Integrated Reporting

The International Integrated Reporting Council (IIRC) Framework is arguably the most important guide for companies willing to implement Integrated Reporting (IR). This chapter offers a review and discussion of the most important guiding principles and content elements that are the backbone of the IIRC Framework. It also compares the Framework with the main sustainability reporting standard, the Global Reporting Initiative (GRI) Guidelines. Following such a comparison, we argue that IR can be seen as an evolution of financial reporting rather than as sustainability reporting. Finally, the chapter discusses some of the most critical aspects of the IIRC Framework, such as its approach towards materiality and capitals.

The International Integrated Reporting Framework suggests the inclusion of a description of an organization strategy and business model in public integrated reporting. An organization’s strategy and business model lies at the heart of its capacity to create and sustain value over time. However, reporting on these issues is far from a mature practice and companies lack previous experience as well as established models to guide them. This chapter examines the current practice of reporting on strategy and business models. We draw on the guidelines for strategy and business model reporting proposed by the International Integrated Reporting Council, as well as relevant literature on strategy and business models, to discuss four recent reports illustrative of the guiding principles.

The chapter analyzes the concept of value creation the International Integrated Reporting Council expresses in its Framework and its constructive components of stocks and flows of diverse capitals. The explanation and argumentation provided contribute to a deeper and clearer comprehension of the concept of Integrated Reporting (IR). Comparisons with value concepts, that have been developed in academic literature and by different institutions, such as Shareholder Value, Stakeholder Value, Shared Value and Public Value are made in order to show communalities and differences. Therefore, the chapter provides useful arguments and information to conceptually enhance the discussion about IR and its merits for society.

Due to the emerging nature of Integrated Reporting, little is known about how companies are preparing their reports. In order to reduce this gap of knowledge, the chapter aims at analyzing the content and quality of the 2013 and 2009 integrated annual reports of the companies engaging in the Pilot Program Business Network of the International Integrated Reporting Council (IIRC) in order to assess the degree of compliance with the IIRC Framework in 2013 and the evolution of IR disclosure quality from 2009 to 2013. The research findings highlight a certain resistance from the companies to adhere to the spirit of IR, although the judgment of overall compliance should be considered positive both in absolute terms, as well as compared to the 2009 results.

This chapter examines the paradigm underlying the emergence of Integrated Reporting (IR), and its relation to the two divergent paradigms underlying current corporate reporting practice, consisting of financial reporting and sustainability reporting. The chapter utilises the Kuhnian definition of paradigm, consisting of shared axioms, shared commitments, shared values, and shared exemplars. The data analysed include recent IR literature, thus this chapter simultaneously presents a contemporary literature review of IR. The analysis unpacks the underpinnings concerning the language, beliefs, identity, and exemplars perpetrated in the IR literature. It also shows that IR shares the same paradigm with financial reporting, but not with sustainability reporting. Yet, the analysis does not demonstrate paradigm shift in the corporate reporting field, but rather shows the existence of two competing paradigms.

Integrated Reporting (IR) may become the twenty-first century revolution in corporate reporting. Traditional corporate reporting concentrated itself in financial reporting and was developed from the first half of the 1900s when most assets were tangible, reflecting in large part the industrialization era. Nowadays we are increasingly living in the knowledge era, and most of the assets of world-class companies are intangibles, or knowledge based (patents, trademarks, software, and similar). Furthermore, capital markets are increasingly looking for firms to generate forms of value creation that go beyond strictly profits: longevity of firms is more and more dependent upon factors like attraction and retention of talent, friendly relationships with neighboring stakeholders, ability to manage and keep personnel satisfied with their jobs, in addition to the ability to raise funds and operate equipment. Information on value creation drivers are required by investors and creditors not only in terms of past performance but also as critical issues for the future sustainability of firms. That is where IR has a vital role to play.

For many years environmental problems, caused or aggravated by the existing model of economic development, have generated almost universal concern. Aiming at at least minimizing, if not solving them, several sustainability initiatives are being taken up in various parts of the world. The work of the Global Reporting Initiative (GRI) deserves special reference, due to its role in developing and improving guidance for companies to prepare sustainability reports, presently in its version G4 (GRI 2015). Equally important, the establishment of the International Integrated Reporting Council (IIRC) in 2009 has encouraged the development of corporate reports presenting far more detailed information about current and expected performance. Since then, some companies have adopted Integrated Reporting that complies either with GRI or with the IIRC Framework.

This chapter focuses on Integrated Reporting (IR) and institutional investors, which are arguably one of the main audiences for IR. In particular, it tests whether institutional investors engaged in activism aimed at pushing companies to join the International Integrated Reporting Council Pilot Program and whether membership in this program has attracted institutional investors. The reasons underlying our hypotheses are connected to the (expected) increase in companies’ disclosure quality and in management’s orientation toward the long-term. The two hypotheses were tested on a sample of 156 companies, over the 2010–2014 period. Our preliminary empirical results disconfirm both our hypotheses and we argue that further research is necessary, specifically regarding the short and long-term orientation of institutional investors internationally.

This chapter has three main aims. First, it discusses the concept of Integrated Report (IR) as a privileged instrument of companies’ voluntary disclosure practices that answers to the investors and regulators’ call for a greater focus on companies’ strategy, governance, future performance and risks, overcoming a great part of the traditional financial statement’s limitations. Second, it introduces key issues currently being debated relating to the IR Pilot Program and the main characteristics of the companies that decided to adhere to it. Finally, it shows some empirical first results about the corporate governance factors associated with the voluntary decision to prepare an Integrated Report according to the IR International Framework. In so doing the authors draw some conclusions about how Corporate Governance structure and mechanisms—such as legal environment, composition of the board of directors or ownership structure—are related to company’s disclosure policies and the decision to adopt Integrated Report.

The aim of this chapter is to study whether and how the institutional context where a company operates influences Integrated Reporting (IR) disclosure quality, as measured through a unique hand-collected dataset. Our results show strong empirical support for the hypothesis that a country’s institutional characteristics significantly shape IR disclosure quality. In particular, we find that disclosure quality is higher in civil law countries and in countries with higher employee protection, levels of market coordination, ownership concentration, education, density of trade unions, corporate social responsibility and economic development. Conversely, the higher the investor protection, the lower the IR disclosure quality. These results allow us to draw new insights on the nature of IR and its relationship with institutional contexts.

Integrated Reporting (IR) and Enterprise Risk Management (ERM) are two ways that have to converge into the “integrated thinking” approach, as both of them push towards a new long-termism in management decisions. Risk management aims to protect company value, this way making the business sustainable over time; so risk issues should be well considered into the integrated report and, in the meantime, company providing the integrated report should demand for the existence of an ERM. Analyzing the companies of the IIRC Pilot Programme we find that: the number of companies filling the IR and contemporaneously adopting the ERM is increasing over time. However, shifting from the traditional to the integrated report doesn’t imply a simultaneous adjustment to an integrated risk management, but when both approaches are present companies have higher performances with respect to those that only do the IR. This evidence supports the hypothesis that ERM can be useful to make the integrated thinking effective.

In this chapter we carry out a fact-based study and answer two main yet unanswered research questions: first, whether and how the adoption of Integrated Reporting (IR) affects the sustainability communication with the market through the channel of conference calls; second, to what extent financial market participants ask for sustainability information when they are in direct dialogue with firms. To answer these questions we analyse the conference calls’ transcripts of firms that have adopted IR framework. Our findings reveal that the sustainability issues are not commonly addressed during the conference calls of IR adopters. This is particularly true while analysing the Q&A session of the call. The probable reason for this evidence comes from the market since the sustainability dimension of information merits a very low level of analysts’ interest. Overall, our empirical evidence supports the dynamic perspective of the International Integrated Reporting Council Framework.

In this chapter, we address the relationship between Integrated Reporting (IR) and cost of capital. By examining the existing accounting, finance and sustainability literature we argue that there is a negative relationship between IR and the cost of capital, i.e. IR should lower the company’s cost of debt and equity in the medium and long terms. In our view, these effects derive from two main factors: (i) the adoption of a sustainable business model due to integrated thinking and (ii) an information asymmetry reduction caused by greater transparency, allowing more informed forecasts both leading to positive returns to investors and creditors in the long term.

The information reported in accordance with the Integrated Reporting Framework of the International Integrated Reporting Council (IIRC) will not be useful for its intended purpose unless it is both credible and perceived to be credible. The Framework outlines the importance of independent external assurance, but also identifies other credibility-enhancing mechanisms, including robust internal control and reporting systems, stakeholder engagement, and internal audit. In 2014 and 2015, the IIRC engaged in a further international stakeholder consultation process seeking to gain feedback on these issues. Using an examination of the responses to the consultation processes and a review of current practices, this chapter outlines the journey to the current credibility-enhancing suggestions. It also identifies current innovative processes for increasing the credibility of the information contained in integrated reports, and associated future research opportunities.

This chapter will discuss the expectation gaps generated by Integrated Reporting (IR) and, more broadly, the motivations that pushed companies towards IR, the difficulties in its implementation process, and finally its possible benefits. Empirical evidence was gathered through questionnaires distributed to Italian companies and investors. The results of our analysis suggest that companies generally reported some kind of benefit deriving from IR implementation; conversely, investors are not fully satisfied with the way Italian companies are implementing IR. The divergent views between companies and investors suggest that IR has already provided companies with some “internal” benefits, in terms of better internal strategy communication and improvement in integrated thinking. Nevertheless, “external” benefits, in terms of external disclosure, are yet to be achieved, thus generating an investor expectation gap.