PROTOTYPE FRAMEWORK. 2

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1 ABOUT THE IIRC The Internatinal Integrated Reprting Cuncil (IIRC) is a glbal calitin f regulatrs, investrs, cmpanies, standard setters, the accunting prfessin and NGOs. Tgether, this calitin shares the view that cmmunicatin abut businesses value creatin shuld be the next step in the evlutin f crprate reprting. Further infrmatin abut the IIRC can be fund n its website including: The backgrund t the IIRC s creatin Its structure and membership, and the membership f grups wh have cntributed t this Prttype f the Internatinal <IR> Framewrk (Prttype Framewrk) Its missin, visin and bjectives The IIRC s due prcess. ABOUT THIS DOCUMENT In its 2011 Discussin Paper, Twards Integrated Reprting Cmmunicating Value in the 21 st Century, 1 the IIRC nted its intentin t develp an Internatinal <IR> Framewrk (the Framewrk). Respnses t the Discussin Paper 2 indicated strng supprt fr this actin. This Prttype Framewrk is a wrking dcument that is being released t keep stakehlders infrmed f prgress n the develpment f the Framewrk fllwing release f a draft utline in July Drafting t date has been dne thrugh the parallel effrts f a number f tpic-specific cllabratin grups, the IIRC s Technical Task Frce and the IIRC Secretariat, taking int cnsideratin feedback received n the 2011 Discussin Paper. The IIRC s Wrking Grup and Pilt Prgramme participants were cnsulted n an earlier draft f this Prttype. As a wrking dcument, the Prttype Framewrk cntains sme repetitin and incnsistencies in terminlgy, cncepts and writing styles, and sme sectins cntain an indicatin f likely cntent rather than draft text where substantive wrk is still being undertaken. A Cnsultatin Draft f the Framewrk is expected t be released in April 2013 fllwed by a final versin 1.0 in December The IIRC is als planning t release subsidiary papers n a range f tpics 4 during early It is fully expected that changes will be made t the Prttype Framewrk s structure and cntent as the Cnsultatin Draft is develped ver the cming mnths. Any apparent psitins r cnclusins in this Prttype Framewrk are, therefre, tentative nly. Althugh this Prttype Framewrk is nt a frmal part f the due prcess fr develping the Framewrk, stakehlder feedback wuld nnetheless be appreciated. Please frward any feedback t prttype@theiirc.rg and As nted in Appendix A, these tpics are likely t include: cnnectivity, the business mdel, the capitals, the cncepts f value, and materiality. 1/51

2 PROTOTYPE OF The Internatinal <IR> Framewrk CONTENTS 1. OVERVIEW 2. FUNDAMENTAL CONCEPTS A. Intrductin B. The capitals C. The business mdel D. Creating value 3. GUIDING PRINCIPLES A. Strategic fcus and future rientatin B. Cnnectivity f infrmatin C. Stakehlder respnsiveness D. Materiality and cnciseness E. Reliability F. Cmparability and cnsistency 4. CONTENT ELEMENTS A. Organizatinal verview and perating cntext B. Gvernance C. Opprtunities and risks D. Strategy and resurce allcatin plans E. Business mdel F. Perfrmance and utcmes G. Future utlk 5. PREPARATION AND PRESENTATION A. Disclsure f material matters and the materiality determinatin prcess B. Frequency f reprting C. Time frames fr shrt, medium and lng term D. Reprting bundary E. Aggregatin and disaggregatin F. Invlvement f thse charged with gvernance G. Use f technlgy H. Assurance I. Other cnsideratins GLOSSARY APPENDICES A. Other IIRC publicatins and resurces B. Basis fr cnclusins 2/51

3 1. OVERVIEW NOTE: IT IS FULLY EXPECTED THAT CHANGES WILL BE MADE TO THE PROTOTYPE FRAMEWORK S STRUCTURE AND CONTENT AS THE CONSULTATION DRAFT IS DEVELOPED OVER THE COMING MONTHS. ANY APPARENT POSITIONS OR CONCLUSIONS IN THIS PROTOTYPE FRAMEWORK ARE, THEREFORE, TENTATIVE ONLY. NOTE: THE FORMAT AND DESIGN OF THE CONSULTATION DRAFT IS LIKELY TO VARY FROM THIS PROTOTYPE FRAMEWORK, E.G., IT MAY INCLUDE TEXT BOXES WITH A SUMMARY OF THE BENEFITS OF INTEGRATED REPORTING <IR>, ADDITIONAL EXAMPLES, ETC. NOTE: CONSIDERATION IS BEING GIVEN TO PREPARING A SEPARATE EXECUTIVE SUMMARY, AND TO REFORMATTING OR RESTRUCTURING THE TEXT TO SEPARATELY IDENTIFY, E.G., REQUIREMENTS, GUIDANCE AND EXPLANATIONS. NOTE: REPETITION, AND INCONSISTENCIES IN TERMINOLOGY, CONCEPTS AND WRITING STYLES ARE TO BE ADDRESSED, AND SOME SECTIONS ARE YET TO BE COMPLETED. 1.1 This chapter prvides an verview f Integrated Reprting (<IR>) and f the Internatinal <IR> Framewrk (the Framewrk). Further backgrund, including Frequently Asked Questins, are available n the IIRC website at Integrated Reprting <IR> 1.2 <IR> is a prcess that results in cmmunicatin, mst visibly a peridic integrated reprt, abut value creatin ver time. An integrated reprt is a cncise cmmunicatin abut hw an rganizatin s strategy, gvernance, perfrmance and prspects lead t the creatin f value ver the shrt, medium and lng term. An integrated reprt shuld be prepared in accrdance with this Framewrk. Objectives f <IR> 1.3 <IR> aims t: Catalyse a mre chesive and efficient apprach t crprate reprting that draws tgether ther reprting strands and cmmunicates the full range f factrs that materially affect the ability f an rganizatin t create value ver time Infrm resurce allcatin by prviders f financial capital that supprts lng term, as well as shrt and medium term, value creatin Enhance accuntability and stewardship with respect t the brad base f capitals (financial, manufactured, human, intellectual, natural, and scial and relatinship) and prmte understanding f the interdependencies between them Prmte integrated thinking, decisin-making and actins that fcus n the creatin f value in the lng term, as well as shrt and medium term. Audience fr <IR> 1.4 While the cmmunicatins that result frm <IR> will be f benefit t a range f stakehlders, they are principally aimed at prviders f financial capital in rder t supprt their financial capital allcatin decisins. Prviders f financial capital are therefre the intended users f integrated reprts. Thse prviders f financial capital wh take a lng term view f an rganizatin s perfrmance and 3/51

4 utcmes are particularly likely t benefit frm <IR>. The interests f such prviders are likely t be aligned with the public interest in that bth are fcused n the creatin f value in the lng term, as well as the shrt and medium term. Activities and strategies that are verly fcused n ptimizing shrt term financial perfrmance n the ther hand, can impede the ability f rganizatins and prviders f financial capital t make lng term investments These include investments in research aimed at lng term innvatin and in the infrastructure needed t address munting glbal challenges, such as resurce shrtages as planetary limits are apprached, ecnmic instability, climate change, and changing demgraphics and scietal expectatins. Objective f the Framewrk 1.5 The purpse f the Framewrk is t assist rganizatins with the prcess f <IR>. In particular, the Framewrk establishes Guiding Principles and Cntent Elements that gvern the verall cntent f an integrated reprt, helping rganizatins determine hw best t disclse their unique value creatin stry in a meaningful and transparent way. The Framewrk des nt, hwever, set benchmarks fr such things as the quality f an rganizatin s strategy r the level f its perfrmance and utcmes. Assessing these things is the rle f the intended users based n the infrmatin in the rganizatin s integrated reprt. Abut the Framewrk 1.6 The Framewrk sets ut: Fundamental cncepts that underpin <IR> Guiding Principles that infrm the cntent f an integrated reprt and hw infrmatin is presented Cntent Elements t be included in an integrated reprt Additinal cnsideratins in the preparatin and presentatin f an integrated reprt. Fundamental cncepts 1.7 The fundamental cncepts underpinning <IR> revlve arund the varius capitals that the rganizatin uses and affects, the rganizatin s business mdel, and the creatin f value ver time. 1.8 These cncepts, which are discussed in Chapter 2, and the reprting requirements and guidance in Chapters 3 5 are mutually reinfrcing. An rganizatin s business mdel is the vehicle thrugh which it creates value. That value is embdied in the capitals that it uses and affects. The assessment f an rganizatin s ability t create value in the shrt, medium and lng term depends n an understanding f the cnnectivity between its business mdel and a wide range f internal and external factrs. Thse factrs are disclsed in an integrated reprt prepared in accrdance with the Framewrk. Guiding Principles 1.9 The Guiding Principles, which are explained in Chapter 3, are: Strategic fcus and future rientatin Cnnectivity f infrmatin Stakehlder respnsiveness Materiality and cnciseness 4/51

5 Reliability Cmparability and cnsistency. Cntent Elements 1.10 The Cntent Elements are explained in Chapter 4. They are expressed in the frm f questins that shuld be answered in the integrated reprt in a way that best expresses the rganizatin s unique value creatin stry and makes their intercnnectins apparent, rather than appearing as islated, standalne sectins: Organizatinal verview and perating cntext Gvernance Opprtunities and risks Strategy and resurce allcatin Business mdel Perfrmance and utcmes Future utlk. Preparatin and presentatin 1.11 The guidance n preparatin and presentatin f an integrated reprt in Chapter 5 includes such tpics as frequency f reprting, reprting bundary, invlvement f thse charged with gvernance, use f technlgy, and assurance. A Principles-based apprach 1.12 The Framewrk takes a principles-based apprach and des nt fcus n rules fr measurement r disclsure f individual matters r identificatin f specific key perfrmance indicatrs (KPIs) r key risk indicatrs (KRIs). This requires senir management and thse charged with gvernance cllectively t exercise judgement t determine which matters are material, and t ensure they are apprpriately disclsed given the specific circumstances f the rganizatin, including the applicatin f generally accepted measurement and disclsure methds as apprpriate (see paragraph 1.18). The intent f the principles-based apprach is t strike an apprpriate balance between flexibility and prescriptin that recgnizes the wide variatin in individual circumstances f different rganizatins but enables a sufficient degree f cmparability acrss rganizatins t meet relevant infrmatin needs. Applicatin f the Framewrk 1.13 The Framewrk is intended primarily fr applicatin by cmpanies f any size but can als be applied, adapted as necessary, by public sectr and nt-fr-prfit rganizatins. It can be applied regardless f lcal legal requirements (see the fllwing paragraphs) r reprting practices, and des nt include any jurisdictin-specific guidance Any cmmunicatin purprting t be prepared in accrdance with the Framewrk shuld apply all f the Guiding Principles and include all f the Cntent Elements (taking accunt f the cntent f the Framewrk as a whle and any ther guidance issued by the IIRC) unless and t the extent the unavailability f reliable data r specific legal prhibitins result in an inability t disclse infrmatin that is material Where the unavailability f reliable data r specific legal prhibitins result in an 5/51

6 inability t disclse infrmatin that is material, the integrated reprt shuld: Indicate what infrmatin has been mitted Explain the reasn why the infrmatin has been mitted In the case f the unavailability f data, identify the steps being taken t btain the data and the expected time frame fr ding s. <IR> in practice Integrated thinking 1.16 <IR> is guided by the Framewrk and by integrated thinking Integrated thinking is the ability f an rganizatin t understand the relatinships between its varius perating and functinal units and the capitals the rganizatin uses and affects. Integrated thinking leads t integrated decisin-making and actins that fcus n the creatin f lng term, as well as shrt and medium term, value. Integrated thinking can be cntrasted with what is smetimes knwn as sil thinking, in that it takes int accunt the cnnectivity and interdependencies between the full range f factrs that have a material effect n an rganizatin s ability t create value ver time, including (but nt limited t): The capitals the rganizatin uses and affects, including the critical interdependencies f financial, manufactured, human, intellectual, natural, and scial and relatinship capitals The external cntext in which the rganizatin perates The pprtunities and risks faced by the rganizatin and hw it tailrs its strategy t manage them Activities, results, perfrmance and utcmes past, present and future Financial and ther infrmatin. Interactin with ther frms f reprting <IR> builds n develpments in financial and ther reprting t catalyse an evlutin in crprate reprting. An integrated reprt cmmunicates the factrs mst imprtant t the creatin f value in the shrt, medium and lng term. Organizatins will prvide additinal detailed disclsures, such as financial statements and sustainability reprts, fr cmpliance purpses and t satisfy particular infrmatin needs, including thse f stakehlders ther than prviders f financial capital. These ther disclsures may be linked t r referenced in the rganizatin s integrated reprt The Framewrk des nt prescribe specific metrics r measurement methds t be used in an integrated reprt. Rather, the IIRC aims t cmplement material develped by established reprting standard setters and thers, such as industry bdies, and des nt intend t develp duplicate cntent. Nnetheless, in rder t prmte cnsistency and rigr, the Framewrk and any ther guidance issued by the IIRC may reference examples f metrics and measurement methds develped by thers (see fr example, references cited in the ftntes t paragraph 4.28). 5 NOTE: The IIRC is cnsidering separate guidance n this tpic. 6/51

7 Emerging <IR> database 1.20 The IIRC acknwledges that <IR> is currently in a frmative stage and plans t revise the Framewrk as further practical experience is gained with the applicatin f this versin. An imprtant reference pint fr that experience will be the database f emerging practice at examples.theiirc.rg. While the database des nt prvide definitive guidance, rganizatins that are develping, r planning t develp, an integrated reprt are encuraged t cnsider the range f practices in the database, which they may chse t adpt r mdify t suit their individual circumstances. 7/51

8 A Intrductin 2. FUNDAMENTAL CONCEPTS 2.1 <IR> recgnizes that value is nt created by r within any ne rganizatin alne, but is: Influenced by external factrs (such as ecnmic cnditins, technlgical change, scietal issues and envirnmental challenges), which create the cntext within which the rganizatin perates C-created thrugh relatinships with thers (including emplyees, partners, netwrks, suppliers and custmers) Dependent n the availability, affrdability, quality and management f varius resurces. 2.2 <IR> therefre aims t prvide insights abut the fllwing (as depicted in the diagram belw): The external factrs that affect an rganizatin The resurces and relatinships used and affected by the rganizatin, which are referred t in this Framewrk as capitals, cmprising: financial, manufactured, human, intellectual, natural, and scial and relatinship capitals (see Sectin 2B) Hw the rganizatin interacts with external factrs and the capitals t create value ver the shrt, medium and lng term. 2.3 By describing, and measuring where it is practicable, the material cmpnents f value creatin and, imprtantly, the relatinships between them, <IR> results in a brader explanatin f perfrmance and utcmes than traditinal reprting. In particular, it makes visible all the relevant capitals n which value creatin (past, present and future) depends, hw the rganizatin uses thse capitals, and its effects n them. 8/51

9 The rganizatin 2.4 Fr the purpse f this Framewrk, the cmpnents f an rganizatin can be depicted as fllws. These cmpnents are aligned with the Cntent Elements f an integrated reprt (see Chapter 4). 2.5 Encmpassing the whle rganizatin is its missin and visin, which sets ut in clear and cncise terms the rganizatin s raisn d être. 2.6 Thse charged with gvernance are respnsible fr creating apprpriate versight structures and establishing the culture f the rganizatin. This includes leading thrugh the tne at the tp, setting the rganizatin s attitude t risk, instituting remuneratin and incentive plicies and practices, and mnitring the rganizatin s activities and the external factrs that affect it, as well as determining strategy and stewardship f the capitals. 2.7 Within this verall structure, rganizatinal cmpnents are in dynamic flux, each interacting with the thers at regular intervals. Cntinuus mnitring and careful analysis f external factrs in the cntext f the rganizatin s missin and visin identifies the key pprtunities and risks relevant t the rganizatin. The rganizatin s strategy identifies hw it intends t maximise pprtunities and mitigate r manage risks. It sets ut lng term strategic bjectives and strategies t achieve them. Shrter term resurce allcatin plans drive implementatin f the strategy. 2.8 At the heart f the rganizatin is its business mdel, i.e., the system f inputs, value-adding activities and utputs that aims t create value ver the shrt, medium and lng term (see Sectin 2C). The rganizatin needs infrmatin abut the perfrmance f its value-adding activities, and the resultant utcmes in terms f the rganizatin s effects n the capitals. This invlves measurement and mnitring systems, including the use f KPIs and KRIs, t prvide infrmatin fr decisin-making. 2.9 The system is nt static; regular review f each cmpnent and its interactins with the ther cmpnents in the cntext f the rganizatin s future utlk leads t revisin and refinement t imprve all cmpnents. 9/51

10 B The capitals The stck and flw f capitals 2.10 All rganizatins depend n a variety f different frms f capital 6 fr their success. In this Framewrk, the capitals cmprise: financial, manufactured, human, intellectual, natural, and scial and relatinship capitals, althugh as discussed belw, this categrizatin is nt required t be adpted by all rganizatins preparing an integrated reprt. These capitals are, in ne frm r anther, the inputs t the rganizatin s business mdel. They are als increased, decreased r transfrmed thrugh the value-adding activities f the rganizatin, in that they are enhanced, cnsumed, used up, mdified r therwise affected by thse activities. Fr example, an rganizatin s financial capital is increased when it makes a prfit, and its human capital is increased when emplyees becme better trained The ttal stck f capitals is nt fixed ver time. There is a cnstant flw between and within the capitals as they are increased, decreased r transfrmed. T demnstrate using the example abve where human capital is increased when emplyees becme better trained, the training is likely t have cme at sme expense t the emplyer rganizatin. In this case, therefre, the immediate effect is t bth increase the rganizatin s human capital and decrease its financial capital. In effect, frm the rganizatin s pint f view, financial capital has been transfrmed int human capital. Such increases, decreases and transfrmatins are happening cnstantly. Ordinarily, rganizatins expect that the net result will be added value accruing t the rganizatin (in this case, thrugh increased efficiency/effectiveness f the trained emplyees that is sufficient t at least ffset the immediate decrease in its financial capital). Althugh this example is relatively simple and has been described nly frm the rganizatin s pint f view, 7 it demnstrates that the capitals are interrelated and cnstantly in a state f flw and transfrmatin Many activities cause flws and transfrmatins that are far mre cmplex than the abve example, and invlve a brader mix f capitals (and very ften a mix f cmpnents within a capital). Sme activities can cause a net increase t the verall stck f capitals, and sme can cause a net decrease. In many cases, it depends n whse perspective is taken whether an activity has caused an increase r a decrease, as different parties will value the same effect n a capital differently (such as in the example abve, the emplyer and the emplyees perceptin f the value f training is likely t differ). 8 The perspective n value that is relevant t <IR> is discussed in Sectin 2D. Availability, quality and affrdability f capitals 2.13 The extent t which rganizatins, cllectively r individually, are building up r running dwn the varius capitals can have an imprtant effect n the availability, quality and affrdability f thse capitals, particularly with respect t capitals that are in limited supply and nn-renewable. This can affect the lng term viability f an rganizatin s business mdel and, therefre, its ability t 6 The capitals are smetimes als referred t as resurces and relatinships. 7 Other relevant pints f view include the increase t the trainer s financial capital due t the payment received frm the emplyer, and the increase t scial capital that may ccur if emplyees use newly acquired skills in cmmunity rganizatins. 8 In this Framewrk, unless therwise stated, the term value creatin includes instances when the verall stck f capitals is decreased, i.e., when value is effectively destryed r depleted. 10/51

11 create value ver time. Categrizatin and descriptin f capitals 2.14 Fr the purpse f <IR>, the varius capitals are categrized and described as fllws: 9 (a) Financial capital The pl f funds that is: available t the rganizatin fr use in the prductin f gds r the prvisin f services btained thrugh financing, such as debt, equity r grants, r generated thrugh peratins r investments. (b) (c) (d) (e) (f) Manufactured capital Manufactured physical bjects (as distinct frm natural physical bjects) that are available t the rganizatin fr use in the prductin f gds r the prvisin f services, including: buildings equipment infrastructure (such as rads, prts, bridges and waste and water treatment plants). Human capital Peple s skills and experience, and their capacity and mtivatins t innvate, including their: alignment with and supprt f the rganizatin s gvernance framewrk and ethical values such as its recgnitin f human rights ability t understand and implement an rganizatin s strategy lyalties and mtivatins fr imprving prcesses, gds and services, including their ability t lead and t cllabrate. Intellectual capital Intangibles that prvide cmpetitive advantage, including: intellectual prperty, such as patents, cpyrights, sftware and rganizatinal systems, prcedures and prtcls the intangibles that are assciated with the brand and reputatin that an rganizatin has develped. Natural capital Natural capital is an input t the prductin f gds r the prvisin f services. An rganizatin s activities als affect, psitively r negatively, n natural capital. It includes: water, land, minerals and frests bidiversity and ec-system health. Scial and relatinship capital The institutins and relatinships established within and between each cmmunity, grup f stakehlders and ther netwrks t enhance individual and cllective well-being. Scial and relatinship capital includes: 9 NOTE: Apart frm the additin f relatinships t the title scial and relatinship capital, this categrizatin and the descriptins are almst identical t thse in the 2011 Discussin Paper. The many cmments received n this matter in respnses t the Discussin Paper and further research cntinue t be cnsidered. While it is likely the categrizatin will remain unchanged, it is als likely that the descriptins will be refined. 11/51

12 cmmn values and behaviurs key relatinships and the trust and lyalty that an rganizatin has develped and strives t build and prtect with custmers, suppliers and business partners an rganizatin s scial licence t perate Nt all f these capitals are equally relevant r applicable t all rganizatins. While it is likely that virtually all rganizatins have sme interactins with all frms f capital, these interactins may be relatively minr r indirect in many cases and therefre nt material fr inclusin in an integrated reprt. The rle f the capitals mdel in the Framewrk 2.16 The Framewrk des nt require that the categrizatin adpted here als be adpted by all rganizatins preparing an integrated reprt. While it is likely that rganizatins will ften find adpting the capitals terminlgy used here t be an apprpriate way t structure r articulate disclsures in their integrated reprt, the inclusin f the capitals mdel in the Framewrk is nt intended t serve as a strict mdel t be reprted against. Rather, the primary reasns fr including the capitals mdel in the Framewrk are fr it t serve: As part f the theretical underpinning fr the cncept f value, as discussed in Sectin 2D As a tl fr ensuring that rganizatins, in preparing their integrated reprts, cnsider all the frms f capital that they use and affect It wuld be impracticable, and indeed unnecessary, fr the Framewrk at this stage t define every pssible stck f value exclusively and exhaustively, and in a way that attempts t cver all rganizatinal strategies and business mdels. The rle f an integrated reprt is t tell the rganizatin s unique value creatin stry; this requires flexibility and shuld nt be unduly bund by definitins f capitals that may nt cater apprpriately fr the rganizatin s particular apprach t value creatin. Fr example, relatinships with stakehlders, which are f grwing significance t the ability f rganizatins t create value ver time, are included in the descriptin f scial and relatinship capital in paragraph Sme rganizatins culd, hwever, think f relatinships as a separate capital, as part f human r intellectual capital, r as inherent in, and therefre cutting acrss and linking, a number f the individual capitals. Similarly, the capacity t innvate (part f human capital in paragraph 2.14) r the intangibles assciated with brand and reputatin (part f intellectual capital in paragraph 2.14), culd be thught f by sme rganizatins as separate capitals, part f ther capitals r cutting acrss a number f the individual capitals Regardless f hw individual rganizatins categrize r define the capitals fr their wn purpses, the pint is that all shuld cnsider the categries identified abve as a tl t ensure that they are cnsidering the full, brad range f capitals and have nt mitted t reprt n any material capital that they use r affect. 12/51

13 Ownership f the capitals 2.19 Nt all capitals an rganizatin uses r that it affects are wned by the rganizatin. They may be wned by thers, r may nt be wned at all in a legal sense (e.g., access t unplluted air). This pint is relevant t the cncept f value and is discussed further in Sectin 2D. Metrics 2.20 Metrics, such as KPIs (see discussin in Sectin 4F) and in sme cases mnetizatin, are very imprtant in explaining an rganizatin s uses f and effects n varius capitals. Nnetheless, the Framewrk des nt require, and it wuld nt be practicable t expect, rganizatins t attempt t quantify all mvements in all capitals. Many uses f and effects n the capitals are best (and in sme cases can nly be) reprted n in the frm f narrative rather than thrugh metrics. Cmplexity and trade-ffs 2.21 The Framewrk des nt require, and it wuld nt be practicable t expect, that <IR> will be able t explain all the cmplex relatinships between all the varius capitals that wuld be necessary t reflect a cmplete, aggregated picture f an rganizatin s verall effect n the wrld s stck f all the capitals. It is imprtant, hwever, that the material factrs that influence value creatin ver time are either quantified r reprted n in narrative frm, r bth Organizatins shuld reprt n material trade-ffs : (a) (b) (c) Between capitals r between cmpnents f a capital (e.g., creating emplyment, which increases scial and relatinship capital, thrugh an activity that negatively affects the envirnment, which decreases natural capital) Over time (e.g., chsing a curse f actin when it is likely that a different curse wuld result in a greater capital increment but nt until a later perid) Between capitals wned by the rganizatin and thse wned by thers r nt wned at all. 13/51

14 C The business mdel Definitin 2.23 Fr the purpse f <IR>, the term business mdel is defined as a system f inputs, value-adding activities and utputs that aims t create value ver the shrt, medium and lng term. Reprting 2.24 As demnstrated in the diagram at paragraph 2.4, the business mdel exists at the hub f an rganizatin and represents the fundamentals f the entity s activities, perating within an verarching rganizatinal architecture Business mdel reprting can be effectively rganized as fllws: Inputs 2.26 The integrated reprt shuld identify the key capitals n which the rganizatin depends r that prvide a surce f differentiatin fr the rganizatin, t the extent that they are material t understanding the rbustness and resilience f the business mdel. The discussin prvides a cncise, yet meaningful, accunt f hw these key inputs link t risk, strategy r financial perfrmance (e.g., cst base). T enhance reprt users understanding f its use f financial capital, the rganizatin shuld prvide an verview f its funding mdel. In terms f manufactured capital, the rganizatin shuld explain hw facilities, equipment and ther infrastructural cmpnents lend peratinal efficiency and effectiveness in terms f prductivity, cst cntainment, enhanced safety and envirnmental stewardship. The imprtance f human capital t an rganizatin shuld be reflected in a discussin f the key skills and experience f staff and the ways in which the required levels are maintained, such as training and develpment prgrammes. 14/51

15 Intellectual capital such as brands, patents, cpyrights and prprietary knwledge are ften vital cmpnents f a rbust business mdel. These intangible assets are ften nt fully reflected n the balance sheet f an rganizatin and it is imprtant that their capacity t create value t the rganizatin is explained. A discussin f natural capital shuld include a descriptin f the key natural resurces needed t allw the business mdel t functin. Many rganizatins have a significant reliance n certain raw materials t ensure cntinuity f prductin. It is imprtant t understand hw secure the availability, quality and affrdability f these materials, particularly in light f planetary limits that can render an rganizatin vulnerable t changes, sme sudden and many irreversible, that can affect its entire value creatin mdel. Where the supply f key raw materials is uncertain in the lng term, the rganizatin shuld explain what is being dne t surce suitable alternatives materials r prcesses. Als, where significant envirnmental remediatin effrts are likely t be invlved, this shuld be explained. Scial and relatinship capital cnsideratins include the netwrk f partnerships and relatinships that the rganizatin relies upn as well as prgrams designed t develp and enhance these interactins Organizatins shuld nt attempt t prvide an exhaustive list f all capitals used. Rather, the fcus shuld be n thse capitals that have a material bearing n the ability f the rganizatin t create value in the shrt, medium and lng term. Value-adding activities 2.28 What an rganizatin des t transfrm inputs int valuable utputs is at the heart f the business mdel. These value-adding activities include the planning, design and prductin f prducts that satisfy market needs r services that prvide slutins t custmer prblems. Sme business mdels rely n making suitable infrastructure available fr use by ther service prviders. In all these cases, the business mdel requires meeting certain current service level agreements as well as maintaining any technlgical advantage ver cmpetitrs Establishing and maintaining a cst advantage ver cmpetitrs is an imprtant factr influencing the lng term success f an rganizatin. An understanding f the prcesses in place t drive imprvements in the efficiency and effectiveness f business activities is anther significant cnstituent part f a gd business mdel descriptin as is the effective management f partnerships and relatinships A descriptin f value-adding activities shuld als include hw the rganizatin differentiates itself in the market place, including prduct differentiatin, market segmentatin, the channels used t cmmunicate with ptential custmers and deliver market fferings, and the extent t which the business mdel relies n revenue generatin after the initial pint f sale (e.g., extended warranty arrangements r netwrk usage charges) Businesses that stand still tend t fall behind in the race t succeed. Encuraging a culture f innvatin is a key value-adding activity in terms f, e.g., generating new prducts and services that anticipate custmer demands, intrducing efficiencies such as better use f technlgy, and input substitutin t minimize adverse scial r envirnmental impacts. Further, the capacity f the business mdel t adapt t changes (e.g., in the availability, quality and affrdability f inputs in respnse t trends such as resurce scarcity) is an imprtant aspect f the ability t add value. The business mdel descriptin shuld therefre include 15/51

16 Outputs an explanatin f hw the rganizatin appraches the need t innvate and hw the business mdel has been designed t adapt t change The aim f this element f the business mdel descriptin is t allw the rganizatin t explain the key prducts and services that it places in the market with the aim f creating value Outputs shuld nt be cnfused with utcmes. The rganizatin prduces utputs that can have a range f utcmes bth internally t the rganizatin (e.g., revenue and cash flw) and externally (e.g., custmer satisfactin, tax payments, brand lyalty, scial and envirnmental impacts). This Framewrk psitins the discussin f utcmes within the Perfrmance and utcmes Cntent Element (Sectin 4F). 16/51

17 D Creating value 2.34 <IR> explains hw an rganizatin creates 10 value ver time. Value creatin therefre lies at the heart f <IR>. In summary: Organizatins can create and maximize value by serving the interests f and wrking with all majr stakehlders, including emplyees, custmers, suppliers, creditrs, cmmunities and the envirnment. Value created in this way manifests itself in financial returns t prviders f financial capital and als in psitive r negative effects n the ecnmy, the envirnment and sciety. Value is stred in the capitals. Value is created r destryed fr the rganizatin and its stakehlders as a result f the use f, impact n, and interplay between the capitals caused by the rganizatin s activities. Value fr <IR> purpses is determined by reference t a wide range f interactins, activities, relatinships, and causes and effects in additin t thse directly assciated with financial revenue r financial capital accretin. Infrmatin that enables assessment f the ability f an rganizatin t create value ver time is cmmunicated thrugh a descriptin f the way in which the rganizatin has used and intends t use the different capitals t perate its business mdel and the effects n and trade-ffs between thse capitals ver different time perids; and the rganizatin s value drivers and the pprtunities and risks that affect them. These factrs are encapsulated in the Cntent Elements in Chapter 4. Value fr prviders f financial capital 2.35 Cmmunicatins that result frm <IR> are aimed principally at prviders f financial capital in rder t supprt their financial capital allcatin decisins. Thse prviders f financial capital that take a lng term view f an rganizatin s perfrmance and utcmes are particularly likely t benefit frm <IR>. Prviders f financial capital are fcused n value in the frm f financial returns. Thse returns are, hwever, dependent upn inter-relatinships between varius types f capital in which ther stakehlders such as custmers, suppliers, emplyees, legislatrs and regulatrs have an interest. Therefre, ther stakehlders are als likely t benefit frm the infrmatin in an integrated reprt, but their particular infrmatin needs will als cntinue t be served thrugh ther frms f cmmunicatin, including financial statements and sustainability reprts. Why fcus n prviders f financial capital, particularly thse taking a lng term view? 2.36 The public interest and the interests f prviders f financial capital that take a lng term view f an rganizatin s perfrmance and utcmes are likely t be aligned in that bth are fcused n lng term, as well as shrt and medium term value creatin. <IR> cmmunicates infrmatin that enables prviders f financial capital t assess the rganizatin s ability t create value ver time. In ding s it supprts their decisin-making, engagement and vting practices, and the public interest by encuraging the allcatin f financial resurce t reward and supprt lng term value creatin within planetary limits and scietal expectatins. 10 Althugh rganizatins aim t create value verall, this may invlve the destructin r depletin f value stred in sme capitals. Whenever value creatin is mentined, this als includes value destructin r depletin. 17/51

18 2.37 All prviders f financial capital may play a part in supprting value creatin and the public interest. Hwever, activities and strategies that are verly fcused n ptimizing shrt term financial perfrmance can impede the ability f rganizatins and prviders f financial capital t make lng term investments. These include investments in research aimed at lng term innvatin and in the infrastructure needed t address munting glbal challenges, such as resurce shrtages as planetary limits are apprached, ecnmic instability, climate change, and changing demgraphics and scietal expectatins The prvisin f financial capital, particularly when taking a lng term view f an rganizatin s perfrmance and utcmes, is, f curse, accmpanied by uncertainties that, in turn, demand sphisticated appraches t pprtunity and risk assessment based n a wide range f infrmatin abut financial, peratinal, reputatinal, legal, scial, envirnmental and plitical risk. Hence <IR> requires a wider range f infrmatin than has rdinarily been prvided thrugh traditinal rganizatinal reprting. The meaning f value 2.39 Traditinally, the meaning f value fr prviders f financial capital has been assciated with the present value f expected future cash flws and value creatin has been understd as the change in that measure f value due t an rganizatin s perfrmance. Althugh prviders f financial capital take ther factrs int cnsideratin, infrmatin abut risk and reward, and particularly hw it affects future cash flws, is crucial t their understanding f hw and the extent t which an rganizatin creates value <IR> is based n the understanding that future cash flws and ther cnceptins f value are dependent n a wider range f capitals, interactins, activities, causes and effects, and relatinships than thse directly assciated with financial revenue r financial capital accretin. Thse brader factrs have nt rdinarily been adequately reflected in traditinal rganizatinal reprts and therefre have nt been adequately reflected in valuatin methdlgies such as thse based n the discunted cash flw mdel Value fr <IR> purpses, therefre, encmpasses ther frms f value that the rganizatin creates r depletes thrugh the use f, impact n r interplay between the capitals, each f which represents a stre f value that may ultimately affect the extent t which prviders f financial capital may expect financial returns. <IR>, therefre, needs t cnsider the brader cntext f the value created r destryed in all the capitals, including the creatin f externalities thrugh the activities f the rganizatin. The relatinship between the capitals and value 2.42 Value is created r depleted ver different time hrizns and fr different stakehlders thrugh different capitals. Overall, value fr prviders f financial capital is unlikely t be created thrugh the maximizatin f ne capital while disregarding the thers. Fr example, the maximizatin f financial capital (e.g., prfit) at the expense f the human capital embdied in an rganizatin s emplyees (e.g., thrugh inapprpriate human resurce plicies and practices) will likely nt maximize value in the lng term <IR> shuld take accunt f the extent t which csts r ther effects n varius capitals have been externalized (i.e., the csts r ther effects have impacted capitals that are nt wned by the rganizatin, such as the envirnment, emplyees, the lcal cmmunity and future generatins). Externalities may be psitive r negative (i.e., they may result in a net increase r decrease t the value embdied in capitals). Externalities may ultimately increase r decrease 18/51

19 value t prviders f financial capital in the lng term, and withut apprpriate disclsure f their effects, thse prviders will nt have the infrmatin they require t make decisins abut lng term value and be able t allcate resurces accrdingly. Organizatinal value drivers 2.44 Value drivers are capabilities r variables that give an rganizatin cmpetitive advantage and ver which it has sme degree f cntrl s as t create value. They may include: Financial drivers such as grwth in sales r market share, pricing strategy, peratinal efficiency, brand equity and cst f capital Other drivers such as custmer relatins, scietal expectatins, envirnmental cncerns, innvatin and crprate gvernance Values such as integrity, trust and teamwrk that supprt value creatin Value drivers alne and in cmbinatin affect an rganizatin s ability t create value ver time. The type and cmbinatin f relevant value drivers are unique t each rganizatin and shuld be disclsed fr <IR> purpses. Cmmunicatins that infrm the assessment f value creatin 2.46 <IR> shuld explain that the rganizatin s ability t create value in the shrt, medium and lng term is affected by a number f factrs, fr example: The varius capitals the rganizatin uses and affects including the interdependencies and trade-ffs that are made between them; The external cntext in which the rganizatin perates, the pprtunities and risks faced by the rganizatin and hw it tailrs its strategy t manage risks, pprtunities, and changes t the external cntext; Organizatinal value drivers; The stability f the rganizatin s gvernance structure, t help assess its resilience against shrt term disruptins s as t secure lng term returns; and The results f engagement with the varius parties that have an interest in the capitals affected by the rganizatin s activities. These factrs are encapsulated in the Cntent Elements in Chapter Infrmatin that supprts the cmmunicatin f value creatin can be cnveyed in quantitative r qualitative terms r a cmbinatin f bth. Where it is nt practicable quantitatively t measure mvements in the capitals, qualitative disclsures shuld be made t explain changes in the availability, quality, r affrdability f capitals as business inputs and hw their use by the rganizatin enhances r depletes them. In sme cases mnetizatin f these factrs may be apprpriate; this is an area f innvatin and develpment. 19/51

20 3. GUIDING PRINCIPLES 3.1 The fllwing Guiding Principles shuld underpin the preparatin f an integrated reprt, infrming the cntent f the reprt and hw infrmatin is presented: A B C D E F Strategic fcus and future rientatin Cnnectivity f infrmatin Stakehlder respnsiveness Materiality and cnciseness Reliability Cmparability and cnsistency. A Strategic fcus and future rientatin 3.2 Guiding Principle 1 An integrated reprt shuld prvide insight int the rganizatin s strategy, and hw that relates t its ability t create value in the shrt, medium and lng term and t its use f and effects n the capitals. 3.3 Applying this Guiding Principle is nt limited t describing the rganizatin s strategy and future utlk in accrdance with Cntent Elements 4 and 7. It als pervades the selectin and presentatin f ther cntent, and may include, fr example: Highlighting significant pprtunities, risks and dependencies flwing frm the rganizatin s market psitin and business mdel that affect the rganizatin s ability t create value ver time An explanatin f thse charged with gvernance s view f: the resilience f the rganizatin s business mdel the relatinship between past and future perfrmance and utcmes, and the factrs that may change that relatinship hw the rganizatin balances shrt, medium and lng term interests. 3.4 Adpting a strategic fcus and future rientatin in an integrated reprt als invlves clearly articulating hw the cntinued availability, quality and affrdability f significant capitals cntribute t the rganizatin s ability t achieve its strategic bjectives in the future and thereby create value. 3.5 Particular care is needed with respect t the future-riented infrmatin t avid creating bilerplate disclsures. Infrmatin shuld nly be included in the integrated reprt when it is f practical use t intended users in cnsidering the rganizatin s strategy, gvernance, perfrmance and prspects. 3.6 Future-riented infrmatin is, by its nature, mre uncertain and, therefre, less precise than histrical infrmatin. Uncertainty is nt, hwever, a reasn in itself t exclude such infrmatin, but it des mean that key estimates and significant assumptins used by management, tgether with pssible risks, shuld be included s intended users can prperly assess that infrmatin. (See paragraphs fr further guidance.) 20/51

21 B Cnnectivity f infrmatin 3.7 Guiding Principle 2 An integrated reprt shuld shw, as a cmprehensive value creatin stry, the cmbinatin, inter-relatedness and dependencies between the cmpnents that are material t the rganizatin s ability t create value ver time. 3.8 Cnnectivity is central t ensuring that an integrated reprt: Fcuses n the ttal picture f the rganizatin s unique value creatin stry (i.e. hw its strategy, gvernance, perfrmance and prspects create value ver time) Supprts intended users understanding f the different factrs that affect the future f the rganizatin (including its pssible perfrmance and utcmes) and hw they interact Helps t break dwn established sils in accessing, measuring, managing and disclsing infrmatin, and the traditinal fcus f reprting primarily n financial matters and histrical matters Facilitates intended users ability t drill dwn and interlink infrmatin in ther cmmunicatins depending n their needs. 3.9 The mre that integrated thinking underlies the rganizatin s unique value creatin stry by being embedded int the activities f the rganizatin, the mre naturally will the cnnectivity f infrmatin flw int management analysis and decisin making, and subsequently int reprting. Accrdingly, intrducing ways t imprve integrated thinking and capabilities within an rganizatin can help drive the <IR> prcess. Mrever, because f the mutually reinfrcing nature f integrated thinking and <IR>, the mre experience an rganizatin gains with the <IR> prcess the mre integrated thinking becmes embedded int its activities The key cmpnents that are relevant t the cnnectivity f infrmatin are the cnnectivity between: The Cntent Elements, i.e., the cnnectivity between the rganizatin s perating cntext, gvernance, pprtunities and risks, strategy and resurce allcatin, business mdel, perfrmance and utcmes, and future utlk. It is nly by cnnecting the Cntent Elements that the rganizatin is able t tell its unique value creatin stry. The stry integrates the Cntent Elements int a ttal picture f value creatin and reflects the dynamism f the rganizatin s activities as a whle. Examples include: an analysis f existing resurce allcatin, and hw the rganizatin will cmbine resurces r make further investment t achieve targeted perfrmance thrugh the business mdel infrmatin abut hw the rganizatin s strategy is tailred fr changes in cnditins and events (e.g., when new pprtunities and risks are identified r past perfrmance and utcmes are nt as expected) hw the rganizatin s strategy links t KPIs and KRIs. The past, present, and future. An analysis by the rganizatin f its activities in the past-t-present dimensin can prvide intended users with significant clues t assess the plausibility f what has been reprted cmpared t what may transpire in the present-t-future dimensin. The explanatin f the past-t-present may als be fundamental t analysis by 21/51

22 intended users f the quality f management when cnsidering whether r nt the rganizatin will achieve the future perfrmance and utcmes described in the integrated reprt. The capitals, including the trade-ff, aggregatin, cnversin ver time, and enhancement and depletin f the capitals. (See discussin f the capitals in Sectin 2B.) Financial infrmatin and ther infrmatin, such as: research and develpment plicy, technlgy/knw-hw, capital investment, and investment in human resurces, and their implicatins fr expected revenue grwth r targeted market share envirnmental plicies, energy efficiency, cperatin with lcal cmmunities, r technlgies t tackle scial issues, and their implicatins fr cst reductin r enlarged business pprtunity lng term custmer relatinship, custmer satisfactin and reputatin, and their implicatins fr revenue r prfit grwth. Quantitative and qualitative infrmatin. Bth qualitative and quantitative infrmatin are necessary if an integrated reprt is t prperly represent the rganizatin s value creatin stry, with each prviding cntext t the ther. Management infrmatin, bard infrmatin and infrmatin reprted externally. Fr example, as nted in paragraph 4.33, quantitative indicatrs that are apprpriate t include in an integrated reprt shuld be cnsistent with indicatrs used by thse charged with gvernance It is als imprtant t cnsider that cnnectivity frm the intended users pint f view invlves the cnnectivity between: Infrmatin in the integrated reprt, infrmatin in the rganizatin s ther cmmunicatins, and infrmatin available t intended users frm ther surces, recgnizing that intended users make decisins by mdifying and custmizing the infrmatin that rganizatins prvide, and cmbining it with ther infrmatin they have accumulated. In this cntext, infrmatin and cmmunicatin technlgy (e.g., the internet, XBRL and scial media) can be used t imprve intended users capability t search, access, cmbine, cnnect r analyse infrmatin. (See discussin f technlgy in Sectin 5G.) 3.12 The cnnectivity f infrmatin, and indeed the verall usefulness f the integrated reprt, is enhanced when it is lgically structured and well presented, written in straight-frward language, and includes effective navigatin devices, such as sectin summaries, clearly delineated (but linked) sectins, and crssreferences. 22/51