Chapter 2: Guiding principles for the preparation and presentation of an integrated report

Seven guiding principles

Seven guiding principles underpin the preparation and presentation of an integrated report, informing the content of the report and how information is presented:

• strategic focus and future orientation;
• connectivity of information;
• stakeholder relationships;
• materiality;
• conciseness;
• reliability and completeness; and
• consistency and comparability.

These guiding principles are applied individually and collectively for the purpose of preparing and presenting an integrated report; accordingly, judgement is needed in their application, particularly when there is an apparent tension between them.

Judgement will be required in circumstances when there is an apparent tension between the guiding principles (e.g., between conciseness and completeness). The <IR> Framework does not provide specific additional guidance on how to make such judgements.

Key aspects of the guiding principles and content elements that offer guidance in making such judgements include:

• looking to the medium- and long-term instead of focusing solely on the short-term;
• in a manner reflecting the importance of relationships with key stakeholders, providing insight into the nature and quality of the organization’s relationships with them, including how and to what extent the organization understands, takes into account, and responds to their legitimate needs and interests;
• applying the materiality concept to determine the content of an integrated report by assessing those matters that substantively affect the organization’s ability to create, preserve or erode value over the short-, medium- and long-term;
• understanding the interconnectivity of information presented in the integrated report (e.g., the linkage between strategy, risks and opportunities, and performance, including financial and non-financial key performance indicators);
• adopting a future orientation (e.g., by clearly articulating information about the availability, quality and affordability of the capitals the organization uses or affects); and
• providing the basis of the report’s preparation and presentation, including any other significant frameworks used to quantify or evaluate material matters for inclusion in the report, in addition to disclosure of (1) a summary of the organization’s materiality determination process, and (2) a description of the reporting boundary and how it has been determined.

Strategic focus and future orientation

An integrated report should provide insight into the organization’s strategy, and how it relates to the organization’s ability to create value in the short-, medium- and long-term and to its use of and effects on the capitals.

Applying this guiding principle extends to the selection and presentation of other content, and may include, for example:

• highlighting significant risks, opportunities and dependencies flowing from the organization’s market position and business model; and
• the views of those charged with governance about:
  • the relationship between past and future performance, and the factors that can change that relationship;
  • how the organization balances short-, medium- and long-term interests; and
  • how the organization has learned from past experiences in determining future strategic directions.

Adopting a strategic focus and future orientation includes clearly articulating how the continued availability, quality and affordability of significant capitals contribute to the organization’s ability to achieve its strategic objectives in the future and to create value.

Connectivity of information

An integrated report should show a holistic picture of the combination, interrelatedness and dependencies between the factors that affect the organization’s ability to create value over time.

The more that integrated thinking is embedded into an organization’s activities, the more naturally will the connectivity of information flow into management reporting, analysis and decision-making, and subsequently into the integrated report.

A review of an organization’s integrated report for linkage of KPIs to the organization’s strategy, business model, strategic objectives, risks and remuneration policy can be a quick measure for assessing the extent to which the organization’s thinking internally is connected or ‘integrated’.

Stakeholder relationships

An integrated report should provide insight into the nature and quality of the organization’s relationships with its key stakeholders, including how and to what extent the organization understands, takes into account and responds to their legitimate needs and interests.

The <IR> Framework explains that this guiding principle reflects the importance of relationships with key stakeholders because, as reflected in the fundamental concept of value creation for the organization and for others, “value is not created by or within an organization alone, but is created through relationships with others”. The <IR> Framework clearly states, however, that this “does not mean that an integrated report should attempt to satisfy the information needs of all stakeholders.”

Stakeholders are defined by the <IR> Framework as “[t]hose groups or individuals that can reasonably be expected to be significantly affected by an organization’s business activities, outputs or outcomes, or whose actions can reasonably be expected to significantly affect the ability of the organization to create value over time. Stakeholders may include providers of financial capital, employees, customers, suppliers, business partners, local communities, NGOs, environmental groups, legislators, regulators, and policy-makers.”

Key to integrated reporting is how an organization considers key stakeholders in how it creates, preserves or erodes value in the short-, medium- and long-term. Disclosing the organization’s approach to stakeholder engagement is a requirement of the Global Reporting Initiative (GRI), whose GRI Standards are used widely around the world.

The primary purpose of an integrated report is to explain to providers of financial capital how an organization creates, preserves or erodes value over time, in the knowledge that value is not created by or within an organization alone but is created through relationships with others.

The <IR> Framework notes that, by disclosing how key stakeholders’ legitimate needs and interests are understood, taken into account and responded to through decisions, actions and performance, as well as ongoing communication, an integrated report enhances transparency and accountability, both essential in building trust and resilience.

The guiding principle of stakeholder relationships also refers to the concept of stewardship, noting that, when the capitals are owned by the organization, a stewardship responsibility is imposed on management and those charged with corporate governance via their legal responsibilities, to care for or use those capitals responsibly.

Further, the <IR> Framework notes that, when the capitals are owned by others or not at all:

• stewardship responsibilities may be imposed by law or regulation (e.g., through a contract with the owners, or through labor laws or environmental protection regulations); and
• when there is no legal stewardship responsibility, the organization may have an ethical responsibility to accept, or choose to accept stewardship responsibilities and be guided in doing so by stakeholder expectations.

Consistent with the fundamental concept of value creation for the organization and for others and extension of the financial reporting boundary, integrated reporting extends consideration of the capitals to those not owned by the organization; the guiding principle of stakeholder relationships is an example of this.

Materiality

An integrated report should disclose information about matters that substantively affect the organization’s ability to create value over the short-, medium- and long-term.

The materiality determination process for the purpose of preparing and presenting an integrated report set out in the <IR> Framework is a four-step process and involves: [IIRF:3.18]

• identifying relevant matters based on their ability to affect value creation;
• evaluating the importance of relevant matters in terms of their known or potential effect on value creation;
• prioritizing the matters based on their relative importance; and
• determining the information to disclose about material matters.

To be most effective, the materiality determination process is integrated into the organization’s management processes and includes regular engagement with providers of financial capital and others to ensure the integrated report meets its primary purpose.

Key to the materiality determination process is the concept of the reporting boundary. Determining the boundary for an integrated report has two aspects:

• the financial reporting entity (i.e., the boundary used for financial reporting purposes); and
• risks, opportunities and outcomes attributable to or associated with other entities/stakeholders beyond the financial reporting entity that have a significant effect on the ability of the financial reporting entity to create value.

The entities or stakeholders beyond the financial reporting boundary may be those considered by organizations for the purposes of standalone reports on corporate social responsibility or sustainability.

The purpose of an integrated report is to communicate to providers of financial capital how an organization creates, preserves or erodes value over time. The <IR> Framework’s focus on comprehensive reporting to providers of financial capital on broader matters that are relevant to value creation remains important in order to direct capital to sustainable and resilient business.

This purpose is in line with the approach adopted in the Prototype Climate-related Financial Disclosure Standard that was published by the IIRC along with CDP (formerly known as the Carbon Disclosure Project), the Climate Disclosure Standards Board (CDSB), the GRI and the SASB (collectively, the five leading international sustainability standard-setters and frameworks) in December 2020.

The prototype standard sets out an approach to materiality which reflects the needs of different users, described as a ‘nested’ approach. Integrated reporting is consistent with “Reporting on those sustainability matters that create or erode enterprise value” to an audience of users who wish to understand enterprise value.

Conciseness

An integrated report should be concise.

An integrated report includes sufficient context to understand the organization’s strategy, governance, performance and prospects without being burdened with less relevant information.

The organization should seek a balance in its integrated report between conciseness and the other guiding principles, in particular completeness and comparability. In achieving conciseness, an integrated report:

• applies the materiality determination process;
• follows a logical structure and includes internal cross-references as appropriate to limit repetition;
• may link to more detailed information, information that does not change frequently (e.g., a listing of subsidiaries), or external sources (e.g., assumptions about future economic conditions on a government website);
• expresses concepts clearly and in as few words as possible;
• favors plain language over the use of jargon or highly technical terminology; and
• avoids highly generic disclosures (often referred to as ‘boilerplate’) that are not specific to the organization.

Reliability and completeness

Reliability and completeness – general principle

An integrated report should include all material matters, both positive and negative, in a balanced way and without material error.

Reliability

The reliability of information is affected by its balance and freedom from material error. Reliability (which is often referred to as faithful representation) is enhanced by mechanisms such as robust internal control and reporting systems, stakeholder engagement, internal audit or similar functions, and independent, external assurance.

Those charged with governance have ultimate responsibility for how the organization’s strategy, governance, performance and prospects lead to value creation over time. They are responsible for ensuring that there is effective leadership and decision-making regarding the preparation and presentation of an integrated report, including the identification and oversight of the employees actively involved in the process.

Maintaining an audit trail when preparing an integrated report helps senior management and those charged with governance review the report and exercise judgement in deciding whether information is sufficiently reliable to be included. It might be appropriate in some cases (e.g., with respect to future-oriented information) for an integrated report to describe the mechanisms employed to ensure reliability.

Balance

A balanced integrated report has no bias in the selection or presentation of information. Information in the report is not slanted, weighted, emphasized, de-emphasized, combined, offset or otherwise manipulated to change the probability that it will be received either favorably or unfavorably.

Important methods to ensure balance include:

• selection of presentation formats that are not likely to unduly or inappropriately influence assessments made on the basis of the integrated report;
• giving equal consideration to both increases and decreases in the capitals, both strengths and weaknesses of the organization, both positive and negative performance, etc.; and
• reporting against previously reported targets, forecasts, projections and expectations.

Freedom from material error

Freedom from material error does not imply that the information is perfectly accurate in all respects. It does imply that:

• processes and controls have been applied to reduce to an acceptably low level the risk that reported information contains a material misstatement; and
• when information includes estimates, this is clearly communicated, and the nature and limitations of the estimation process are explained.

Completeness

A complete integrated report includes all material information, both positive and negative. To help ensure that all material information has been identified, consideration is given to what organizations in the same industry are reporting on because certain matters within an industry are likely to be material to all organizations in that industry.

Determining completeness includes considering the extent of information disclosed and its level of specificity or preciseness. This might involve considering potential concerns regarding cost/benefit, competitive advantage and future-oriented information, each of which is discussed below.

Cost/benefit

Information included in an integrated report is, by nature, central to managing the business. Accordingly, if a matter is important to managing the business, cost should not be a factor in failing to obtain critical information to appropriately assess and manage the matter.

An organization may evaluate cost and benefits when determining the extent, level of specificity, and preciseness of information necessary for an integrated report to meet its primary purpose, but may not refrain entirely from making any disclosure about a material matter on the basis of cost.

Competitive advantage

In including information about material matters dealing with competitive advantage (e.g., critical strategies), an organization considers how to describe the essence of the matter without identifying specific information that might cause a significant loss of competitive advantage. Accordingly, the organization considers what advantage a competitor could actually gain from information in an integrated report, and balances this against the need for the integrated report to achieve its primary purpose.

Future-oriented information

Legal or regulatory requirements may apply to certain future-oriented information in some jurisdictions, covering for example:

• the types of disclosures that may be made;
• whether cautionary statements may be required or permitted to highlight uncertainty regarding achievability; and
• an obligation to publicly update such information.

The <IR> Framework acknowledges that future-oriented information is by nature more uncertain than historical information but states that uncertainty is not, however, a reason in itself to exclude such information.

Consistency and comparability

Consistency and comparability – guiding principle

The information in an integrated report should be presented:

• on a basis that is consistent over time; and
• in a way that enables comparison with other organizations to the extent it is material to the organization’s own ability to create value over time.

Consistency

Reporting policies are followed consistently from one period to the next unless a change is needed to improve the quality of information reported. This includes reporting the same KPIs if they continue to be material across reporting periods. When a significant change has been made, the organization explains the reason for the change, describing (and quantifying if practicable and material) its effect.

Comparability

The specific information in an integrated report will, necessarily, vary from one organization to another because each organization creates value in its own unique way. Nonetheless, addressing the questions relating to the content elements, which apply to all organizations, helps ensure a suitable level of comparability between organizations.

Other powerful tools for enhancing comparability (in both an integrated report itself and any detailed information that it links to) can include:

• using benchmark data, such as industry or regional benchmarks;
• presenting information in the form of ratios (e.g., research expenditure as a percentage of sales, or carbon intensity measures such as emissions per unit of output); and
• reporting quantitative indicators commonly used by other organizations with similar activities, particularly when standardized definitions are stipulated by an independent organization (e.g., an industry body). Such indicators are not, however, included in an integrated report unless they are relevant to the individual circumstances of, and are used internally by, the organization.