Integrated Reporting: Linking financial and non-financial performance
Integrated Reporting (IR): Linking Financial and Non-Financial Performance
Integrated Reporting is the modern way to tell the “Company Story”. It moves beyond just presenting historical financial statements to explain how the company uses its Six Capitals—such as intellectual capital and human capital—to create value over time. This guide explains why IR has become vital for investors and how to start linking your figures to the value creation process.
ESG is often the data source, while Integrated Reporting is the “narrative” that links this data to financial value.
- A clear understanding of the Integrated Reporting framework and the “Value Creation” mindset.
- Identifying the Six Capitals and how to represent them beyond traditional accounting.
- Mastering the concept of Connectivity of Information to provide deeper insights to investors.
- Practical steps for the finance team to transform into “Value Communicators”.
- An interactive calculator to assess your company’s readiness for Integrated Reporting.
1) What is Integrated Reporting (IR)?
Traditional reporting focuses on “what happened” financially. Integrated Reporting focuses on “How we create value” by linking strategy, governance, performance, and the external environment. It’s a concise communication intended to show providers of capital how an organization creates value over the short, medium, and long term.
2) Why IR? From Profit to Value Creation
Investors have realized that financial figures only represent a fraction of a company’s real value (often less than 20% in technology/service sectors). The remaining value lies in “Intangibles”. Integrated Reporting bridges this gap by:
- Reducing Information Silos: Linking different departments (HR/Ops/Fin) in one report.
- Focusing on the Long Term: Explaining sustainability beyond the next quarter.
- Improving Capital Allocation: Providing investors with a clearer picture of risks and opportunities.
3) The Six Capitals: More Than Financials
The IR framework identifies six resources and relationships used by an organization:
| Capital Type | Definition & Examples |
|---|---|
| Financial | Funds available for use (Equity, Debt, Retained earnings). |
| Manufactured | Physical objects available (Buildings, Equipment, Infrastructure). |
| Intellectual | Knowledge-based intangibles (IP, Patents, Software, Brand). |
| Human | People’s competencies, capabilities, and experience. |
| Social & Relationship | Relationships with stakeholders, brand reputation, and trust. |
| Natural | Renewable and non-renewable environmental resources (Water, Air, Land). |
4) Spotlight: Intellectual and Human Capital
In the digital economy, intellectual capital is often the primary driver of value. IR allows you to report on this through:
Budgeting & Forecasting Model - Excel File
- Innovation Performance: R&D efficiency and new product pipelines.
- Brand Equity: Market share growth and customer loyalty metrics.
- Talent Management: Training ROI and employee engagement rates.
5) The IR Framework: Connectivity & Conciseness
A successful integrated report is built on Guiding Principles:
- Strategic Focus: Insight into strategy and its ability to create value.
- Connectivity of Information: The “Holy Grail” of IR—showing the holistic picture.
- Materiality: Focus only on items that significantly affect value creation.
- Conciseness: Avoid the 300-page report; be precise and meaningful.
The ISSB standards provide the metrics, while IR provides the integrated framework.
6) The Value Creation Process (Inputs to Outcomes)
This is the heart of the report. You must describe how your Business Model transforms inputs (Capitals) into outputs (Products/Services) and outcomes (Impact on Capitals).
7) Trust and Reliability: Assurance of IR Data
For investors to trust non-financial data, it needs Reliability and Completeness. Accountants play a vital role in:
- Establishing internal controls over non-financial data collection.
- Preparing data for external “Limited” or “Reasonable” assurance.
- Ensuring consistency between the financial and non-financial narrative.
8) How to Start Implementing Integrated Reporting?
- Secure Board Commitment: IR starts with “Integrated Thinking” at the top.
- Identify Materiality: Determine what truly drives value for your stakeholders.
- Map Your Capitals: Which of the six capitals are most critical to your model?
- Break Down Silos: Form a cross-functional team (Finance, HR, ESG, Strategy).
- Focus on Connectivity: Start linking non-financial KPIs to financial results.
9) IR Readiness Calculator
Assess your company’s readiness for Integrated Reporting across 5 axes. (0 = Not present, 5 = Fully integrated and reviewed).
10) Frequently Asked Questions
What is the difference between IR and a Sustainability Report?
Sustainability reports (ESG) often focus on impact on society/environment. Integrated Reports focus on “Value Creation” for the organization, linking all capitals through connectivity.
Are Integrated Reports mandatory?
It depends on the jurisdiction and stock exchange. While voluntary in many places, it’s becoming a best practice for listed companies to improve investor communication.
Can non-financial data in an IR be audited?
Yes, it is called “Assurance.” It requires clear definitions, established internal controls, and verifiable evidence for each indicator.
11) Conclusion
Integrated Reporting is the key to demonstrating real value in a complex economy. By linking the Six Capitals to your strategy and showing Connectivity between financial and non-financial data, you provide a concise, trust-building narrative for investors. The journey starts with Value Creation thinking, not just formatting.