Partner, Global IFRS leader and head of corporate reporting, Deloitte
The integrated reporting movement rose in response to calls for a redefinition of the social contract between business and society. There is a growing recognition that, without a sense of purpose, a company cannot achieve its full potential or maintain its social license to operate. Companies rely on, and impact, natural and social capital. Moreover, the drivers of value are no longer predominantly financial, but are related to people, technology, brand and reputation.
Investors have also been a driving force for change. As environmental, social and governance (ESG) information has become more central to investors’ understanding of risk and reward, they have demanded better insight into strategy and performance in order to see whether the business is appropriately focused on sustainable value creation in the long term, rather than the singular drive for short-term profitability. The concepts of integrated thinking and integrated reporting responded well to the changing societal and business dynamics and to the investor asks.
Under the inspirational leadership of Professor Mervyn King and Paul Druckman, rapid progress was made from the start, and over the years that followed, integrated reporting became a widely recognized concept, gaining widespread adoption by individual companies. At systems level, it influenced policy on corporate reporting and related areas of governance.
The concept of ‘multi-capital value creation’ has particularly resonated. The categorization of capitals has enabled companies to describe more clearly the resources they rely on in their business models, and has become a commonly used term in corporate reporting. What has become known as the ‘octopus diagram’ created a powerful visual, putting the business model at the centre of the narrative and showing the circularity that arises from the impacts that companies have on the very same capitals that they depend on.
But the most powerful concept behind integrated reporting is integrated thinking. Integrated reporting should be an output of integrated thinking, demonstrating authenticity. This means that a report can only be called ‘integrated’ when the company preparing it is truly focused on sustainable value creation over the long term and has integrated ESG into its everyday governance, strategy and performance management decisions. In the UK environment, this approach goes to the core of the section 172 duty that requires directors to have regard to their stakeholders, the long term and maintaining high standards of business conduct.
Perhaps most significantly, the IIRC has recognized that the corporate reporting connections go wider than ‘preparer – user – regulator.’ It is a system, involving investors, companies, standard setters, regulators, civil society and the professions. By convening relevant stakeholders covering both the financial system and the sustainable development agenda, the IIRC has strengthened the role of corporate reporting in contributing to financial stability and sustainable development.
Much has been achieved in ten years. But now we need to accelerate progress even more if we are to deliver climate net zero commitments and the Sustainable Development Goals.
The critical priority for the IIRC now is to work together with the international standard setters and frameworks to put in place a system solution for global sustainability standards, building on the statement of intent that the IIRC has made along with CDP, the Climate Disclosure Standards Board, Global Reporting Initiative and the Sustainability Accounting Standards Board.
As part of this system solution, the IIRC should aim to emphasize connectivity between integrated reporting and financial information. Investors expect consistency between the narrative and the pledges made, and the assumptions and forecasts in the financial statements. This expectation has increased in light of the systemic risks of the transition to the low carbon economy. By collaborating with the International Accounting Standards Board on its Management Commentary project, the IIRC can make a more explicit link between the entity’s business model and how it creates value, and how it converts that value into cash flows.
There is another critical role that the IIRC can and should play going forward. Integrated thinking is a prerequisite for integrated reporting, which effectively highlights the need for an integrated approach not only to running, but also to governing a business. Integrated reporting, integrated thinking and integrated governance must indeed go hand in hand if we are to take a broader and more complete view of corporate purpose that delivers long-term value for all stakeholders – investors, employees, customers, suppliers and communities. The IIRC should use its convening power to harness the best innovation and thought leadership to evolve the concept of integrated governance; it should also continue to support the excellent work of its sister organization, HRH The Prince of Wales’s Accounting for Sustainability project, in further development of and advocacy for integrated thinking.
Corporate reporting is a powerful lever in changing behaviour. Progress in integrated reporting and the systemic moves to bring sustainability into the mainstream are therefore great to see. However, if we are to build stakeholder capitalism and achieve shared prosperity and sustainability for business and society, we need faster and more decisive moves to embrace integrated thinking and integrated governance.
I congratulate the IIRC on your tenth anniversary and look forward to supporting you on the journey ahead!