A Case for Integrating Financial and Sustainability Reporting

In her article, “Integrated Reporting: What, Why and How,” author Aparna Khandelwal, a senior associate at sustainability consulting firm cKinetics, discusses the importance of integrating sustainability results with financial performance information.

Khandelwal says that the current approach of annual financial reporting focuses on the short term, which does not meet the needs of investors and other stakeholders who would like to have a holistic view of the company’s performance and the ability to connect financial and sustainability results.

Combining financial and non-financial performance in a single report can provide context for non-financial data, such as how the company performs on environmental, social and governance (ESG) parameters and how sustainability is embedded in the core business strategy. Such information can help stakeholders analyze and assess the company’s ability to create and sustain value in the medium and long term.

It is important to note that integrated reporting isn’t simply merging financial and sustainability information into one report. Its true meaning is to link sustainability strategy to business strategy and help the company and its stakeholders identify the non-financial priority areas.

An integrated report can help a company:

• Demonstrate that it is serious about incorporating sustainability into its core business.
• Communicate the impact of its operations on environment and community and illustrate its commitment to mitigating the effects.
• Correctly identify ESG-related risks and opportunities, which can highlight a competitive edge and help lower the cost of capital.
• Make informed decisions and improve overall performance.
• Identify cost savings by analyzing financial and non-financial metrics together.
• Increase internal collaboration between different departments and create a more streamlined organization.
• Increase engagement with internal and external stakeholders through consistent and balanced reporting.
• Address risk to reputation, as integrated reporting provides a medium to communicate strategy and identify gaps, thus helping build trust amongst stakeholders.
• Increase brand value and customer loyalty.

An increasing number of investors believe that non-financial metrics such as those related to environmental, social and governance have an impact on the economic value of a company. Khandelwal says integrated reporting recognizes the value of such assets as various forms of intellectual, natural, financial, organizational and social capital:

• Intellectual capital (patents, software, etc.) would include reporting issues such as expenditures on sustainability-related R&D and monitoring of sustainability-related targets.
• Natural capital (clean air, land, water, forests, biodiversity, etc.) would involve reporting issues such as scarcity of these natural resources, climate change strategy, carbon emission, water consumption and recycling.
• Financial capital (funds owned or borrowed) would consist of reporting issues like financial risks and liabilities associated with government regulations, stock markets, etc.
• Organizational capital (systems and processes that enable smooth operations) includes issues such as existence and performance of occupational health and safety systems, compliance with established norms and code of operation, etc.
• Social capital (employees, community, customers) would include reporting issues related to employee well-being such as adoption and enforcement of human and labor rights, community engagement programs, etc.

Integrated reporting will help analyze company’s level of control and influence on various forms of capital and whether its activities serve to increase or decrease the stock of various forms of capital.

Khandelwal also offers advice on overcoming the challenges of integrated reporting such as assurance of accuracy of reported data, lack of standards, complexity, and more.

The full article “Integrated Reporting: What, Why and How”