In recent months, the International Integrated Reporting Committee (IIRC) released its Discussion Paper entitled Towards Integrated Reporting: Communicating Value in the 21st Century. Pilot integrated reports are being developed by more than 40 entities across the globe, and in recent months South African regulators have mandated integrated reporting, with the Johannesburg Stock Exchange requiring listed companies to produce the first iterations of integrated reports for the 31 March 2012 reporting period.
Social investment has a longer history, but has come to the fore in recent times with a greater international focus on the nature and extent of world poverty and the effectiveness of government aid programs continually under scrutiny. In light of the increased awareness of the role that private sector can play, in the past year the United Nations established the Principles for Social Investment Secretariat (PSIS) in Melbourne to guide developments in the field.
There appears to be a groundswell of support for both integrated reporting and social investment, both of which are clearly linked. The remainder of this article explores these links and the nature and extent of implications for professionals in the field.
Integrated reporting
Organisations globally are under continuing pressure to broaden the base on which they periodically report current and past performance. The need for a broader information set is demonstrated clearly by the falling percentage of organisational value that is now explained by physical and financial assets disclosed in conventional balance sheets, down to less than 20 per cent from more than 80 per cent in the mid-1970s. Integrated reporting is one initiative being put forward as a robust mechanism for addressing the imbalance.
Integrated reporting is being driven by the IIRC, a joint initiative of the Prince Charles Accounting for Sustainability project and the UN’s Global Reporting Initiative. The IIRC brings together global leaders from diverse sectors relating to accounting and business to guide the development of the ‘new’ reporting approach. Comprising the Global Chairman of each of the Big Four professional accounting firms and the CEO (or equivalent) of various other organisations, including the IASB, ICAEW, IFAC, FASB, World Business Council and the World Bank, the potential for the IIRC to shape the accounting and business landscape in the short term is significant.
In its discussion paper, the IIRC defines integrated reporting in the following way:
… Integrated reporting brings together the material information about an organisation’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context in which it operates. It provides a clear and concise representation of how an organisation demonstrates stewardship and how it creates value now and in the future. Integrated reporting combines the most material elements of information currently reported in separate reporting strands (financial, management commentary, governance and remuneration and sustainability) in a coherent whole…
A key asserted benefit of the approach is the bringing together of diverse information presently being reported in different and separate reports and communications while also offering a coherent reporting basis in which market and regulatory compliance reporting requirements can be met. The view of the IIRC is that the main reporting output for organisations in future should be a single integrated report – the organisation’s primary report – replacing existing reporting requirements. Figure 1 summarises the framework.
A further asserted benefit of integrated reporting is that stakeholders will receive more meaningful information on the ability of the reporting organisation to create and sustain value in the short, medium and longer term. According to the IIRC, all organisations depend on a variety of resources and relationships for their success. The extent to which the organisation is running down or building up those resources and relationships (referred to as ‘capitals’), will directly affect its ability to create and sustain value. Thus it is the six capitals that form the basis of the integrated reporting approach:
(i) financial (funds available to the organisation)
(ii) manufactured (manufactured physical objects such as equipment, buildings and public infrastructure)
(iii) human (people’s skill, experience and motivation to innovate)
(iv) intellectual (intangibles that provide competitive advantage and include the development and maintenance of intellectual property, brands, patents)
(v) natural (water, land, biodiversity and ecosystem health)
(vi) social (institutions and relationships established within communities, stakeholder groups and networks which affect collective wellbeing).
While the framework is presently high-level and conceptual, it appears to offer a means by which organisations can report in meaningful ways on diverse activities which are not readily captured in conventional financial reports. An example of such activity is social investment.
Social investment
Social investment is the practice of making voluntary financial and non-financial contributions that demonstrably help local communities and broader societies to address their development needs.
The idea that investments can leave a positive legacy for social welfare is not new, with examples dating back at least to the Industrial Revolution. What is new is the growing realisation of the importance of engaging the private sector to address more effectively the world’s development needs.
The task of alleviating poverty has traditionally fallen on governments and NGOs, yet despite significant advances in recent years, nearly two-thirds of the world’s population continue to live in poverty. There is a growing realisation that the scale of resources available in the private sector and the linking of philanthropic intent with core business strategies and models can have a positive and lasting social impact.
With a focus on the private sector in particular, the role of the new UN Principles for Social Investment Secretariat is to facilitate and improve the global impact of social investment, thereby contributing in measurable ways to the development of sustainable communities. This is to be done through the development and dissemination of resources on the practice and goals of social investment, the championing of research to develop new knowledge in the field and the fostering of productive global collaborations.
There are various ways in which corporations may involve themselves in social investment, which range from traditional hands–off philanthropic giving to the embedding of social and community concerns across the value chain of the organisation. Figure 2 gives some insight.
At opposite ends of the continuum are traditional philanthropic giving and the taking of an organisation-wide approach to corporate social responsibility (CSR). These approaches differ most obviously in terms
of the complexity of their implementation and the degree of embededness of social concerns across core business activities. Between the extremes are myriad investment models that link business activities with philanthropic intent in diverse ways, with three examples given.
‘Catalytic philanthropy’ refers to the taking of an active role in the management of an organisation’s philanthropy portfolio. Bill & Melinda Gates Foundation is an example. ‘Inclusive Business’ refers to incorporating the under-served (poor) sector in the business value chain, whether it be as customer, supplier, employer producer or via some other role (eg, Ericsson). ‘Cause-related marketing’ occurs through an agreement between non-profit and for-profit organisations to promote a product that provides benefit for the cause through increasing awareness and financial contributions from sales. UNICEF is one example of this approach.
The motivation for organisations undertaking social investment are typically complex, particularly for those in the profit sector, where concerns for financial performance and accountability to shareholders are paramount. Taking the high moral ground, many argue that organisations are morally bound to assist societies and communities in which they do business. Alternatively, others contend that social investments are costly for businesses, consuming resources in ways that are not always in the best interests of shareholders.
Social investment has its rewards
Those competing views often find common ground where corporate giving improves shareholder value and also social welfare. There is evidence to suggest, for example, that debt and equity markets tend to reward organisations that disclose higher quality information, particularly where such disclosures are voluntary and reflect a genuine concern for environmental, social or ethical issues.
At the organisational level, entities undertaking social investment typically report significant benefits for improving revenues and profits, as well as increases in employee and customer satisfaction. Corporations have also found such activities to be useful in repairing damaged relationships with community leaders and other stakeholders.
Measuring social investments
The foregoing discussion presupposes that organisations have in place established mechanisms for understanding the costs and benefits of social investments and are able to communicate such activities in meaningful ways to stakeholders. This, however, is largely not the case. Unless organisations can develop a clearer understanding of the benefits of the different forms of social investment, such activities will not be seen as anything more than a cost to the organisation – particularly by those not already pre-disposed to social concerns.
Likewise, at present there is no mandated mechanism for reporting on social investments, with existing GAAP traditionally and comfortably emphasising the reporting of financial capital. Under current reporting regimes, details of social investments are buried in sustainability reports, directors’ commentary, or within dense notes to account. Where this impedes the capacity of organisations to demonstrate the nature and extent of investments, potential capital market benefits are less likely and the implications for corporations that might be considering greater engagement with social investment are obvious.
More work to do
With an emphasis on the reporting of six ‘capitals’ integrated reporting just might provide an appropriate mechanism for organisations to report such activities in meaningful ways. It is not often we in accounting and business face the prospect of a paradigm shift in our approach to reporting, while at the same time the possibility of creating the conditions for positive social change. Before any changes are to occur, there remains much work to do.
At present the framework is broad and conceptual. We know little about specific disclosures that might be required or how stakeholders will react to integrated reports.
There is every reason to believe the reports will be meaningful and useful, but only time will tell. Likewise, we know little about the broader costs and benefits of social investment in its various forms. Capital markets appear to reward such behaviour, but the precise nature of any association is not yet clear.
Thus, there remains much work to do to explore more fully the nature and consequences of developments in both fields. There appears little to lose and the potential upside is significant.
