Integrated Reporting And The Six Capitals: What Does It All Mean?
Big companies are all talking about integrated reporting. But what is it? How do you do it? And what difference will it make to whom?
I’ll be looking at some of these questions over my next few blogs as the IIRC starts to release its Background Papers to support the International <IR> Framework, the Consultation Draft of which will be released on 16th April.
One thing to clarify right up front is that Integrated Reporting is not simply combining your sustainability report, annual report and financial statements. There are different views about what it is, but it requires a fundamentally different way of thinking about what makes an organisation successful and its reliance on a much broader set of capitals than financial capital. It requires a different way of working – working together, rather than in silos.
The Capitals Background Paper for <IR> elaborates on the multiple capitals concept which was overwhelmingly supported in responses to the 2011 Discussion Paper. It defines the six capitals which are: financial capital; manufacturing capital; human capital; social and relationship capital; intellectual capital and, natural capital. Natural capital is described and visually depicted (page 3) as providing “providing the environment in which the other capitals sit”.
Some robust discussions were had within the Project Team/Technical Collaboration Group, of which I was a member, about the boundaries between the various capitals. There are of course overlaps, for example, between social and relationship capital, human capital and intellectual capital. Consensus was reached informed by research. But as the paper says, this is unlikely to be the last word on the matter and thinking will evolve. There is an opportunity for leading companies to stand out with some real innovation in reporting.
It remains to be seen the extent to which the paper will change the thinking of CFOs and corporate boards. It will be a challenge for them. They will need to think differently. They have tended to: privilege information which can be quantified – preferably in monetary terms; focus on the short term; and, ignore the impact that value creation and depletion of some of the capitals can have on long term business success. All that must change for organisations that want to be around in the long term.
There is explicit recognition in the Capitals Background Paper for <IR> that some impacts on the capitals can only be reported on in narrative terms. It brings to the fore the recognition that organisations depend on all the capitals, not just financial capital, for their success.
The paper also explicitly acknowledges that value is subjective and impacts on capitals will be judged differently by stakeholders. There is recognition of the impact of companies on non-renewable capitals (and the implications for organisational risk, future costs and long term success).
The paper calls for organisations to: consider the availability of capitals in the context of overall strategy and governance; report on how the organisation’s culture and ethical values impact on its relationship with the capitals; report how the organisation’s use and effects on capitals are incorporated into performance-based compensation; risk management arrangements in relation to all of the capitals; and, the implications of the availability, quality and affordability of the capitals to the organisation’s future success.
Organisations that take the challenge and change the way they think about their relationship with the capitals and the interrelationships between them will prosper.