Reporting ESG information is now omnipresent among companies worldwide, reaching all-time highs in 2021 with 96% of the S&P 500 and 81% of the Russell 1000 publishing a sustainability report. However, this information’s reliability, meaningfulness, and use are suspect. In addition, these new reporting efforts have created independent cost structures within companies dedicated to managing sustainability and ESG risks in an ad-hoc, fragmented way. Meanwhile, there are many interdependencies between mandatory, regulated financial reporting and what is, at present, voluntary, unregulated ESG reporting. But while most companies issue standalone reports on environmental, social, and governance (ESG) risk topics, separate reports require different reporting processes and additional cost. As investors and other stakeholders strive to understand companies’ ability to create value over time, they’re pressing for more comprehensive corporate reporting that accounts for these interdependencies.
US, EU, UK, and global regulators and standard-setters are all looking toward the same solution: integrated reporting, which connects financial and nonfinancial reporting to offer a more cohesive, transparent, and holistic approach to corporate reporting.
By virtue of its recent consolidation of several of the world’s foremost ESG organizations — including the International Integrated Reporting Council (IIRC), which rolled out the Integrated Reporting <IR> Framework in 2013 — the IFRS Foundation’s International Sustainability Standards Board (ISSB) has taken on the integrated reporting mantle. Momentum is growing, and not simply due to impending regulation. Many businesses are realizing the benefits of the symbiotic relationship between integrating reporting, integrated thinking, and integrated risk management, which come together to support decisions and create efficiencies that drive value creation over time. Here are three reasons you should invest in an integrated approach to solve your ESG challenges.
1. Independent reporting is costly and not effective.
According to 2022 IFRS Foundation research, more than 2,500 businesses in 70+ countries have already adopted integrated reporting. While this level of voluntary adoption is impressive, most companies still issue sustainability and financial reports independently — in separate forms, at different times, and often under separate governance.
And whereas financial reporting has long been subject to regulation, auditing, and certification, ESG reporting mechanisms generally lack all of the above, leaving the door open for inaccurate, incomplete, or even greenwashed reporting. Wide-ranging differences between 600+ competing ESG standards and frameworks make it hard to compare performance. ESG reporting also tends to be largely qualitative, inadequately grounded in quantitative data. Altogether this means that the quality of ESG reporting is often in question, leaving investors and other stakeholders unsure if they can or should rely on it.
Despite all this, an ever-widening pool of stakeholders seeks to use ESG reporting in decision-making. There’s growing consensus that ESG reporting must move along the spectrum toward where financial reporting sits, becoming subject to greater structure, governance, and verification. Hence the push for integrated reporting, which subjects financial and nonfinancial reporting to the same processes to ensure validity, accuracy, and completeness.
2. The era of voluntary, unregulated ESG reporting is ending.
A shift of this magnitude requires an external force to push it forward. The push toward integrated reporting is — at this point — largely being driven by regulation. My next article will take a detailed look at the different regulators, the scope and timing of their ESG reporting requirements, and the companies each impacts. For our current purposes, the summaries below highlight how each regulator is driving toward integrated reporting.
- The UK’s Financial Reporting Council (FRC) led the pack with its 2022 requirement, based on the Task Force on Climate-related Financial Disclosures (TCFD) Framework, for mandatory climate-related financial disclosures in annual reports.
- The EU’s European Financial Reporting Advisory Group (EFRAG) adopted the Corporate Sustainability Reporting Directive (CSRD) in 2021. Taking effect mid-2023, CSRD mandates sustainability disclosures in management reports. CSRD’s approach, mirroring the <IR> Framework nearly to a T, will push the integrated reporting message forward, forcing the issue for many.
- The US Securities and Exchange Commission (SEC) is developing rules for mandatory reporting of climate-related metrics and risk disclosures in registration statements and periodic reports. Ongoing delays mean the timeline remains hazy.
- The IFRS Foundation’s ISSB is developing voluntary standards to incorporate sustainability disclosures in corporate reporting that could ultimately become a baseline for businesses worldwide, given widespread international acceptance of IFRS Accounting Standards.
3. Integrated thinking, risk management, and reporting are proven methods.
Integrated reporting isn’t a new concept. PricewaterhouseCoopers’s 1999 Value Reporting Framework incorporated environmental, social, and ethical concerns into a multi-capital approach to measuring corporate performance. But it was the IIRC, formed in 2010 in response to the global financial crisis, that formalized “integrated reporting” as we know it today.
IIRC’s goal wasn’t merely to create a new framework, but a new way of thinking about how organizations should shift reporting from a purely financial perspective in the quantitative realm, to one combining quantitative and qualitative information to explain risks and value creation over time. The <IR> Framework links companies’ ability to create value to “capitals” across the organization (i.e., financial, intellectual, human, social/relationship, manufactured, and natural).
This approach blends multi-capital information to provide a qualitative understanding of a company’s strategy and outcomes, underpinning it with quantitative data that shows both successes and challenges. Combining the quantitative and the qualitative: That’s where integrated reporting, risk management, and thinking generate value.
Integrated reporting is founded on integrated thinking, which helps companies actively consider how their operations, functional units, and different types of capital relate to and impact one another. This enables companies to view themselves more holistically, supporting integrated decision-making and strategies that consider value creation over time.
Integrated thinking enables integrated risk management, which looks at how financial and nonfinancial risks interconnect and interact. Risk isn’t siloed, so a connected risk view is core to the integrated thinking that helps companies identify risks and opportunities and articulate them through integrated reporting. This approach accounts for the broader impact of integrated risk across operations, stakeholders, and the value-creation process.
Integrated Thinking and Risk Management in Action
The Value Reporting Foundation’s 2021 Integrated Thinking: A Virtuous Loopexamines how organizations use integrated thinking across five key macro areas, which serve as lenses to assess maturity and identify improvement opportunities. Example activities follow each.
- Culture and Purpose
- Linking corporate purpose with a holistic understanding of the value-creation process, potentially supporting redefinition of purpose, strategy, and value-creation model.
- Shifting organizational structure to support a more agile and interconnected working environment.
- Ensuring that organizational values drive internal processes and procedures.
- Strategy and Business Model
- Examining capitals’ outcome value to find new value-creation approaches to foster a more holistic approach to generating outcomes.
- Integrating sustainability into corporate strategy.
- Gaining insight to anticipate and more quickly act on client needs.
- Governance, Risk, and Opportunities
- Driving top-down or bottom-up adoption of integrated thinking and risk management across leadership, the board, and the entire organization.
- Adopting integrated thinking to develop an integrated approach to innovation.
- Assessing value-creation outcomes in defining materiality and financial implications.
- Processes and Practices
- Enabling a holistic approach that integrates aspects of sustainability into processes/practices that create cross-departmental collaboration.
- Integrating financial and nonfinancial aspects in decision-making.
- Performance Management
- Implementing performance management tools that foster multi-capital transformation in decision-making processes and put financial and nonfinancial information at the center of corporate strategy.
- Using a connected risk platform to monitor and foster the effectiveness of the multi-capital transformation process.
What does this look like in practice? Organizations find that integrated reporting and integrated thinking are symbiotic, creating a “virtuous loop” and iterative cycle that enables ongoing evolution and continuous improvement. For example, through integrated thinking, global financial powerhouse ING Group integrates risk management and awareness into everything from big-picture strategic planning to daily business activities. ING’s “Orange Code” process supports integrity-led, balanced decision-making. The process includes a set of collective standards that define organizational values and behavior. “Orange Code” helps all of ING integrate the corporate purpose into their work meaningfully.
How to Get Started With Integrated ESG Reporting?
Delivering on the promise of integrated ESG reporting requires a deliberate and systematic approach. By undertaking a current-state assessment, understanding integrated reporting best practices, rallying support, and gathering qualitative and quantitative data, you’ll put your organization on a path to begin thinking, managing risks, and ultimately reporting in an integrated manner.
1. Current-State Assessment
Understand where your company is today. Do you issue a standalone or integrated ESG report, or are you on a path to doing so? What regulatory requirements and timelines impact your ESG reporting?
2. Understand Integrated Reporting Best Practices
Educate yourself on the tried-and-true integrated reporting methods the ISSB has defined. Review case studies for lessons learned and best practices. Read publicly available integrated reports from peers or other companies you admire. For example, Bridgestone’s 2022 Integrated Report is highly accessible and readable. Whereas many annual reports’ major risk disclosure sections read like hard-to-decipher legal boilerplate, Bridgestone’s provides a well-structured, easy-to-follow, and meaningful compendium of what investors and other key stakeholders genuinely need to know. It offers well-laid-out financial and nonfinancial data reflecting both current and historical performance alongside integrated management discussion.
3. Rally Support and Establish Governance
Rally leadership around the cause, painting a clear picture of the potential for short-, medium-, and long-term value creation. Establish both governing and working groups of leadership to champion efforts, including management up through the board of directors.
4. Gather Qualitative and Quantitative Data
Understand your ESG data needs and figure out what support you’ll need to get it, including enabling technologies. Assess materiality to determine which qualitative and quantitative ESG metrics matter for your organization, and identify one or more ESG frameworks that fit. AuditBoard’s Step-by-Step Guide to Building Your ESG Program can help you understand the different frameworks, common challenges, key considerations, and how ESG management technology can help in identifying, collecting, analyzing, auditing, and operationalizing your ESG data and reporting.
Set Your Organization Apart With an Integrated Approach
Companies that think, manage risk, and report in an integrated way will be seen as more proactive and transparent in addressing stakeholders’ sustainability concerns. Integrated reporting — coupled with the integrated thinking and risk management that underpin it — is a highly effective way to convey not only how your organization is performing, but how that performance impacts the broader business community. The time is now to lay the groundwork for your own “virtuous loop,” using integrated methods to enhance how your organization creates value.