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December 2020


By Himanshu V. Kishnadwala
Chartered Accountant
Reading Time 14 mins


Over the last few years there has been a paradigm shift in how the
performance of a company is viewed – it is no longer viewed only by how much
profits the company made, how much did it pay shareholders, or how much taxes
did it pay to the government. At business and investor forums, companies are
increasingly being asked questions like ‘Is the company following sustainable
practices?’ ‘Is it following the best ethical practices?’ ‘Is there gender
equality?’ ‘Is it employing child labour?’ ‘What is it doing about climate


At the UN Climate Action Summit in 2019 a
young activist 17 years of age, Greta Thunberg from Sweden (who on 20th September,
2019 led the largest climate strike in history), gave a devastating speech
questioning why world leaders are not considering climate change and are
‘stealing the future’ from the next generation. She said: ‘You have stolen
my dreams and my childhood with your empty words. And yet I’m one of the lucky
ones. People are suffering. People are dying. Entire ecosystems are collapsing.
We are in the beginning of a mass extinction, and all you can talk about is
money and fairy tales of eternal economic growth. How dare you!’


Welcome to the brand new world of Integrated



Beyond the traditional financial reporting,
there is a growing interest in reporting other matters and this has drawn the
attention of not only activists and companies (mainly goaded by activists), but
also regulators and governments. Various stakeholders have started realising
the need to have a fundamental change in reporting wherein the focus is not
only the financial capital but also on demonstrating the value created by the
company while operating within its social, economic and environmental system.


The intended change requires in-depth
understanding of all the building blocks of the value creation process of
business, to enable corporates to develop a reporting model which gives an
insightful picture of its performance and is considered sufficient to assess
the quality and sustainability of their performance.


Integrated Reporting is the process founded
on integrated thinking that results in a periodic integrated report by an
organisation about value creation over time and related communication to
stakeholders regarding aspects of value creation.


The evolution of Integrated Reporting can be
depicted as under:



The accumulation of all the above reporting
aspects of an organisation would culminate in what is called an ‘Integrated


An Integrated Report, besides the financial,
regulatory information and management commentary, also contains reports on
sustainability and the environment to give users and the society a 360-degree
view of the overall impact which a company can have on the society.


As can be seen from the above, Chartered
Accountants as well as other professionals in the finance and related fields
who till now considered ‘financial reporting’ as their main job, will now
understand and get involved in much more ‘reporting’, especially since many of
these ‘reports’ would, sooner than later, need independent assertion or



International Integrated Reporting Council

Founded in August, 2010, the International
Integrated Reporting Council (IIRC) is a global coalition of regulators,
investors, companies, standard setters, the accounting profession, academia and
NGOs. The coalition promotes communication about value creation as the next
step in the evolution of corporate reporting.


The purpose of IIRC is to promote prosperity
for all and to protect our planet. Its mission is to establish integrated
reporting and thinking within mainstream business practice as the norm in the
public and private sectors. The vision that IIRC has is of a world in which
capital allocation and corporate behaviour are aligned to the wider goals of
financial stability and sustainable development through the cycle of integrated
reporting and thinking.


IIRC has issued the International Integrated
Reporting Framework (referred to as the <IR> Framework) to accelerate the
adoption of integrated reporting across the world. The framework applies
principles and concepts that are focused on bringing greater cohesion and
efficiency to the reporting process and adopting ‘integrated thinking’ as a way
of breaking down internal silos and reducing duplication. It improves the quality
of information available to providers of financial capital to enable a more
efficient and productive allocation of capital. Its focus on value creation,
and the capital used by business to create value over time contributes towards
a more financially stable global economy. The <IR> Framework was released
following extensive consultation and testing by businesses and investors in all
regions of the world, including the 140 businesses and investors from 26
countries that participated in the IIRC Pilot Programme. The purpose of the
Framework is to establish Guiding Principles and Content Elements that govern
the overall content of an integrated report, and to explain the fundamental
concepts that underpin them.



As per IIRC, the Integrated Report <IR>
should provide insight into the company’s strategy and how it relates to the
company’s ability to create value in the short, medium and long term and to its
use of and effects on capital. It should depict the combination,
inter-relatedness and dependencies between the factors that affect the
company’s ability to create value over time. Further, it should provide insight
into the nature and quality of the company’s relationships with its key
stakeholders, including how and to what extent the company understands, takes
into account and responds to their legitimate needs and interests. The report
also provides truthful information about the company, whether the same is
positive or negative. The information in the report should be presented:

(a)        On
a basis that is consistent over time;

(b)        In
a way that enables comparison with other organisations to the extent it is
material to the company’s own ability to create value over time.





1. Financial Capital:

This describes the pool of funds that is
available to the organisation for use in the production of goods or provision
of services. It can be obtained through financing, such as debt, equity or
grants, or generated through operations or investments.


2. Manufactured Capital:

It is seen as human-created,
production-oriented with equipment and tools. It can be available to the
organisation for use in the production of goods or the provision of services,
including buildings, equipment and infrastructure (such as roads, ports,
bridges and waste and water treatment plants).


3. Natural Capital:

The company needs to present its activities
which had positive or negative impact on the natural resources. It is basically
an input to the production of goods or the provision of services. It can
include water, land, minerals, forests, biodiversity, ecosystems, etc.


4. Human Capital (carrier is the

This deals with people’s skills and
experience, their capacity and motivations to innovate, including their:

  •         Alignment with and support of the
    organisation’s governance framework and ethical values such as its recognition
    of human rights;
  •         Ability to understand and implement an
    organisation’s strategy;
  •         Loyalties and motivations for improving
    processes, goods and services, including their ability to lead and to


5. Social

This deals with institutions and
relationships established within and between each community, group of
stakeholders and other networks to enhance individual and collective
well-being. It would include common values and behaviours, key relationships,
the trust and loyalty that an organisation has developed and strives to build
and protect with customers, suppliers and business partners.


6. Intellectual

This discusses a key element to a company’s
future earning potential, with a tight link and contingency between investment
in research and development, innovation, human resources and external
relationships. This can be a company’s competitive advantage.



In September, 2020 the following five
framework and standard-setting institutions came together to show a commitment
to work towards a Comprehensive Corporate Reporting System:

(i)         Global
Reporting Initiative (GRI)

(ii)        Sustainability
Accounting Standards Board (SASB)

(iii)       CDP

(iv) Climate Disclosure Standard Board (CDSB)

(v)        International
Integrated Reporting Council (IIRC).


GRI, SASB, CDP and CDSB set the frameworks / standards for
sustainability disclosure, including climate-related reporting, along with the
Task Force on Climate-related Financial Disclosure (TCFD) recommendations. IIRC
provides the integrated reporting framework that connects sustainability
disclosure to reporting on financial and other capitals.


The intent of this collaboration is to

(a)        Joint
market guidance on how the frameworks and standards can be applied in a
complementary and additive way,

(b)        Joint
vision of how these elements could complement financial generally accepted
accounting principles (Financial GAAP) and serve as a natural starting point
for progress towards a more coherent, comprehensive corporate reporting system,

(c)        Joint
commitment to drive towards this goal, through an ongoing programme of deeper
collaboration between the five institutions and stated willingness to engage
closely with other interested stakeholders.


In September, 2020 the International
Financial Reporting Standards (IFRS) Foundation published a consultation paper
on sustainability reporting inviting comments by 31st December, 2020

(I)        Assess
the current situation;

(II)       Examine
the options – i.e., maintain the status quo, facilitate existing
initiatives, create a Sustainable Standards Board and become a standard-setter
working with existing initiatives and building upon their work;

(III)      Reducing
the level of complexity and achieving greater consistency in sustainable


In October, 2020 the International Auditing and Assurance Standards
Board (IAASB) highlighted areas of focus related to consideration of
climate-related risks when conducting an audit of financial statements in
accordance with the International Standards on Auditing (ISA) by issuing a
document, ‘Consideration of Climate-Related risks in an Audit of Financial


If climate change impacts the entity, auditors need to consider whether
the financial statements appropriately reflect this in accordance with the
applicable financial reporting framework (i.e., in the context of risks of
material misstatement related to amounts and disclosures that may be affected
depending on the facts and circumstances of the entity).


In November, 2020, IFRS issued a document on ‘Effects of climate-related
matters on financial statements’ – companies are now required to consider
climate-related matters in applying IFRS Standards when the effect of those
matters is material in the context of the financial statements taken as a
whole. The document also contains a tabulated summary of examples illustrating
when IFRS Standards may require companies to consider the effects of
climate-related matters in applying the principles in a number of Standards.


Auditors also need to understand how climate-related risks relate to
their responsibilities under the professional standards and the applicable laws
and regulations. (An illustrative audit report where a Key Audit Matter on
‘Potential impact of climate change’ is given in the feature ‘From Published
Accounts’ by the same author on page 75 of this issue.)


The importance of Integrated Reporting <IR> can be gauged by the
fact that HRH Prince Charles in 2004 founded the Accounting for Sustainability
Project (A4S). A4S is challenging accountants to save the world by helping
companies meet the United Nations’ Sustainable Development Goals. At present,
A4S has a presence across the Americas, Europe, Middle East, Africa and Asia
Pacific. Its Accounting Bodies Network includes 16 accounting bodies representing
2.4 million accountants in 181 countries, or nearly two-thirds of accountants
globally. Its goal is to inspire action in the global finance industry and
drive a fundamental shift towards resilient business models and a sustainable


‘The risks from environmental, social and economic crises are clear to
see – not just for our planet and society, but also the future resilience of
the global economy,’
said A4S executive Chairman Jessica Fries who led a session titled ‘Can
Accountants Save the World?’ at the 20th World Congress of Accountants, Sydney,
in 2018. She added, ‘Finance leadership and innovation are essential to the
changes needed to tackle these risks and to create the businesses of tomorrow.
The accountancy and finance profession are uniquely placed to create both
sustainable and commercially viable business models’.



In 2017, the Securities Exchange Board of
India (SEBI) had issued a circular encouraging the Top 500 companies of India
to consider the use of the Integrated Reporting <IR> framework for annual
reporting. The circular was delivered on the International Organization of
Securities Commissions (IOSCO) principle 16 which states that ‘there should be
full, accurate and timely disclosure of information that is material to
investors’ decisions’.


Since then, the companies have started their
integrated reporting journey. In 2019, it was noticed that approximately 100 of
the top 500 companies have reported on Integrated Reporting in their Annual
Reports. Further, SEBI also issued a ‘Consultation Paper on the Format for
Business Responsibility & Sustainability Reporting’ to invite the views of
various stakeholders.


In India, several companies included
information on emissions management, water conservation, energy reduction,
human rights and similar topics in the annual report or published / hosted the
same in a separate sustainability report. The transition from corporate social
responsibility to sustainability reporting focused on moving from philanthropic
social impact to stating the impact on natural and human capital. Moving to
Integrated Reporting <IR> would further broaden the report to be
inclusive of all material capitals, connecting them to business risks, its
related decisions and outcomes in the short, medium and long term.


Several leading companies in India have
already started issuing Integrated Reports and reporting on the six capitals of
Integrated Reporting listed above. These additional aspects of reporting can
result in an extra 15 to 20 pages of reporting, depending on the use of
graphics, etc. Some of the leading companies that have started issuing
Integrated Reporting are Reliance Industries Ltd., Mahindra & Mahindra
Ltd., HDFC Ltd., ITC Ltd., Tata Steel Ltd., Bharti Airtel Ltd., WIPRO Ltd.,
Larsen & Toubro Ltd., Bharat Petroleum Corporation Ltd., Indian Oil
Corporation Ltd. and so on. Though some disclosures in these reports are of the
‘boilerplate’ type, these would evolve in course of time to carry more
meaningful information.



In February, 2015 the ICAI constituted a
group on Integrated Reporting and in February, 2020 it constituted the
Sustainability Reporting Standards Board (SRSB), respectively. The mission of
SRSB is to take appropriate measures to increase awareness and implement
measures towards responsible business conduct; its terms of reference, inter
include developing audit guidance for Integrated Reporting and to
benchmark global best practices in Sustainability Reporting.


ICAI has, to encourage SEBI, also introduced
India’s first award to celebrate the business practice of Integrated Reporting,
internationally acknowledged as the emerging best practice in corporate



A recent trend in investing is
‘Environmental, Social and Governance or ESG Investing’. ESG investing refers
to a class of investing that is also known as ‘sustainable investing’. This is
an umbrella term for investments that seek positive returns and long-term
impact on society, environment and the performance of the business. Many
investors are now not only interested in the financial outcomes of investments,
they are also interested in the impact of their investments and the role their
assets can have in promoting global issues such as climate action. Although big
in global investments, ESG funds, which imbibe environment, social
responsibility and corporate governance in their investing process, are
witnessing growing interest in the Indian mutual fund industry, too. As per
reports, there are currently three ESG schemes managing around Rs. 5,000


Trust in a company is achievable through transparent behaviour and is a
key success factor for the business to operate, innovate and grow. Integrated
Reporting <IR> is promoting the need to answer important questions around
long-term value creation and in a world where economic instability and
long-term sustainability threaten the welfare of society. Integrated Reporting
<IR> is not the ultimate goal. It is only the beginning to take the world
towards more sustainability, to make it a better place for the future


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