Introducing Integrated Reporting

The CPA Journal: Can you talk about what changes and new developments have been going on at the IIRC since you took this position?

Richard Howitt: In the last couple of years, I’ve been the body’s chief executive; I was part of the governance before, but am now its CEO. Many people won’t know that the IIRC is the global body that is driving a change to corporate reporting. It’s existed since 2010. Its members range from the World Economic Forum, the World Bank, and UNCTAD [United Nations Conference on Trade and Development] in the UN system; to the world’s biggest private investors, like BlackRock and Rockefeller; to some of the major businesses, like HSBC and Unilever. These are the drivers—along with the accountancy profession, the IFAC [International Federation of Accountants], the IIRC, the financial market authorities of the world, and the regulators of the world—of the change in what corporate reporting will be in the future.

What we’ve seen is a move from what we described as the breakthrough phase—the initial adoption of integrated reports, the growing of awareness about integrated reporting—to what earlier this year—2018—we were able to say is a new global strategic phase for the IIRC, the momentum phase.

We’ve got the awareness. We’ve got the initial adoption. We now need to drive the scale and give momentum to this global change, where integrated reporting will become the global norm.

CPAJ: When you talk about awareness, can you talk a little bit more about what that means exactly, and how you would define the fact that this part of the mission has been established?

Howitt: Firstly, we set a number of breakthrough tests in 2013 when the framework was published, and those were evaluated as being passed this year. It’s seen now 16 corporate governance codes in the world recommending integrated reporting, out of 31 in target markets.

We have 1,600 companies in 67 different countries that have adopted it. That’s all of the BRICS countries [Brazil, Russia, India, China, South Africa], all of the G20 countries. The global growth is impressive.

And for us, the important thing is that we had a further consultation worldwide. It was called our Global Framework Feedback Exercise. We had events in 19 countries, including in the United States, and some 400 submissions to that. Now, the issue is adoption and implementation. We’re trying to answer those questions.

We don’t want this to happen through regulation. It’s a great idea. It’s for business benefits. It’s about introducing integrated thinking, not just reporting, to the company.

CPAJ: What is involved in adoption and implementation? What is the IIRC looking for in terms of this next phase?

Howitt: What we’ve got are big-name companies in target markets doing this, and a real momentum with others coming on board. Clearly, we need to get deeper in terms of private companies, other sectors, and small businesses. We have guidance and case studies on small business implementation of integrated reporting—the public sector, as well, and not-for-profits. This is about the future of reporting, and the fit has to be for all sectors.

We’re doing it because this is a better form of reporting and a better form of business: a much more holistic view, understanding the connections between the business and the six capitals—human capital, natural capital, intellectual capital, social and relationship capital, alongside the existing financial and manufacturing capitals—understanding the real value drivers within that more connected, holistic view, and therefore providing a better tool for long-term value creation.

When that’s understood, the real business benefit of doing this speaks for itself, and that is what will drive us in the next phase.

CPAJ: How do you make them believe that integrated reporting is the right business choice for them?

Howitt: Well, I think accountants, your members, understand there was a challenge in today’s valuations. The traditional approach of financial reporting—to be short term, to be backward-looking, to be about narrow financial results—is increasingly being questioned by the profession and by others as diminishing in relevance in a world where there’s the growth of intangible assets, where the value of human capital and intellectual capital is so much higher than it was 20 and 30 years ago. And if the profession is to serve business, that wider, connected analysis is extremely important. If that analysis is better understood, then that absolutely is true for the small business, as it is for any other type of business.

This is about how you create value in the long term. Which business doesn’t want to be around in a few years’ time? Doesn’t want to have a better understanding of its own operations and its relations with the stakeholders in this new business environment, where that is so much more critical to success?

An integrated tool is not the answer to every business problem, but it is absolutely essential in order to equip businesses to look to the future.

Financial Reporting Directive

CPAJ: The EU nonfinancial reporting directive is one of the biggest recent changes we’ve seen in this area. Can you talk about what it is, and what you’re seeing at the IIRC in terms of both awareness and actual implementation?

Howitt: The first thing I would say is there’s no single region or country in the world that’s the leader. But Europe is an important region of the world, and they adopted a nonfinancial reporting initiative some years ago. What we’ve seen is that between 10,000 and 12,000 companies in Europe are doing what they call non-financial reporting for the first time. That’s reporting on the different capitals. Not all of them will be integrated reports, but an important minority will be. The high-level expert group that advises the European Commission has said integrated reporting is the ultimate ambition.

This is being done in Europe because they recognize that this is the future of corporate reporting. It’s a signpost to the future not just in Europe, but across the whole world. And I hope our studying the implementation in Europe will draw some lessons here in the United States and across the world.

What I expect is that, in the first year, a certain number of reports will be integrated reports, but we will see this gradually grow year by year. That’s an exciting moment, an exciting staging post, which is a great example of why the IIRC itself has been able to move from our breakthrough phase to our momentum phase, and ultimately to a phase that will see global adoption.

CPAJ: Can you talk a little bit more about those lessons?

Howitt: The pressure is on every business here in the United States: rapid technological changes that are fundamentally going to change every business model; pressures of the environment and climate change, now recognized as a financial issue; societal pressures that every business leader is worrying about. This is affecting their ability to connect with their own customers, the younger people that they want to recruit in the war for talent.

And the lessons that we’re learning from the application of integrated reporting, whether it’s in Europe or more widely, are around how this can be an effective tool to manage and understand how this impacts not just what we might want as individuals. This is not the old idea of corporate social responsibility or philanthropy, but how we can manage the business in a way that meets those demands and makes us a more competitive business, because we understand those stakeholder views better, and we’re able to put them into our business strategy. I think those are the big lessons that we’re learning.

CPAJ: Do you think we’ll learn something about what might need to be done in terms of improving the integrated report?

Howitt: We believe this is a learning process within the company, and at this stage, that the enabling approach is a better way to address it. The ACCA [Association of Certified Chartered Accountants], one of the global accountancy institute surveys, has year-by-year tracked the same reports. And it shows that there is a correlation between how long a company has produced its integrated report and the quality of that report, which is a very good sign. You don’t move to a perfect integrated report in year one. In fact, there is no such thing as a perfect integrated report.

I think some of the areas that have seen improvements. I think we all know that the workforce has a huge impact on the value of the company. But traditionally, we’ve been better at knowing some metrics like staff turnover, or the amount spent on training. We haven’t really understood the return on that investment in terms of the success of the business. We’re now doing that better, that connectivity between the different capitals, and ultimately value creation in the business itself.

I could give a second example around governance. We all know that if boards take this seriously, that’s a huge advance in terms of the implementation of integrated reporting. We’re seeing how good corporate governance is actually contributing to value creation.

CPAJ: Is there a particular geographic region or economic sector that is a source of good examples or good practice?

Howitt: It really is widespread. In the old days, there was this famous phrase: social license to operate. And it was the big oil and the gas companies who realized that they were putting their investment in for 30, 50 years, and unless they had the support of host communities around those sites, that had a real cost.

What we now understand is that it’s every business—not just those extractive industries—that is being questioned. As part of this new transparency resolution, every business has been subject to scrutiny about the relationships that it has with the wider world, with the environment, with its own workforce, and with all of its stake-holders. The understanding and the support from those relationships is a crucial part of business success in this new world.

Understanding the Frameworks

CPAJ: There are many different sustainability and integrated reporting standards. How would you describe the alternatives to the typical accountant or manager? And how would you distinguish the IIRC and the IR framework from the alternatives out there?

Howitt: Firstly, it’s important to say that integrated reporting is not a new or different type of a sustainability report. They fulfill very different functions. The sustainability report describes how a company impacts upon the environment. And for many companies, that’s an interesting and crucial thing for them to analyze.

There are a number of frameworks out there. We associate with four in particular in something called the Corporate Reporting Dialogue that we’ve established, trying to bring together both non-financial and financial standards setters, and that’s a really interesting part of our mission. But those sustainability reports are only part of that.

We see, particularly in the United States, here in 2018, the launch by SASB [Sustainability Accounting Standards Board] of their new central reporting standards. There’s a very good shopping list, whether it’s them or any of the other frameworks, that companies can choose.

But the difference in integrated reporting is that it’s wider than traditional sustainability. It’s not just natural capital, the environment. It does look at all of what we call the six capitals.

If we take intellectual capital, for example—knowledge, ideas, innovation, research—that is critical to the value of the company. The idea that we’re just going to create a new silo will simply, again, prevent companies from moving forward. Therefore this integrated approach, where we look at all of the external risks and opportunities and value drivers of the company, and crucially the connections between them and how that’s integrated in the business strategy, is completely different from having a stand-alone sustainability report.

Many companies will choose to do a stand-alone sustainability report, and there are no metrics in the integrated reporting framework. It’s a set of principles, questions that will guide what companies put in their MD&A [management’s discussion and analysis]. But they may well want to draw on metrics from within a sustainability report, or use metrics from different sustainability frameworks, if they feel they are material. In short, the sustainability report is how the company impacts the outside world. The integrated report is how the outside world impacts the company.

CPAJ: Can you talk a little bit more about the Corporate Reporting Dialogue?

Howitt: We decided three years ago that in order to get rid of the perceived confusion in the market about all these different frameworks, part of our mission to try and reform corporate reporting would be not to simply establish a new framework, but to take the existing major financial and nonfinancial frameworks and drive a process of convergence or alignment between them.

We invited the two major financial standards-setters in the world—FASB and IAASB—and what we regarded as the four major sustainability frameworks—SASB, the GRI [Global Reporting Initiative], CDP (former Corporate Disclosure Project), and CDSB (Carbon Disclosure Standards Board)—on that journey. Each of them was happy to see the IIRC as the convener, and the integrated report as the umbrella bringing together these different forms of reporting.

We have a common landscape map, so each framework recognizes what the other does. You can see there’s no competition between the frameworks. We have a common statement of principles of materiality. We have a common statement between ourselves and the seven major investor organizations in the world on the benefits for investors. We have common positions on business reporting of the Sustainable Development Goals of the UN.

And most exciting of all, in 2018 we launched a two-year major alignment project. This isn’t just a dialogue and common statements; we are driving a common set of metrics between companies.

Whichever framework you choose to start with, you will end up at the same destination, and we hope this will incentivize companies who are not doing this reporting today to do so.

The Future

CPAJ: When you talk about alignment, where do you see the process being in 5 or 10 years?

Howitt: You know, we’re still not, 20 years later, in a position where we have a single global set of financial accounting standards, and we’re all aware of the history behind that.

We’re trying to do the same for integrated reporting, and it’s going to take a number of years. People say, though, we haven’t got 20 years to achieve it, and we feel that pressure. But what’s crucial to us in this is that we don’t pick winners and losers. Each of the reporting frameworks, financial and nonfinancial, has an audience, has a focus, has a history, has tradition, has a mission. Those have to be respected.

The strength of the position that the IIRC takes is that we don’t want to build an empire. We don’t want to be a standards setter. We’re providing globally the framework, the technical advice behind it, the thought leadership, and the space by which these changes are taking place. But when this becomes mainstream corporate reporting, we want to do ourselves out of business.

It’s not just about the future of reporting—it’s about the future of a successful accountancy profession in the world, and that therefore is of interest to younger members.

CPAJ: How would you describe the current state of integrated reporting in the United States?

Howitt: We’re in an exciting moment here in the United States, moving from the breakthrough phase to the momentum phase. We’ve had a number of big-name reporters in integrated reporting, including PepsiCo, General Electric, and Southwest Airlines. That sends a signal to the market that this can and will take reach within the United States.

What we’ve done in the last year, 2018, is to establish a practitioner network. We call it the Integrated Reporting U.S. Community. We’re getting together the practitioners of integrated reporting. They’re learning from each other and from external sources, and it’s great to see that.

We have huge support from the accountancy profession here in the United States. The AICPA and the IMA [Institute of Management Accountants] are key backers of the move toward integrated reporting.

We’ve seen training taking place from Boston College and others, which has been exciting. We’re working with some of the big Silicon Valley companies, planning not just for them as companies to be integrated reporters, but also for them to help us shape how integrated reporting can be successful with the new generations of technology.

Here in the United States, our partners, the Conference Board, decided earlier in the year to set up a research project backed by a number of very big corporations. That’s great to see. I will also say that we have a strategic partnership with the CFA Institute. Sandy Peters, who leads for them on those issues, is another key global leader for integrated reporting.

Do we need to grow much further and faster? Yes. I’d be the first to accept that. This is now not about establishing what integrated reporting is, why it’s successful in creating long-term value creation. We’ve now seen that’s been established in so many different companies based within the United States and worldwide.

Now, the question is, will more companies do it more quickly? That’s very much my message today.