Climate change and sustainability are now right at the top of many organisations' priorities. These issues are no longer seen as purely environmental. They have become central business issues, and companies are putting in place systems to analyse their impact on the environment, the business risks and the potential opportunities available. Many organisations have woken up to the profound effect that climate change will have on their activities, and we are seeing more and more organisations in the financial sector taking significant action. But can you measure if these actions are having a positive external impact? And what is their role in the organisation as a whole?
Integrated reports disclose and connect financial, social, environmental and governance inputs and performance information. They improve transparency by providing concise communication about how an organisation's strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term. In the current situation with the COVID-19 pandemic, an integrated report could be particularly significant for many businesses to help stakeholders understand how an organisation’s current and future value has been impacted.
The traditional view of the value created by organisations focussed on the purely financial, implying that value was very narrowly defined and measured purely in monetary terms. Now, value has a much broader meaning. According to the IIRC Framework, value is created by organisations from a wide range of interactions, activities, relationships, causes and effects.
So what are the six capitals of value creation that should be considered?
- Financial: The pool of funds available to use in the business activities which may be obtained through financing or generated from activities or investments.
- Manufactured: Manufactured physical objects including buildings and infrastructure, which may be purchased from other entities or internally generated.
- Intellectual: Organisational, knowledge-based intangibles including intellectual property, patents, rights, and organisational capital like tacit knowledge, systems and protocols.
- Human: People’s competencies, capabilities and experience, and their motivation to innovate.
- Social and relationship: The institutions and relationships within and between organisations, communities, groups of shareholders and other networks. This can include key stakeholder relationships, intangibles associated with reputation and brand, social norms and values.
- Natural: All renewable and non-renewable environmental resources and processes including land, minerals, water and biodiversity.
The capitals are categorised by the International Integrated Reporting Council (IIRC) into six categories, but the IIRC explicitly acknowledges that an organisation may choose to use a different way to describe, monitor and measure its capitals. It is up to your organisation to decide how you should categorise your capitals, and this will largely be driven by your organisation’s mission, vision and business model. Your core activities will dictate the type and magnitude of the capital flows that occur.
Climate change and sustainability look set to make headlines throughout the finance world. This is rightly a hot topic and finance professionals can be influential in encouraging the organisations they work for to adapt and change to be successful in the future. The ethos behind Integrated Reporting is strongly linked to sustainable development, which in turn discourages short termism and encourages a longer view when determining an organisation’s strategy and operations.
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