An overview of Integrated and Sustainability Reporting. What's the difference and suggestions for best practice

1. Towards Integrated Reporting
Reana Rossouw
Next Generation Consultants - 2013

2. Corporate Reporting Journey
• Financial information
• Backward looking
• Short term focus
• Compliance with regulations and standards to inform investors
• Financial Accounting Standards Board; General Accepted Accounting
Procedures (IASB, IFRS)
• Mandatory for publicly listed companies
Financial Reports
• Primarily non-financial information
• Backward and forward looking
• Long term focus
• Global Reporting Initiative (GRI)
• Voluntary and mandatory
Sustainability Reports
• Financial and non-financial information
• Backward and forward looking
• Short-medium-long term
• Support more informed capital allocation
• International Integrated Reporting Council (IIRC), Sustainability
Accounting Standards Board
• Voluntary and mandatory
Integrated Reports
01/04/2013Next Generation Consultants2

3. Reporting in a unsustainable future?
 Strategy first, then management and then reporting
 “Integrated Reporting may mean the end of the lengthy
‘carpet bombing’ sustainability report, but it will
definitely not become a one-stop shop.”
 Different types of sustainability communications with
different contents, adopted to the expectations of all
other stakeholders, will flourish with the help of new
communication technologies. Reporting leaders are clear.
Integrated Reporting will not mean the end of other
sustainability communications.
01/04/2013Next Generation Consultants3

4. Purpose of Corporate Reporting
 To engage and involve stakeholders in corporate practice
 To inform business practice, strategy and management
focus
 To share the framework for measurement and target
setting – performance
 To show commitment and compliance
 Show understanding and consideration of impacts and
risks on external environment
 To account for sustainability performance and activities
 To improve internal processes
 To demonstrate adequate management of risks
01/04/2013Next Generation Consultants4

5. Corporate Reporting
 Describes performance
 Where you are, where you come from and where you are
going
 Involves measurement
 Against specific targets and objectives
 Is a recurring process
 Over time the story emerges by reporting regularly against
consistent indicators
 For a specific audience
 The practice of measuring, disclosing and being accountable to
stakeholders for performance against specific goals and
metrics
01/04/2013Next Generation Consultants5

6. Reporting is a management process
1. Company identifies relevant
sustainability issues and understands
how these are linked to its business
2. To address these issues, the
company defines action plans to
implement business cases with
performance targets
3. The company commits to
performance targets, monitors and
reports annually to stakeholders, and
feeds back stakeholder perspectives
into the company strategy
01/04/2013Next Generation Consultants6

7. Challenges in reporting
 The definition of key indicators and topics to report on
 The sensitivity of some of the information that needs to be
provided
 Non-financial information is not valued or considered as
irrelevant
 The associated costs of reporting
 Ignorance or lack of knowledge about reporting and
difficulties with linking sustainability performance to the needs
of stakeholders and investors
 Internal organisational structures
 To continue reporting - for SMEs, the biggest challenge is not
to report for the first time, but to continue reporting in the
future –
(resources, costs, time, technology, systems, processes)
01/04/2013Next Generation Consultants7

8. Why people don’t read reports
 A general lack of interest in the issues covered
 A high degree of mistrust of the company’s intentions
and lack of reliability of the reports
 Reports are often hard to find, too lengthy or difficult to
navigate through
 More direct means of communication with companies
are preferred to obtain the required/specific information
 Important general company statements with regard to
good policies and issues (for example, animal testing or
the use of GMOs) are often not included in the
reports, but disclosed on the website of the
company, which therefore are preferred sources of
information
01/04/2013Next Generation Consultants8

9. Sustainability Reporting is…
 The practice of measuring, disclosing and being accountable
to both internal and external stakeholders for the progress
towards a more sustainable future
 Documenting the journey of progress against organisational
performance targets against specific
economic, environmental, social and governance goals and
metrics that support sustainable development
 Confirms how sustainability is considered and integrated into
business strategy and execution
 “Sustainability reporting gives a snapshot of performance that
can be used both internally to focus on the most material
issues and drive improvements, and also by external
stakeholders to assess how a company manages sustainable
development risks and to monitor performance over time.” –
SAB Miller
01/04/2013Next Generation Consultants9

10. Integrated Reporting is…
 Integrated Reporting is a process that results in
communication by an organisation, most visibly a periodic
integrated report, about value creation over time
 An Integrated Report is a concise communication about how
an organisation’s strategy, governance, performance and
prospects, in the context of its external environment, lead to
the creation of value over the short, medium and long term
 An Integrated Report should be prepared primarily for
providers of financial capital in order to support their financial
capital allocation assessments
 An Integrated Report should be prepared in accordance with
the IIRC IR Framework
01/04/2013Next Generation Consultants10

11. Issues to consider
 Do not reduce the concept of integrated reporting to:
 Combining the sustainability and other business impacting information with the
annual report
 There is a risk of the information getting lost in the abundance of legally
required information, space being too limited to tell the full and balanced story
and the medium being inaccessible to key stakeholder groups
 It might be an option to combine the annual report with web reporting on the
road to integration
 Take care to balance the story and the figures:
 Not all information can be captured in figures and quantitative targets – while
telling a story may be incomplete without the concrete results to support it.
 Be willing to share the key dilemmas the company faces in order to provide
credible and transparent reporting
 Consider the option of external assurance as part of the process to further
improve the quality of the information and add credibility to the report
 Look for ways to provide easily accessible information tailored to key
stakeholder groups; avoid an overload of information by putting it all
together in one report
01/04/2013Next Generation Consultants11

12. Differences between integrated and sustainability
reporting (1)
 While experience in sustainability reporting may prove
invaluable to some on their journey toward integrated
reporting, there are key differences between the two forms of
reporting, particularly in the context of the capitals. It is worth
noting that sustainability reporting:
 targets a wider stakeholder audience than integrated reporting
which focuses primarily on providers of financial capital, particularly
those with a long term view
 focuses on impacts on the environment, society and the
economy, rather than on the effects of the capitals on value creation
over time, as in Integrated Reporting
 As such, sustainability reporting is less likely to focus on the
connectivity between various capitals or the strategic
relevance of the capitals to value creation, and is more likely
to include many disclosures that would not be material for
inclusion in an integrated report.
01/04/2013Next Generation Consultants12

13. Differences between integrated and sustainability
reporting (2)
 For Integrated Reporting, an organisation’s impact on various capitals is
ordinarily material only if it:
 Significantly affects the availability, quality and affordability of capitals upon
which the organisation depends
 affects stakeholders’ perceptions of the organisation in such a way that it has a
significant business consequence (e.g., strengthens/weakens customer
demand, or affects the organisation’s licence to operate)
 has some other strategic relevance.
 Other forms of reporting: Reporting on aspects of natural, social and
relationship, and human capital is also becoming more prevalent in:
 Legislative and regulatory regimes, such as the Grenelle Act in France and the
National Greenhouse and Energy Reporting System in Australia
 Listing regimes, such as implementation of the principles of King III (King Code of
Governance Principles) for companies listed on the Johannesburg Stock
Exchange in South Africa
 Voluntary regimes, such as the United Nations Global Compact and the Carbon
Disclosure Project
01/04/2013Next Generation Consultants13

14. Integrated Reporting ……
01/04/2013Next Generation Consultants14
 Integrated reporting is not the stapling together of
different pieces of loose hanging information. It is meant
to be a strategic and holistic explanation of HOW a
company uses the resources and relationships available to
it in order to create and sustain value in the
short, medium and longer term. Therefore it would
include information as to HOW the company performed
in the past as well as its plans and the challenges that it
faces in the future.
 A number of internal changes are required to achieve this
strategic and holistic reporting. These would include:

15. The integrated reporting process
01/04/2013Next Generation Consultants15
 Changing focus within the company away from only financial
drivers, indicators and economic information, to more connected, strategic
drivers including social and environmental indicators
 Changed timeframes from focusing and measuring short-term, through
annual or bi-annual performance and budgets, to a more medium- and
long term focus
 Condensing the level of detail from long, complex lists of information to a
handful of key material issues and indicators
 Changing the mind-set from focusing on compliance and rules such as
financial reporting disclosure requirements, to becoming more responsive
to the company’s unique circumstances and needs
 Thinking differently outside the traditional convention where
financial, social and environmental matters were put into silos to be
managed by different people and processes, to become integrated in how
money is allocated, performance is measured and boards make decisions
 Changing the company’s view on stewardship beyond financial
performance to include social, natural, intellectual, capital of the business
 It is very simple – REPORT WHAT YOU DO AND DO WHAT YOU REPORT!

16. Reporting Trends
 Companies that have not properly embraced the concept of Integrated Reporting are
becoming increasingly isolated
 The foundations are strengthening:
 In general, companies are demonstrating their ability to tell their integrated story in a
more concise and clear manner. More and more reports reflect the use of quick reading
options, graphs and illustrations, and the general flow of the company’s story (strategy,
risks and opportunities, KPIs and KRIs) seems to be improving
 Companies are increasingly starting to engage with sustainability issues as it affects their
businesses, but have not yet adequately embedded this into their business strategy and
processes
 Contrary to popular belief, the response to King III is still not as strong as many boards believe
 The most common weakness lies with companies’ response to IT risk management and the
effectiveness of risk management and compliance programmes
 The disclosure of the companies’ remuneration policy has improved but the detail provided is
not sufficient to determine how remuneration is aligned to facilitate delivery on the strategic
objectives
 Risk disclosure remains superficial
 The ethics performance of companies is not well reported on or adequately assured as required
by King III
01/04/2013Next Generation Consultants16

17. Reporting Trends
 Companies are still reluctant to set measurable non-financial
targets
 The definition of materiality as it relates to non-financial
information is not well explained
 The Assurance regime applied in Integrated Reports requires
substantial attention
 Reporting on stakeholder engagement has improved, however the
alignment of the identified and moderated material concerns with
the strategy, key performance indicators and remuneration still
requires improvement
 It remains easy to spot the window dressers. Producing an
Integrated Report in the absence of a proper process allows the
reader to easily identify companies that produce a report in order to
apply the guidance rather than embedding and integrating ESG
aspects into their business model and strategy
 Slowly but surely, supply chain management will be impacted
01/04/2013Next Generation Consultants17

18. It’s complicated so why bother?
 Integrated Reporting can have several benefits –
 An in-depth understanding by top management of how strategy is
affected by environmental, social, financial and economic issues
 A demonstration of C-suit commitment to a sustainable long-term
future
 A holistic view, useful for stakeholders wishing to make decisions
 A greater balance resulting in better trust and confidence in the
company
 Better risk management and access to capital
 Better management of key resources
 The development of a culture of innovation
 A new and better understanding of the business environment and
better leverage of new business opportunities
01/04/2013Next Generation Consultants18

19. An integrated report
WHAT IT IS WHAT IT’s NOT
01/04/2013Next Generation Consultants19
 One output of the IR
process, speaking primarily
to the providers of capital
 A concise overview of the
business, its
strategy, governance, perfor
mance and prospects
 A reflection on how the
organisation creates value
over time
 A combination of the AR
& SR
 An attempt to address all
stakeholders in one
report
 An attempt to convince
readers that
‘sustainability’ is
important to the
organisation

20. Typically…
01/04/2013Next Generation Consultants20
 Link to strategy
 The primary reason for including
performance indicators in corporate
reporting is to enable readers to assess
the strategies adopted by the company
and their potential to succeed.
 Definition and calculation
 What is being measured allows
comparisons between companies
within an industry.
 In the absence of standards for the
measurement of many industry specific
indicators, and with many companies
also applying their own indicators, an
explanation of the components of a
metric and how it is calculated is vital.
 Purpose
 Management must explain why they believe
a performance indicator is relevant. In many
instances this will be because it measures
progress towards achieving a specific
strategic objective. The rationale for why
certain quantified measures are considered
“other performance indicators” should also
be communicated.
 Source, assumptions and limitations
 Readers must be able to make their own
assessment of the reliability of the
information, it is important to identify the
sources of the data used in calculating
performance indicators and any limitations
on that data.
 Any assumptions made in measuring
performance should be explained so that
readers can reach an informed view of
judgements made by management. An
indication of the level, if any, of
independent assurance of the data would
also be valuable.

21. Typically (2)
01/04/2013Next Generation Consultants21
 Future targets
 Some performance indicators are best suited
to a quantification of future targets.
Expectations and aims for other indicators
may be better explained in commentary.
Either way, a forward-looking orientation is
essential for readers to assess the potential
for strategies to succeed, and to give them a
basis against which to assess future
performance.
 Trend Data
 Measurement of performance in isolation
over a single period does not provide the
reader with very useful information. An
indication of how performance has
improved or worsened over time is much
more valuable in assessing the success of
management’s strategies.
 It is also beneficial to explain to the reader
what a particular trend in the data means –
for example, an increasing measure is not
always a sign of strength – and to explain
management’s actions to address or
maintain such trends.
 Segmental
 Often KPIs make little sense when consolidated at
group level. In those instances corporate reporting
users want more detailed segmental information to
assess progress towards specific segmental strategic
aims. Performance indicators that are relevant to a
specific segment’s industry or strategy should
therefore be provided in addition to those with a
more group-wide focus.
 Comparability
 Comparability over time is a key principle of good
corporate reporting. It is recognised that KPIs may
evolve over time as strategies change or more
information becomes available. When such
changes are made to the KPIs being
monitored, either in terms of the KPIs used or how
they are calculated, these changes need to be
explained.
 Benchmarking
 Performance benchmarked against a relevant
external peer group, with an explanation of why
these peers were chosen, is considered extremely
valuable to users. This provides a clear indication
of who management believes the company’s
competitors to be, as well as setting the company’s
own performance in the context of a well-defined
peer group.

22. Contact
 Reana Rossouw
 Next Generation Consultants
 Specialists in Development
 Sustainable Development and Reporting
 Community, Social, Socio Economic, Local
Economic and Enterprise Development
 Business Development
 Leadership Development
 Tel: (011) 275 0315
 E-mail: rrossouw@nextgeneration.co.za
 Web: www.nextgeneration.co.za
 PLEASE NOTE: THIS PRESENTATION IS
PART OF A LARGER BODY OF RESEARCH!
 THIS INFORMATION IS COPYWRITED AND
THE INTELLECTUAL PROPERTY OF NEXT
GENERATION CONSULTANTS
01/04/2013Next Generation Consultants22