Chapter 3: Content elements

Content elements – general

An integrated report includes the following eight content elements:

• organizational overview and external environment;
• governance;
• business model;
• risks and opportunities;
• strategy and resource allocation;
• performance;
• outlook; and
• basis of preparation and presentation.

The content elements are fundamentally linked to each other and are not mutually exclusive. The content elements do not need to be included in any set sequence or as isolated, stand-alone sections. Rather, information in an integrated report is presented in a way that makes the connections between the content elements apparent.

The content of an organization’s integrated report will depend on the individual circumstances of the organization. The content elements are therefore stated in the form of questions rather than as checklists of specific disclosures. Accordingly, judgement needs to be exercised in applying the guiding principles to determine what information is reported, as well as how it is reported.

Organizational overview and external environment

An integrated report should answer the question: what does the organization do and what are the circumstances under which it operates?

An integrated report identifies the organization’s purpose, mission and vision, and provides essential context by identifying matters such as:

• the organization’s:
  • culture, ethics and values;
  • ownership and operating structure;
  • principal activities and markets;
  • competitive landscape and market positioning (considering factors such as the threat of new competition and substitute products or services, the bargaining power of customers and suppliers, and the intensity of competitive rivalry); and
  • position within the value chain;
• key quantitative information (e.g., the number of employees, revenue and number of countries in which the organization operates), highlighting, in particular, significant changes from prior periods; and
• significant factors affecting the external environment and the organization’s response.

Significant factors affecting the external environment include aspects of the legal, commercial, social, environmental and political context that affect the organization’s ability to create value in the short-, medium- or long-term. They can affect the organization directly or indirectly (e.g., by influencing the availability, quality and affordability of a capital that the organization uses or affects).

These factors occur in the context of the particular organization, in the context of its industry or region, and in the wider social or planetary context. They may include, for example:

• the legitimate needs and interests of key stakeholders;
• macro- and micro-economic conditions, such as economic stability, globalization, and industry trends;
• market forces, such as the relative strengths and weaknesses of competitors and customer demand;
• the speed and effect of technological change;
• societal issues, such as population and demographic changes, human rights, health, poverty, collective values and educational systems;
• environmental challenges, such as climate change, the loss of ecosystems, and resource shortages as planetary limits are approached;
• the legislative and regulatory environment in which the organization operates; and
• the political environment in countries where the organization operates and other countries that may affect the ability of the organization to implement its strategy.

Governance

An integrated report should answer the question: how does the organization’s governance structure support its ability to create value in the short-, medium- and long-term?

It is worth noting that many jurisdictions already require organizations to follow a corporate governance code.

“Governance” is one of the four pillars of the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations. It recommends that organizations describe the board’s oversight of climate related risks and opportunities and management’s role in assessing and managing climate related risks and opportunities.

An integrated report provides insight about how such matters as the following are linked to the organization’s ability to create value:

• the organization’s leadership structure, including the skills and diversity (e.g., range of backgrounds, gender, competence and experience) of those charged with governance and whether regulatory requirements influence the design of the governance structure;
• specific processes used to make strategic decisions and to establish and monitor the culture of the organization, including its attitude to risk and mechanisms for addressing integrity and ethical issues;
• particular actions those charged with governance have taken to influence and monitor the strategic direction of the organization and its approach to risk management;
• how the organization’s culture, ethics and values are reflected in its use of and effects on the capitals, including its relationships with key stakeholders;
• whether the organization is implementing governance practices that exceed legal requirements;
• the responsibility those charged with governance take for promoting and enabling innovation; and
• how remuneration and incentives are linked to value creation in the short, medium and long term, including how they are linked to the organization’s use of and effects on the capitals.

Business model

Business model – general

An integrated report should answer the question: what is the organization’s business model?

An organization’s business model is its system of transforming inputs, through its business activities, into outputs and outcomes that aims to fulfil the organization’s strategic purposes and create value over the short-, medium- and long-term.

An integrated report describes the business model, including key:

• inputs;
• business activities;
• outputs; and
• outcomes.

Features that can enhance the effectiveness and readability of the description of the business model include:

• explicit identification of the key elements of the business model;
• a simple diagram highlighting key elements, supported by a clear explanation of the relevance of those elements to the organization;
• narrative flow that is logical given the particular circumstances of the organization;
• identification of critical stakeholder and other (e.g., raw material) dependencies and important factors affecting the external environment; and
• connection to information covered by other content elements, such as strategy, risks and opportunities, and performance (including KPIs and financial considerations, like cost containment and revenues).

The business model can be shown in any format, bearing in mind that the overall goal is to demonstrate how the business creates, preserves or erodes value over time and connectivity between inputs, activities, outputs and outcomes; a visual representation may have more impact than long blocks of narrative. In opting for a visual presentation, preparers should ensure their graphics are not generic (such as circular graphics which do not clearly relate to or explain the business) or unclear.

Inputs

An integrated report shows how key inputs relate to the capitals on which the organization depends, or that provide a source of differentiation for the organization, to the extent they are material to understanding the robustness and resilience of the business model.

An integrated report does not attempt to provide an exhaustive list of all inputs. Rather, the focus is on those that have a material bearing on the ability to create value in the short-, medium- and long-term, whether or not the capitals from which they are derived are owned by the organization. It may also include a discussion of the nature and magnitude of the significant trade-offs that influence the selection of inputs.

Business activities

An integrated report describes key business activities. These can include:

• how the organization differentiates itself in the market place (e.g., through product differentiation, market segmentation, delivery channels and marketing);
• the extent to which the business model relies on revenue generation after the initial point of sale (e.g., extended warranty arrangements or network usage charges);
• how the organization approaches the need to innovate; and
• how the business model has been designed to adapt to change.

When material, an integrated report discusses the contribution made to the organization’s long-term success by initiatives such as process improvement, employee training and relationships management.

Outputs

An integrated report identifies an organization’s key products and services. There might be other outputs, such as by-products and waste (including emissions), that need to be discussed within the business model disclosure depending on their materiality.

Outcomes

An integrated report describes key outcomes, including:

• both internal outcomes (e.g., employee morale, organizational reputation, revenue and cash flows) and external outcomes (e.g., customer satisfaction, tax payments, brand loyalty, and social and environmental effects); and
• both positive outcomes (i.e., those that result in a net increase in the capitals and thereby create value) and negative outcomes (i.e., those that result in a net decrease in the capitals and thereby erode value).

An integrated report presents outcomes in a balanced way. When practicable, it supports the organization’s assessment of the use of and effects on the capitals with qualitative and quantitative information.

Identifying and describing outcomes, particularly external outcomes, requires an organization to consider the capitals more broadly than those that are owned or controlled by the organization. For example, it may require disclosure of the effects on capitals up and down the value chain (e.g., carbon emissions caused by products the organization manufactures and labor practices of key suppliers).

Organizations with multiple business models

Some organizations employ more than one business model (e.g., when operating in different market segments). Disaggregating the organization into its material constituent operations and associated business models is important to an effective explanation of how the organization operates. This requires a distinct consideration of each material business model as well as commentary on the extent of connectivity between the business models (such as the existence of synergistic benefits) unless the organization is run as an investment management business (in which case, it may be appropriate to focus on the investment management business model, rather than the business models of individual investments).

The integrated report of an organization with multiple businesses often needs to balance disclosure with the need to reduce complexity; however, material information should not be omitted. Aligning external reporting with internal reporting by considering the top level of information that is regularly reported to those charged with governance is ordinarily appropriate.

One of the challenges to be considered for a group report is whether the business model should be that of the group holding company or of the different businesses in the boundary used for financial reporting purposes. When the information presented relates to the group of entities included in the financial reporting entity’s consolidated financial statements, the business model presented should consider and reflect the business models of the different businesses included in the consolidation, except when, for an investment management business, it may be appropriate to focus on the investment management business model, rather than the business models of individual investments.

Risks and opportunities

An integrated report should answer the question: what are the specific risks and opportunities that affect the organization’s ability to create value over the short-, medium- and long-term, and how is the organization dealing with them?

“Risk management” is one of the four pillars of the TCFD recommendations. It recommends that organizations describe their processes for identifying, assessing and managing climate-related risks. Further, a description of how the processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management should be disclosed.

An integrated report identifies the key risks and opportunities that are specific to the organization, including those that relate to the organization’s effects on, and the continued availability, quality and affordability of, relevant capitals in the short-, medium- and long-term.

This can include identifying:

• the specific source of risks and opportunities, which can be internal, external or, commonly, a mix of the two. External sources include those stemming from the external environment, as discussed on external environment. Internal sources include those stemming from the organization’s business activities;
• the organization’s assessment of the likelihood that the risk or opportunity will come to fruition and the magnitude of its effect if it does. This includes consideration of the specific circumstances that would cause the risk or opportunity to come to fruition. Such disclosure will invariably involve a degree of uncertainty; and
• the specific steps being taken to mitigate or manage key risks or to create value from key opportunities, including the identification of the associated strategic objectives, strategies, policies, targets and KPIs.

Risks and uncertainties is often an area of focus and scrutiny by regulators. Risks evolve and change frequently. Concerns about commercial sensitivity or competitive harm may also have their part to play on the disclosures. Better reporters not only describe specific risks and how they are managed or mitigated, but also demonstrate how the organization’s risk profile has changed over time.

It may also be the case that the organization has traditionally focused on risks and uncertainties, but not necessarily the opportunities arising from these; these are important in the context of providing an outlook on future value creation.

Strategy and resource allocation

An integrated report should answer the question: where does the organization want to go and how does it intend to get there?

An integrated report ordinarily identifies:

• the organization’s short-, medium- and long-term strategic objectives;
• the strategies it has in place, or intends to implement, to achieve those strategic objectives;
• the resource allocation plans it has to implement its strategy; and
• how it will measure achievements and target outcomes for the short-, medium- and long-term.

This can include describing:

• the linkage between the organization’s strategy and resource allocation plans, and the information covered by other content elements, including how its strategy and resource allocation plans:
  • relate to the organization’s business model, and what changes to that business model might be necessary to implement chosen strategies to provide an understanding of the organization’s ability to adapt to change;
  • are influenced by/respond to the external environment and the identified risks and opportunities; and
  • affect the capitals, and the risk management arrangements related to those capitals;
• what differentiates the organization to give it competitive advantage and enable it to create value, such as:
  • the role of innovation;
  • how the organization develops and exploits intellectual capital; and
  • the extent to which environmental and social considerations have been embedded into the organization’s strategy to give it a competitive advantage; and
• key features and findings of stakeholder engagement that were used in formulating its strategy and resource allocation plans.

“Strategy” is one of the four pillars of the TCFD recommendations. It recommends that the climate-related risks and opportunities the organization has identified over the short, medium, and long term be disclosed, as well as the impact of those risks and opportunities on the organization’s businesses, strategy, and financial planning. Further, a description should be given of the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario.

Performance

An integrated report should answer the question: to what extent has the organization achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?

An integrated report contains qualitative and quantitative information about performance that may include matters such as:

• quantitative indicators with respect to targets and risks and opportunities, explaining their significance, their implications, and the methods and assumptions used in compiling them;
• the organization’s effects (both positive and negative) on the capitals, including material effects on capitals up and down the value chain;
• the state of key stakeholder relationships and how the organization has responded to key stakeholders’ legitimate needs and interests; and
• the linkages between past and current performance, and between current performance and the organization’s outlook.

KPIs that combine financial measures with other components (e.g., the ratio of greenhouse gas emissions to sales) or narrative that explains the financial implications of significant effects on other capitals and other causal relationships (e.g., expected revenue growth resulting from efforts to enhance human capital) may be used to demonstrate the connectivity of financial performance with performance regarding other capitals. In some cases, this may also include monetizing certain effects on the capitals (e.g., carbon emissions and water use).

“Metrics and targets” is one of the four pillars of the TCFD recommendations. It recommends that organizations disclose the metrics used to assess climate-related risks and opportunities in line with its strategy and risk management process. Consideration should be given to including metrics on climate-related risks associated with water, energy, land use, and waste management when relevant and applicable. Specifically, the TCFD recommendations call for disclosure of Scope 1 and Scope 2 GHG emissions and, if appropriate, Scope 3 GHG emissions and the related risks.

Alongside these metrics, organizations should describe the targets used to manage climate-related risks and opportunities and the performance against those targets. When climate-related issues are material, organizations should consider describing whether and how related performance metrics are incorporated into remuneration policies.

It may be relevant for the discussion of performance to include instances where regulations have a significant effect on performance (e.g. a constraint on revenues as a result of regulatory rate setting) or the organization’s non-compliance with laws or regulations may significantly affect its operations.

While financial capital is a defined and well-understood term, manufactured, human, intellectual, social and relationship and natural capitals are not as clearly understood today and outcomes in terms of the effects on the capitals can be difficult to measure.

The SASB Standards, which are now maintained by the same organization as the <IR> Framework, are a helpful source of non-financial metrics. They provide detailed industry-specific disclosure topics and metrics to inform organizations what to include in the integrated report, lending insight into the subset of sustainability issues that are most closely tied to an organization’s ability to create long-term value for investors.

Outlook

An integrated report should answer the question: what challenges and uncertainties is the organization likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?

An integrated report ordinarily highlights anticipated changes over time and provides information, built on sound and transparent analysis, about:

• the organization’s expectations about the external environment the organization is likely to face in the short-, medium- and long-term;
• how that will affect the organization; and
• how the organization is currently equipped to respond to the critical challenges and uncertainties that are likely to arise.

Care is needed to ensure the organization’s stated expectations, aspirations and intentions are grounded in reality. They need to be commensurate with the ability of the organization to deliver on the opportunities available to it (including the availability, quality and affordability of appropriate capitals), and a realistic appraisal of the organization’s competitive landscape and market positioning, and the risks it faces.

The discussion of the potential implications, including implications for future financial performance, ordinarily includes discussion of:

• the external environment, and risks and opportunities, with an analysis of how these could affect the achievement of strategic objectives; and
• the availability, quality and affordability of capitals the organization uses or affects (e.g., the continued availability of skilled labor or natural resources), including how key relationships are managed and why they are important to the organization’s ability to create value over time.

An integrated report may also provide lead indicators, KPIs or objectives, relevant information from recognized external sources, and sensitivity analyses. If forecasts or projections are included in reporting the organization’s outlook, a summary of related assumptions is useful. Comparisons of actual performance to previously identified targets further enables evaluation of the current outlook. [IIRF:4.39]

Disclosures about an organization’s outlook in an integrated report are made taking into account the legal or regulatory requirements to which the organization is subject.

Basis of preparation and presentation

Basis of preparation and presentation – general

An integrated report should answer the question: how does the organization determine what matters to include in the integrated report and how are such matters quantified or evaluated?

An integrated report describes its basis of preparation and presentation, including:

• a summary of the organization’s materiality determination process;
• a description of the reporting boundary and how it has been determined; and
• a summary of the significant frameworks and methods used to quantify or evaluate material matters.

Summary of materiality determination process

An integrated report includes a summary of the organization’s materiality determination process and key judgements. This may include

• a brief description of the process used to identify relevant matters, evaluate their importance and narrow them down to material matters; and
• identification of the role of those charged with governance and key personnel in the identification and prioritization of material matters.

A link to where a more detailed description of the materiality determination process can be found may also be included.

Reporting boundary

An integrated report identifies its reporting boundary and explains how it has been determined. Material risks, opportunities and outcomes attributable to or associated with entities that are included in the financial reporting entity, are reported on in the organization’s integrated report.

Risks, opportunities and outcomes attributable to or associated with other entities/stakeholders are reported on in an integrated report to the extent they materially affect the ability of the financial reporting entity to create value.

Practical issues might limit the nature and extent of information that can be presented in an integrated report. For example:

• the availability of reliable data with respect to entities the financial reporting entity does not control; and
• the inherent inability to identify all risks, opportunities and outcomes that will materially affect the ability of the financial reporting entity to create value, particularly in the long term.

It may be appropriate to disclose such limitations, and actions being taken to overcome them, in an integrated report.

Summary of significant frameworks and methods

An integrated report includes a summary of the significant frameworks and methods used to quantify or evaluate material matters included in the report (e.g., the applicable financial reporting standards used for compiling financial information, a company-defined formula for measuring customer satisfaction, or an industry-based framework for evaluating risks). More detailed explanations might be provided in other communications.

When information in an integrated report is similar to or based on other information published by the organization, it is prepared on the same basis as, or is easily reconcilable with, that other information. For example, when a KPI covers a similar topic to, or is based on information published in the organization’s financial statements or sustainability report, it is prepared on the same basis, and for the same period, as that other information.

General reporting guidance

Supplementary guidance relevant to the content elements

Section 5 of the <IR> Framework provides further guidance on matters relevant to various content elements, as follows:

• disclosure of material matters, including the characteristics of suitable quantitative indicators;
• disclosures about the capitals, including complexity in interdependencies and trade-offs;
• time frames for short-, medium- and long-term; and
• aggregation and disaggregation.

Disclosure of material matters

Taking the nature of a material matter into consideration, the organization considers providing:

• key information, such as:
  • an explanation of the matter and its effect on the organization’s strategy, business model or the capitals;
  • relevant interactions and interdependencies providing an understanding of causes and effects;
  • the organization’s view on the matter;
  • actions to manage the matter and how effective they have been;
  • the extent of the organization’s control over the matter; and
  • quantitative and qualitative disclosures, including comparative information for prior periods and targets for future periods;
• if there is uncertainty surrounding a matter, disclosures about the uncertainty, such as:
  • an explanation of the uncertainty;
  • the range of possible outcomes, associated assumptions, and how the information could change if the assumptions do not occur as described; and
  • the volatility, certainty range or confidence interval associated with the information provided;
• if key information about the matter is considered indeterminable, disclosure of that fact and the reason for it; and
• if significant loss of competitive advantage would result, disclosures of a general nature about the matter, rather than specific details.

Depending on the nature of a matter, it may be appropriate to present it on its own in the integrated report or throughout in conjunction with different content elements.

Care is needed to avoid generic disclosures. Information is only included when it is of practical use in achieving the primary purpose of an integrated report. This requires that disclosures be specific to the circumstances of the organization. Accordingly, the bulleted lists of examples and considerations with respect to each content element are not meant to be checklists of disclosures, nor is the value creation process diagram as illustrated in the <IR> Framework intended to be a fixed template for disclosure purposes. It is important that disclosures are specific to the circumstances of the organization.

Quantitative indicators, such as KPIs, can help increase comparability and are particularly helpful in expressing and reporting against targets. Common characteristics of suitable quantitative indicators may include that they are:

• relevant to the circumstances of the organization;
• consistent with indicators used internally by those charged with governance;
• connected (e.g., they display connectivity between financial and other information);
• focused on the matters identified by the organization’s materiality determination process;
• presented with the corresponding targets, forecasts or projections for two or more future periods;
• presented for multiple periods (e.g., three or more periods) to provide an appreciation of trends;
• presented against previously reported targets, forecasts or projections for the purpose of accountability;
• consistent with generally accepted industry or regional benchmarks to provide a basis for comparison;
• reported consistently over successive periods, regardless of whether the resulting trends and comparisons are favorable or unfavorable; and
• presented with qualitative information to provide context and improve meaningfulness. Relevant qualitative information includes an explanation of:
  • measurement methods and underlying assumptions; and
  • the reasons for significant variations from targets, trends or benchmarks, and why they are or are not expected to reoccur.

Disclosures about the capitals

Disclosures about the capitals, or a component of a capital:

• are determined by their effects on the organization’s ability to create value over time, rather than whether or not they are owned by the organization; and
• include the factors that affect their availability, quality and affordability and the organization’s expectations of its ability to produce flows from them to meet future demand. This is particularly relevant with respect to capitals that are in limited supply, are non-renewable, and can affect the long-term viability of an organization’s business model.

When it is not practicable or meaningful to quantify significant movements in the capitals, qualitative disclosures are made to explain changes in the availability, quality or affordability of capitals as business inputs and how the organization increases, decreases or transforms them. It is not, however, necessary to quantify or describe the movements between each of the capitals for every matter disclosed.

The <IR> Framework does not require an integrated report to provide an exhaustive account of all the complex interdependencies between the capitals such that an organization’s net impact on the global stock of capitals could be tallied. It is important, however, that an integrated report discloses the interdependencies that are considered in determining its reporting boundary, and the important trade-offs that influence value creation over time, including trade-offs:

• between capitals or between components of a capital (e.g., creating employment through an activity that negatively affects the environment);
• over time (e.g., choosing one course of action when another course would result in superior capital increment but not until a later period); and
• between capitals owned by the organization and those owned by others or not at all.

Time frames for short-, medium- and long-term

The future time dimension to be considered in preparing and presenting an integrated report will typically be longer than for some other forms of reporting. The length of each time frame for short-, medium- and long-term is decided by the organization with reference to its business and investment cycles, its strategies, and its key stakeholders’ legitimate needs and interests. Accordingly, there is no set answer for establishing the length for each term.

Time frames differ by:

• industry or sector (e.g., strategic objectives in the automobile industry typically cover two model-cycle terms, spanning between eight and 10 years, whereas within the technology industry, time frames might be significantly shorter); and
• the nature of outcomes (e.g., some issues affecting natural or social and relationship capitals can be very long term in nature).

The length of each reporting time frame and the reason for such length might affect the nature of information disclosed in an integrated report. For example, because longer term matters are more likely to be more affected by uncertainty, information about them may be more likely to be qualitative in nature, whereas information about shorter term matters may be better suited to quantification, or even monetization. However, it is not necessary to disclose the effects of a matter for each time frame.

Aggregation and disaggregation

Each organization determines the level of aggregation (e.g., by country, subsidiary, division, or site) at which to present information that is appropriate to its circumstances. This includes balancing the effort required to disaggregate (or aggregate) information against any added meaningfulness of information reported on a disaggregated (or aggregated) basis.

In some circumstances, aggregation of information can result in a significant loss of meaning and can also fail to highlight particularly strong or poor performance in specific areas. On the other hand, unnecessary disaggregation can result in clutter that adversely affects the ease of understanding the information.

The organization disaggregates (or aggregates) information to an appropriate level considering, in particular, how senior management and those charged with governance manage and oversee the organization and its operations. This commonly results in presenting information based on the business or geographical segments used for financial reporting purposes.