²⁶ White sees the opportunity to encourage companies to view integrated reporting as essential to their communications with credit rating agencies. “If this were to evolve,” he mused, “it would directly feed the information needs of integrated credit ratings which, in turn, would propel uptake of integrated reporting by companies.”¹²⁷ At the time of this writing, GISR is establishing an accreditation program to give its “seal of approval” to ratings methodologies that align with the GISR framework. That framework is based on five process principles and seven content principles, which collectively comprise the first component of the three-part standard, with issues and indicators components to follow.¹²⁸

Endorsements

Endorsements are public demonstrations of support for integrated reporting that help contribute to its institutional legitimacy. The 100+ companies that form the IIRC's “Pilot Programme Business Network,” which “provides the opportunity to discuss and challenge developing technical material, test its application and share learning and experiences,” at least agree that the concept of integrated reporting is worth experimentation.¹³⁵ While they do not commit to publishing an integrated report, they invest resources to help develop an asset, the <IR> Framework, that other companies can freely use. Similarly, the 36 investors in the IIRC's “Pilot Programme Investor Network,” which “provides an investor's perspective on the shortfalls of current corporate reporting; providing constructive feedback on emerging reporting from the Pilot Programme Business Network,” also form a complementary endorsement.¹³⁶

Several individual high-profile investment funds have also provided public endorsements for integrated reporting. APG (a big Dutch pension fund), California Public Employees' Retirement System (CalPERS, the big California state pension fund), and Norges Bank Investment Management (the Norwegian sovereign wealth fund) jointly submitted a letter on December 15, 2011, to the IIRC providing commentary on its “Discussion Paper on Integrated Reporting,” saying, “we are supportive of the concept of Integrated Reporting as set out in the high-level Discussion Paper.”¹³⁷ CalPERS took this one step further in 2012 when it listed integrated reporting as one of its “key initiatives” for its Global Governance Program in 2013.¹³⁸ Generation Investment Management listed mandated integrated reporting as its second recommended action to create “a paradigm shift to Sustainable Capitalism.”¹³⁹