This article is written by Sharanya Ramakrishnan who is pursuing a Certificate Course in Capital Markets, Securities Laws, Insider Trading and SEBI Litigation from LawSikho.
Table of Contents
Introduction
The reporting structure of corporate entities in India and globally, is developing significantly by becoming more transparent, compact, material, and by providing information to extensive set of users. Integrated Reporting forms part of a progressing corporate reporting structure. It enables corporate reporting to be more efficient and cohesive by aiming to improve the quality of information accessible to its users.
An integrated report communicates in a concise manner, how an organisation’s strategy, governance, performance and prospects result in creation, preservation or erosion of value over the short, medium and long term, as far as its external environment is concerned. Such report may either be a standalone report or be an integral part of another report.
This type of reporting enables an organisation to represent both financial and non-financial data in a single report. As a result, non-financial data is given a greater context by laying emphasis on an organisation’s performance on environmental, social and governance parameters while meeting its business targets. Such type of reporting benefits not only the providers of financial capital, but also all other stakeholders interested in an organisation’s capacity to create value over time such as employees, suppliers, customers, business partners, legislators, regulators and policy-makers.
Of late, several organisations have realised that the present form of annual financial reporting takes a short-term approach and is unable to effectively meet the needs of investors and other stakeholders. Thus, the demand for integrated reporting has been gaining momentum.
Origin of Integrated Reporting
The Prince’s Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) announced the formation of the International Integrated Reporting Committee. In November 2011, it was renamed as International Integrated Reporting Council (IIRC). IIRC is a global coalition of regulators, investors, accounting professionals, companies and non-governmental organisations. The objective of the IIRC is to establish integrated reporting as a globally accepted framework for providing information relating to financial, social, environmental and governance in a concise, clear, reliable and comparable format.
IIRC released the International Integrated Reporting Framework (“the Framework”) on 9th December, 2013. Following the release of the Framework, Securities and Exchange Board of India (SEBI) vide Circular No. SEBI/HO/CFD/CMD/ CIR/P/2017/10, on February 6, 2017 prescribed that Integrated Reporting as per the Framework may be adopted on a voluntary basis from the financial year 2017-18 by top 500 companies which are required to prepare Business Responsibility Report.
As per Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI LODR’), the annual report shall consist of a business responsibility report specifying the actions taken by a listed entity from an environmental, social and governance perspective.
The Circular gives reference to Regulation 4(1)(d) of SEBI LODR and IOSCO Principle 16, which collectively state that there shall be adequate, accurate and timely disclosure of information to the investors so as to assist them in decision making. It also states that the information connected to Integrated Reporting may either be prescribed in the Annual Report separately or be incorporated in the Management Discussion & Analysis Report or by preparing a separate report (annual report prepared according to Framework). As a green initiative, the Companies may host the Integrated report on their website and furnish suitable reference to the same in their Annual Report.
Pillars of Integrated Reporting embodied in the Framework
The Framework elucidates the various concepts involved in Integrated Reporting. It identifies the information to be embodied in an Integrated Report so as to effectively analyse an organisation’s ability to create value.
The Framework is principles-based. It strikes an appropriate balance between flexibility and prescription that recognizes the wide variation in individual circumstances of different organisations while enabling a sufficient degree of comparability across organisations to meet relevant information needs. It does not set any benchmarks, performance indicators, measurement methods for an organisation’s performance. Those responsible for preparation and presentation of the Integrated Report should exercise independent judgement to determine which matters are material and the methods of measurement and disclosure.
The pillars of the Framework are the Guiding Principles, Content Elements and ‘the Capitals”. These govern the preparation and presentation of an Integrated Report.
Guiding Principles
There are seven Guiding Principles which form the basis of preparation of an Integrated Report:
- Strategic Focus and Future orientation
An Integrated Report should describe the organisation’s strategy, and how it relates to the organisation’s capacity to create value over a period of time.
- Connectivity of Information
An integrated Report should display a comprehensive picture of the interrelatedness and interdependencies among various factors which affect the organisation’s capability to create value.
- Stakeholder relationships
An Integrated Report should communicate the nature and quality of the organisation’s relationships with its key stakeholders. It should also specify the steps taken to satisfy their needs and interests including the organisation’s ability to develop strategies and identify and manage the risks involved.
- Materiality
An Integrated Report should disclose, identify and evaluate the significance of relevant matters which have the potential in substantially effecting the organisation’s ability to create value in the future.
- Conciseness
An Integrated Report should only contain relevant information pertaining to the organisation’s strategy, performance and governance and should be precise and on point.
- Reliability and Completeness
An integrated Report should make a faithful representation of all material matters, both positive and negative in a balanced manner and without any errors.
- Consistency and comparability
An integrated Report should present information in a manner which ensures that it is consistent from one period to another and is suited to enable comparison with other organisations.
Content Elements
An Integrated Report should consist of eight Content Elements posed in the form of questions to be answered:
- Organisational overview and external environment
What does the organisation do, i.e., what is its purpose, mission and vision and what is its operational style?
- Governance
How does the organisation’s governance structure linked to its ability to create value in the short, medium and long term?
- Business Model
How does the organisation transform inputs into outputs through its business model to fulfil its strategic objectives?
- Risks and opportunities
What are the main risks and opportunities specific to the organisation that influence its ability to generate value over a period of time?
- Strategy and resource allocation
Where does the organisation want to go and what are the resources it has in place to enable it to get there?
- Performance
To what degree has the organisation achieved its strategic targets and objectives for a given period?
- Outlook
What obstacles and uncertainties are the organisation likely to face in pursuing its strategy, and what are the possible implications for its business model and future performance?
- Basis of preparation and presentation
What is the basis of decision making used by the organisation to determine the matters to be included in the Integrated Report and the methods for evaluation and measurement of such matters?
It’s important to note that these Content Elements are not mutually exclusive but are essentially linked to one another. The Integrated Report should connect the Content Elements into a comprehensive picture that showcases the dynamic and systematic interactions of the organisation’s activities as a whole.
The Capital
All organisations rely on diverse forms of capital for their prosperity. An Integrated Report should prescribe the resources and relationships utilised by organisations, which the Framework collectively describes as, “the Capitals”. The capitals are stocks of value that are increased, decreased or transformed through the activities and outputs of the organisation.
There are six Capitals that form the basis of Integrated Reporting:
- Financial Capital
It consists of the pool of funds accessible to the organisation for enabling production of goods and provision of services. Such funds may be obtained through equity or debt financing or grants, or generated through operations or investments.
- Manufactured Capital
It consists of manufactured physical objects utilised by an organisation for production of goods or provision of services, including, machinery, equipment, buildings and other infrastructure.
- Intellectual capital
It consists of intellectual property rights such as patents, trademarks, copyrights, rights, licences and softwares. It also includes “organisational capital” such as tacit knowledge, systems, procedures and protocol.
- Human capital
It consists of capabilities, competencies, knowledge and experience of people which can effectively be used to achieve and implement organisation’s strategic objectives. It also comprises of their skills and motivations which drive them to improve organisations products, processes including their ability to lead, manage and collaborate.
- Social Capital
Social Capital (stakeholders, employees, communities, groups and customers) includes disclosing issues dealing with stakeholder relationships and employee well-being, such as adoption and enforcement of human and labour rights, and community engagement programmes.
- Natural capital
It comprises of all renewable and non-renewable resources (air, water, biodiversity, forests, minerals, etc) that supply goods and services enabling the organisation to achieve prosperity in the future. An Integrated Report should disclose organisational insights on the scarcity of these natural resources and how it plans to adopt sustainable practices dealing with climate change, carbon emission, recycling and water usage.
Adoption of Integrated Reporting in India
Several surveys and investigations were conducted to analyse the need felt for Integrated Reporting and the extent to which it was adopted in India.
- Assessment of status of Integrated Reporting by Dr Nandita Mishra, IIRC Ambassador, Associate Professor, Amity University, Noida.
In this study, top 500 Indian companies, excluding banks, listed by Economic Times in 2018-19 were chosen. Annual Reports of all the companies were assessed to determine whether the seven Guiding Principles of the Framework are followed.
Result of the Study
- Number of companies following Integrated Reporting
It was found that 33 companies out of 500 follow Integrated Reporting.
The following table shows the division of the companies as per their economic sector:
|
Economic Sector |
Number of Companies |
|
Automobile |
4 |
|
Consumer goods |
5 |
|
Utilities |
3 |
|
Oil and gas |
2 |
|
Software service |
4 |
|
Metal and mining |
5 |
|
Others |
10 |
|
Total |
33 |
Aside from the ‘others’ category, it can be seen that the Consumer Goods and the Metals and Mining sector have widely adopted Integrated Reporting.
- Level of compliance of Integrated Reports
Each Guiding Principle is scored, if the companies are following then they are given a score of 1 and if not, they are given a score of 0.
The following table shows the total scores of the companies:
|
Range of score of companies |
Number of companies |
|
5-10 |
12 |
|
11-15 |
13 |
|
16-20 |
8 |
|
Total |
33 |
It can be seen that majority of the companies fall within the bracket of 11-15 which means that they are adopting Integrated Reporting but the disclosures are either insufficient or the reporting does not fully conform to the Guiding Principles. Only 8 companies have fallen within the highest score range.
- Comparison of scores to the Guiding Principles
Lastly, a study was undertaken to see which among six of the Guiding Principles are lacking amongst the companies.
The following table shows the average score of a company with regard to the Guiding Principles:
|
Guiding Principle |
Score |
|
Strategic Focus |
2.43 |
|
Connectivity of information |
2.01 |
|
Stakeholder relationship |
2.16 |
|
Materiality |
2.10 |
|
Conciseness |
2.01 |
|
Reliability and completeness |
2.53 |
The study shows that Reliability and Completeness is the Guiding Principle which is the most followed by the companies and Strategic Focus being the second.
- Survey conducted by Bombay Chamber of Commerce and Industry and PwC to understand corporate approach towards Integrated Reporting
Respondents representing top Indian companies across functions such as finance, corporate communications, investor relations and sustainability participated in the survey.
The following are the primary findings of the survey:
Better understanding
- 90% of the participants believed that Integrated reporting will enhance the Board’s understanding of methods of value creation by companies.
- 83% of the participants stated that Integrated Reporting will enable better understanding of the risks and opportunities of the companies.
- 83% of the participants stated that Integrated Reporting will improve the decision making of investors and providers of finance.
Relationships
- 90% of the participants believed that value created through Integrated Reporting will enable better stakeholder relations.
- 83% of the participants felt that adoption of Integrated Reporting will result in better internal collaborations.
Benefits
- 80% of the participants believed that Integrated Reporting promotes the culture of sustainability within companies.
- 87% of the participants claimed that Integrated Reporting can be utilised to integrate numerous forms of financial and non-financial reports.
Willingness to inculcate Integrating Reporting
84% of the participants had either already adopted Integrated Reporting or are willing to adopt it in the near future.
- Grant Thornton Bharat survey of adoption of Integrated Reporting in India
The following are the primary findings of the survey:
- 66% of the respondents believe that adopting Integrated Reporting improves stakeholder value.
- 56% of the survey respondents state that Integrated Reporting will enhance corporate governance and transparency.
- 65% of the respondents believe that framing a cogent framework by the government will increase the adoption of Integrated Reporting.
- Only 43% of the participants were sufficiently aware of the concept of integrated reporting and its benefits.
- However, 75% of the participants believe that Integrated Reporting will promote corporate reporting in India.
Benefits and drawbacks of Integrated Reporting
Benefits
Taking into consideration the Framework and the various surveys conducted, the following can be said to be the main benefits of Integrated Reporting:
- Improves decision-making.
- Enhances the quality of information.
- Enables stakeholders to assess the risks and opportunities of the organisation.
- Improves stakeholder relations.
- Encourages sustainable development practices.
- Increases financial stability of the companies.
- Enhances the quality of reporting by providing metrics to both financial and non-financial matters.
Drawbacks
The surveys also highlighted the challenges faced in adopting Integrated Reporting:
- Insufficient understanding
- Familiarity and inclination towards traditional and alternate forms of reporting such as Corporate Social Responsibility or Sustainable Reporting.
- Absence of existing guidelines, rules or regulations.
- Belief that Integrated Reporting will require additional costs, know-how and skillsets.
Conclusion
Although lack of awareness and uses may lead to certain roadblocks in adoption of Integrated Reporting, its benefits certainly outweigh its costs. In 2017, companies such as Mahindra and Mahindra, Wipro, Tata Steel and Reliance Industries adopted Integrated Reporting. In 2018, more than 30 companies in the Nifty 50 Index elected the framework if Integrated Reporting. By 2019, 45-50 companies have adopted this framework. This goes to show that, Integrated Reporting is an efficient framework in creating value addition, enhancing disclosure and reporting requirements and improving investor relations. Increasing awareness together with adequate regulatory guidelines will go a long way in utilisation of Integrated Reporting in India.
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