Integrated Reporting: Trends in India and Professional Opportunities

Introduction

Since its inception in 2010, Integrated Reporting (IR) has emerged as the latest form of stakeholder communication by listed entities across the globe. Today over 2,500 companies across 75 countries adopted this advanced reporting for stakeholder communication. India witnessed the first IR in 2016 when only one firm voluntarily issued an IR. However, since then number of firms adopting IR witnessed a steady growth. As of 31st March 2023, 96 non-financial firms across industries have voluntarily issued Integrated Reports. This growth in IR was mainly driven due to perceived reporting benefits which promote value creation, sustainable business practices, and enhanced stakeholder communication.

Mishra et al., (2022), reveals that critical components that shape this perception are concise, effective & transparent reporting, enabling enhanced decision-making. However, these perceived benefits are subject to the quality of IR. Devarapalli et al., (2024), found that although the quality of Integrated Reporting Information (IRI) improved in 2021 compared to 2020, individual items did not show significant variation. Soriya & Rastogi, (2023) explored that robust IR practices can bolster the issuer\'s capacity to attract capital from markets by appealing to investors. These research findings reaffirm that the advantages of IR depend on how well the reports adhere to the IR framework standards.

The IR framework comprises important parameters like integrated thinking, value creation amongst the six capitals, and information interconnectivity which distinguish IR from traditional reporting. An IR reflects these parameters majorly through disclosures like value creation or business model diagram, materiality assessment process & materiality matrix. An adequate depiction of value creation or business model diagram along its key elements like input, process, output, and outcomes, disclosure regarding the materiality assessment process, and presentation of materiality matrix are key differentiators for checking the quality of IR.

Amongst this backdrop, this article discusses the trends in the voluntary adoption of IR by Indian corporates over the years, and the compliance towards the integrated reporting framework with emphasis on connectivity of information and materiality through content analysis of the IR. We further present the potential professional opportunities in the domain of IR.

Integrated Reporting Framework

As per the definition by The International Integrated Reporting Council (IIRC) \"integrated report is a concise communication about how an organization\'s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation, preservation or erosion of value over the short, medium and long term\" (IIRC, 2021). The integrated reporting framework is the fundamental document that lays the foundation of IR. The important aspects as per the framework are integrated thinking and value creation amongst the six capitals with its interconnected functioning. The IR framework defines integrated thinking as \"the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects\". The fundamental concept of value as per the IR framework includes creation, preservation, and erosion across the six capitals on which any organization depends. These capitals are financial, manufactured, intellectual, human, social and relationship, and natural capital. The preparation and presentation of IR are assisted by seven guiding principles (Table 1). These principles assist the organization in deciding the content of the report and towards its proper presentation.

Table 1: Guiding Principles of IR

The Rise of Integrated Reporting in India

The Securities and Exchange Board of India (SEBI) in its circular dated 6th Feb 2017, provided an advisory to the firms on following the principles of Integrated Reporting (SEBI, 2017). It allowed the voluntary adoption of Integrated Reporting for listed firms. With just one company in 2016, there has been a consistent increase in the number of firms voluntarily issuing IR over the period, except for FY 2022-23, where the increase was lower. This shows that Indian firms have preferred to provide financial and non-financial information to their various stakeholders beyond the mandatory reporting requirements and also meet global reporting expectations. For FY 2022-23, there were 96 firms that issued voluntary IR. A further breakup indicates that the manufacturing industry dominates over the services industry in adapting to integrated reporting.

The major reason would be its operationally higher impact on the environment and social aspects as compared to the service industry. An overview of the number of companies involved in IR across different sectors highlights the construction materials sector being the highest among all the sectors.

There is no mandatory requirement for the assurance of non-financial information forming part of the IR. However, firms can voluntarily get the report assured to further enhance the credibility of the disclosure. There is an increasing trend in the firms opting for external assurance of the IR.

Meeting the IR Framework Requirements

There has been a significant increase in the number of Indian non-financial firms issuing voluntarily integrated reporting. These reports must adhere to the IR reporting framework to ensure the objectives of such reporting are achieved. Although there are high-quality informative integrated reports, the fact that a few reports do not comply with the basic framework requirements can\'t be denied. We carried out a primary investigation of the IR issued in FY 2022-23, focusing on the presence of a business model diagram, one of the vital content elements and materiality, a crucial guiding principle for the preparation and presentation of IR.

1. Primary Investigation: Business Model Diagram & Materiality Matrix

\"Business Model\" aims towards the value creation over the short, medium, and long term. It is described with the key elements of inputs, business activities, outputs, and outcomes. The materiality matrix depicts the material issues identified by an organization through a materiality assessment process involving various stakeholders. These are the matters that substantively affect the organization\'s ability to create value over the short, medium, and long term.

Out of the 96 reports examined, 14 reports (around 15%) did not disclose the business model diagram and 29 firms (around 30%) did not report the materiality matrix. The lack of these disclosures can make it difficult for stakeholders to understand the company\'s business and how it creates value. Further, such disclosures are highly recommended to improve transparency and accountability, and they could also help the company to identify and address its most important sustainability challenges.

For the reports which have provided business model diagrams and materiality information, we carried out more in-depth content analysis. The aspects covered include:

• business model-related presentation
• output and outcomes contents
• materiality assessment-related information
• integration of IR in Indian Annual Reports

2. Business/Value Creation Model related presentation

As per the IIRC framework, the business model diagram and explicit identification of key elements are two of the crucial aspects towards enhancing the effectiveness and readability of the business model. In this section, we present our findings basis in-depth content analysis aspects of the relevant sections within the IR.

The business model diagram provides a quick snapshot to understand the organization\'s system of transforming inputs towards creating value. Table 2 summarizes the best practices, followed by observations that have a scope for improvement.

Table 2: Best Practices of Business Model Diagram

Source: Authors\' compilation

Below are the common observations which have a scope of improvement:

1. no information about the business model on the content page of the report;
2. the business model diagram being presented towards the lagged part of the report; and
3. the diagram goes across two to three pages, thus impacting the readability and understanding.

3. Output and Outcome Contents

Across all the IRs where a business model diagram has been provided, inputs regarding the six capitals have been provided along with the presence of business activities, strategies etc. The major challenge identified was with the information provided in the reports regarding output and outcomes.

As per the IIRC framework, outputs are organizations\' key products and services (e.g. for a steel company, tonnage of steel production can be output) with the possibility of other outputs like by-products and waste depending upon their materiality. Outcomes are internal (e.g. cash flows, employee satisfaction) and external consequences (e.g. customer satisfaction, $CO_2$ emission) for the six capitals, with both positive and negative possibilities.

There was a huge variation observed in this aspect of the business model diagram observed in the 77 reports (Table 3) majorly related to data diversity, lack of negative outcomes, and inconsistency across reports.

Table 3: IR for Output and Outcome Study

Source: Authors\' compilation

The primary focus of the reports was on quantitative data, mostly KPIs (Key Performance Indicators) related to the six capitals (financial, manufactured, intellectual, human, social and relationship, natural). However, some reports also include qualitative information, typically presented as factual statements. Scrutiny on referring to earlier year reports revealed instances of repetition of similar statements over years. Table 4 demonstrates the inconsistency across reports where outputs are reported quantitatively, with outcomes described qualitatively (most common), both outputs and outcomes reported quantitatively, outputs and/or outcomes missing entirely and a mix of quantitative and qualitative data for both outputs and outcomes. The variations existed among both early adopters and those newly implementing IR.

Table 4: Variation in Output and Outcomes

Source: Authors\' compilation

A significant concern of the IR was the tendency to report only positive outcomes. Negative outcomes, if any, are often absent, which is a common area of improvement across IRs.

4. Materiality Assessment

The materiality determination process comprises identification, evaluation, prioritization and determination of information to be disclosed. This section discusses the major observation on the materiality-related disclosure of the Indian IRs where major reports have provided the material issues under three categories i.e. environment, social, economics & governance.

Best Practices in Materiality Assessment (IR)

A few IRs under study demonstrated a strong approach to materiality assessment. This was evident through several key aspects. First, the report outlined a comprehensive process for identifying material issues, involving detailed research and stakeholder engagement activities such as interviews, focus groups, and surveys. Second, each identified issue was evaluated based on its significance to both the company\'s success and stakeholder concerns. The report then categorized these material issues under environmental, social, and governance (ESG) themes for better organization. Furthermore, a materiality matrix was likely presented, visually prioritizing the issues based on their impact (low, moderate, or high). Importantly, the IR went beyond simply disclosing these material matters. It also demonstrated how these issues connect to the company\'s six capitals, operational boundaries, and their impact on stakeholders. Finally, the report provided information on how the company addresses each material issue, outlining its strategies and actions taken. This transparency strengthens the overall materiality assessment and emphasizes its role as a foundation for effective IR.

Additional Observations

Most reports incorporated an economic pillar alongside the standard ESG (environmental, social, and governance) pillars, providing a more comprehensive view of materiality. Some companies based their current assessment on previous years\' exercises, validating them through internal discussions. Certain topics, like sustainable supply chains, digitalization, community engagement, and occupational health & safety, emerged as common themes across the ESG matrix, indicating differences in organizations\' approaches towards these issues.

Practices with a scope of improvement

There are reports where the materiality issues contain very generic disclosure. This depicts a lack of regular engagement with the stakeholders and can be evidenced basis the below observations. There were reports where the materiality assessment was carried out internally only. Some reports have not provided any information regarding the materiality assessment exercise however materiality assessment information has been provided. A report has shown that the material issues were identified during the FY 2014-16, which might no longer be relevant for the issued IR. The same report has shown \"operational efficiency\" as a material issue twice and thereafter described community development. A report has mentioned carrying out materiality assessment every three years. Further on, only 3 material issues were disclosed with no issues reported under governance factors.

Major Material Issues

Here is a summary of the findings on material issues across the studied IRs:

1. A total of 1,298 material issues were identified across reports, including repetition across the firms.
2. Social aspects (42%) were the most common material issue category, followed by environment (33%) and economics/governance (25%).
3. Common material issues included:
   
   • Governance: Corporate Governance, risk management, ethics
   • Environment: Waste Management, climate change, water management
   • Social: Safety and Human Rights, diversity, inclusion

The findings suggest that social issues are of primary concern to companies, followed by environmental and economic/governance issues. This highlights the importance of social responsibility for businesses. Safety, waste management, and human rights emerged as the most common material issues across all categories, indicating their widespread significance.

Integration of IR in Indian Annual Reports:

There\'s significant variation in how well companies integrate their IR section with other report sections like financial statements and management discussions. Some companies achieve strong integration by aligning IR narratives with financial metrics, risk assessments, and strategic priorities from other sections. This fosters a holistic view of performance and strategy. However, not all reports exhibit this level of integration. In some cases, the IR section remains isolated, presenting high-level information without strong connections to details in other sections. This lack of integration can lead to a fragmented understanding for stakeholders, making it difficult to see how strategies translate into financial and operational outcomes. Enhancing IR integration is crucial for transparency and allows stakeholders to gain a clearer understanding of the impact of strategic initiatives on financial and operational performance.

Professional Opportunities in IR

Amidst the rise of IR in India, with evidence of high-quality reporting along with scope for improvements, possibilities for Chartered Accountants (CAs) who develop the necessary skills can\'t be ruled out. By embracing IR principles, CAs can position themselves for diverse and rewarding career paths in both practice and industry.

• CAs in Practice: CAs in practice can leverage their existing client base to promote IR\'s benefits and guide implementation. Their financial expertise is crucial for ensuring strong links between financial and non-financial data in reports, making them more user-friendly for stakeholders. Additionally, CAs can expand their assurance services by assuring the non-financial disclosures that are a core part of IR. Upskilling and collaborating with non-accounting professionals strengthens their offerings.
• CAs in Industry: Within companies, CAs can play a vital role at various levels. In leadership, they can champion \"integrated thinking,\" fostering strategic value creation, the foundation of effective IR. Mid-level CAs can execute IR preparation by developing methods to effectively capture non-financial information for accurate reporting. Finally, CAs in the investment sector can leverage their IR knowledge to better value companies based on non-financial data and business value creation models, enabling them to identify sustainable investment opportunities and manage wealth more effectively.

Conclusion

Integrated reporting has gradually emerged as a preferred mode of one-stop document for corporate communication to its various stakeholders. Since 2016, when the first IR was issued in India, there were 96 listed non-financial firms that have issued voluntary IR in FY 2022-23. This growth story is evidence of responsible business by Indian listed firms and a transformational shift from traditional reporting to integrated reporting. Although Indian IR fulfils the framework requirements, there exists a wide scope of improvement majorly in areas like business or value creation model diagram, clarity between output and outcomes, adequate materiality assessment procedure, presentation of materiality matrix with deeper insights on material issues and connectivity of information. The growth of IR and its inherent challenges create opportunities for Indian CAs. By embracing IR principles, Indian CAs would not only contribute towards improvement in the IR regime but can embark on professional growth in this global reporting arena.