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Integrated Reporting: Some Research Issues
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Integrated Reporting: Some Research Issues
Mrigakshi Das
Doctoral Scholar
Xavier Institute of Management, Xavier University, Bhubaneswar
Abstract
Corporate reporting gives readers a quick and a comprehensive understanding of the organization.
The annual report plays a key role, as a means of furthering accountability and increasingly, the
value and relevance of the information provided in an annual report are being questioned.
Corporate reporting has seen significant changes in the last three decades with the increased
globalization of business; the advent of the internet and then social media which has increased the
impact of stakeholder activism. The objective of this paper is to understand the state of corporate
reporting across the globe and to examine the prior research studies to find whether integrated
reporting affects firm performance and hence the providers of financial capital. Literature review
reveals that integrated reporting affects firm performance and the shareholders wealth in the long
run.
Keywords: Integrated Reporting, Firm Performance, Shareholders Wealth
Introduction
Corporate reporting gives readers a quick and a comprehensive understanding of the
organization. The annual report has a key role to play as a means of furthering accountability, while
also being an important channel for communication between organisations and their many
stakeholders. Increasingly, the value and relevance of the information provided in an annual report
are being questioned (Adams, 2013). „The corporate identity of companies have changed and so
reporting has to change,‟ says Professor Mervyn King, who has been involved in this transition (for
some years) through his roles as chairman of the Global Reporting Initiative (GRI), deputy chairman
of the International Integrated Reporting Committee (IIRC), and chairman of the Integrated
Reporting Committee (IRC) of South Africa. „Integrated reporting is the evolution of financial
reporting,‟ says King, but he is keen to point out that this doesn‟t mean the end of financial reporting
as we know it. However, Integrated reporting does not mean replacing financial reporting; rather it
reflects the evolution of reporting and the company‟s role in society.
1
In a world of rapid globalization, information inefficiency in the market, changing
expectations of the society, led all the companies towards the challenging task of disclosing their
working practices, not only on the financial aspects, but also about their impact on the society and
environment they operate, thereby increasing the responsibilities of management, auditors and
boards (Eccles and Saltzman, 2011). This is where the concept of integrated reporting is proving to
be increasingly welcomed by preparers and users of annual reports. In 2010, the Prince of Wales‟s
Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI) announced the
formation of the International Integrated Reporting Council (IIRC), whose stated mission is to create
a globally accepted integrated reporting framework.
IIRC defined „Integrated Reports‟ as a new approach to corporate reporting that demonstrates
the linkages between an organisation‟s strategy, governance and financial performance and the
social, environmental and economic context within which it operates‟. Organizations are using
integrated reporting to communicate a clear, concise, integrated story that explains how all of their
resources are creating value and is helping businesses to think holistically about their strategy and
plans, make informed decisions and manage key risks to build investor and stakeholder confidence
and improve future performance. In other words, the organizations publishing Integrated Reports
aims at improving the quality of information available to providers of financial capital in order to
enable a more efficient and productive allocation of capital, thereby enhancing accountability and
stewardship for the 6 broad base of capital (financial, manufactured, intellectual, human, social and
relationship and natural) and promote understanding of their interdependencies (IIRC Report, 2013).
Fig.1: Integrated Reporting Framework developed by IIRC, 2013
Source: IIRC Report, 2013
2
Eccles and Krzus (2010) said that “today‟s winners increasingly undress for success”. In other
words, transparency is becoming central to business success and is a new form of power, pays off
when harnessed and such firms are likely to survive and thrive which choose to open(IIRC Report,
2013). So, Interest in and adoption of integrated reporting regarding a company‟s financial,
environmental, social, and governance performance is growing rapidly and there are several smart
companies across the globe that have actually started producing their Integrated Reports (Ithner and
Larker,2001). So, this paper examines the following issues by reviewing the existing body of
literature1) Geographical Diversity of companies publishing Integrated Reports
2) Nature of Companies publishing Integrated Reports
3) Integrated Reports and Firm Performance
4) Integrated Reporting and Providers of Financial Capital
State of Integrated Reporting across the Globe
Every Company listed on a stock exchange is required to issue on at least annual basis a financial
performance report. These reports are based on a set of accounting standards, typically International
Financial Reporting Standards or US Generally Accepted Accounting Principles, which defines the
information reported in a company‟s income statement, balance sheet, and notes to the financial
statements. Financial reporting by listed companies has for decades been viewed as a company‟s
primary communication tool with investors and financial analysts. But financial reporting also has its
critics, who cite its increasing complexity, making it hard for all but most sophisticated for the users
of financial statements to understand the economic substance of a transaction or event and the overall
financial position and results of operations of a company (Eccles and Krzus, 2010, p.52). United
Kingdom‟s Financial Reporting Council noted that Users of Financial Statements are worried that
reports no longer reflect the reality of the underlying businesses, with key messages lost in clutter of
lengthy disclosures and regulatory jargon. So, there is a greater need of more transparency in case of
detailed disclosure of business performance, such as getting information on risks, eliminating fraud
and other reasons through more detailed disclosure of key performance indicators.
So, with the increasing complexity of financial reporting, the need for non-financial reporting
has also increased. Non-financial reporting is a broad term and that applies to all information
reported to shareholders and other stakeholders, that is not defined by an accounting standard or a
calculation of a measure based on an accounting standard, which will refer to as “financial
information” (Eccles and Krzus, 2010, p. 84). As a result, a large number of companies across the
3
globe have voluntarily started producing their Integrated Reports. Typically, they contain
information on a company‟s environmental (for example, energy and water usage and carbon
emissions), social (for example, labor practices, employee turnover, and workforce diversity), and
governance (e.g., independence of the board and approach to risk management) performance; along
with pre dominant financial performance.
The percentage of companies publishing reports on their nonfinancial performance varies
from country to country. Compared to other countries, like, USA, UK, Germany, Asian Countries
except Japan are well far behind in terms of these Practices (Eccles and Saltzman, 2011). Some
countries have introduced regulations which mandate the adoption of integrated reporting by
companies of certain size. South Africa and other developed economies such as Denmark, France,
United Kingdom, etc. lead the pack (Eccles and Saltzman, 2011). In Asia, so far, major
developments has taken place in East and South East Asia which includes Japan and Singapore and
India has started progressing on the front. In Asia, major number of sustainability reports is
contributed by Japan and it holds 2nd position after UK. In India and China, the non-financial
reporting Initiative started in 2001 but was very slow (Mitra, 2012).
In December 2007,
recognising the contribution of financial institutions including banks towards sustainable
development and considering the crucial role they play in financing the economic and development
activities, the Reserve Bank of India drew attention of their roles in Sustainable Development and
Non-financial disclosure (Pandey, 2015).
Fig 2: Graph showing percentage (%) of companies reporting ‘non-financial performance’ from top
10 ‘non-financial performance’ reporting countries over different periods of time
100
90
80
70
60
50
40
30
20
10
0
2002 (%)
2005 (%)
2008 (%)
2011 (%)
Source: Adapted from KPMG Survey Report (2002, 2005, 2008 & 2011) and Delloite Report (December 2014)
4
Integrated Reporting is a mandatory requirement in some countries and voluntary in some. Except
for some high performing, visible companies, a lot of organizations haven‟t started reporting
effectively on their non-financial performance and the reporters are mainly from Oil and Gas,
Mining, Cement, Steel, Minerals, Pharmaceuticals, the Construction, Telecom, Mining, Energy &
Power and Infrastructure sectors (Kumar and Devi, 2013).
Table 1: Industrial Sectors regardless of country of origin, disclosing non-financial
performance
Sector (regardless of country
of origin
Banking and Insurance
Trade and Retail
Metals and Engineering
Information Technology
Beverage
Oil and Gas
Construction
Chemicals
Pharmaceuticals
Energy
Number of companies in sector in survey
1999
127
161
105
69
104
53
57
64
30
22
2002
340
241
141
131
126
114
108
67
47
28
1999 (%)
2002 (%)
8
7
17
30
22
53
18
59
50
55
61
52
61
69
67
69
65
68
64
84
Source: Adapted from KPMG report (1999 and 2002)
It has been observed that issues differ from sector to sector too. Novo Nordisk, a pharmaceutical
company, is the first company in the world, to produce Integrated Report in the year 2001, with the
aim to drive business performance, thereby enhancing shareholders value by exploring the
interactions between financial and non-financial objectives and this entails alignment of key
priorities, target setting, in consultation that involves internal and external stakeholders (Hopewood,
Unerman and Fries, p.219). Similarly, in energy sector, the process started with UK‟s EDF Energy,
a business organization involved in generating and distribution of electricity to residential and
commercial customers. Energy sector is the sector which contributes maximum to environmental
pollution. So, the main objective of EDF Energy was reduction in the intensity of Carbon Dioxide
emissions from Electricity Generation, reduction in the proportion of carbon dioxide arising from the
customers‟ energy consumption, reduction in the volume of materials from generation activities,
reduce the volume of waste produced in energy billing activities and employee involvement. So, the
process started in the year 2007 and by 2012. (Hopewood, Unerman and Fries,p.73). Similarly,
Aviva Insurance, the first insurer in UK to report on the environmental performance indicators such
5
as, greenhouse gas emissions, energy usage, resource use and waste minimization (Hopewood,
Unerman and Fries, p.197) and with the strategic decision to become „carbon neutral‟ (p.199). Then,
HSBC, one of the largest banking and financial services organizations in the world, considers long
term thinking to be central to its success that means, achieving profits for the shareholders, but
underpinned by good governance, lasting customer relationship and managing environmental and
social impact of business operations (Hopewood, Unerman and Fries, p.174).
Every observation drawn is based on the literature. The list of articles reviewed is mentioned
in the Table 1 in the annexure. Given the industry and geographical diversity of these companies, it
is unlikely that they knew about each other‟s efforts. But their reasons for issuing integrated reports
are similar. They include a commitment to sustainability, defined broadly in financial and ESG
terms; a belief that an integrated report is the best way to communicate to shareholders and other
stakeholders how well a company is accomplishing these objectives; and a recognition that
integrated reporting is an important discipline for ensuring that a company has a sustainable strategy.
Now, question arises, does disclosure of non-financial information affect the performance of
corporates? If yes, how?
Integrated Reporting and Firm Performance
Integrated reporting is a process which builds up the linkages between an organization‟s strategy,
governance and financial performance and the social, environmental and economic context within
which it operates. The aim of the integrated report is to give the stakeholders a holistic view of the
company, how it affects the performance of organizations and how it creates value. The two essential
concepts of integrated reporting are capitals and the value creation process. Corporate sustainability
performance, measures the extent to which a firm embraces economic, environmental, social and
governance factors into its operations, and ultimately the impact they exert on the firm and society
(Artiach et al., 2010). An important stream of research tries to establish a business case for
sustainable activities by empirically testing the relationship between corporate sustainability and firm
performance. Researchers try to analyse whether firms which are perceived as sustainable outperform or under-perform firms which are not perceived in the same way. One view is that improved
sustainability performance can lead to increase in costs and thereby reducing profitability of the
corporates (Fullerton & Wempe, 2008); another view is that improved sustainability performance
can lead to optimum and proper utilization of resources, such as energy efficiency, thereby saving
costs and leading to improved performance of an organization (Hoque, 2004). So, literature shows a
mixed relationship between disclosure of non-financial information and organizational performance.
6
Every observation drawn is as per the existing body of literature. The list of articles reviewed are
given in the Table 2 of the annexure.
Based on the the literature, it is not fair to conclude that integrated reporting impacts firm
performance, because integrated reporting is integrated representation of a company‟s performance
in terms of both financial and other value relevant information. Integrated Reporting provides greater
context for performance data, clarifies how value relevant information fits into operations or a
business, and may help embed long-termism into company decision making. According to Fombrun
et al. (2000), firms can obtain benefits from engagement in socially and environmentally responsible
activities because, on the one hand, it helps firms and their employees to build community ties and
become socially integrated, and, on the other hand, it assists firms in building reputational capital
that improve their ability to negotiate more attractive contracts with suppliers and governments, to
charge premium prices for goods and services offered, and to reduce its cost of capital. There is some
evidence of improvement of firms‟ performance because of Integrated Reporting.
Pharmaceutical Company, NovoNordisk was successful in reducing their energy usage,
emissions to air, water wastage by almost 10% by 2014, as compared to that in 2005, thereby
increasing profitability and company reputation (Hopewood, Unerman and Fries, 2014, p. 233).
Similarly, Aviva was successful in reducing their Carbon Emissions with all their business reporting
consistently on their footprint and applying practices to reduce the emissions. They could do that by
using technologies, changing behaviours and by purchasing zero emissions and renewable electricity.
They could also reduce their overall wastes and water consumption by around 6000 tonnes and
thereby improving performance and corporate reputation (Hopewood, Unerman and Fries, p.195).
Similarly, EDF Energy could reduce their Carbon Dioxide emissions by almost 40% by 2014
compared to 2007, and aims to achieve 60% by 2020. They could also reduce emissions from offices
and their transport by almost 20% by 2014, etc (Hopewood et. al, 2014, p.79). So, these had a
positive impact on their performance.
These companies could improve their profitability as a result of factors like energy efficiency,
waste minimization, and reduction in water consumption, etc over a period of time. So, it can be
regarded that, adopting sustainability practices in the long run would lead to improved financial
performance, increased competitive advantage, profit and wealth maximization of shareholders of
corporates . Ultimately, it is Financial Sustainability of an organization, which will result in
sustainability of any corporate house it has been suggested in the literature that, the best way is to
pursue shareholders wealth, but with a long run orientation that seeks sustainable growth and profits,
based on responsible attention to relevant stakeholder interest (Millon, 2010). Although academia
has started giving importance of this concept, many companies often express their corporate
7
concerns on whether investors are aware of their corporate sustainable decision (Cheung, 2011). So,
question arises, does this disclosure really impact the providers of financial capital?
Integrated Reporting and Providers of Financial Capital
The words “Providers of Financial Capital” suggests that IIRC‟s focus is on Investors. Investors and
financial advisors are (rightly) demanding more non-financial information about companies‟
performance and value creation than the little they can glean from current corporate reports ( Davies,
2015). They are interested in the value an organization creates for others when it affects the ability
of the organization to create value for itself, or relates to a stated objective of the organization (e.g.
an explicit social purpose) that affects their assessments‟ (Flower,2015).
Fuelled by widely reported corporate environmental and social scandals, scams, managers
and shareholders are now showing heightened interest in the concept of transparency of information
about company‟s operations (Lourenco et. al, 2012). Most sceptics believe that sustainability
performance leads to increase in operating costs for the business, thereby reducing wealth for
shareholders (Bauer, Derwall and Koedijk, 2011). In contrast, Fombrun et al. (2000), posit that these
initiatives can lead to reputational advantages, improvements in investors‟ trust in the company,
more efficient use of resources, and new market opportunities, all of which could ultimately be
perceived positively by capital markets (Bauer, Derwall and Koedijk, 2011). Some of the world‟s
largest institutional asset managers, for example, those at CalPERS in the USA, Universities
Superannuation Scheme in the UK, ABP and PGGM in the Netherlands, and AP7 in Sweden, are
publicly demonstrating their commitment to investing in companies that are deemed socially,
morally, and environmentally responsible ( Bauer, Derwall and Koedijk, 2011).
Lourenco and Branco (2013) found that Brazilian leading corporate sustainability
performance firms are significantly larger and have a larger return on equity than their counterparts,
which is consistent with previous findings for US firms. Thus, they suggested that financing
characteristics are likely to have higher significance in determining corporate sustainability
performance in emerging markets, such as Brazil, than in developed countries. Similarly, Bauer,
Derwall and Koedijk (2011) found evidence suggesting that the virtues of a strong corporate ecoefficiency policy can be significant from a financial perspective, thereby, helping the investors
attaining superior excess returns. Konar and Cohen (2001) found that stocks from companies with
high Corporate Sustainability Performance outperformed the market and their peers over extensive
periods of time, with reasonably low risk.
8
Further, as per PWC report, 2012, according to Institutional Shareholder Services, average
support for environmental and social shareholder resolutions topped 20% for the first time in 2011,
compared to 18.1% in 2010 and 16.3% in 2009. Then, according to a Harward Business School
working paper, sustainability leaders tend to have better stock performance, lower volatility, and
greater return on assets (ROA) and return on equity (ROE) and this is due to superior governance
structures and better constructive engagement with stakeholders (PWC report, 2012).
Similarly, every observation drawn is based on the review of literature. The list of articles
reviewed for addressing the relationship between “Integrated Reporting and Providers of Financial
Capital” is mentioned in Table 3 of the Annexure. So, this can be argued that Investors do care for
Corporate Sustainability Performance and have begun to recognize that the social and environmental
conditions in society can have a direct impact on the business operations of a company and its longterm viability. A beverage company, for example, must protect a long-term source of potable water
in order to manufacture its product. A technology company must have a dependable electrical grid
and affordable power sources.
Way Forward
There was a strong recognition that in many of the studies that qualitative assessments of economic,
social and environmental sustainability impacts, and reporting in qualitative terms, in conjunction
with the use of quantitative information, are sometimes the most suitable ways to communicate
sustainability performance and qualitative information has a vital role, because many strategically
and operationally important sustainability impacts cannot be quantified. However, it has been
observed from the review that, in order to understand the relationship between non-financial
performance and financial performance, many non-financial issues were quantified using different
metrics and that helped managers to embed considerations of environmental and social sustainability
into their day to day decision-making.
So, literature review reveals that there is a link between Integrated Reporting and Firm
Performance. So, future research may focus on using Integrated Reporting Framework.
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Practices. Accounting Forum. 32, p. 288-302
Cheung, A. W. K. (2011). Do stock investors value corporate sustainability? Evidence from
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Do Investors care about Sustainability? Report by PwC. March, 2012
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Stanford Social Innovation Review
Eccles, R. G., Ioannou, I., & Serafeim, G. (2014). The impact of corporate sustainability on
organizational processes and performance. Management Science, 60(11), 2835-2857.
Flower J. (2015). “ The International Integrated Reporting Council: A story of Failure”,
Critical Perspectives on Accounting, Vol. 27, 1–17
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measures and Financial Performance. International Journal of Operations and Production
Management,
Guenster, N., Bauer, R., Derwall, J., & Koedijk, K. (2011). The economic value of corporate
eco‐efficiency. European Financial Management, 17(4), 679-704.
Hopewood A., Unerman J., Fries J. (2014). Accounting for Sustainability- Practical Insights.
London, Washington DC
Hoque Z. (2004). Linking environmental uncertainty to non-financial performance measures
and performance: a research note , The British Accounting Review, 471-481
International Integrated Reporting Council
Report, 2013
Integrated Reporting in the Netherlands. Report by Delloite. December 2014
Ittner, C. D., & Larcker, D. F. (1998). Are nonfinancial measures leading indicators of
financial performance? An analysis of customer satisfaction. Journal of accounting
research, 1-35.
Konar, S., & Cohen, M. A. (2001). Does the market value environmental performance?.
Review of economics and statistics, 83(2), 281-289.
K. Venkateshwara Kumar and V. Rama Devi (2013). Sustainability Reporting Practices in
India: Challenges and Prospects, 12th AIMS International Conference on Management
Lourenço, I. C., Branco, M. C., Curto, J. D., & Eugénio, T. (2012). How does the market
value corporate sustainability performance? Journal of business ethics, 108(4), 417-428.
Lourenço, I. C., & Branco, M. C. (2013). Determinants of corporate sustainability
performance in emerging markets: the Brazilian case. Journal of Cleaner Production, 57,
134-141.
Millon D. (2010). “Enlightened Shareholder Value, Social Responsibility, and the Redefinition
of Corporate Purpose without Law”, Journal of Washington and Lee University
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Pradip Kumar Mitra (2012). Sustainability Reporting Practices in India: Its Problems and
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Annexures
Table 1: List of articles reviewed for addressing the first and the second issue
Title of the Paper
Achieving Sustainability
through Integrated
Reporting
Sustainability Reporting
Practices in India: Its
Problems and Prospects
Sustainability Practices in
India: Themes, Phases and
Future Trends
Author (s)
Journal
Eccles R. &
Saltzman D
Stanford Social
Innovation Review
Year
Findings
2011
The authors have tried
to understand the state
of corporate reporting
in 21st Century and the
benefits that
companies can get due
to integrated reporting
and the challenges
faced by them for the
same.
P.K. Mitra
International Journal
of Marketing,
Financial Service and
Management
Research
2012
P. C. Pandey
Talk on Sustainability
Leadership Summit,
Xavier Univeristy,
Bhubaneswar
2015
The author has tried to
understand the state of
non-financial reporting
in India and the
benefits that
companies can get
from the same.
The speaker talked on
the Sustainability
Practices in India, GRI
in India and the
possible future trends
of non-financial
reporting by Indian
Companies
Table 2 : List of articles reviewed for addressing the third issue
Title of the Paper
Are nonfinancial measures
leading indicators of financial
performance? An analysis of
customer satisfaction
Author (s)
CD Ittner, DF
Larcker
Journal
Journal of
Accounting
Research
12
Year
Findings
1998
Relations between customer
satisfaction measures and future
accounting performance generally
are positive and statistically
significant and customer
satisfaction measures are linked to
stock price of companies but are
not reflected in book value of
companies.
Lean Manufacturing, NonFinancial Performance
Measures,and Financial
Performance
Rosemary R.
Fullerton &
William F.
Wempe
International
Journal of
Production &
Operation
Management
2008
Utilization of NFMP measures
mediates the relationship between
lean manufacturing and financial
performance
The Worth of Values: A
Literature Review on the
Relation between Corporate
Social and Financial
Performance
Pieter van
Beurden and
Tobias
Gössling
Journal of
Business
Ethics
2008
There is no significant
relationship between corporate
social and financial performance
The Economic Value of
Corporate Eco- efficiency
N. Guenster,
R. Bauer, J.
Derwall, &
K. Koedijk
European
Financial
Management
2010
Ecoefficiency relates positively to
operating performance and market
value
The Impact of Corporate
Sustainability on
Organizational Processes and
Performance
Robert G.
Eccles,
Ioannis
Ioannou, and
George
Serafeim
2014
High sustainability companies
significantly outperform their
counterparts over the long-term,
both in terms of stock market as
well as accounting performance.
Integrating sustainability
reporting into management
practices
CA Adams,
GR Frost
Management
Science
Accounting
Forum
13
2008
Sample companies have adopted
best practices for integrating
sustainability issues into decisionmaking using performance
measurement techniques as a tool
to encourage decision-making
which considered social and
environmental impacts and found
that this disclosure profoundly
impact the performance of those
organizations
Table 3 : List of articles issued for addressing the 4th issue
Title of the Paper
Author (s)
Does the market value
S. Konar &
environmental performance? M. A. Cohen
Journal
Review of Economics and
Statistics
Do stock investors value
corporate
sustainability?
A. W. K CheungJournal of Business Ethics
Evidence from an event
study
Do Investors care about
Sustainability
Report by PWC
N. Guenster, R.
The economic value of Bauer, J.
European Financial
corporate eco-efficiency
Derwall, & K. Management
Koedijk
14
View publication stats
Year
Findings
The authors found tat
10% reduction in toxic
emissions leads to a 34
2001
million increase in market
value of the sample
companies
The authors did'nt find any
strong evidence that
2011 announcement per se has
any significant impact on
stock return and risk.
Mar-12
The market's valuation of
environmental
performance has been
time variant, which may
indicate that the market
incorporates
environmental information