My guess is that most of you have not been following the developments International Integrated Reporting Council (IIRC) and the recent issuance of its draft framework for integrated reporting. It’s not like public or private companies in the U.S. or most countries in the world are about to be required to adopt an entirely new reporting model as a result of this report. This does not have the authority of an IASB, FASB or regulator behind it, but it is a widely supported effort that standard setters and regulators are paying attention to and it will result in impacts to corporate reporting across the globe at different paces depending on where your corporate headquarters is located.
The IIRC Integrated Reporting Draft Framework (IRDF) was issued on April 16 and will be open for comments until July 15, 2013. There are many important concepts introduced in the IRDF, but for this blog I want to focus on the six “capitals” that are the subject of an integrated report. Those capitals are:
- Financial – The pool of funds used in the production of goods or the provision of services
- Manufactured – Manufactured physical goods that are available for use in the production of goods or the provision of services
- Intellectual – Knowledge based intangibles such as patents, software, organizational knowledge, brand and reputation
- Human – People’s competencies, capabilities, and experience and their motivations to innovate
- Social & Relationship – The institutions and relationships within and between communities and groups of stakeholders including the ability to share information and enhance individual and collective wellbeing
- Natural – All renewable and non-renewable environmental resources
The main idea behind integrated reporting is to report on and tie together the increases and decreases in all six of these capitals as they were impacted by the activities of the reporting organization. The intended target audience of this new type of reporting is still the provider of financial capital, but other stakeholders will often find such reporting useful as well.
There have already been attempts at reporting on each of these capitals, but those attempts have generally been through a silo approach only addressing one or maybe two of these capitals at a time with no significant attempt to integrate them together into a single coherent story. Whatever your personal feelings are about the intent of this type of reporting, it is important for everyone in business and industry to at least become aware of these principles and begin to think about how they relate to your organization. Standard setter and regulators are certainly paying attention and it will only benefit you and your organization to at least keep up with this important development.
The SEC can’t seem to make up its mind on integrated reporting. Their actions seem to both support and hinder the movement to integrated reporting. The support comes from the SEC’s recent de facto rule making on cyber security reporting. The SEC sent a series of letters to more than twenty companies telling them the SEC expects to see significant new disclosures on actual security breaches. There was no discussion in the SEC letters of “financially significant” breaches – just breaches.
The hindrance comes from the SEC rule making on conflict mineral reporting. By backing away from requiring the disclosure to be included in the 10-K, the SEC has relegated the new reporting to a separate – unintegrated – report. In fact it could be argued that as a result of not including it in a report with the same distribution requirements as the annual report, conflict mineral reporting is destined to be read by very few actual investors.
The point of integrated reporting is to combine all relevant information about a company into one report that shows how the financial and non-financial information relates to the overall success (or lack there of) of the enterprise. It’s possible that the SEC action on conflict minerals is as much a statement about the lack of relevance of such information to the success of the business as it is any statement about integrated reporting. But if that is the case, then it might make for some interesting discussions around two other pet disclosures of the sustainability/integrated reporting crowd.
The first is information on access to and use of fresh water. Much like cyber security is a critical business risk to certain technology firms, access to the necessary amounts of fresh water is just as critical to a series of other businesses. On the other hand, absent artificial government imposed limits, carbon emissions do not pass the same criticality test.
Are these recent SEC decisions a peek at the future regulation over integrated reporting? Is the SEC going to look at the direct relation to the success of a business of non-financial disclosures when deciding what is required and what is not in the future required integrated report? Or am I reading too much into isolated decisions? What do you think?