Integrated
reporting
Elevating value
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1.1
1.2
2
2.1
2.2
2.3
3
3.1
3.2
3.3
3.4
3.5
4
4.1
Introduction: An evolving view of value
What is integrated reporting?
Connectivity and integrated thinking
Changing corporate reporting
Limits of the current corporate reporting model
Toward integrated reporting
Background
Main aspects of the integrated report
The business model in an integrated report
Themultiplecapitalsmodel:beyondfinancialcapital
Strategy and key performance indicators
Risk and opportunity management
Materialitydefined Measuring value creation
Interactionbetweenfinancialperformance,intangible
value and externalities
4.2
Explaining the gap between net book value and
intrinsic value
4.2.1 Monetization of intangibles
4.2.2 Monetization of externalities
4.3
Impact of externalities on the value of intangibles
4.4
The value of measuring value
1
1
3
4
4
6
7
8
9
12
16
21
22
24
25
25
27
28
29
30
Appendices
i
ii
iii
Monetization of intangibles in practice: case studies
Externality valuation in practice
Methods of economic valuation
Contact
31
38
48
49
We recommend that organizations take into account the guidance of the
International Integrated Reporting Council (IIRC) when carrying out an integrated
report. This paper gives relevant background for organizations to be able to
understandthejourneyofintegratedreportingsofar,thetheorybehindhow
itwilloperateandsomedetailsonframeworks,guidelinesandevenregulatory
requirementsthatareemergingaroundtheworld.Inaddition,weofferourviewof
howorganizationscanutilizeKPIsandmonetization,whichgoesbeyondtheguidance
of the IIRC framework.
Foranotherversionofthispaper,whichincludespracticaltipsonhoworganizations
canimplementintegratedreporting,strategyandthinkingintotheirprocesses,please
see our document Integrated reporting: tips for organizations on elevating value.
TheIIRChasreleasedaframeworkforintegratedreporting.Thefullversionofthis,
whichismentionedwithinthispaper,canbefoundatwww.theiirc.org.
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Introduction: an evolving view of value
Integrated
reporting
Inthelast35years,themarketvalueof
organizations has slowly shifted from a price
based largely on tangible assets to greater
emphasis on intangible assets. The concept of
valuehasfundamentallychanged,andwithit
the dynamics of the global economy.
Tocreatevalueovertime,today’sorganizations
need to actively manage a wider range of resources.
Intangibleassetssuchasintellectualcapital,research
anddevelopment,brandvalue,naturalandhuman
capital have become as important as tangible assets
inmanyindustries.However,theseintangibleassets
arenotuniversallyassessedincurrentfinancial
reporting frameworks even though they often
represent a substantial portion of market value.
A range of issues combined with intangible assets
influencecompetitiveness.Examplesinclude:
regulationorderegulation,technologyinnovation,
finiteresourcesandconsumersovereignty(the
growingpoweroftheconsumer),andcompliance
andlegislation.Now,morethanever,creating
sustainable value for organizations depends on
two things:
Adapting to change and the challenges
and opportunities in their environments
•
Effectively managing intangible assets,
which can represent a substantial portion
of market value
•
In this paper we offer our vision on integrated
reporting and its role in value creation. We are
confidentitwillinformorganizationsthatwantto
taketheirreportingtothenextlevel,aswellashelp
them articulate their unique value creation stories.
These stories will ultimately help to attract investors
who demand clear performance analysis to assess
current and future prospects.
1.1 What is integrated reporting?
Integrated reporting is a concept that has been
created to better articulate the broader range of
measures that contribute to long-term value and the
role organizations play in society.
Central to this is the proposition that value is
increasinglyshapedbyfactorsadditionaltofinancial
performance,suchasrelianceontheenvironment,
socialreputation,humancapitalskillsandothers.
This value creation concept is the backbone
ofintegratedreportingand,webelieve,isthe
direction for the future of corporate reporting. In
additiontofinancialcapital,integratedreporting
examinesfiveadditionalcapitalsthatshouldguide
anorganization’sdecision-makingandlong-term
success — its value creation in the broadest sense.
(Please see Chapter 3.2 for details.)
Whileintegratedreportsbenefitabroadrangeof
stakeholders,they’reprincipallyaimedatlongterm investors. Integrated reporting starts from
the position that any value created as a result of
a sustainable strategy — regardless of whether
it becomes a tangible or intangible asset — will
translate,atleastpartially,intoperformance.Market
value will therefore be impacted.
Critical to integrated reporting
is the concept of sustainable
value creation
Today,anorganizationcreatesvaluenot
only for its shareholders but also for the
society as a whole by means of a sustainable
strategy. This concept requires organizations
tofactordecisions,trade-offsandsacrifices
intotheirbusinessmodel.Forexample,for
an organization to reduce its dependence
onnaturalcapital,itmayhavetosacrifice
financialcapitaltoinvestinthehumancapital
capable of achieving this goal.
An organization may face the choice between
protectingitsfinancialcapitalinthenearterm
andincreasingitsprofitpotentialinthelonger
term.Thesedecisions,ifimportant,shouldbe
setoutinanintegratedreportanddefinedin
theorganization’svaluecreationobjectives.
Thisapproachgoesbeyondthevaluereflected
intheannualfinancialstatementsandincludes
the creation of intangible value and the impact
ofanorganization’sactivityonsocietyasa
whole.Italsoincludesameasurement,or
atleastadescription,ofhowtheseimpacts
influencelong-termshareholdervalue.
1
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Integrated
reporting
2
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Sustainable organizations create value by
combining a broad range of resources controlled
by the organization or third parties. They are
increasingly expected to generate positive
outcomes for society that go beyond returns for
their shareholders or investors — outcomes that can
beinstrumentalinimprovinganorganization’slongtermfinancialperformance.Understandingthiscocreation and shared value process is fundamental to
integrated reporting. Other considerations include:
The chart below shows that the only layer of value
currently measured consistently by organizations is
financialcapital—usuallythroughtheannualreport
and accounts. This value is translated into dividends
for shareholders or stock price gains.
1 Anorganization’svaluecreationpotentialdepends
on its ability to identify all of the resources
availabletoit,whethertangibleorintangible,
ownedbytheorganizationorthirdparties,and
to align them with its corporate strategy
The second layer encompasses shared value that
benefitsstakeholdersdirectlyrelatedtothe
organization(employees,customers,suppliers,
publictreasury,etc.).Sharedvaluedepends
extensivelyonfactorssuchasemployeeperformance,
operatingpermitsandconsumerconfidence.
►
The third layer describes the value that an
organizationgeneratesforsocietyatlarge,evenif
it’snotdirectlylinkedtoitsbusinesspurpose.These
externalities,astheyareknown,maybeeither
positive or negative. An integrated report is broader
than traditional approaches in terms of scope and
timehorizon.Itshouldtelleachorganization’s
unique value creation story for each of these areas
and include how:
►
•► It creates value and for whom
2 Anyvaluecreated,includingthatwhichbenefits
societyasawhole,hasthepotentialtoimpact
ontheorganization’svalueandprofitability
►
3 An organization that communicates its
strategytothemarketandquantifiesthis
broader contribution may well be stimulating
valuecreationinitself.However,toincrease
stakeholderconfidencetheinformationmust
be credible. (This will be explained further
in Chapter 2.3.)
•
•
►
Itmeasuresandquantifiesthelayersofvalue
Itidentifiesthevaluecreatedateachleveland
how it may affect future performance
1.2 Connectivity and
integrated thinking
of Value
Layers of value
Externalities
Value for society
and the environment
Shared value
Value captured by
the organization
(The only layer of
value currently
measured consistently)
Totellacomprehensivevaluecreationstory,
integrated reporting requires organizations to
identify the interdependency between all
elements — internal and external — that materially
affect their ability to create value over time. Seeing
this connectivity requires integrated thinking as
opposed to “silo thinking.” All the operating and
functionalunitsofanorganization,aswellas
thecapitalsthatitusestocreatevalue,mustbe
considered. This leads to integrated decision-making
and actions. The integrated report is the product of
the processes of connectivity and integrated thinking
in the organization. Integrated reporting is therefore
notjustaboutthereport,butabouttheprocessof
theorganization’suniqueapproachtovaluecreation.
To translate integrated thinking into integrated
reporting the organization should convey a holistic
viewofstrategy,governance,performanceand
prospects. The integrated report should also
bridge time horizons. Therefore integrated
reporting can be used as a governance tool for
performance-oriented management.
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2
Integrated
reporting
Changing corporate reporting
The economy is facing a new value paradigm.
Thesechanges,however,arenotreflectedin
the way we measure or report value. Traditional
corporate reporting models have failed to adapt
to an uncertain economy and account for the
increase in intangible assets. Traditional metrics
for measuring value and economic progress no
longer provide a complete picture.
A good example of this is gross domestic product
(GDP),thecurrentyardstickformeasuringeconomic
growthand,indirectly,prosperity.However,GDP
fails to take into account increasingly important
factors such as environmental sustainability or
socialinclusionlevels.There’snowgrowingcrossborder consensus on the need to enhance GDP
measurements with additional data and indicators.
Corporatefinancialinformationfacessimilar
shortfalls.Itfailstoreflectallthefactorsthatmay
haveasignificantimpactonvaluecreation.Ittoo
must be revised.
2.1 Limits of the current corporate
reporting model
Overthepast40years,organizationshavebeen
disclosing an increasing amount of information to
satisfythedemandsofstakeholders.Specifically,
they have offered complementary information to
providersoffinancialcapitalwhoincreasinglyview
thesnapshotreflectedbyfinancialstatementsand
sustainability reports as inadequate.
Research performed by ACCA1 concluded
that investors say:
Tocreatevalue,organizationsincreasinglyrelynot
just on their resources but the scarce resources
belongingtosociety.Therefore,thevaluecreation
process is based on the principle of “shared costs.”
Alleconomicactivityconsumes,tosomeextent,
resourcesthatbelongtosociety.Consequently,the
value created by an organization should be shared
between its owners and society.
Ifthe“sharedcost”islessthanthe“sharedvalue,”
the value created by the organization will show a net
positivebalance.Ontheotherhand,iftheshared
costismorethanthesharedvalue,thiswillshow
anetnegativebalance.Inprivateorganizations,
assuming that the ultimate measure of the success
of a competitive strategy is growth in shareholder
value,theequationbecomesmorecomplex.Thekey
is to determine the extent to which shareholder value
creation depends on a contribution by society as a
whole — and whether that contribution is sustainable
inthelongterm.InSection4,frompage24,we
elaborate on this theory and provide examples.
•
Alinkismissingbetweencurrentreporting,
businessstrategyandrisk,andwedonot
believethatsufficientinformationis
providedtoassessfinancialhealth
►
•
•
► urrentnon-financialreportingisnot
C
sufficientlyrelevant,andnon-financial
information should be better integrated
withfinancialinformation
Qualitative policy statements are important
toassessfinancialmateriality,butquantitative
key performance indicators (KPIs) are viewed
as essential
• A
► ccountability mechanisms should be part
ofnon-financialreporting,eitherthrough
newboardoversightmechanisms,third-party
assurance and/or shareholder approval at
annual general meetings
With organizations having the ability to create
valuebeyondthatcapturedbyfinancialstatements,
there’saneedtofindnewwaystomeasureand
communicate value creation.
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ACCA and Eurosif; What do investors expect from non-financial reporting?, June 2013
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The information needed to evaluate an
organization’sabilitytocreatevaluesustainably
over time cannot be gleaned from the prevailing
corporate reporting model. A number of arguments
support this assertion:
►
•► Organizations are publishing a growing variety
ofincreasinglyextensivereports.However,
the information provided in them is disjointed.
They’reoftengeneratedbydifferentdepartments
within the organization and are products of silo
thinking instead of integrated thinking
Page 2, Figure 2
►
•
►
hecomplexityoffinancialreportingstandards
T
requires increasing technical knowledge
•
•
►
Thecurrenteconomic,socialandenvironmental
crisesweface(e.g.,recession,theincome
gap and climate change) are forcing us to think
differently about the world and business
►
The lack of a conceptual and regulatory
frameworkfornon-financialreportsmeansthat
inconsistenciesoccur.Therefore,stakeholders
mayfinditdifficulttocomparereportson
many benchmarks
• Evolution of corporate reporting
Evolution of corporate reporting*
1960
Financial
statements
1980
2000
Financial
statements
2020
Projected
Financial
statements
Financial
statements
Management
commentary
Governance
and
remuneration
Financial
information
Management
commentary
Governance
and
remuneration
Governance
and
remuneration
Sustainability
information
Management
commentary
Integrated
report
Environmental
reporting
Sustainability
reporting
Source:AdaptedfromIIRC,Towards Integrated Reporting: Communicating Value in the 21st Century, September 2011
*Inthefuture,integratedreportingcouldeventuallyreplaceexisting
corporate reports. Organizations should be able to decide the
wayinwhichitwillbepresented—forinstance,asanoverarching
documentlinkingtovariousotherreports,orasasingle
stand-alone document covering all material aspects.
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2.2 Toward integrated reporting
Integrated
reporting
•
•
►
Markets move on information. The more forwardlooking and detailed information organizations
provide,themoreefficientlymarketsoperate.
Therefore,organizationsneedtoexplaintheirvalue
creation goals from a new perspective: a view that
accounts for both intangible and tangible assets and
quantifies,wheneverpossible,thevaluetheycreate
fromabroadereconomic,socialandenvironmental
perspective. The chart on page 7 shows that volatility
invaluation,whichcanovervalueorundervalue
anorganization,canbeloweredbyincreasingthe
amount of information available to stakeholders.
The ultimate goal is to enable investors to make
moreefficientandeffectivedecisionsandbringan
organization’smarketvalueclosertoitsintrinsic
value. Integrated reporting does just that. Leading
organizations are adopting the concept.
Financialreportsfailtoreflectanorganization’s
abilitytocreatevalueintheshort,mediumand
longtermthroughefficientmanagementofits
strategic resources
Anorganization’svalueisdecreasinglyderived
from the tangible assets on its balance sheet and
increasingly from its intangibles. The weight of
tangible to intangible assets has inverted over
the last three decades as shown below
These arguments illustrate how the current
reportingframeworkfallsshortofstakeholders’
needsandexpectationsandisinsufficientfor
investment decision-making purposes.
Perspectives on integrated reporting
•
”An integrated report is a concise communication
abouthowanorganization’sstrategy,governance,
performance and prospects lead to the creation of
valueovertheshort,mediumandlong-term.”2
•
”An integrated report is a holistic and integrated
representationoftheorganization’sperformance
intermsofitsfinanceanditssustainability.”3
•
“Integrated reporting builds on the practice of
financialreporting,andenvironmental,social
andgovernance—orESG—reporting,andequips
organizations to strategically manage their
operations,brand,andreputationtostakeholders
and be better prepared to manage any risk that
may compromise the long-term sustainability of
the business.”4
Increasing value of
intangible assets
• Increasing value of intangible assets
Components of S&P 500 market value
● Intangible assets
● Tangible assets
Components of S&P 500 Market Value
Source:OceanTomo,LLC,“OceanTomo’sAnnualStudyofIntangibleAssetMarketValue—2010,”4April2011
IIRCframework,“Whatisintegratedreporting?”
InstituteofDirectorsSouthernAfrica,“KingCodeofgovernanceforSouthAfrica2009,”2009
4
ProfessorMervynKing,PressRelease“FormationoftheInternationalIntegratedReportingCommittee(IIRC),”2August2010
2
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2.3 Background
The concept of integrated reporting was introduced
inSouthAfricain2009throughKingIII,thecode
of corporate governance. The Johannesburg Stock
ExchangeadoptedKingIII,andalllistedcompanies
are now required to “apply or explain” the King III
principles,ofwhichintegratedreportingisone.
Regulatory requirements around the world and
some listing requirements in different parts of
the world are heading in the same direction.
Requirements are emerging to increasingly disclose
non-financialperformance,suchas:
•
In Germany,GermanAccountingStandard
15 (GAS 15) includes disclosure requirements
withrespecttocontext,KPIs,risksand
opportunities,forward-lookingstatements
and corporate governance
•
In France,GrenelleIIstipulatestheinclusionof
externallyassurednon-financialinformationin
annual reports
•
In Spain,aregulator’staskforceisworkingon
proposals for a new management report format
•
In Brazil,theSaoPauloStockExchangerequires
listedcompaniestoreportnon-financialKPIsona
“comply or explain” basis
•
In the UK,theCompaniesAct2006(strategic
reportanddirector’sreport)extendsthescopeof
mandatorynon-financialreportingobligationsfor
listed companies
TheIIRC,setupattheendof2010,aimsto
create the globally accepted integrated reporting
framework.Ultimately,anintegratedreportshould
explainthereportingentity’sinterrelatedfinancial,
environmental,socialandcorporategovernance
information.Itshouldbepresentedinaclear,concise,
consistent and comparable manner. And disclosure
should be retrospective and prospective to better
matchinvestors’needs.Bydoingso,organizations
could improve their ability to access capital.
Page
4, Figure 4 disclosure
Increased
improves
investors’estimatesofthe
• Increased firm disclosure improves investors’ estimates of the firm’s intrinsic value
organization’sintrinsicvalue
Organization value
Reduction of
information gap
premium
Overvaluation
Intrinsic
value
Zero
Undervaluation
Low
Medium
High
Full
Extent disclosure
Source:M.Rikanovic,“CorporateDisclosureStrategyandtheCostofCapital—AnempiricalstudyoflargelistedGermancorporations,”
basedontheworkofE.F.Fama,30June2005
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3
Main aspects of the integrated report
Integrated
reporting
Integrated reporting is a management and
communication tool for understanding
and measuring how organizations create
value now and in the future. The goal
isnottoprovidemoreinformation,but
betterinformation.It’stheinformationthat
investors are increasingly looking for.
InkeepingwiththeIIRCFramework,anintegrated
report should address the following questions:
A number of organizations were already publishing
integrated reports before the launch of the IIRC
Framework in December 2013. These pioneers
incorporate many of the concepts established in the
IIRCFrameworkandclearlydefinethefoundationsof
how they create value. Included among them are:
•► Organizational overview and operating
context: Whatdoestheorganizationdo, and what are the circumstances under which
it operates?
►
•
Governance:What’stheorganization’s governancestructure,andhowdoesitsupport
theorganization’sabilitytocreatevalueinthe
short,mediumandlongterm?
•► Business model:Whatistheorganization’s
•► •► •► •► •► businessmodel,andtowhatextentisita resilient one?
►
Wheredoestheorganizationwanttogo,
and how does it intend on getting there?
►
•
Outlook: What challenges and uncertainties is the
organization likely to encounter in pursuing its
strategy,andwhatarethepotentialimplications
for its business model and its future performance
and outcomes?
Port of Rotterdam Authority (the Netherlands)
Natura (Brazil)
year-on-year rise in the publication of selfdeclared integrated reports around the world.
•►
Countries leading the integrated reporting trend
includeSouthAfrica,theNetherlands,Brazil,
Australia and Finland.
►
•
Globally,thefinancialsectorself-declaresmore
integratedreportsthananyothersector,followed
bytheutilities,energyandminingsectors.
•
Integrated reporting is still a minority practice.
Onlyoneoutoffiveofthesurveyreportsis
self-declared as an integrated report.
•► Performance: How has the organization
performedagainstitsstrategy,andwhatare
the key outcomes in terms of the capitals?
Novo Nordisk (Denmark)
•► Large private multinationals are driving the
•► Strategy and resource allocation:
SAP (Germany)
The Global Reporting Initiative (GRI) conducted
a survey5 to assess current practices in relation to
integrated reporting and concluded that:
•► Risks and opportunities: What are the key
opportunities and risks that the organization
faces;howdotheyaffecttheorganization’s
abilitytocreatevalueintheshort,medium
and long term; and how is the organization
tackling them?
The Crown Estate (UK)
►
•► About one-third of these reports combine
sustainabilityandfinancialinformationtogether.
•► Basis of presentation: How did the organization
determinematerialmattersontheircharacteristics,
likeKPIs,aspresentedintheintegratedreport?
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Global Reporting Initiative, “The sustainability content of integrated reports — a survey of pioneers,” 2013
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3.1 The business model in an
integrated report
•
►
About half of all self-declared integrated reports
are two separate publications — an annual report
and a sustainability report — published together
underonecover,withminimalcross-connection
•
The rest of the reports are sustainability reports
but self-declared as an integrated report without
showing a clear link between sustainability and
financialperformance
•► Over 70% of the reports surveyed exceed
100 pages
Todate,broadacceptanceofintegratedreporting
has been hindered. The delay in universal progress
iscausedbyalackofconsensusamongcompanies,
industries and even countries as to what an
integratedreportshouldcontain.Also,adebate
is ongoing as to whether it should replace existing
corporate reports. The IIRC Framework could provide
greater clarity and align the concept of an integrated
report for the vast majority.
Thebusinessmodelisthevehiclethatdefines
andexecutesanorganization’sstrategyandmaps
out the process by which an organization creates
sustainable value over time. It should assess an
organization’slong-termviability,valueproposition
andbusinessstrategy.Itshouldenhancetheentity’s
futureresilience.AccordingtotheIIRCFramework,
the business model is based on the theory of
multiplecapitals.Thisstatesthat,inthenew
economy,anorganizationcanonlybuildandsustain
value if it manages the full range of input capitals
efficientlyandresponsibly.Theresourcesitusesto
build this value include:
•► Tangibleitemssuchasfinancialcapitaland
manufactured capital
•►
Intangible elements such as relationships
withthecommunity,humancapitaland
intellectual capital
►
•
Other inputs or resources such as ecosystem
services derived from natural capital;
organizations can draw on these capitals for
free or in exchange for payment
The business model should identify the key inputs
that contribute to value creation. It should also
showhowthesearemanaged,thekeyvalue-adding
activities of the organization and the potential
outcomeintermsofvaluecreationovertheshort,
mediumandlongterm.Withinthebusinessmodel,
value creation encompasses the products and
services produced by the organization (including
any by-products) as well as the external factors
which increase or decrease the value of the capitals
usedandaffectedbyit.Valuecreationordestruction
occurs through an increase or decrease in the value
oftheorganization’stangibleandintangibleassets
and in the creation of positive or negative impacts
forthecommunity(externalities)thatcan,inturn,
feedbacktotheorganization’svalue.
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Integrated
reporting
When describing the business model in an
integrated report the following series of questions
should be considered:
• Whataretheinputs,i.e,theresourcesorcapitals
on which the organization depends? They can
beinternalorexternal(e.g.,fundingmodel,
infrastructurereliance,people,intellectual
property,rawmaterialsconsumed,relationships
or dependence on natural capital).
•► Howdoestheorganizationdefinevalue?
►
•► Whataretheorganization’smissionandvision?
►
• What’stheorganization’senvironment?
►
•► Howdoestheorganizationdefinestrategy,and
what resources does it use?
►
• What are the main opportunities and challenges
faced by the organization?
►
•► What indicators are meaningful in terms of
measuring the extent to which the organization
achieves its stated value creation goals?
►
Page 5
• The business model
►
•► What are the outputs? The products and services
produced by the organization.
►
• What are the outcomes? Performance in terms
of increasing or decreasing the value of the
capitals as a result of product or service
production. These outcomes may be internal or
external(e.g.,revenueandcashflow,customer
satisfaction,taxpayments,brandloyalty,and
social and environmental impacts).
►
• What are the value-adding activities? The key
elementsoftheorganization’sstrategyand
the related initiatives designed to lead to
valuecreation(e.g.,strategicinvestments,
innovation,planning,design,production,
servicelevelagreements,relationship
management,differentiationfactors).
The business model
Value
added by
organization
Society Organization
Organization
Source:AdaptedfromIIRC,“Interactionofbusinessmodelwithinternalandexternalcapitals”,March2013
Customer Organization
Society
Source: Business model background for <IR>, IIRC
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How should an organization define its
mission and vision, and the external
factors that shape its business model?
The operating context and external factors should
definetheenvironmentinwhichtheorganization
interacts. These include:
Thebusinessmodel,viewedasawebofprocesses
devotedtothecreationofvalueintheshort,
mediumandlongterm,needstobealignedwith
anorganization’smission,visionandoperating
circumstances.
•► The macroeconomic situation
The missionsetsoutanorganization’soverarching
purposeandguidesanorganization’smanagement
and employees in decision-making. It answers the
questions of what an organization does and how it
createsvalue.Oncecreated,itshouldprovidethe
frameworkfordesigninganorganization’sstrategy
anddefiningitstargetcustomers,productsor
services,anduniquevalueproposition.
SAP’sintegratedreportfor2012includesagood
exampleofmissionformulation.ItrelatesSAP’s
mission to the role the organization plays
in society as an entity that creates value:
“Our mission is to help every customer
become a best-run business. We do this by
delivering new technology innovations that
webelieveaddresstoday’sandtomorrow’s
challengeswithoutdisruptingourcustomers’
business operations.”
Visionreflectswhattheorganizationaspires
to in the future.
The Port of Rotterdam Authority formulated
the following vision for its Business Plan
2011—2015:
“The Port of Rotterdam Authority is fully
committed to the continued development of
Rotterdam’sportandindustrialcomplexso
itcanbecomethemostefficient,safe,and
sustainable in the world. The Port of Rotterdam
Authority is creating value for customers by
developingchains,networks,andclusters,both
in Europe and in emerging markets worldwide.
Asanenterprisingportdeveloper,thePortof
Rotterdam Authority is the partner for worldclasscustomersinpetro-chemicals,energy,
transport,andlogistics.InthiswaythePort
of Rotterdam Authority is enhancing the
competitiveness of the Netherlands.”
•► The availability of natural resources
•► The availability of social capital
•► Market circumstances
•► The competitive landscape
•► Technology
•► Supply chain
•► Labor conditions
•► The regulatory environment
An organization needs to continually monitor and
analyzethesefactorswhendefiningandfine-tuning
itsbusinessmodel.It’simportantthatmanagement
takes the lead in providing required governance
andoversightstructures,sincetheintegrated
reporting concept of value stems from the notion
that the interaction between an organization and its
operating environment has become more intense
and mutually dependent.
Anglo American plc includes socioeconomic
indicators in its operating circumstances and
defineshowtheseindicatorsimpactitscorporate
strategies and values. It includes economic
growth indicators such as GDP for its various
markets,andittrackschangingdemandtrends
in a global environment marked by crisis.
Aegon,inits2012annualreport,outlined
the trends and new realities of its business
inthemacroeconomiccontext,definingtheir
implications and indicating the risks and
opportunities implied.
“Trends and new realities described are:
•► An aging planet
•► An uncertain economy
•► Crisis in the Eurozone
•► The way products are bought and
sold is changing
•► Winning trust
•► A new working environment”
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3.2 The multiple capitals model:
beyond financial capital
Integrated
reporting
Sustainable development requires a balance
betweeneconomicprogress,socialadvancesand
environmentalprotection,whichisthefoundationof
the new value creation vision intrinsic to integrated
reporting. This balance is increasingly important
because organizations draw from multiple capitals
or resources that interact with each other to form a
competitive strategy and unique value proposition.
This “multiple capitals approach” is the cornerstone
of the economic system and development model in
the new economy.
The approach provides a new framework for
guiding decision-making that is underpinned by a
series of principles:
•► Thelevelofsustainabilityinanorganization’s
strategy and business model shapes its
future performance
•► Anorganization’sbusinessmodelandstrategy
should be designed to maintain and protect all
stocks of capital over time
•
or by society and local communities (environmental
services,atalentedworkforceorkeytransport
infrastructure). An organization may have access
to these third-party capitals without having to incur
anydirectcosts,oritmayhavetoconsumeother
capitals,suchasfinancialcapital,beforeearningthe
right to use them.
Capitalsmaybeclassifiedastangibleorintangible.
Intangibleassetsaredefinedasidentifiable,
non-monetary assets without physical substance.
The organization controls and holds these assets
for use in the production or supply of goods or
services,forrentaltoothers,orforadministrative
purposes. The tangible or intangible assets are
purchased or generated by the organization. They
may even be owned by third parties. Prevailing
accounting regulations seriously limit the ability to
recognize internally generated intangible assets on
thebalancesheet.Asaresult,theirvaluationsare
“backstage”infinancialstatements.Integrated
reporting aims to change that by giving intangibles
and externalities a place in corporate reporting.
The organization should analyze the impact of
its activities on each of its capitals and minimize
any unsustainable dependencies
AstraZeneca’s2012reporthighlightsandstates
thecompany’sdependenceontheuseofcapitals
in order to successfully deliver its strategic goals.
►
•► Anyimpactderivingfromanorganization’s
activity,internalorexternal,hasthepotential
toaffectitsfuturefinancialperformance
“Theresources,capabilitiesandskillswehave
in the business and how we use them to
ensure a focus on:
Thecapitalsstorevaluethat’sneededby
organizationstocreatesustainableprofitand
prosperity for society. These values can be
transformed,increasedordecreasedthroughthe
activities and outputs of the organization. The IIRC
Frameworkidentifiessixcapitals:natural,socialand
relationship,human,intellectual,manufactured,and
financialcapital.Thecategorizationisflexible,and
the IIRC Framework allows organizations to adopt
otherclassificationstructures.Forreporting
purposes,anorganizationshouldonlyidentifythe
individual capitals that materially contribute to or
affect the value creation process and the long-term
viability of its business model.
•
There are different ways to classify the various
forms of capital used by organizations in the value
creation process. Access to the capitals may be
controlledbytheorganization(suchasfinancial
resources,equipment,managementskillsandthe
intangibles associated with brands and reputation)
Research and development: the
discoveryanddevelopmentofinnovative,
differentiated and commercially
attractive medicines that make a real
difference to the health of patients
•► Sales and marketing: focused on the need
ofourcustomers—patients,physiciansand
payers — and undertaken the right way
•► Supply and manufacturing: a reliable supply
and manufacturing operation that ensures our
medicines are where they need to be when
they are needed
•► People: a talented and diverse workforce
with the right capabilities operating in a
high-performance culture”
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Integrated
reporting
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The new capitals
•
Natural capital: serves as the basis and glue for
the entire economic and social system. It provides
resources that often cannot be replaced. And
it’sessentialforthefunctioningoftheeconomy
as a whole. Resources include water or fossil
fuels,renewablenaturalresourcessuchassolar
energyoragriculturalcrops,andthecapacityof
theworld’scarbonsinks—i.e.,theair,forestsand
oceans — to neutralize or sequester the waste
generated by economic activity. When it comes to
determining whether natural capital is material to
anorganization,relevantfactorsmustbebrought
to bear. These include the level of reliance on
naturalresources,theenvironmentalimpactof
itsproductiveprocess,andwhattheorganization
has to do to operate within the limits imposed by
the environment.
►
•
Social and relationship capital: the stock of
resources created by the relationships between
an organization and all its stakeholders. These
relationshipsincludetiestothecommunity,
governmentrelations,customersandsupply
chainpartners.Operatinglicenses,dependence
on the public sector or an unusual supply chain
may also be factors
►
•
Intellectual capital: encompasses the intangibles
associated with brand and reputation that are
critical to the organization. It also includes
resourcessuchaspatents,copyrights,
intellectualpropertyandorganizationalsystems,
procedures and protocols. These can provide
significantcompetitiveadvantages.Theycan
alsohavedisadvantages,suchasthenegative
brand equity attributed to major polluters or
ill-reputed shareholders
•
►
•
Human capital: refers to the skills and know-how
ofanorganization’sprofessionalsaswellastheir
commitment and motivation and their ability to
lead,cooperateorinnovate.Thesuccessofan
organization is tied to proper management of its
teams and care for their motivation and well-being.
Excessive employee turnover or inadequate
remuneration policies can damage reputations
andimpairanorganization’sabilitytocreatevalue
►
Financial capital: is the traditional yardstick
ofanorganization’sperformance.Itincludes
fundsobtainedthroughfinancingorgenerated
bymeansoftheorganization’sproductivity.It’s
the pool of funds available to the organization for
use in the production of goods or the provision of
services,includingdebtandequity
Financial capital interacts extensively with the
other capitals. Organizations need to understand
andreflectthisinterdependenceintheirintegrated
reports.It’simportanttoshowfinancialcapitalis
converted into other forms of capital — assigning
value to the latter — and explain how these other
formsofcapitalwillgeneratefinancialreturns
overtheshort,mediumandlongterm
►
•► Manufactured capital: mainly comprises physical
infrastructure such as buildings or technology
equipment and tools. Manufactured capital may
beownedbytheorganizationorbythirdparties,
e.g.,portsandotherpublicinfrastructure.They
contributetoanorganization’sproductiveactivity.
Itfollowsthattheirefficientmanagementcan
reduce the use of resources and drive innovation
thatleadstogreaterflexibilityandsustainability
How do the various
capitals contribute
to the value creation
strategy?
The capitals available to the organization are
increased,decreasedortransformedasaresult
of its value-adding activities. The connectivity
and interdependence among the various capitals
orinputs—specificallytheirinfluenceonthe
organization’slong-termfinancialperformance—
should be communicated in an integrated report.
Moreover,notonlydothecapitalsinteractwith
eachother,buttheyarealsoinfluencedby
external factors. These include the economic
climate,technologicalprogress,socialchangesand
environmentalissues.Viewedfromthisperspective,
anorganization’sabilitytomitigaterisks,adaptto
change and interact with its shifting surroundings
iskey.What’smore,thecapitalscanbecomean
internally generated intangible asset.
Tounderstandhowanorganizationusesitscapitals,
howtheyrelatetoeachotherandtheinfluenceof
externalfactors,it’svitaltodefinethestrategy,and
aseriesofKPIs,tomeasurethestrategy’sprogress.
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3.3 Strategy and key
performance indicators
Integrated
reporting
Strategy formulation should describe the process
and tools earmarked for the creation of value for
shareholdersandotherstakeholders,specifically
customers,suppliers,employeesandsocietyasa
whole. The value created for the community is the
result of the production of positive and negative
externalities. When the market is aware of the
externalitiesgenerated,thelattercanalsotranslate
intoanincreaseordecreaseofanorganization’s
value. Strategy must clearly set out the differential
value proposition for the customer and the
community as a whole.
Intangible assets have a value potential that depends
onhowtheorganizationdefinesitsstrategyandhow
thoseassetscontributetotheorganization’svalue
creation goals. An intangible asset unaligned with
theorganization’sstrategymayhavenovalue.
Thesuccessofastrategydepends,aboveall,on
execution.Thisrequiresembracingacoretenet:it’s
only possible to manage that which can be measured.
In a new economic environment where the ability to
adapt to changing environments and intangibles is a
focus,thisprinciplerequiresspecificvaluecreation
measurement metrics.
The strategy must address questions such as:
•► What does the organization do to create value for
itscustomers,theprovidersoffinancialcapital
and other stakeholders?
•►
What outcomes does the organization strive for?
•
What capitals does the organization rely on?
•
How will the organization position itself in the
value chain and in its operating markets?
The strategy should mirror and articulate a balance
betweentwothings:first,short-termfinancial
performance;second,thesustainablecreationof
valueinthemediumandlongterm.It’simportant
to distinguish the time horizons framing decisions
regarding the allocation or consumption of the
capitals.Anorganization’sstrategyshouldalso
reflectthechoicesneededwhenitcomesto
consumingresources.Often,theuseofonecapital
can deplete its value yet drive an increase in the
value of other capitals over time.
The strategy should pinpoint the management
processes and systems to mobilize and use all the
resources (including external resources) within
theorganization’sreachasefficientlyaspossible.
References to the value creation chain that go
beyond elements strictly controlled or owned by the
organization can enhance the strategic direction of
the organization.
The value of intangibles depends on the extent
towhichtheylinkwiththeorganization’s
objectives—orinotherwords,valuecreation
through connectivity. Any increase in their value
mayeventuallymaterializebyimprovingfinancial
performance through interrelated links. This
alignment and these interactions are key since
the measurement of the value of an intangible
canbecost-based,butitcanalsorelyonother
performance indicators.
This is where we believe KPIs can be useful in
addition to the narrative portion of the integrated
report.KPIsmeasurefinancialandnon-financial
performance against targets and long-term value
creation goals. They can also indicate what the
organization’soutcomesareintermsoftangibleand
intangible value as well as value for society.
KPIs can be used to measure performance and
outcomes resulting from the use of tangible and
intangible assets as well as capitals the organization
doesn’town.Theyrelatetotheorganization’s
criticalvaluedriversandtracktheorganization’s
performanceintheshort,mediumandlongterm.
With correct KPIs the management team can focus
onmonitoringmaterialmatters,andinvestors
can assess value creation. Creating KPIs enables
organizations to understand how they can minimize
negative externalities and maximize positive ones.
Ultimatelythiswillsupporttheperformanceoftheir
intangible assets and by extension their value.
It’simportanttoshowhowmeasurableindicators
(e.g.,employeeturnover,energyefficiency,media
coverage)impacttheorganization’stangibleand
intangible assets (such as brand and customer
relationships).Why?Becauseitdirectlyinfluences
shareholdervalue.Forexample,takeKPIsrelated
to waste reduction generated in manufacturing.
The reduction of waste may indirectly measure
the creation of external value through enhanced
environmental performance. The improvement
could result in an improved brand image. This in
turnenhancescustomerloyaltyand,byextension,
customer relations (an intangible asset).
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Integrated
reporting
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the European Academy of Business in Society
(EABIS) and the Sustainability Accounting Standards
Board (SASB).
Finally,communicationisacrucialcomponentof
strategyandthevaluecreationstory.Naturally,it’s
vital that the entire organization is aligned with the
organization’sstrategictargets.However,it’salso
true that the market will only tend to recognize an
organization’sintrinsicvaluetotheextentthatit
receivessufficientinformation.Moreover,reporting
how an organization creates intangible value and
a value for society may create additional intangible
value as long as the communication is credible
and consistent. Integrated reports should disclose
the measurement methods used by management
to calculate KPIs. This information is relevant
to enable comparisons between organizations
and provide a clear understanding of the
organization’sperformance.
InSeptember2010,theDVFA(DeutscheVereinigung
für Finanzanalyse und Asset Management/
German Association for Financial Analysis and
AssetManagement),togetherwiththeEuropean
FederationofFinancialAnalystsSocieties(EFFAS),
jointly published a paper outlining the ground rules for
integrating ESG considerations into corporate reports.
The document includes an extensive list of KPIs for
each of the 114 subsectors presented.
These same principles underpin the Global Reporting
Initiative’ssustainabilityreportingguidelinesthatare
designedtoenhancethequality,relevance,reliability
and comparability of the information disclosed in
corporate sustainability reports.
Selecting sources of KPIs
TheIIRCFrameworkdoesnotlistspecificindicators
tobeincludedinanintegratedreport.However,
there are readily available sources for selecting KPIs
in line with the broad concept of value creation.
TheseKPIsarenotonlyfinancialmetricsbutalso
ESG indicators. They have or are being developed by
organizationssuchastheGlobalReportingInitiative,
Designing or implementing processes and systems
to generate input for KPIs requires special
attention,especiallyfornon-financialKPIsasthey
tend to be new to most organizations. Showing
connectivity through KPIs often requires links
between systems that have not been linked to
date. Creating solid processes and systems to
get the right information on KPIs requires time
and commitment from senior management.
Page 6, Figure 5
• Connecting the dots
Connecting the dots
Primary
objective
Financial
drivers
Core nonfinancial
drivers
Key
metrics
Increased
sales
Human
capital
Employee
engagement
Reduced
costs
Customer
relations
Customer
satisfaction
ESG
factors
Increased
cashflow
Partnerships
Brand
value
Environment Innovation
Public
perception
Carbon
emissions
Supply chain
management
Waste
management
Risk
management
Corporate
governance
Product/
service
development
Ethical
integrity
New products
and services
Value of patents
Customer
perception
Talent recruitment
and retention
Training
R&D expenditure
Numbers of
non-exec/
independent
directors
Equality
and diversity
Training and
development
Audit processes
Reporting and
transparency
Reputation
Shareholder
interests
Anti corruption
policy/practice
Competitiveness
Board
composition
Life cycle
assessment
Absence rate
Staff turnover
Health and safety
Fair restructuring
Training
Performance
management
Equality
and diversity
Reputation
Commitment
to customer
Talent recruitment
and retention
Customer loyalty
Retention
Reputation
Trust
Price, product,
service quality
Opinion former
perception
Media coverage
Community
investment
Stakeholder
dialogue
Social impact
Legal/regulatory
breaches
Inclusion
Energy efficiency
Deployment of
renewables
Waste reduction
Recycling
Environmental
impacts
Environmental
breaches
Source: Doughty Centre for Corporate Responsibility, Cranfield School of Management, “Sustainable Value EABIS Research Project:
Corporate
Source: EABIS
Research Project
Responsibility, Market Valuation and Measuring the Financial and Non- Financial Performance of the Firm”, September 2009
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Integrated
reporting
Page 8, Figure 7
• Risk and opportunity management
Risk and opportunity management
Group
strategy
Reporting
Group
strategic
objectives
Manage group
risk exposure
Market and
credit risk
Strategic
direction
Apply risk
management
process
Strategy
implementation
and operation
Risk-based
strategic
choices
Operational and
functional risk
Compliance
monitoring
Riskadjusted
outcomes
Risk-relevant
control and
response
Investment and
project risk
Maximize certainty between aspirations, objectives and outcomes
• Considering the group’s strategic direction,
we apply the risk management process to
inform the strategic choices we make
• Aligned to the group’s strategic
objectives, we apply the risk
management process proactively
to realize the expected outcomes
Source: Adapted from SASOL’s annual integrated report
Source:AdaptedfromSasol,“Annualintegratedreport–bettertogether…wedeliver,”30June2013
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3.4 Risk and opportunity
management
Integrated reporting takes a broader approach to
risk and opportunity management than traditional
frameworks.Asaconsequence,astrategythat
includestheidentificationandmitigationofrisks
against the integrated reporting six capitals has
a direct impact on performance. It also has an
impact on reducing the gap between its market
and intrinsic values.
Risks can be placed into four major categories
according to the Committee of Sponsoring
Organizations of the Treadway Commission (COSO)
EnterpriseRiskManagementmodel:strategic,
financial,operationalandcompliance.Risksrelated
to natural resources such as scarcity and risks
envisioned for the future fall into the category of
strategic and operational risks.
Enterprise risk management is seen as important to
guaranteeing the viability of any corporate strategy
and,byextension,thevaluecreationprocess.
Materialrisksthatcouldhaveasignificantimpact
ontheexecutionoftheorganization’sstrategyand
its value creation goals should be incorporated
into the decision-making process with the aim of
reducing uncertainty with respect to achievement of
operating results.
a positive relationship between risk management
maturityandfinancialperformance.
Withriskmanagementaclear-cutvaluedriver,
it’simportanttocommunicateitproperlyto
theorganization’svariousstakeholdersand
relateittoitscorporatestrategy.Investors,
regulators,shareholdersandsuppliers,among
otherstakeholders,areincreasinglycallingon
organizations to enhance their risk management
disclosures.However,there’sarecurring
discussion regarding how much risk information
should be disclosed to the market in terms
ofriskidentificationandcorporatestrategic
response,andhowthisinformationcanaffect
anorganization’scompetitiveadvantage.
Control over reporting and communication of
risk management information can help maximize
valuecreation.Internally,it’simportantthatthe
organization understands and is familiar with
existing risks and stringently applies the related
controls. This process should be overseen by its
board of directors and audit and control committee.
Externally,it’svitalthatthirdpartiesunderstandthe
key characteristics of the risk management model
and how the organization responds to the most
material risks.
Empirical studies show that organizations with
Decisionsregardingwhatshouldbecommunicated,
advanced risk management systems create more
andhow,needtobehandledbymanagement.
valueintermsofrevenue,operatingprofitsand
And they must weigh the advisability of disclosing
Page 9,resultsagainstequity.Usingaglobal,quantitative
Figure 8
absolutefigures/metricsversustheuseof
survey based on 576 interviews with companies
• Compound
annual growth rates 2004-2011 by risk maturity
level such as the percentage achievement of
alternatives
aroundtheworld,EYassessedthematuritylevelof
stated key risk indicators (KRIs).
risk management practices and then determined
● T
op 20%
● Middle 60%
● Bottom 20%
Compound
annual
growth rates
2004–2011
by risk
maturity level
2011 year to date
reported as of
18 November 2011
Source:EY,“Turningriskintoresults:howleadingcompaniesuseriskmanagementtofuelbetterperformance,”2012
2011 Year to date reported as of 18 November 2011
Source: EY, Turning risk into results
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Integrated
reporting
3.5 Materiality defined
Bearing in mind the characteristics of an integrated
report,apropermaterialityassessmentisneededto
ensure that:
►
•► The report is focused on those factors and
informationthatsignificantlyimpactthelong-term
financialperformanceoftheorganization
►
•► The report is concise and meaningful
Webelievethatamatterismaterialifit’sofsuch
significancethatitcouldsubstantivelyinfluence
theassessmentsanddecisionsoftheorganization’s
highest governing body or the providers of capital.
Creatingsustainablevaluefortheorganization’s
shareholdersistheultimatefactorthatwillinfluence
the materiality assessment. This analysis needs to
factorintheneeds,interestsandexpectationsofits
core stakeholders.
Therefore,thematerialityconceptinthecontextofan
integratedreportdiffersfromthetraditionaldefinitions
usedinfinancialandsustainabilityreportingframeworks.
Materiality in integrated reporting spans the entire
strategyoftheorganization,notjustthecurrent
financialorsustainabilityreportingframeworks.The
latest GRI guidelines encourage a strict approach on
determining what is material in a sustainability report
and provide a useful starting point for beginning a
materiality analysis for an integrated report.6
According to the IIRC Framework the providers
offinancialcapitalarethetargetaudienceof
an integrated report. But they are not the only
stakeholders with a vested interest in assessing the
organization’svaluecreationpotential.Forareader
ofanintegratedreporttomakesuchanassessment,
theorganizationshouldpublishthematerialfinancial,
social,economicandenvironmentalinputsthatallow
ittocreatevalueandthatrevealtheorganization’s
ability to respond to a changing environment. Other
stakeholders’views,besidesinvestors’,should
therefore be included in the decision-making process
on what is material for the organization so long as
they,inturn,haveafinancialimpact.Inaddition,
meetingcertainstakeholders’expectationswith
regardstospecificformsofcapitalmayimpactthe
organization’svalueandthereforeitslong-term
financials(seecasestudiesinAppendixi).
The process of determining what is material and would
be disclosed in an integrated report should be based
on the following criteria:
►
•► Relevance: matters that have already impacted the
organization’sstrategy,businessmodelorstrategic
capitals,ormaydosointhefuture
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6
Global Reporting Initiative, “G4 Sustainability Reporting
Guidelines: Reporting principles and standard disclosures,” 2013
•
Significance:anassessmentofamatter’s
significancerequiresevaluatingthemagnitudeof
impact(formattersthathaveoccurred,currently
exist or will occur with certainty) and the
probability of occurrence (for matters where
there’suncertaintyaboutwhetheritwilloccur)
►
•► Prioritization: people charged with the
organization’sgovernanceneedtoprioritize
the material matters based on their relevance
andsignificance
Determining materiality in an integrated report
requires the use of the above criteria or instance in
a four-step model as depicted on the next page (see
page 23).
Topinpointthematerialissuesrequiringdisclosure,an
organization needs to start with a broad list of issues
relatedtothevariouscapitals.Thislistisfiltereddown
as a function of:
•► I► nternal factors: bearing in mind the ultimate goal
of value creation and the risks emerging from the
enterprise risk management system
►
•► Externalfactors:theneeds,interestsand
expectationsofstakeholders—society,sector
stakeholders or government bodies — by prioritizing
these matters
Thiswilldeterminethematerialmattersthatinfluence
anorganization’sabilitytocreatevalueintheshort,
medium and long term. Both the material matters and
theprocesstodefinethesewillneedtobedisclosedin
its integrated report.
Initsintegratedreportfor2012,TheCrown
Estatedefinedtheprocessfollowedtoidentify
its material matters. It described its internal
andexternalfactors,listingopportunityand
riskmanagement,stakeholderrelationsandkey
company principles and policies as its key internal
factorsandindustry-wideissues,legislationand
norms,andtheissuesraisedthroughsector
organizations and panels as its external factors.
The Crown Estate concluded that its most material
issuesareitssustainedandprofitablegrowth;
optimization of the portfolio for long-term total
return;attraction,nurturingandretentionof
best talent; attraction of suitable commercial
partners; health and safety; maintaining
effective stewardship; reputation and successful
“placemaking”; creating amenity value; the effect
of climate change; the availability of natural
resources; customer focus; organizational and
managementstructure;thehealthoftheUK
economy; and government policy.
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Page 7, Figure 6
•The
Thesteps
steps
toward
materiality
toward
materiality
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4
Integrated
reporting
Measuring value creation
Valueiscreatedordestroyedbyanorganization
when it uses and affects the various capitals.
Thecapitalsstorevalue.And,althoughchanges
inthesestoresarenotreflectedintraditional
corporatereports,theyhavethepotentialto
generatefuturecashflowsfortheorganization.
Changes in the value of stores translate
into increased tangible and intangible asset
valuations and into externalities.
Externalitiesmeananorganization’simpact—positive
ornegative—onsocietyasawhole.Generally,they’re
notreflectedintheorganization’sfinancialreporting.
They only show up on balance sheets to the extent
they affect the capitals owned by the organization.
Whereas stakeholders (including providers of
financialcapital)areincreasinglyconsideringinternal
andexternalnon-financialfactorswhenassessingan
organization’slong-termprospects.Moreeffective
capital allocation decisions can also lead to better
long-term investment returns.
Whenexternalitiesarepositive,theycanbecome
asourceofcompetitiveadvantageandfinancial
returninthelongerterm,whichcanhaveaplaceon
balancesheets.Infact,anorganizationcanturnthe
production of positive externalities into an intangible
asset or a driver for increasing the value of existing
intangibles.Forthistohappen,anorganizationhas
todothreethings:identifytheexternalities,estimate
their value and communicate both to the market.
Externalities can be positive or negative depending
on the nature of their impact. They can affect the
economyingeneral(economicexternalities),
society (social externalities) or the environment
(environmentalexternalities).Forinstance,the
production of renewable energy may reduce a
nation’sdependenceonforeignenergy(economic
externalities),creategreenjobs(social)and
protect natural capital by reducing greenhouse gas
emissions (environmental).
Withnaturalcapitalincreasinglyscarce,
environmental externalities are becoming a key
economicissue.Theirsignificancewasclearly
illustratedbyenvironmentaldataexperts,Trucost.
Trucost estimated that the environmental costs
caused by human activity on a global scale were
aroundUS$6.6trillion,or10.97%ofworldGDP,in
2008.By2050,thefigurecouldreach17.78%of
global GDP.
Page 10, Figure 9
environmental
•Annual
Environmental
impact costs
for the global economy in 2008
and projections for 2050
Fish
Timber
Source: Trucost
Source:TrucostPlc,PRIAssociationandUNEPFinanceinitiative:“UniversalOwnership:Whyenvironmentalexternalitiesmatterto
institutionalinvestors,”2011
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4.1 Interaction between financial
performance, intangible value
and externalities
4.2 Explaining the gap between net
book value, market value and
intrinsic value
Integrated reports enable organizations to tell their
uniquevaluecreationstories.Todothat,theyneed
to identify and measure the intangible value and
the externalities they generate as a result of their
business. Organizations also need to assess to what
degreetheexternalitiesproducedmayalsoinfluence
intangible value. Some practical examples of this are
shown in Appendix i.
All investment decisions are preceded by an
exhaustiveanalysisoffinancialandnon-financial
information focused on a single question: what
monetary value will an investment generate
or destroy?
Moreimportantly,organizationsneedtobeable
to describe the ability of both intangible assets
andexternalitiestogeneratefuturecashflows.
These can be measured using consistent and
generallyacceptedcriteriaandmethodology,the
most common of which are listed in Appendix iii.
Determining that value and communicating it is
imperative to creating additional value. The process
of communication can impact market value and
can bring it closer to the intrinsic value of the
organization,asseeninthegraphiconpage7.
Page 11, Figure 10
Inthecaseoflistedcompanies,acompany’smarket
capitalization should be a good proxy for its value.
However,theinformationcurrentlyavailableto
investorsdoesn’ttellthefullstory.Thismaygenerate
agapbetweenintrinsicvalue,marketcapitalization
and book value.
Asillustratedinthegraphsonpage27,thegap
between market value and book value is explained by
thefactthatinvestors,throughthemarkets,sense
and acknowledge the existence of unrecognized
intangible assets and externalities. The market
valuealsodiffersfromanorganization’sintrinsic
value,whichisitstargetvalue.Inaperfectandfully
transparent market where participants had access to
thesameinformation,intrinsicvaluewouldcoincide
with its market capitalization. Integrated reporting
helps to reduce the gap between intrinsic and
market values by identifying intangible assets and
externalities and assessing their monetary value.
Interactionbetweenfinancial
performance,intangible
value and externalities
• Interaction between financial performance, intangible value and externalities
Value of the
organization
Initiatives aligned with organization’s strategy
Future
economic
value
Intangible
value
*
Linkages and value-creation cycle*
• The value of the organization is in part defined by intangible value. Therefore, correct communication of this value is also important.
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Page 13, Figure 12
• Purchase Price Allocation
Purchase price allocation
Consideration paid
Goodwill
Excess price
paid or
pre-PPA
goodwill
Intangible
assets
Equity market
value
Intangible assets
Equity book
value
Tangible
assets
Long-term
debt
Working
capital
Short-term
debt
Target’s assets and liabilities at book value
(before the acquisition)
Purchase
price
allocation
Tangible
assets
Long-term
debt
Working
capital
Short-term
debt
Target’s assets and liabilities at ‘fair value’
(after the acquisition)
FairvalueasdefinedbyInternationalFinancialReportingStandards(IFRS)13.
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4.2.1 Monetization of
intangibles
Measuring the contribution of intangibles to
futurecashflowsisfundamentaltointegrated
reporting and will help explain the gaps between
book,intrinsicandmarketequityvalue.Under
currentfinancialreportingstandards,organizations
are required to recognize (and if material
disclose) intangible assets acquired in a business
combination as part of the purchase price allocation
(PPA)process.Consequently,theintangibleassets
are only measured once for this purpose.
However,organizationswouldbefreetogo
further in their integrated report and disclose
the change in value of an intangible as a result
ofanysustainablegrowthstrategyoraspecific
initiative,makingitconvenientincertaincases
to communicate the value of intangibles in an
integrated report.
Appendix i includes case studies showing how
intangible asset value can be measured and the
valuation methodologies used:
►• Measurement of the increase in the value of
anorganization’shumancapitalasaresult
of a career development and retention effort
Inpractice,itcanbedifficulttomeasurethe
impact of isolated initiatives on the value of an
organization’sintangibleassetsand,byextension,
onitsoverallvalue.It’spossiblethat,atthetimeof
measuringtheimpactofaspecificstrategicaction,
therewereinfluencesfromotherinitiatives,
positiveornegative,thatmayhaveoccurred
in the same timeframe.
However,theprocessofidentifyingandmeasuring
intangible assets and communicating the outcome
to the market helps investors to:
►• Recognize,toagreaterextent,thecashflows
►• Associatethegenerationofthesecashflows
with the various intangible assets that create
value on a sustainable basis
►• Measurement of the increase in brand value
as a result of a corporate social responsibility
initiative
Page 14
►• Perceive reduced investment risk
•
Measurement of the increase in the value of
customer
relationships
at a assets
major organization
• Valuing an
organization’s
intangible
from an environmental initiative
This information allows
the market to adapt
capitalization to the
reported value
Value
As with the PPA,
book value equals
intrinsic value
Valuingan
organization’s
intangible
assets
However, if the valuation
is not repeated (except for
impairment testing), the
three values tend to diverge again
Page 15
• The effect of greater communication on market capitalization
Value
Time
The effect
of greater
communication
on market
capitalization
Intrinsic value
Market capitalization
Net book value
Adjusted net book value
Potential market capitalization
Greater communication leads to
a lower perceived risk by investors,
leading to higher valuations
Time
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||
that the organization is capable of generating
in the future
Intrinsic value
Market capitalization
Net book value
Potential market capitalization
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4.2.2 Monetization of externalities
A wide variety of externalities can be produced as
aconsequenceofbusinessactivity.Thefirsthurdle
lies with acknowledging or identifying their existence.
Whentheexternalityisdestroyingsociety’svalue
(e.g.,globalwarming,airpollution,urbancongestion
orbiodiversityloss),theorganization’schallenge
ishowtomitigatetheimpactanddevelopa“profit
and loss” approach — identifying mitigation costs
and comparing them with the value to society of
implementingmitigationactions.Havingdonethat,
the organization can communicate its efforts to the
market. This may in turn contribute to protecting
or increasing the value of its intangible assets
or decrease the importance of hidden intangible
liabilities. When activities generate positive
externalities,thisgivesagoodopportunityto
effectively communicate the increasing value of the
intangible assets to the market.
Untilrecently,mostoftheseindicatorsweremainly
tracked for internal purposes. Their oversight was
assigned to the business areas with the power to
influenceperformance.However,toboostthe
organization’scredibilityamongstakeholders,
it’sincreasinglyimportanttocommunicatethem
appropriately,transparentlyandfrequently,
both within the organization and externally.
Communicatinghowtheorganizationdefinesits
KPIs,theirsignificancetothestrategicobjectives
andhowthey’retrackedandcalculatedwillhelp
stakeholdersbetterappreciatetheorganization’s
performance,situationandprospects.
Appendix ii provides some additional examples on
monetizing externalities.
AccionaandEDP,producersofrenewableenergy,
have developed a methodology to monetize
the value of renewable energy generation in a
numberofeconomiesincludingFrance,Spain,the
UKandtheUS.Thescopeoftheworkincludes
the contribution of renewable energy in terms of
EDP’sgrowth,greenjobs,energysecurity,CO2
emission reduction and the economic value of
energy security. The main goal of this exercise
is to protect their license to operate and public
policy support in certain markets.
Formula E Holdings has developed a
methodological approach to calculate the impact
ofthecompany’sactivityinacceleratingthe
development of the electric vehicle market
globally. This exercise allows the organization
to estimate the monetary impact of its role
in mitigating global warming or improving air
qualityinlargecities,forexample.Byproviding
thisvalue,sponsorsareabletogaugethe
strength of the positive environmental attributes
theyareseekingtoattachtheirownbrandsto,
thus making the company more attractive for
sponsors,andthereforeforinvestors.
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4.3 Impact of externalities on the
value of intangibles
•
Aspreviouslymentioned,tocompletelyunlockits
intrinsicvalue,anorganizationneedstoconvertits
positive externalities and the actions to mitigate
negative impacts into intangible value.
Access to more favorable valuations in bidding
foroperatinglicensesorpublictenders,paving
the way for operating cost savings within the
organization as well as geographic and sales growth
►
•► The sharing of savings along the supply chain when
Potential approaches to estimate the impact of the
externalities produced by an organization on the
value of intangibles include:
suppliers manage to enhance their performance
►
•► Reduced risk of energy dependence and natural
•► The ability to relate the externalities generated
with the share price performance
•
•
capital depletion/scarcity
►
The generation of customer loyalty or brand
equity by means of enhanced consumer
perception thanks to the reputation earned
by an organization when it generates positive
externalities or reduces negative ones
►
Reduced compliance costs vis-à-vis future
regulations and access to new market niches
The graphic below shows how externalities can
bemeasuredtodemonstratehigherrevenues,
improved productivity and cost savings.
►
Page 16, Figure
15
• Enterprise value
Environmental
marketing
Social policy
Enterprise value
Retention of the
employees and talent
attraction
Brand
value
Reputation
Enterprise
value
Environmental due
diligence, occupational
risk prevention
Health, occupational
and environmental risks
Product innovation,
new market
niches, etc.
Impact value
of the
organization
in the
environment
How prepared the
organization is
for an unstable
climate
Externalities
Resilience
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4.4 The value of measuring value
Measuring value creation is not so much a
theoretical discussion anymore. There is a clear
trend toward organizations displaying their value
innewways.However,werecognizethatthere
arechallengesorganizationsmustfirstovercome
to effectively measure and monetize their value.
Tostartwith,therearemanytechniques,butno
consensus,onhowtomeasureandmonetizekey
impacts particularly natural and social capital. This
lack of a global monetization guideline therefore
limits consistency and comparability of monetized
outcomes between organizations. There is however
a number of movements aiming to create more
globally accepted frameworks for this type of
information.Forexample,theNaturalCapital
Coalition is trying to form a standard for valuing
natural capital in business.Secondly monetizing
externalitiesposesachallengeasit’sheavilybased
on assumptions. That is why organizations should
be transparent in explaining their assumptions and
what kind of limitations they have in terms of access
todata.Anotherchallengeariseswithfinancial
reportingrequirementsinmajorfinancialcenters.
Insomeregions,theremaybelimitationsonwhat
can be disclosed in terms of monetized value within
an integrated report. The IIRC should continue
discussions with regulators about these limitations.
Finally,revealingexcessivedetailregarding
monetizedvaluecanbeseenasarisk,especially
sincesomeorganizationscurrentlyalsobenefit
from investors not understanding their full
(negative) impact on certain externalities. This is a
challenge we believe could be overcome by either
reporting improvements or require organizations to
communicate negative externalities.
Despitethesechallenges,wesupportmoving
towardamoreholisticpictureofanorganization’s
value,includingmeasuringandmonetizingit.Most
importantly,monetizationclearlydemonstrates
the extent of the positive or negative impacts on
each of the capitals caused by the value-adding
activities of the business model. It also assists in
the strategic decision-making process of ensuring
thatgrowthinone’svaluecapitaldoesn’tdepend
(at least excessively) on the destruction of another
capital’svalue.Ultimately,italsoservestoprovide
stakeholders with a clear and concise answer to their
recurringquestion:“what’sinthisforme?”
Page 17
•Quantifying
Qualifying externalities
externalities
5% to 20%
premium
• The premium charged for
selling “greener” goods
Source: Accenture, Survey
of 250 Senior Executives, May 2012
+27%
productivity
• Impact of telecommuting, in
addition to savings on fuel,
CO2, office space and
traveling time
Source: Telework Research Network, 2010
$19
billion
• Potential benefits
of video conferencing by
2020 for US and UK
businesses, in addition to
CO2 emission cuts
Source: Carbon Disclosure Project, 2010
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Appendix i
Monetization of intangibles in
practice: case studies
Case study 1:
The“relieffromroyalty”method,themost
commonlyusedbrandvaluationapproach,isbased
on the premise that the owner of a brand obtains
abenefitfromholdingitinsteadofhavingtopay
a royalty for the use of a third-party brand. Brand
value is thus the present value of the stream of
future royalty savings. To estimate the stream of
royalties,royaltyratesareanalyzedforcomparable
industry brands or trademarks.
Increase in brand equity due to
higher brand recognition as
a result of a corporate social
responsibility (CSR) initiative
The royalty charged for the use of a brand tends
tobecorrelatedtothatbrand’smainvaluedrivers.
In the example below we see how higher brand
recognition on the part of the general public leads
to higher royalty charges for its use by third parties
and,therefore,higherbrandvalue.
Page 18, Appendix 1
• Brand equity
Relief from
royalty method
Brand recognition
1. We analyze comparable royalties in
the industry to determine the correlation
with possible value drivers (e.g., brand
recognition).
A
F
x
G
C
E
B
2. We rank the brand we want
to value according to its brand
recognition, resulting in an
estimated royalty rate.
D
H
3%
6%
Royalty rate (% over sales)
9%
3. By multiplying the royalty
rate by the forecast sales of
that brand’s products, we can
estimate the yearly savings
the organization has by owning
the brand instead of licensing it.
The value of the brand is the
present value of the sum of
the future royalty savings.
A-H are comparable brands to the brand being valued
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Inthiscase,theorgainzationchampionedameritbased foreign university scholarship program that
proved highly popular among young university-goers
and their families and peers. The initiative garnered
widespread media coverage and was quickly
associatedwiththesponsoringfirm’sbrand.
Ayearaftertheinitiative,theorganizationmeasured
its brand positioning in an independent ranking
of brands. Recognition levels were used as the
KPI.Accordingtotheindependentstudy,the
organization’sbrandhadclimbedfrom28thto10th
place. In a fresh valuation of the brand in the wake of
theCSRinitiative,theroyaltyusedtocalculatethe
organization’s“relieffromroyalties”washigherthan
the rate used in the valuation exercise performed
priortotheinitiative.Thissuggeststhat,allother
thingsbeingequal,theorganization’sbrandhas
Page 19, Appendix 1increased in value.
• Increasing brand equity
Measuring the value
creation in the brand
The implemented initiative allows for
higher brand recognition which, in
turn, makes the brand comparable
with a brand with a higher royalty
rate (all other things being equal)
C
Brand recognition
E
B
A
F
G
D
H
Royalty rate (% over sales)
A-H are comparable brands to the brand being valued
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Case study 2:
Increase in the value of an
organization’scustomerrelationships
thanks to an environmental initiative
Forexample,clientrelationshipsbasedon
long-term contracts will have a higher value
than those with no contract base.
The “multi-period excess earnings” method is the
most common and widely accepted approach to
valuing the intangible assets deriving from customer
portfolios. It consists of estimating the present value
of the “excess earnings” attributable to the customer
portfolio over the useful life of the asset.
Excessearningscanbedefinedasthe
difference between:
•► Theafter-taxcashflowsattributabletothe
customer base in existence on the acquisition date
•
►
The cost implied by the capital invested in all the
otherassets(tangibles,intangiblesandworking
capital) used to maintain the customer relationship
T
► he value of the resultant intangible asset
corresponds to the present value of this excess
of earnings over the useful life of the asset. The
highertheriskofthecashflows,thelowertheir
present value.
Page 20, Appendix 1
• Customer cash flow over time
Inthisexample,theorganizationundertookan
initiative that delivered a 25% reduction in the
volume of GHG emissions generated in the
production of its core product. The organization
communicated this environmental achievement to
the media. It highlighted that the initiative made
its core product the most environmentally
friendly of its class.
Followingtheinitiativeandmediacampaign,the
organization measured customer relationship.
Customer loyalty was used as the KPI. The survey
results showed that 45% of those polled claimed that
theywouldcontinuetousetheorganization’s
product even “if there were a similar product on the
market that cost up to 15% less.”
Withthisinitiative,theorganizationmanagedto
reducethenaturalattritionrateofitscustomerbase,
thereby increasing the value of this intangible asset.
Inthisexample,aninitiativeaimedatmitigating
negative externalities has turned into an increase
intheorganization’sintangiblevaluethroughthe
communication process.
Measuring value creation
in customer relationships
Cash flows produced by existing customer relationships
$
As a result of client attrition, cash flows
attributable to the existing client
relationships tend to drop. The more loyal
the customers, the flatter the curve will be,
and therefore the higher the cash flows
produced by that intangible asset.
As a result of the fall in attrition, the cash
flows expected in the future increase.
Time
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Case study 3:
Increase in the value of an
organization’shumancapitalas
a result of a career development
and retention effort program
The most widely used method for valuing human
capital as an intangible asset is to measure its
replacementcost.Todoso,it’snecessaryto
estimate all of the costs the organization would
have to incur in order to substitute its existing
employees,includingrecruiting,hiringand
trainingcosts,amongothers.
Often,themostsignificantcostitemisthetime
elapsing (measured in terms of wages) between
the time a new employee starts on the job and the
moment they attain the required level of know-how
and expertise.
Ahighlyspecializedworkforce,requiringspecific
training,willbemorevaluablethanaworkforce
without any such specialist know-how. This is
reflectedinthehigherrequiredtrainingcosts.
Similarly,anorganizationwhoseworkforce’smost
valuable contribution is its experience will require
a longer period of time (therefore higher costs) to
replace if these experienced people move on.
The value of the intangible asset in this case is
the sum of all of the costs needed to replace the
organization’shumanresourcesasawhole.
Page 22, Appendix 1
Human capital
• Human
capital
opportunity cost
opportunity
cost
Cost of on-the-job learning and tacit
knowledge to reach an employee’s full
productivity potential
Training expenses
Recruiting costs
• The more difficult it is to replace a
workforce in its current state of productivity,
engagement, motivation, etc., the greater
its value. This is based on the premise that
a quality workforce contributes to the
future cash flows of the organization.
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Inthecaseathand,anorganizationsustaining
an annual employee turnover rate of over 30%
(a KPI measured regularly) set in motion a raft
of measures designed to enhance employee career
development and retention. When this KPI was
remeasuredthreeyearsaftertheinitiative,its
annualturnoverratehadfallento19%.Moreover,
theinternalpromotionoftheorganization’s
employees had given them a command of
theorganization’sproductsandmarketsthat
surpassed that of any competitor.
Page 23, Appendix 1
Measuring
value
creation
• Measuring
value
creation in the workforce
in the workforce
|| |
This concept is depicted in the chart below:
● V
Value
alueofemployeesat
of employees
full
potential
at productivity
full productivity
potential
● Training
expenses
● Recruiting costs
Value created in
the workforce as
a result of the
initiative
Value of the
workforce before
the initiative
In the year after the organization announced
thedeclineinitsturnoverrate,itwasacquired
byaprivateequityfirmthatmentionedinthe
pressthat“thequalityoftheorganization’s
human resources was the highest of any of the
organizationswelookedat.Wearefullyconfident
that,withtheirexperienceandmotivation,wewill
manage to bring the organization to the global
leadership position it deserves.”
Training expenses
Recruiting costs
• Initiative
Value of the
workforce after
the initiative
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Appendix ii
Externality valuation
in practice
Business case
The organization’s need
Valuing human capital
Monetizing the effects of changes
in social KPIs
TosupportitsHRstrategy,alargemultinational
wanted to know the monetary impact of social
changesintheorganization.Forinstance,itwanted
to place a value on changes in employee engagement
and retention.
EY’s approach
The approach consisted of two phases:
1.
Identifying and quantifying interactions
around social KPIs
2. MonetizingchangesinKPIs(e.g.,whatis
the$effectofa1%increaseinemployee
retention?)
Phase 1
•
Qualitative analysis of
forces around KPIs
•
Quantification of impact of
organization’s initiatives
on KPIs
•
Analysis of quantifiable
effects of KPIs (e.g.,
productivity)
Phase 2
• Cost analysis of
organization’s initiatives:
how much needs to be
spent to improve
the KPI by X%?
• Effect analysis of changes
in a KPI (e.g., productivity
rises by X%, what does
this mean in terms of
revenue?)
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Value from our approach
•
We used quantitative methods to measure
interactionsaroundKPIs,e.g.,therelationship
between staff engagement and their productivity.
Ability to leverage available literature on
social performance
•► Innovative use of available HR data from the
organization to identify trends and interactions
This approach allows:
•► Validation of hypotheses through working
groups and interviews at every level of
the organization
•► Quantificationofthelinksbetweenpredictorsand
outcome variables
►
►
•
Measuringifthelinksarestatisticallysignificant
•
Identificationofthenatureoftherelationship
(linear,exponential,etc.)
►
Illustration of qualitative analysis
of interactions around a given KPI
Incentives
Effects
Social HR KPI
Key quantitative indicators
with direct impact on turnover
and operational costs
Organization’s key tool to
enhance retention rate
Remuneration strategy
Bonus system
Share ownership, employee
participation plan
Fair treatment
Management quality
Manager training
manager assessment (3600 and
associated reward)
Career opportunities
Internal mobility
Promotion


Retention rate
Productivity rate
Sales turnover
quality
 Service
Sales turnover (customer loyalty;
 recommendations from client)

turnover rate
 Employee
Cost of replacement (recruiting;
training; temporary loss of
productivity)
 Sales turnover (recruiting staff
renewal and innovation)
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Integrated
reporting
Business case
The organization’s need
Eco-premium of green products
An international hotel chain wanted to know the
costsandbenefitsofISO14001environmental
certificationofitshotels.Inparticular,towhat
extentdoescertificationattractcustomersand
increase sales?
Demonstratingthebenefitsof
environmentalcertification
EY’s approach
Four studies were conducted in parallel to evaluate
theimpactofISO14001certification:
• Water and
energy
consumption
• Study of correlations between certification and
resource consumption across 300 hotels
• Environmental
opex/capex
• Survey of 230 hotels to measure the costs and
workload for implementing environmental certification
• B2C sales
• Statistical comparison of customer KPIs of 300
certified hotels versus 200 non-certified hotels
• B2B sales
• Interviews with 26 account managers on
46 key accounts
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Value from our approach
•
Demonstration of the impact of ISO 14001
certification: reduction of water and energy
consumption,increaseofB2Bsales,B2C
customer satisfaction
•
►
ROI estimation ofISO14001certification
►• Recommendations for environmental
management systems
►
Page 25
Page 25
B2C customer
satisfaction:
• Demonstrating
the benefits
of environmental certification
certifiedversusnon-certified
Page 25 • Demonstrating the benefits of environmental certification
hotelsfiveyearsaftercertification
Recommendation
Value for money
• DemonstratingGeneral
thesatisfaction
benefits of environmental
certification
General satisfaction
Recommendation
General satisfaction
Value for money
Recommendation
Value for money
ª Certified hotels
● Certifiedhotels
group of hotels
ª Control
ª Certified
● Control
grouphotels
hotels
ª Control group of hotels
B2C customer
satisfaction:
ª Certified hotels
B2C customer
certified
versus
of hotels
ª Control group
7,505
7,366
7,161
6,952
7,505
7,366
7,161
6,952
Difference of 2.7%*
7,366
Difference
of 2.7%*
*=Statistically
significant
7,505
Difference of 3%*
7,161
6,952
Difference
of 3%*
5,849
*=Statistically significant
Difference of 2.7%*
Difference of 3%*
satisfaction:
non-certified
certified versus
hotels 5 years
non-certified
B2C customer
after certification
5,849
5,712
hotels 5 years
satisfaction:
after certification
certified versus
Difference of 2.3%* non-certified
5,712
Difference
of 2.3%* hotels 5 years
after certification
5,849
5,712
Difference of 2.3%*
ª Before certification
workday after certification
ª Additional
ª Before certification
Additional
workday after certification
ª
Estimation of workload for
implementingcertification
Environmental
training
*=Statistically significant
and awareness
Environmental training
Collect
archive
andand
awareness
records — HR
Collect and archive
records
— HR
Environmental
training
Environmental
training
sessions
for employees
and
awareness
Environmental training
Preparation
and
up of
Collect
and archive
sessions
forfollow
employees
environmental
internal audit
records — HR
Preparation and follow up of
Collect
and archive
environmental
internal
audit
Environmental
training
records
— room keeping
sessions for
employees
Collect and archive
Preparation
and
up
records
— room
keeping
Preparation and
follow up
of follow
of certification
audit
environmental internal
audit
Preparation and follow up
Collectand
and
archive records
—
ofarchive
certification
audit
Collect
restaurant and bar
records — room keeping
Collect and archive records —
restaurant
and bar
Collect
and
archive
—
Preparation
and
follow
up records
maintenance/technical
of certification
audit
Collect and archive records —
and
archive
Collect andCollect
archive
records
— records —
maintenance/technical
environmental
system
restaurantmanagement
and bar
Collect and archive records —
Collect and archive
environmental
management
system
Collect and archive records —
records — reception
maintenance/technical
Collect and archive
recordsof
reception
Information
on
Collect and archive
records
—— clients
environmental
issues
environmental management system
Information of clients on
Collect and
archive
environmental
issues
records — reception
Estimation of workload
● Beforecertification
certification
ª Before
for implementing certification
● Additionalworkdayaftercertification
workload
workday afterof
certification
ª AdditionalEstimation
for implementing certification
Estimation of workload
for implementing certification
1
2
Total 1
workload in days
Information of clients on
environmental issues
3
4
5
6
7
3
4
5
6
7
4
5
6
7
Total workload in days
1
2
Total workload in days
6509 - EY Int Report v18.indd 39
2
3
39
09/05/2014 13:38
Integrated
reporting
Business case
The organization’s need
Valuing environmental risk
and resilience
Measuring business sensitivity
to environmental factors
The organizer of an electric racing competition
in Europe wanted to measure the potential
“sustainabilityvalue”generated,throughsupporting
theelectricvehicle(EV)market.
►
EY’s approach
A four-stage approach for estimating the
organization’spotentialboosttotheEVmarket
and translating this contribution into
positive externalities.
• EV
scenario
analysis
•
Analysis of different EV market share evolution
scenarios; consolidation into a vision of three
different evolution scenarios
• Barriers
analysis
•
Analysis of barriers for EV development;
measuring the influence of barriers in different
EV development scenarios
• Impact
on EV
market
•
Quantifying the extent to which organization’s
actions address barriers for EV development,
and hence boost EV market share
• Global
value
created
•
Translating company impact into measurable
externalities (e.g., employment, CO2 emissions,
health, consumer surplus)
40
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Value from our approach
New perspective on EV market and
organization’srole
•
►•
Estimation of organization’s potential
sustainability value (fuelsavings,health,
employment,CO2emissions,etc.)
►•
Strategic recommendations for organization
Page 28
to reach its sustainability impact objectives
through its actions
• Promoting sustainability impact and “extended value”
►
• Pricing
barrier
UnderstandingofEV
market barriers and
their relative strength
• Technological
barrier
• Social
barrier
• Infrastructure
barrier
20%
24%
22%
15%
Page 28
•
Theorganization’s
“extended value”
measured by its
economic,social
and environmental
externalities
• Regulatory
Promoting barrier
sustainability19%
impact
•
•
•
•
Initial cost of the car
Running costs of the car
Maintenance
Residual value of the vehicle
• Battery capacity
• Car performance,
especially durability
• Charging time
• Battery performance (cycles)
1
Potential impact on
the EV penetration
success
2
Complexity and the
effort needed to
overcome the barrier
to achieve massproduction by 2020
3
Influence of barrier
on the other
evaluated barriers
• Charging time
• Consumer awareness,
“eco-aspiration”
• Range anxiety
• Safety: noiseless driving
electrocution risk
• Grid capacity
• Charging infrastructure
• Climate regulation (CO2)
• Air quality regulation (NOx, SOx)
• Environmental impacts
(Well-to-Wheel)
• Uncertain government incentives
and support
and “extended value”
Green growth
Social
Environmental
77million
€25 billion
savings
4.0 billion
oil barrels
• additional EVs sold
€431billion
savings
• for consumers of fuel
energy (NPV)
€142 billion
• extra sales in the car industry
• on health care costs from
pollution reduction
Quality of
life improvements
• significant quality of life
improvement in cities
• equivalent to 2.5 years of
Japan’s current consumption
900 million
tonnes of CO2 eq
• equivalent to 2 years of
Italy’s emissions
42,000
€13.9 billion
• created in the car industry
• on CO2 costs (NPV)
permanent jobs
saved
€X
billion
Global value
creation
6509 - EY Int Report v18.indd 41
• The relative influence of
each barrier on EV market
share is quantified by
considering three criteria:
41
09/05/2014 13:38
Integrated
reporting
Business case
The organization’s need
Valuing externalities
Measuring the potential externalities
of renewable energy policies
The organization wanted insight into the external
costsandbenefitsofrenewableenergypolicy
measures that are not yet accounted for in the
decision-makingprocess(jobcreation,GDP,
energy security).
►
EY’s approach
Wind technology was selected as the reference
renewable energy source and was compared to
Combined Cycle Gas Turbine (CCGT). For six
countriesandtheentireEU27,thefollowing
work was done:
Micro-analysis:
up-front price of each
source of energy
•
•
Estimation of capex, opex, fuel cost and
CO2 costs
Calculation of the levelized cost of energy
in € per kWh
Macroeconomic
analysis:
economic benefits
of each source
•
Bibliographic
analysis
Impact of wind power on electricity
spot prices
•
•
Computation of the turnover, global value
added and jobs created
Direct, indirect and induced economical effects
Additional effects (security of supply, wind
integration costs, etc.)
42
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Value from our approach
Insight into socioeconomic effects
ofwindenergyforseveralEUcountries
•
•► Comparison of net costs when integrating all
external costs
•► Analysis of the contribution of windpower
toenergysecurityforseveralEUcountries
•► Calculation of impact of wind energy on
electricity cost
Page 29
of levelized cost of
Page Comparison
29
• Business
Case: valuing externalities
energy,includingenvironmental
andsocialcostsandbenefits
• Business
Case: valuing externalities
Wind
integration
costs
Security
of supply
Wind
integration
costs
100
GDP
creation
GDP
creation
€/MWh€/MWh
(levelized)
(levelized)
100
80
GDP
creation
Induced
Induced
Opex
80
60
Indirect
40
20
13.1
42.4
Fuel
Net
costs
Opex
Direct
Net
13.1
20
0
Capex
Opex
Net
costs
Net
Wind
costs
Capex
CCGT
CCGT
Wind
CCGT
costs
Wind
0
42.4
Direct
Fuel
Direct
Capex
Direct
Indirect
CO2
Opex
Capex
Indirect
Induced
CO2
Induced
Indirect
60
40
GDP
creation
Security
of supply
Wind
CCGT
€ cents€tax
return/€
invested
(levelized)
cents
tax return/€
invested
(levelized)
Analysis of tax revenues
in different countries
27
27
26
26
UK
UK
● Wind
● CCGT
6509 - EY Int Report v18.indd 43
51
16
51
16
France
France
ª Wind
ª CCGT
ª Wind
ª CCGT
33
33
11
11
Spain
Spain
52
19
52
19
Germany
Germany
29
29
9
9
Poland
Poland
27
12
27
12
Portugal
Portugal
43
09/05/2014 13:38
Integrated
reporting
Business case
The organization’s need
Valuing environmental risk
and resilience
Measuring customer
sensitivity of business
to environmental factors
Arealestateowner,primarilyrentingoffices,
wanted to:
•► Segment its customer base (tenants)
according to sensitivity to energy performance
•► Measure the risk of losing tenants due to poor
►
energy performance
EY’s approach
EYdevelopedathree-stepapproach:
1.
2.
3.
• Consolidate
performance
data
• Segment
tenant base
• Identify
tenants
at risk
Consolidate available data and establish
energyefficiencymetricsforeachbuilding
in the asset base
Develop a scoring system for segmenting
tenants according to their sensitivity to
energy performance
Identify tenants who are at most risk of
cancelling or abandoning the contract
For each asset in the organization’s portfolio,
consolidate performance metrics such as:
•
Energy consumption per square meter
•
Energy expense per square meter
Based on interviews with organization relationship
managers, score the degree to which each tenant
is sensitive to his or her office’s energy performance
Identify risks of losing tenants, in particular
tenants who are:
•
Sensitive to energy performance
•
Renting office space with poor performance
•
Close to the end of their lease agreement
44
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Value from our approach
•
Identification of segments of customers
sensitive to energy efficiency and valuation
of the risk faced by the organization of having
officespacewithpoorenergyperformance
•► Integration into B2B marketing strategy ►
of energy performance and tenant sensitivity
to energy performance
►
building 1 Identifying tenants at risk of cancelling
or abandoning the contract (early
adopters who are most sensitive to
energyefficiency,butworkinginoffices
with poor energy performance)
Tenants at risk of being
lost in the near term
790
Energy performance (kWh Ep/m2year)
t B, building 690
2
End of lease agreement
● Within 2 years
● Within 3 years
● Within 4 years
Tenant A, building 1
Tenant E, building 5
Tenants at risk of being
Tenant
F,in the near term
lost
building 6
590
t C, building 490
3
Tenant B, building 2
Tenant E, building 5
Tenant F,
building 6
390
Tenant C, building 3
t D, building 4
20%
10,000m2
5,000m2
290
190
Surface
Tenant D, building 4
Tenant G, building 7
10%
25%
15%
20%
Tenant G, building 7
1,000m2
25%
Energy performance improvement potential by 2020
provement potential by 2020
45
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Integrated
reporting
Business case
The organization’s need
Valuing impact on reputation
Measuring the impact of CSR
policy on intangible capital
The organization wanted to study the sustainable
value of its CSR policy and measure the extent
to which CSR has enhanced its intangible capital:
licenses,technologies,brandreputation,
processes,know-how,customerbase,partnerships,
suppliers,etc.
►
EY’s approach
Our approach consisted of delineating the
organization’sintangibleassetinventoryand
connectingthebenefitsofCSRpolicywithshared
value creation and intangible asset appreciation.
• Intangible
asset
inventory
• Intangible
asset
accounting
• Effects
of CSR
policy
•
Identification of intangible resources controlled
by the organization (brand, know-how, licenses)
•
Identification of external intangible resources
(suppliers, customer base, partners, state)
•
Study of each intangible component: virtual
operating account, balance sheet, cash flow
• Distribution of value created through CSR policy
across the intangible asset inventory
46
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Value from our approach
•
Vision of value added through CSR policy
and the impact on enhancement of
intangible assets
•► A multidisciplinary team combining
CSRadvisory,HR,stakeholderconsultation
and quantitative modeling to achieve the
best results
This is underpinned by a SWOT analysis. The
analysis included an estimate of the monetized
changes in value of intangible assets as mentioned
in the SWOT analysis.
Page 27
• Measuring the impact of CSR policy on intangible capital
EconomicanalysisofCSRpolicy,
intangible capital and shared
value creation
Mapping and inventory of intangible capital
Mapping
(organization
vs. society)
Society
(industry,
country,
world)
Organization
(itself and
stakeholders
directly
linked to its
shareholders)
Mapping
(internal vs.
external)
External
resources
(shared
values and
externalities)
Inventory
and
measurement
Society
(collective
goods
and other
stakeholders)
Stakeholders
(directly linked)
Internal
resources
(captured
value)
Consolidation
and
reporting
Organization
(intangible
assets)
Economic analysis
of CSR policy
Benefits
Losses
Shared value
creation
Net impact
Distribution of
impact according to
intangible capital
Intangible
capital
resources
(strategy
without CSR)
Society
stakeholder
organization
Intangible capital
(strategy with CSR)
47
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Appendix iii
Methods of economic
valuation of externatilities
Integrated
reporting
Page 30
• Main
valuation techniques
Main
valuation
techniques used in
measuring externalities
Total
economic
value
• Use values
• Non-use values
• Revealed preferences
• Stated preferences
• Dose — response/production function*
• Market
prices
• Avoidance
costs
• Hedonic
pricing
• Travel cost
method
• Contingent
valuation
• Choice
modeling
• Benefit transfer
Source:Pearce,Atkinson,Mourato,“Mainvaluationtechniques,”Cost-benefitanalysisandtheenvironment:Recentdevelopments:TheStages
ofaPracticalcost-benefitanalysis,February2006
*Doseresponse/productionfunctionapproachisnotavaluationtechniqueperse,butitisanimportantelementofseveralofthevaluation
approaches(e.g.,doseresponsefunctionmaybeusedtoestablishthelinkbetweenairpollutionandhealtheffects).
48
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Contact
EY Climate Change and Sustainability Services
For further information on integrated reporting and other EY Climate
Change and Sustainability Services, please contact:
Area leaders
Juan Costa Climent
Global,Europe,MiddleEast,
India and Africa (EMEIA)
T: +34 9 1572 7381
Christophe Schmeitzky
Europe,MiddleEast,India
and Africa (EMEIA)
T: +33 1 4693 7548
E: christophe.schmeitzky@
fr.ey.com
Steve Starbuck
Americas
T: +1 704 331 1980
E: stephen.starbuck02@ey.com
Mathew Nelson
Asia-Pacific
T: +61 3 9288 8121
E: mathew.nelson@au.ey.com
Integrated reporting specialists
Hugo Hollander
Global,Europe,MiddleEast,India
and Africa (EMEIA)
T:+31 88 40 74059
E: hugo.hollander@nl.ey.com
Hester Touwen
Global
T: +31 88 40 7 3115
E: hester.touwen@nl.ey.com
Brendan LeBlanc
Americas
T: +1 617 585 1819
E: brendan.leblanc@ey.com
Matthew Bell
Asia-Pacific
T: +61 2 9248 4216
E: matthew.bell@au.ey.com
Kenji Sawami
Japan
T: +81 3 4582 6400
E: sawami-knj@shinnihon.or.jp
Lucia Argüelles
Global
T: +34 93 366 3709
E: lucia.arguelles@es.ey.com
49
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EY | Assurance | Tax | Transactions | Advisory
About EY
EYisagloballeaderinassurance,tax,transactionandadvisory
services. The insights and quality services we deliver help build trust and
confidence in the capital markets and in economies the world over. We
develop outstanding leaders who team to deliver on our promises to all
ofourstakeholders.Insodoing,weplayacriticalroleinbuildingabetter
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EYreferstotheglobalorganization,andmayrefertooneormore,of
thememberfirmsofErnst&YoungGlobalLimited,eachofwhichisa
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byguarantee,doesnotprovideservicestoclients.Formoreinformation
aboutourorganization,pleasevisitey.com.
About EY’s Climate Change and Sustainability Services
Governments and organizations around the world are increasingly
focusingontheenvironmental,socialandeconomicimpactsofclimate
change and the drive for sustainability.
Yourbusinessmayfacenewregulatoryrequirementsandrising
stakeholder concerns. There may be opportunities for cost reduction
and revenue generation. Embedding a sustainable approach into core
business activities could be a complex transformation to create long-term
shareholder value.
The industry and countries in which you operate as well as your extended
businessrelationshipsintroducespecificchallenges,responsibilitiesand
opportunities.
Ourglobal,multidisciplinaryteamcombinesourexperienceinassurance,
tax,transactionsandadvisorywithclimatechangeandsustainability
skillsandexperienceinyourindustry.You’llreceiveatailoredservice
supported by global methodologies to address issues relating to your
specificneeds.Whereveryouareintheworld,EYcanprovidetheright
professionals to support you in reaching your sustainability goals.
©2014EYGMLimited.
All Rights Reserved.
EYGno.AU2354
ED none
This material has been prepared for general informational purposes only and is not intended to
berelieduponasaccounting,tax,orotherprofessionaladvice.Pleaserefertoyouradvisorsfor
specific advice
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