Integrated Reporting by Deloitte Netherlands

Shifting from long reports to reporting on the long term Current reporting compared with the Integrated Reporting Framework

Colofon

Interviewers Frits Snijder Barbara Majoor Editorial Board Frits Snijder Gras Communicatie Lead researchers Frits Snijder Lola Debersaques Design Deloitte BCR Marco Dobbelmann Erik Huizer Photography Bekedam (Rotterdam) Print Groen Media

Foreword

Reporting on non-financial information such as sustainability, governance and risk management is on the rise since the last few years. We are convinced that the recent trend of reporting on sustainability and, in its wake, Integrated Reporting, will continue. A Deloitte survey clearly shows this development to affect the CFO’s role in the coming years1. According to the survey more than 70% of CFOs expects sustainability to have an impact on companies’ risk management, the audit procedures, and the reporting processes. This contrasts with 30% of the CFOs currently stating to have no, or hardly any, involvement in the strategy or other business aspects of sustainability. As a consequence, opportunities are missed. The executive board’s involvement is essential if Integrated Reporting is to create any added value. Particularly the involvement of CFOs will enhance the quality, relevance and reliability of the non-financial information, a prerequisite for effective management of social and environmental risks and opportunities. Our conversations as well as our day-to-day experiences indicate that many questions around Integrated Reporting still exist: What is an Integrated Report and will this replace my sustainability report? What is the current framework and what are the requirements? How to start with Integrated Reporting and what are the best practices? And, most importantly, how will Integrated Reporting benefit my company?

This report represents our vision on many of these questions. To this end, we have initiated a research into the current status of and practices for Integrated Reporting in the Netherlands. We have assessed the current reports of listed companies in the Netherlands and compared them with the prototype framework2 of the International Integrated Reporting Council (IIRC). Our report also includes interviews with relevant stakeholders. They shared with us their main expectations of and experiences with Integrated Reporting. We hope the information presented will be practical and conducive to a better common understanding of Integrated Reporting and the related practices. Our survey was based on the prototype framework published on 26 November 2012. The next survey is planned for December 2013. The IIRC is expected to publish its first version of the Integrated Reporting framework by that time. Peter Bommel Chief Executive Officer Deloitte Nederland

Landscape of Sustainability Reporting

Companies that apply GRI in Reporting

24%

Did not prepare a GRI Report

22%

Applied GRI Level C

28%

Applied GRI Level B

26%

Applied GRI Leval A

Level of external assurance on the sustainability information

44%

no assurance

36%

Limited assurance

20%

Reasonable assurance

Content

3 Foreword 6 Management Summary 8 Introduction 13 Susanne Stormer, Deputy executive officer Novo Nordisk ’’We feel Integrated Reporting should add something for companies and anyone reading reports” 23 Rients Abma, Managing director of Eumedion ’’We wish companies to indicate whether their strategy is sustainable in the long term” 33 Cees de Boer, Chief Financial Officer and Chief Operations Officer Deloitte ’’Integrated Reporting is also about the sustainability of your company in its full operating context” 41 Methodology 42 Organisational overview and operating context 44 Governance 46 Opportunities & Risks 48 Strategy and resource allocation plans 52 Business model 56 Performance and outcomes 58 Future outlook 60 Guiding principles 62 References 5

Management Summary

Integrated Reporting is not about reporting more, it is about reporting better. It goes beyond the mere report itself. Integrated Reporting is much more about the processes enabling organisations to better understand the relationships within the company and the resources the organisation uses and affects, as well as how the company impacts its value chain. The most visible output of Integrated Reporting will be the companyâ&#x20AC;&#x2122;s communication about how it is creating and preserving value. The increasing number of events and publications regarding Integrated Reporting is a clear sign of the rising interest in this topic. Our research and this report give the readers a better understanding of what Integrated Reporting is and what it is not. Although the Integrated Reporting framework is still under development, we took the opportunity to see were the 2011 corporate communications of Dutch listed companies stand compared to the prototype framework. In performing this research we acknowledge that the framework is still work in progress and the fact that the prototype framework was launched in November 2012, thus after the publication of the 2011 corporate communications. In this perspective it is no surprise this has resulted in gaps between those two elements, so the current scores are relatively low. Our research should not be concluded as a critical note on current corporate communications. 6

Instead, it provides an overview of the elements companies can improve on in their journey towards Integrated Reporting. The number of companies that have embarked on this journey is very promising. Every action at this stage of the journey is a step towards understanding the concept of Integrated Reporting and, hence, a step in the right direction. To keep the momentum going, we will follow up on this research next year, to identify any progress and the remaining challenges. The two areas showing the most room for improvement are the description of the future outlook and the connectivity. In our interview, both Rients Abma (Eumedion) and Barbara Majoor (professor of accountancy at Nyenrode Business Universiteit) emphasise the importance of forward-looking reporting (page 23). The connection of this information with the business modelâ&#x20AC;&#x2122;s sustainability is considered key information for the shareholders, including a broader picture of the value chain.

Our research shows most companies to have an ’’outlook” section in their annual report. However, these sections usually focus on the short term and mainly discuss financial information. Insight into the business model’s sustainability requires more non-financial information and a long term vision. This is where the reporting companies face challenges. The next steps in reporting on the future outlook would be reporting on expected future changes and how these will affect the availability, quality and affordability of the various capitals. This would help shape a more holistic picture of the companies. Of the companies included in our research, 46% have separate annual reports and sustainability reports. This could be a reason why the companies score relatively low on connectivity - it was one of the reasons Novo Nordisk decided to integrate their annual report and their sustainability report. ’’In dealing with more than one report it took us a great deal of time to decide on what to report and to monitor the consistency of the message”, says Susan Stormer, Deputy executive officer Novo Nordisk and IIRC’s Working Group Member (page 13). One of the challenges we see is avoiding bigger reports with tons of information. We feel the answer is not just combining the reports. It is not about providing more information, but better communication about material issues.

It should include sustainability topics, since they substantially affect the future generation of cash flows. The process of Integrated Reporting, which enhances Integrated Thinking, can help in improving the coherence between the strategy and the business model. Mark Brand, relationship manager for the IIRC pilot programme participants in the Benelux, Germany and Italy, elaborates on two of the questions about Integrated Reporting he receives regularly. What is an Integrated Report and why the framework focuses on long-term capital providers. Another questions we receive as Deloitte a lot, is where to start with Integrated Reporting and how to design such a process. We therefore included our Roadmap towards Integrated Reporting on page 20. A step by step approach that is also recognised by Susan Stormer. She emphasises that performance indicators and targets are important in this respect. We believe our insights from the research can help corporate communications in the current reports be further improved. To be of practical assistance, as all start is hard, we have include some examples of sound reporting for each of the aspects in the IIRC prototype framework. These are presented in the report Shifting from long reports to reporting on the long term – Sector analyses.

The reports in our research showed limited connectivity between the strategy, the business model and the performance indicators. By publishing two separate reports, some companies report two strategies: a business strategy and a sustainability strategy. That is, of course, odd. A company only has a single strategy. 7

Introduction

Financial statements are becoming increasingly long and complex with vast data and technical detail, requiring a high level of financial expertise to interpret. But corporate reporting encompasses more than just the financial statements.

Companies produce an increasing array of reports - not necessarily linked to the financial statements. This includes reports on environmental and social performance as well as risk management and governance. These communications are often aimed at different audiences, published in different formats and at different times. With this in mind, the idea of Integrated Reporting - providing a holistic view of the company’s performance and future prospects - is very attractive.

Currently the International Integrated Reporting Council (IIRC) is developing a framework for this type of reporting. The IIRC first issued the discussion paper ’’Towards Integrated Reporting – Communicating Value in the 21st Century”. In November 2012, after the Council had considered the comments received on the discussion paper, it released the prototype framework1 for Integrated Reporting. Over 80 companies worldwide participate in the pilot programme, experimenting with Integrated Reporting. This allows them to co-create the framework and to demonstrate global leadership in this emerging field of corporate reporting.

The International Integrated Reporting Council The IIRC was formed in 2010 under the aegis of the Prince’s Accounting for Sustainability Project and the Global Reporting Initiative. In addition to representatives from business and investors, the major accounting bodies, standards setters and security regulators sit on its governance committee. The academic community has also been involved in developing thinking along similar lines.

What is Integrated Reporting? In our opinion the goal of Integrated Reporting is not to have one single report. It is not about combining annual reports and sustainability reports. In our view it is more about the reporting process. Integrated Reporting is a set of processes and activities, one result of which is communication, most visibly through a concise, periodic ’’integrated report”.

While the communications resulting from Integrated Reporting will benefit a wide range of stakeholders, the prime target group regards providers of long-term capital. They need this information for their capital allocation decisions. Long-term capital providers are therefore, according to the IIRC, the intended users of Integrated Reports. Reporting on how an organisation’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term requires a comprehensive understanding of the business model and the different forms of capital the organisation uses and affects.

’’The process of Integrated Reporting provides benefits” for both the company and its stakeholders The process of Integrated Reporting provides benefits for both the company and its stakeholders. The significant value for the company regards the process towards Integrated Thinking. Recent research showed the participants in the IIRC pilot programme to recognise a number of benefits from the Integrated Reporting process1. (see overview on the right).

Benefits of Integrated Reporting • Recent research shows the participants in the IIRC pilot programme to recognise a number of benefits from the Integrated Reporting process. • It breaks down the silos by connecting departments. This helps understanding the interconnections between the full range of functions and operations; • Integrated Reporting is a driver for prioritising improvements to internal processes, including identifying material issues and KPIs, streamlining the data collection process and increasing robustness of data by obtaining external assurance; • It increases focus and awareness of senior management. Integrated Reporting increases the interest and engagement of senior management in issues involving the long-term sustainability of the business; • It improve coherence between the strategy and the business model. The process of clarifying the value creation story reinforces Integrated Thinking, which then helps to drive further integration. This also enables companies to streamline corporate communication. • It creates value for stakeholders. The views of the stakeholders can help companies build the business case for Integrated Reporting, partially where there are opportunities to differentiate from competitors.

The stakeholders will be able to enhance their understanding of the organisationâ&#x20AC;&#x2122;s value creation and preservation in the short, medium and long term, through a better understanding of its management, its strategy and operations, its risks and opportunities,

We have applied the Deloitte Integrated Reporting Scorecard to rate the communications, a methodology developed by Deloitte Netherlands and especially how all these elements are connected. Seeking to further enhance the practice of Integrated Reporting, we have examined the recent public communications by 50 Dutch listed companies (AEX and AMX) about their financial, social and environmental performance, including Integrated Reports, annual reports, sustainability reports and information on websites referred to in these reports. We have examined whether these communications contain the information one may expect from an Integrated Report. To this end, we have applied the Deloitte Integrated Reporting Scorecard to rate the communications, a methodology developed by Deloitte Netherlands, which in turn is based on the prototype framework for Integrated Reporting as published by the IIRC.

The outcome is presented in highlights of our research per content element, providing insight into were these entities are in presenting the information elements included in the prototype framework. We have also included overviews with specific findings per industry. These are presented in the Sector Analyses, a separate report. This report also includes examples of sound reporting per industry, for practical guidance. We believe this insight into the main gaps and examples of sound reporting to be a valuable contribution to developing Integrated Reporting. The report starts with interviews with relevant stakeholders. They shared with us their main expectations of and experiences with Integrated Reporting.

’’It’s important for CFOs to be responsible for non-financial as well as financial KPIs because they are well-placed to see links between them and can implement company-wide processes to gather data.” Patrick Heinig, Randstad

’’We feel Integrated Reporting should add something for companies and anyone reading reports” Susanne Stormer, Deputy executive officer Novo Nordisk

Susanne Stormer heads up Novo Nordisk’s Corporate Sustainability function She is responsible for plotting the company’s strategic sustainability course. Stormer and her team manage corporate programmes and the annual report. They maintain contacts with Environmental, Social, Governance investors (ESG) and stakeholders, and they advocate the business side of the Triple Bottom Line principle. Her success in integrating the company’s financial and sustainability reporting has made Novo Nordisk one of the pioneers of Integrated Reporting.

Novo Nordisk is among the participants in the IIRC’s Integrated Reporting pilot. Deputy executive officer Susanne Stormer is one of the IIRC’s Working Group Members. She definitely has the experience required: Novo Nordisk was one of the first to publish an Integrated Report, as early as 2004. ’’Integrated Reporting is irreversible and progressive. Once you start, there’s no way back.”

’’Even before 2004,” says Stormer, ’’we had already set out to synchronize and harmonise the timetables and contents of the financial annual report and the sustainability report. We had already produced a third report as well: an ‘annual review’ intended for retail investors, without all the statements and in a more narrative form. We did notice that in dealing with three reports it took us a great deal of time to coordinate which information would be published in what report and ensure consistency of our messages. Our shareholders’ approval of the proposal by the Board of Directors to amend the articles of association and explicitly include Novo Nordisk’s ‘Triple Bottom Line’ principle for conducting its business in a way that strives to be financially, environmentally, and socially responsible, provided the specific trigger to opt for an Integrated Report. As this principle was now instilled in the objectives of our company, it would have to be reflected in how we manage our business and how we account for performance. We then said: this makes having three separate reports useless.

A single report According to Stormer, Integrated Reporting was in a nascent state at the time. ’’Our sister company, Novozymes, had made the move to combine their financial and sustainability reporting in one and other companies were making similar experiments. We, in turn, received sceptical responses from stakeholders when we shared the idea with them. They said: ‘Your reports are excellent, they have each won you prizes. Why fit something that’s not broken?’ We nevertheless opted for an Integrated Report. I am aware that the positioning of integrated reporting by the the IIRC is that an Integrated Report should complement the existing reporting. To us, for Integrated Reporting to be meaningful will have to replace something, and also contain something extra for companies and report users. The question then is: what to drop? The voluntary sustainability report? Or the compliance-driven and mandatory financial report? The latter, naturally, is not an option. We have decided to move on and produce a single report as our main document, supplemented by a portfolio of reports for specific information

needs, including statutory requirements. But the main report is still the legal document, so we would first and foremost comply with the legislative requirements and additionally make our reporting fully integrated. We are making progress, but the end goal is still some way down the line.” As Novo Nordisk had realised beforehand, some of the content of the various reports would no longer be - or reported differently. ’’The Integrated Report became more concise and some elements were insufficiently substantial to be included. We posted the additional information on our website. Instead of reporting more, Integrated Reporting is all about enhancing the value of reporting by being more focused on report users’ needs, that is: what is material.”

’’Instead of reporting more, Integrated Reporting is all about enhancing the reporting” Framework required ’’Both from an external and an internal perspective Integrated Reporting has many benefits,” Stormer claims. ’’It’s easier to convey a more consistent picture of your company’s position - now and in the future. You will avoid reduncancies and the risk of speaking in different tongues in the various reports. What’s more, an Integrated Report offers the readers a holistic

view of the company, so they can understand how the multiple dimensions of the performance coalesce and how the business environment influences the the risk profile and determines how the company pursues opportunities. Internally it forces us to have a single conversation about content and presentation with those responsible for the diverse business areas. When they return from such a conversation they will have a better understanding of the company as a whole during their daily work. As an added bonus it promotes a deeper understanding of sustainability and more qualified decision-making.” Stormer expects the IIRC framework to have an even bigger positive impact once it is finished. ’’The major issue now is the absence of a common standard for sustainability reporting that has the same status as the IFRS does for financial reporting We recognise that GRI is a de fact standard, but what I would like to see emerging following the launch of the framework for integrated reporting is parity between financial and non-financial reporting. Until that happens we have to try to fold the sustainability reporting into something already existing - the robust and well-defined financial framework, and that is a suboptimal solution. The lack of both a framework and an Integrated Reporting standard are barriers. The absence of a standard means you will fall short of obtaining assurance at the same level that you obtain with the auditing standard. We strongly emphasise the development of statements on our social and environmental performance. We attach a similar weight to how we manage performance, set targets and report data – regardless of whether they concern financial or non-financial disclosures. This 17

may be very difficult, but it is important. If you show financial data in a table to the left of the page and social and environmental data in a table to the right, the reader should be able to trust both sets of data to have the same quality. Reliable and clearly defined. We will not be able to obtain the same level of assurance on non-financial reporting until we have reached this point, not even if we do extremely well. The standard is lacking.”

Information on performance Financial reports, is the general idea, are read by investors while other interested parties such as NGOs or employees read sustainability reports. Stormer has a more even view: ’’We believe that compartmentalising information in this way carries a risk. Employees also want information on the company’s financial performance. So, while we primarily prepare our Integrated Report for the investor, we consider other audiences too. This is consistent with the way we manage our business: we hold ourselves accountable to shareholders and to other stakeholders as well. As yet it is quite rare for analysts to include information on sustainability in their models. Such information would have to be appropriate enough to be recorded in their factsheets. So far this often is not the case, although particularly in the space of carbon emissions much progress has been made. Our forward-looking statement is a statement that defines the basis for our guidance towards the market, and – again defined by external requirements – this relates to financials only. We have tried to include information on how sustainability could affect our company’s performance. But this fails to comply with the legislative requirements: it is considered to be too uncertain. I find it strange, actually, that you can discuss financial uncertainties, while expected uncertainties involving availability and prices of raw materials are considered no-go issues.”

Sustained and progressive Stormer knows about Deloitte’s Roadmap towards Integrated Reporting: ’’I quite like it. Performance indicators and targets are important in this respect: you have to be able to measure. Materiality is one thing, but how do you know whether you are moving forward? Companies deciding to opt for Integrated Reporting will have to be vigilant. Challenges will arise, certain issues will be impossible to realise just yet, but you will have to stick out your neck and make the try. In conversations I frequently use the comparison with diabetes, as this correlates directly with our business. Integrated Reporting is chronic, progressive and irreversible. Once you have started, there’s no way back. So first list the benefits and consider whether you can convey the correct information. Part of this involves contemplating on whether your organisation has the right people to prepare an Integrated Report. And once you start

’’It’s easier to convey a more consistent picture of your company’s position now and in the future”

Right now annual reports are often the joint ’’love child” of the Legal department and the Investor Relations department. However, Integrated Reporting should involve all functions with an interest in the question as to how the information is presented. Integrated Reporting aims to achieve ’’integrated management”. So, avoid the trap of starting to report any and all things measurable simply because they can be measured. It is better to include less but more meaningful information and to go forward from there. It is a journey and our journey has taken us years. The ideal format has eluded us too, so far. That is why it is so important that the IIRC-driven framework must be realised.” This, thus, explains Novo Nordisk’s involvement with the IIRC. Stormer is a member of the IIRC Working Group and Novo Nordisk is one of the companies currently participating in the Pilot Programme. ’’When we volunteered to be a pilot company the reactions were in the line of: ‘How can you pilot for something non-existent?’ But our belief in Integrated Reporting as the future has prompted us to join the design stages rather than wait for what others will come up with. It is an opportunity to co-create new forms of reporting that are more meaningful and therefore more useful. As an added bonus we learn a lot from likeminded companies and stakeholders during this process. We are not kidding ourselves that we are invincible only because we are ahead a few steps.”

working on an integrated report, you will inevitably have to address integrated thinking – and that, in my view, is the real strength of integrated reporting. That is forces new conversations about how to do business for long-term success. 19

Roadmap towards Integrated Reporting

Re po rti n

Co ing ult ns

ud it nA e ry iso v Ad

4. Report and communication

2. KPI framework Co n

d an

ices erv S k Ris

3. Systems and processes

Integrated Reporting by Integrated Thinking

1. Strategic focus

ng lti su

Co ns u lti ng

Deloitte competencies

1. Strategic focus

Organisational overview and operating context • Assess and evaluate current business practice • Respond to stakeholders • Review of peers • Identify short, medium and long term trends, risks and opportunities • Perform scenario planning

2. KPI framework

3. Systems and processes

4. Report and communication

- Impact on strategy and resource allocation - impact on business model - Impact on relevant capitals

Benefit from opportunities and mitigate risks • Assign accountability and ownership • Determine effect on capitals in the value chain • Translate into actionable KPI’s • Align strategy and strategic targets

Connect reporting systems and enable people • Integrate in existing reporting and system structure • Perform data analytics • Develop an integrated dashboard • Align behavior and culture • Align governance and company policies

Telling a concise and reliable value creation story • Monitor progress on strategy and performance • Collect reliable data • Prepare Integrated Report • Accelerated Reporting • Obtain assurance 21

’’We wish companies to indicate whether their strategy is sustainable in the long term” Rients Abma, Managing director of Eumedion

Eumedion represents the interests of institutional investors in the Netherlands. Its participants are large investors: pension funds, pension administrators, asset managers and insurers. Eumedion has foreign participants too - investors holding shares of Dutch companies. The Eumedion participants represent an estimated 20% of Dutch shares. Rients Abma is the managing director of this foundation. Eumedion is involved in the discussion about Integrated Reporting and is a member of the Technical Taskforce and the Council of the IIRC, with representatives in the IIRC’s Working Group. ’’We have no preconceived ideas about the future of Integrated Reporting”, Abma states. ’’We issue a spearheads letter every year, asking listed companies to enhance the transparency and relevance of their annual reports. The IIRC, too, seems to be heading in that direction: improving the user-friendliness of the annual report and offering insight into the sustainability of a company’s long term strategy and business model.

The road to Integrated Reporting was taken quite some time ago. The IIRC has been working hard on designing a Prototype Framework. Dutch listed companies can already use this when preparing their annual report. As the representative of the institutional investors, Eumedion is closely involved in this process. Three-way split should be maintained Eumedion’s members, all shareholders with a long term horizon, Rients Abma states, want to know a company’s position five to ten years from now. ’’So, we would wish companies to indicate whether their strategy is sustainable in the long term. Think of it as an extensive continuity analysis. We wish companies to inform us on the sustainability of their business model, considering the burden they place on the environment and labour. The annual report should also point out any trends vital to a company and how these are anticipated. The three-way split of annual report, financial statements and auditor’s report should, as far as we are concerned, be maintained. It’s a discussion I feel is still underexposed in the IIRC’s Prototype Framework: the financial statements should continue to be a snapshot of the company’s financial situation at the end of the financial year. Preparing one is difficult enough as it is. I consider Integrated Reporting to be more of a perfection of the annual report. Future Integrated Reports should certainly continue to include the governance structure and remuneration reports, although these will need to be more meaningful. 26

Is, e.g., the remuneration policy properly aligned with the company’s strategy? Right now this receives too little attention. Integration and connectivity will have to be realised here. Obviously, it all starts with the remuneration committee’s mindset.” Forward-looking statement This, then, represents the main challenge for Integrated Reporting: breaking down the silos. ’’Integrated thinking should be top of mind, so a holistic view of the company’s position can be outlined. Not just its financial performance, but the long-term sustainability of the business model too.

’’The added value of Integrated Reporting should be the more holistic view on the company’s business model it provides the shareholders with” The forward-looking statement holds yet another challenge. Some companies ‑ particularly if they are listed in the US – are reluctant due to possible liability claims. A valid argument. I think scenario-based thinking should be a fundamental issue in the board room, one the annual report will

need to reflect. Place markers on the horizon, if possible and guide long-term capital providers towards them. Shareholders want to make a return. An impossible goal if no risks are taken. You will, hence, want to know the risks involved in the business model; it will have to be clearly worded in the related risk paragraph. Still, you also wish the management board to be seen as properly weighing all pros and cons, with any risks taken being well thought through. Some annual reports do report on the strategy, but separately. Again, the interdependency between the strategy and the risks will have to be reported here. Another frequently lacking item in the current annual report is a good market analysis. Shareholders tend to be given little information about a company’s competitive position.” Annual reporting framework IIRC Abma considers the IIRC to be the prime body to guide the further development of Integrated Reporting. ’’All relevant parties are involved in the IIRC’s committees. And this goes beyond Europe: countries from across the world are represented. It is a good platform, reason why Eumedion, too, supports it. We try to gather sufficient support. A relatively large number of Dutch companies participate in the pilot: twelve in all, nine of which are listed. I am curious about their findings on the Prototype Framework once they have prepared their annual reports over 2012. A final framework will have to be ready by the end of 2013. We fully cooperate in this respect. Even though some tough issues still loom large, we hope the framework will receive proper international support. With all stakeholders – companies, shareholders and not in the least auditors – being in agreement. Hopefully policy makers and legislative bodies will, in 27

the end, designate it as the recommended framework. The IIRC framework could become to the annual report what the IASB framework is to the financial statements. It would have to be purely principle‑based, though, not too binding. It should provide a foothold. The interaction of governance structure, risks, strategy and remuneration policy is different for each company. This is something companies will have to stipulate themselves.” Integrated consistency statement Abma feels the scope of the auditor’s report need not be changed. Hence, a single auditor’s report for both the financial statements and the consistency with the annual report. ’’I do not advocate a range of different assurance reports as in the model, with a separate statement to the sustainability report. Secondary reports may have their own statements but I would prefer the primary Integrated Report to have an integrated consistency statement. Contrary to what auditors are now used to they would have to put in a little more effort, though. I expect the external auditor to expand its team with experts on the other topics,

’’I think scenario-based thinking should be a fundamental issue in the board room, one the annual report will need to reflect” 28

such as sustainability, reporting the remuneration policy, and the effectiveness of the governance structure. We feel an Integrated Report need not be more comprehensive than the current annual report. Companies will always need to keep track of what information long-term capital providers consider to be important. More extensive interpretations may be placed on the website, or in a more extensive secondary report. That said, materiality is still hotly contended within the IIRC. We think from the investor’s point of view. The added value of Integrated Reporting should be the more holistic view on the company’s business model it provides the shareholders with. Essential information for taking long-term investment decisions. Integrated reporting may thus contribute to how big the group of stable investors will be. Besides, management boards applying integrated thinking and with a greater focus on the long term can only be a good thing.”

Prof. dr. Barbara Majoor Partner Deloitte and professor of accountancy at Nyenrode Business University

’’Risk reporting is an essential component of Integrated Reporting” According to Barbara Majoor

A proper risk analysis is crucial to a future outlook and making a statement on whether the business model is sustainable. Companies will, naturally, find it easier to cautiously have their say about short-term developments than to expound on a vision covering the next ten years. If companies wish to stipulate a long-term vision this will inevitably require scenario-based thinking. All the more so when discussing the burden on resources. Listing a top five of risks for companies - including a scenario discussing the effect on companies under different circumstances - may provide a logical step-up towards Integrated Reporting. It’s something you can start with right away, as I expect the Integrated Report to have a legal basis in 2018. Exactly when is hard to tell just yet, although sometime within the next five years seems likely. I consider the Integrated Report to be a good replacement of the current annual report. The way I see it, the Integrated Report will not be an addition to existing reports. Instead, it will be the new annual report. To this end, it will have to be positioned clearly. Although the IIRC framework requires further development, some elements may certainly already be used when preparing an annual report. Auditors can contribute to this development. They could more extensively discuss whether the risks reported in the ’’renewed” annual report are properly explained as regards the impact on the financial position and the latter’s consistency in relation to the financial statements. They can, in other words, already start with a more extensive consistency check.

IIRC Pilot Programme

In leading the development of a global framework for Integrated Reporting the IIRC has set-up a Pilot Programme consisting of both a Business Network and an Investor Network. The Pilot Programme underpins the development of the Integrated Reporting Framework and allows companies to co-create the Framework and to demonstrate global leadership in integrated reporting. Using the Pilot Programme participants can experiment with Integrated Reporting in their reporting cycle and share their results with others. In January 2013, over 80 companies globally had joined the Business Network, 12 of which are Dutch based. The Investor Network comprises more than 25 investors.

12 4 9 1

Netherlands

Germany

Italy

Belgium

5 1 1 1

Spain

Sweden

France

Switzerland

Experiences from the IIRC Pilot Programme

Since mid-2012 I have been seconded from Deloitte to the IIRC. Within the IIRC I am responsible for the European mainland, focusing on Germany, Italy and the Benelux. One of the interesting aspects of my function is visiting organisations interested in or experimenting with Integrated Reporting. I have found a lot of their questions to be the same and will elaborate on some of the main questions asked. Companies often think Integrated Reporting means combining different corporate reports. That might explain why a lot of companies claim they have an Integrated Report, while in actual practice I have seen very few. Integrated Reporting is a process that results in communication about value creation over time. An Integrated Report is a concise communication about how an organisationâ&#x20AC;&#x2122;s strategy, governance, performance and prospects lead to value creation over the short, medium and long term, in response to the most relevant risks and opportunities the company will face. To put it shortly: Integrated Reporting is not just about preparing another report, it is about transparency on value creation for the short, medium and long term. Most of the other questions I receive are about why Integrated Reporting focuses on long-term capital providers. As mentioned already Integrated Reporting is primarily about a companyâ&#x20AC;&#x2122;s current and future value creation and preservation and will result in a focused, concise report. Current reporting focuses mostly on

historical (financial) information in bulky reports. As investors play a vital role in resource allocation, they need Integrated Reporting for their decision-making process. Consequently, other companies, too, will be driven to shift their horizon to long-term value creation and preservation. This is not to say that other stakeholders will benefit from Integrated Reporting through its aim on the long term as well as Stakeholder Responsiveness as one of the guiding principles of Integrated Reporting. The IIRCâ&#x20AC;&#x2122;s ultimate vision is for organisations, their investors and other stakeholders to benefit from Integrated Reporting. By encouraging a different way of thinking, Integrated Reporting will contribute towards the advancement of a more sustainable global economy. If you want to be involved in developing Integrated Reporting and the work of the IIRC, or if you want more information, visit www.theiirc.org. Mark Brand mark.brand@theiirc.org

’’Integrated Reporting is also about the sustainability of your company in its full operating context” Cees de Boer, Chief Financial Officer and Chief Operations Officer Deloitte

Cees de Boer held various positions, including that of partner, at Arthur Andersen’s Dutch firm from 1981 up to 2002. He assumed responsibility for Arthur Andersen’s consulting activities in 1993. In 2002, he became partner at Deloitte Consulting. Cees de Boer joined the Deloitte Netherlands Executive Board in September 2007, where he was appointed CFO and COO. De Boer has been actively working on Integrated Reporting for years now. On behalf of Deloitte he is involved in the International Integrated Reporting Council (IIRC), an organisation that develops a global framework for Integrated Reporting.

Integrated Reporting is more than merely putting a financial report and a sustainability report in one single cover. Integrated Reporting combines financial and non-financial aspects and indicates how they are connected. The road to more professional and improved Integrated Reporting will be a very gradual one. Like other companies, Deloitte has embarked on this journey: a highly enlightening one.

According to Cees de Boer, its is difficult to predict the future development of Integrated Reporting. ’’Everything depends on whether the larger Dutch companies will accept this way of reporting, as they are the frontrunners when it comes to reporting. I do not expect regulatory requirements concerning Integrated Reporting on the shorter term. Already, long term investors in major listed companies, can draw from more sources than the financial statements alone. One could even argue the financial statements to be a less relevant source of information for this group of stakeholders, since major companies frequently publish their main key figures through press releases and analyst meetings months before the formal financial statements are published.”

Key role for the Executive Board What’s more, everyone seems to have their own interpretation of Integrated Reporting. De Boer emphasizes the significant difference between Integrated Reporting and the current practice of financial and sustainability reporting: ’’So it’s not simply a matter of stapling two reports together. The financial figures are exactly what they are: they represent the financial outcome of what has happened in a company in the reporting year- no more, no less. They reveal nothing on the ins and outs of the company itself. Nothing is revealed on the underlying activities, the management quality, the quality of the business model, the quality of the products and clients, and nothing on the quality of the governance. All these aspects, however, are prime drivers for success. The very nature of Integrated Reporting is its focus on more than just the outcome of the process: it concentrates on the indispensable drivers required to ensure the company can continue to operate sustainably and successfully

over time. This represents a whole different mind-set about reporting. One where the Executive Board - the management -, holds the key to opening this route rather than the sustainability manager or the controller.

’’Deloitte had always viewed Integrated Reporting as a ’’product”. It has gradually dawned on us this is a process” Risk reporting At first Deloitte viewed Integrated Reporting as a ’’product”. ’’It has gradually dawned on us that we are talking about a process instead. This marks a significant difference. While the business model is not traditionally part of our approach to risk management, it does form an important element of Integrated Reporting: over the recent years it has become clear to us that the business model can be a fail factor instead of a success factor ‑ DSB being a notorious example. We have given thought to whether we have sufficiently reflected on the sustainability of our business model and whether we are ready to form an opinion and a report on it. A structurally well-balanced opinion that is mutually agreed upon by supervisory bodies and supervisory board members. Are your properly financed? Do you have sufficient equity, are you sufficiently insured, is

your talent ready to deliver the quality demanded by clients and society at large? Every single one of them is a highly substantial risk factor. These are always very obvious discussion points, of course, but issuing a transparent report on them is a whole different ballgame. Since we consider it to be our responsibility as an audit firm to actively address these issues, we are willing to take the discussion further. As an auditor, we do not only have legal demands to comply with, but also have societal expectations to take into account. Integrated Reporting concerns your company’s sustainability too in its full operating context. Risk management and the business model play an incredibly important role here. Right now, these factors are underexposed in our current reporting.” Transparent plus ’’All the information we provide in the various reports,” explains Mark van Rijn, sustainability manager at Deloitte, ’’means we are already highly transparent, something of which we are quite proud. We consider Integrated Reporting to be ’’transparent plus”, calling for a well-considered and well-founded vision for the longer term. Our current reporting does not explicitely cover this type of vision and the related strategic choices we have to make in a changing world. Interconnecting the various challenges we face as a company, thus is a lot harder to do. Conciseness and materiality requirements make it harder still, as these force us to make clear-cut choices about what we include in our Integrated Report and what we leave out. An Integrated Report opens a window to the future. Our continuity is important to our clients, as

they often enter into a long-term relationship with us. The same applies to our people: they want to have at least some sort of foothold in these tough times on the labour market. The differentiating feature of the Integrated Report is its vision of the future and how we plan to address internal and external risks and opportunities. Translating this into the business strategy, offers our stakeholders the opportunity to form a better picture of who we are and of our place in the world. The process so far would indicate a Deloitte report to be published in September. It will represent our vision on what an Integrated Report should be. Our clients and other stakeholders are welcome to provide us with feedback so we can distil any points for improvement. ”

’’The process‑oriented approach of Integrated Reporting will make sure your company will emerge all the more stronger strategically” It’s a market demand Society demands auditors to enhance their added value, according to Cees de Boer. ’’We will have to deal with these issues pro-actively if we are to remain relevant to our stakeholders. It’s a market demand. I think an auditor is a very good sparring partner for a CFO to explore the unchartered territory of what 38

it would mean if reporting is more ’’integrated”. It’s a professional one-on-one: knowledge about the company coupled with an outside view of the inside - unmistakably providing for an objective and critical attitude. Auditors can provide assurance on more than financials only. They may not do so right now, this may very well change in the future. And this, too, is a reason why we need the discussion with the CFOs: to ask them what they need assurance for. Providing assurance on issues that stakeholders find totally irrelevant is useless. The crux is to support the company in exceeding itself: if you achieve this you will truly have great added value. Never mind any assurance resulting from this. Advice for CFOs: just do it! Van Rijn has a straightforward answer to the question about what advice to give CFOs of companies starting with Integrated Reporting: ’’Go for it! I think many sustainability managers are struggling within their companies to find an answer to the question just how important it is what they already do for the company. Merging the material impact of your sustainability agenda with the Integrated Reporting agenda is what you should aim for. These are the issues about which you say: there’s a continuity risk I have to tackle. A company with both a business strategy and a sustainability strategy is, of course, odd. A company only has one single strategy. This should include those sustainability issues that can substantially affect the future cash-flow generation. List your current situation and determine your ’’gap to fill”. More than any of the restraining array of financial and other reports, Integrated Reporting offers you the possibility to tell your stakeholders your own authentic story. The

process‑oriented approach of Integrated Reporting will make sure your company will emerge all the more stronger strategically. Proper Integrated Reporting based on ’’integrated thinking” creates trust with your investors, your staff, your clients and society as a whole. And in these times of economic doldrums, trust is what we desperately need! Cees de Boer has the final say: ’’Just read some of the example reports. We did it too – it’s enlightening. Discuss them with colleagues and your auditor, since going to work right away will backfire. First reflect on what you wish to achieve.

What will I do differently than I did before? If things go as planned, you will run into issues you had never encountered before. Integrated Reporting is about the company’s long-term continuity and the relationship with its stakeholders. That, to me, is where Integrated Reporting provides added value. Once it brings what I’m talking about it will greatly improve our reporting. It won’t be easy, very difficult even. But it would really be a major boost en route to a better way of reporting on the state of the company and its future outlook. We will all get to benefit from this.”

20%

Consumer Business

16%

18%

Manufacturing

Real Estate

20%

Technology Media & Telecommunication

10%

Financial Services Industry

16%

Energy Recources & Transportation

Methodology

This study has examined the recent public communications by 50 Dutch listed companies (AEX and AMX) about their financial, social and environmental performance, including Integrated Reports, annual reports, sustainability reports and information on websites referred to in these reports.

The objective of this study was to examine whether the current communications1 contain the information one may expect from an Integrated Report. Deloitte Netherlands has developed the methodology used to rate the communications based on the prototype framework for Integrated Reporting as published by the IIRC2. Changes will most likely be made to the structure and content of this prototype in its development towards a final framework. We therefore anticipate an update of this study once the final framework is published (expected in December 2013). We have categorized the companies into sectors. A summary of the number of entities per sector has been included to provide a clearer picture of our study’s findings. The overall list of companies and the communications examined is included in Annex I of the report Sector Analyses.

Where Integrated Reports were available we have incorporated them in our study. We have mostly examined the annual report and the sustainability report. We neither conducted direct interviews with the companies, nor had a survey questionnaire been distributed for companies to respond to.

’’The objective of this study was to examine whether the current communications contain the information one may expect from an Integrated Report’’ 41

Organisational overview and operating context What activities do organisations engage in and what are circumstances under which they operate? The content element ’’Organisational overview and operating context’’ aims to answer this question.

Organisational overview While the description of the company and how it creates value is usually fairly presented, our research shows that major improvements are possible in describing the time frame (the short, medium and long term). This requires scenario-based thinking in order to underscore the long-term vision, an improvement area also emphasized by Barbara Majoor (page 29). The reporting companies’ vision, values, mission, strategy and goals are mostly described according to the requirements of the prototype framework. Hence, the companies examined score relatively high on this aspect.

The organisational overview also refers to the reporting boundary. 46% of reporting companies have different reports (annual report and sustainability report), often without a linkage between the two. A description of any differences in the reporting boundary is especially lacking. This lowered the scores. In addition, we observed that a few companies exclude some operations from the report, without an explanation. We recommend reporting companies to have the boundary of their future reporting’s be more in sync with the prototype framework’s guidance principles by also linking the boundary to entities and relationships that are part of the company’s value chain.

’’Improvements are possible in describing the timeframe in which value is created’’

Operating context This content element elaborates on the context in which companies operate, encompassing stakeholder engagement, significant legislation and regulations, material issues, and the positive and negative impact companies have on different forms of capital (financial, manufactured, human, intellectual, natural and social, see figure, page 54). Although in our opinion the stakeholder engagement is often well described by the reporting companies, its presentation could nevertheless be upgraded. This could be improved by including a table presenting the different stakeholders

needs and interests, how the company engages with them, and how these are linked to the report’s content.

Read more about our detailed findings on the Integrated Reporting content elements, guiding principles and our sector analyses in Shifting from long reports to reporting on the long term - Sector analyses.

’’Readers will have to assume the focus areas presented are the material issues for the company’’ Our research likewise showed reporters to refrain from including a clear description of the impacts of their companies’ operations, positive or negative, on different forms of capital. These impacts, such as carbon emissions, are mostly described indirectly. The current reports include more general statements like ’’we minimise our impact on the environment by reducing our carbon footprint’’. As Susanne Stormer from Novo Nordisk said (page 13), it is important that non-financial data are of the same quality as financial data. Moreover, when reports include an overview of companies’ focus areas - an important item in this content element, the process of identification is, however, missing; the reader will just have to assume these focus areas represent material issues. Hence, this materiality aspect resulted in a relatively low score (31%).

49%

Average score on boundary Sector

Content element average score

Energy, Resource & Transport

53%

Financial Services Industry

53%

Consumer Business

53%

Manufacturing

49%

Real Estate

46%

Technology, Media & Telecommunication

44%

Governance

Is the company’s governance structured such that it reflects its strategic objectives, risk management and remuneration approach?

The prototype framework has formulated this question to gain an understanding of the company’s governance structure and see how this structure supports the company’s ability to create value in the short, medium and long term and to identify risks and opportunities.

’’Illustrating the board’s commitment to comply with the Corporate Governance Code is common practice as the prototype framework largely overlaps with current governance reporting requirements’’ The information requirements in the prototype framework largely overlap with current governance reporting requirements.

As the disclosure on governance, illustrating the board’s commitment to comply with the Corporate Governance Code, is common practice, it is no surprise our research group scored the best on this content element (71%). The prototype framework states that companies should disclose how remuneration and incentives are linked to value creation in the short, medium and long term, including financial and non-financial performances (financial, social and environmental performances). On this aspect the current reporting needs to improve in order to be compliant with the prototype framework. Indeed, so far only 24% of companies fully comply to report that remuneration applies the requirements of the Corporate Governance Code and the integrated Reporting guidelines. Improving on this aspect would also enhance the connectivity between the remuneration and the strategy, being one of the framework’s principles. As Eumedion’s Rients Abma also mentions, (page 23) remuneration committees should start to properly integrate the remuneration policy into the company’s strategy.

’’Remuneration policy should be properly integrated into the company’s strategy’’ The current prototype framework regularly refers to innovation as this is considered to be one of the company value drivers. The framework also requires a disclosure on the role of those charged with governance in promoting and enabling innovation. Deloitte research1 shows supervisory boards members to believe that innovation is an important value driver. Almost all supervisory boards members (99%) hold the opinion that it is important to invest in innovation. Currently 50% of the supervisory boards members are responsible for advising on innovation, 71% believe it is desirable to have this be part of their responsibilities.

71%

Average governance score Sector

Content Element average score

Energy, Resources & Transport

77%

Real Estate

74%

Consumer Business

73%

Financial Services Industry

70%

Technology, Media & Telecommunication

69%

Manufacturing

61% 45

Opportunities & Risks

What are the key opportunities companies have and what risks do they have to cope with?

Through this question, companies should elaborate on the content element ’’Opportunities and risks” of the prototype framework. It deals with the key risks and opportunities, also in relation to external factors affecting the availability, quality and affordability of relevant capitals. As a whole, reporting companies scored high on the risk disclosure. This might relate to the requirement of the risk chapter for Public Interest Entities. Companies usually describe the key risks affecting their company, the impacts, and their mitigation plans. Companies that present their risk analysis in a table is considered to be a clear and concise manner of reporting the different elements.

’’A proper risk analysis is crucial to a future outlook and to a statement as to whether the business model is sustainable’’ 46

The research showed most companies to subdivide their risks (i.e., strategic, operational, financial and compliance risks). However, it appears that even though companies take sustainability seriously, only 10% scored full mark on the compliance score for having a risk disclosure balanced with regards to financial, economic, environmental and social risks. Risk reporting requires improvement - especially where it concerns connectivity. A finding that corresponds to Deloitte’s research on risk paragraphs of September 20121. This research showed only 2% of the risks reported by the companies examined to include sustainability aspects such as changing regulations related to climate change, reputational risks due to accidents and damage to the environment, and non-compliance with environmental laws and regulations. This underlines the opinion of Barbara Majoor that a proper risks analysis based on a scenario-based thinking is crucial to a future outlook and to a statement as to whether the business model is sustainable (page 29).

We have observed that information on opportunities and on how the reporting company is creating long term value is often listed in various places in the report; the related reporting was less straightforward than the risk reporting. Resulting in a score on reporting on opportunities of 56%. The companies disclosing their strengths, challenges, opportunities and threats currently represent best practices.

’’Information on opportunities is less straightforward than reporting on the risks’’ As in the definition of this content element this research, too, focused on the companies’ dependency on the availability, quality and affordability of the different forms of capital. The research showed reporting companies to not present this information, or to not present it clearly.

54%

Balanced view of risks disclosure Sector

Content Element average score

Consumer Business

60%

Financial Services Industry

58%

Technology, Media & Telecommunication

56%

Real Estate

52%

Manufacturing

51%

Energy, Resources & Technology

51% 47

Strategy and resource allocation plans

What are the company’s strategic objectives and how does it plan to achieve them? This is the question that the fourth content element of the prototype framework focuses on.

It instructs reporting companies to describe their company’s short, medium and long term strategic objectives and the strategies in place to implement or to achieve them, including how the company will measure achievements. Not all reporting companies present its strategy or its strategic objectives. If reported, the companies mostly refrain from providing quantifications or non-financial strategic objectives. Resulting in an average score on reporting on strategy of 42%. The connectivity between the strategic objectives and the overall strategy as well as between the strategic objectives and the KPIs frequently remains unclear.

’’Analyzing the company’s vital trends and how it anticipates them helps to assess the sustainable strategy in the long term’’ 48

Our research also included the identification of future and external threats that could prevent the company from achieving its strategic objectives, as well as how they manage these threats. Rients Abma, too, is clear when he states that companies have to issue a statement on the sustainability of their strategy in the long term, including an analysis of the vital trends of the company and how it anticipates them (page 23). The research shows numerous instances where threats are not clearly disclosed. 20% of reporting companies present their threats through a SWOT analysis. Nevertheless, we observed that the companies refrain from disclosing how these threats are managed. Last we also analysed the (key) relationships with stakeholders or within the value chain as these impact the ability to achieve the strategy. Companies generally report on their collaborations and partnerships. However, few explicitly report these relationships to be necessary to achieve overall strategic objectives.

Reporting companies state innovation to be important but there are differences in extent, detail and clarity. This depends on the sector the companies operate in. The role of innovation is however an important aspect to determine the future value creation of a company.

45%

Disclosure of future external risks Sector

Content Element average score

Energy, Resource & Transport

56%

Real Estate

52%

Consumer Business

50%

Technology, Media & Telecommunication

49%

Manufacturing

49%

Financial Services Industry

49% 49

’’we would wish companies to indicate whether their strategy is sustainable in the long term. Think of it as an extensive continuity analysis’’ Rients Abma, Eumedion

’’…so we took a ’’clean sheet of paper” approach to identify what’s most important to investors and demonstrate our vision of how an Integrated Report could look” Bob Laux, Microsoft

Business model

How do companies use the different key capitals (financial, manufactured, human, intellectual, natural and social), how do they affect those capitals and how do companies realize value creation and value preservation in the short, medium and long term?

This description of the business model is the fifth content element of the IIRC’s prototype framework. Besides describing companies’ services or products and their position on the market, this should cover companies’ key inputs, value-adding activities and outputs by which they aim to create value in the short, medium and long term. Reporting companies scored high (78%) in describing their products or services, including their geographical markets and customers.

’’Most companies refrain from reporting on all the relevant capitals’’ 52

Concerning their position on the market, reporting companies also scored relatively high (62%) on the description of how they maintain their position, add value and how they differentiate themselves from competitors. This element could however receive more attention from the reporting companies, as also noted by Eumedion’s Rients Abma (page 23). A good market analysis describing the company’s competitive position is often missing. The prototype framework mentions the companies’ position within the entire value chain as one of the features to enhance the disclosure of the business model. Although some reporting companies clearly state their position in the value chain, the reporting companies scored on average 35% on the description of their impacts on the value chain.

We also observed that none of the report we have analysed scored full marks on the disclosure of how they use the various capitals and consequently their ability to respond to future changes in the availability of these various capitals. While most companies do report on human capital they refrain from reporting on all the relevant capitals. Some of the companies describe the use of capitals indirectly and/or in various places throughout the report. As mentioned earlier by Barbara Majoor (page 29), scenario-based thinking helps in formulating a vision on the dependencyon resources. Finally, although this is one of the most elementary content elements of the prototype framework, we conclude improvement is required of companiesâ&#x20AC;&#x2122; transparency about how they create and retain the value of the key capitals now and in the future.

78%

Average score description of services and products

Sector

Content Element average score

Energy, Resources & Transport

58%

Consumer Business

56%

Manufacturing

55%

Real Estate

48%

Financial Services Industry

43%

Financial Services Industry

41% 53

Financial

External factors

Manufactured

Financial

Manufactured

Human

Human Business model How the organisation creates and sustains value in the short, medium and long term Intellectual

Intellectual

Natural

Social

Natural External factors

Social

Financial capital The pool of funds that is: • available to the organisation for use in the production of goods or the provision of services, and • obtained through financing, such as debt, equity or grants, or generated through operations or investments.

Intellectual capital Intangibles that provide competitive advantage, including: • intellectual property, such as patents, copyrights, software and organisational systems, procedures and protocols, and • the intangibles that are associated with the brand and reputation that an organisation has developed.

Manufactured capital Manufactured physical objects (as distinct from natural physical objects) that are 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).

Natural capital Natural capital is an input to the production of goods or the provision of services. An organisation’s activities also impact, positively or negatively, on natural capital. It includes: • water, land, minerals and forests, and • biodiversity and eco-system health.

Human capital People’s skills and experience, and their 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 strategies, and • loyalties and motivations for improving processes, goods and services, including their ability to lead and to collaborate.

Social capital The institutions and relationships established within and between each community, group of stakeholders and other networks to enhance individual and collective well-being. Social capital includes: • common values and behaviours, • key relationships, and the trust and loyalty that an organisation has developed and strives to build and protect with customers, suppliers and business partners, and • an organisation’s social licence to operate.

Performance and outcomes

How has the company achieved its strategic objectives and what have been the performances? Obviously, the IIRC’s framework gives guidelines to describe how the company has performed against its strategy, by means of their strategic objectives. This includes the different KPIs in relation to past, current and future performances both qualitatively and quantitatively.

One interesting research outcome is that companies could provide KPIs even without a clear strategy and strategic objectives based on material issues and the risks and opportunities. This outcome shows a lot of companies to have started including non-financial (performance) information in their corporate reports.

’’Information on opportunities is less straightforward than reporting on the risks’’ We recommend companies to link these non-financial performances with the Integrated Reporting principles in future reporting’s. Most of the reports can, in short, be seen as combined reports instead of integrated reports. This is not a criticism - it merely shows

companies to have only just begun their journey towards Integrated Reporting. Companies sometimes provide a clear overview of the KPIs on the first pages of their report. They show both financial and non-financial performance indicators, but often without a clear link to the strategic objectives as mentioned before. Consequently the overall score on this aspect is relatively low with 45%. Our research further showed that 80% of reporting companies use the reporting guidelines of the Global Reporting Initiative (GRI) to build their KPIs. The GRI guidelines provide a universal guidance for reporting on sustainability performances. When it comes to comparing current performances to past and future performances, the scores were lower (46%). Many companies provide the information for multiple years but they refrain from connecting this to future short, medium and long term targets. 42% of the companies have a limited assurance statement by a third party

’’Secondary reports may have their own statements but Integrated Reporting should be more comprehensive, including an integrated consistency statement’’ on their non-financial report or KPIs. According to our research, reasonable assurance tends to be an exception for this kind of information as it was the case for only four companies. Eumedion’s Rients Abma expects that accountants will have to expand their team in the future with experts on sustainability, remuneration policy and governance structure (page 23). Secondary reports may have their own statements but Integrated Reporting should be more comprehensive, including an integrated consistency statement. Also, Susanne Stormer from Novo Nordisk mentioned (page 13) that information presented (financial and non-financial) should be of the same quality.

45%

have KPIs for each strategic objectives. Sector

Content Element average score

Energy, Resources & Transport

61%

Financial Services Industry

58%

Manufacturing

56%

Consumer Business

52%

Real Estate

48%

Technology, Media & Telecommunication

47%

Future outlook

Is the company affected by future opportunities, risks and uncertainties that could prevent it to achieve its strategic objectives and how would these future changes impact its strategies and future performance?

This question helps companies to build the information for the content element ’Future outlook’. Our research shows that this content element seems to be the most difficult part to report on. The reporting companies scored 40% on average on giving a clear assessment of their future outlook. Even though the

’’A long term overview of financial as well as non-financial expected changes is usually not reported’’ reports list general developments and expectations, these are often not substantiated or specific to the company.

The reporting companies refrain from clearly describing the process to identify future opportunities, risks, challenges and uncertainties. The companies score 31% on identification of future changes. 20% of reporting companies provide a SWOT analysis, but often either omits an explanation on how this analysis was built, or the analysis is not future oriented. A good risk analysis is crucial to establishing a proper future outlook and to seeing whether the business model is sustainable, as also emphasized by Barbara Majoor (page 29). Many of the reporting companies’ reports have an ’’outlook’’ section. This usually focuses on the short (and sometimes medium) term. In addition, the ’’outlook” section often focuses on financial information only. A long term overview of financial as well as non-financial expected changes is usually not reported. Considering the above findings, the research subjects, unsurprisingly, did not assess extensively how future changes will affect the availability, quality and affordability of the various capitals. With a score of just 29% on this aspect it leaves room of further improvement.

Improvement can be also achieved in providing a clear statement on the connectivity between future opportunities, risks, challenges and uncertainties and the implications these changes have on strategy and future performance. As Cees de Boer said (page 33), the future orientation and the way a company determines internal and external risks and opportunities helps to create a bigger picture and to understand where and how it stands in the world.

’’A future orientation and describing internal and external risks and opportunities helps to create a bigger picture’’ Overall we conclude that despite references to some general developments and expectations stated in the reports, there is a major opportunity for improving the topic of future outlook.

31%

Average score on identification of future changes Sector

Content Element average score

Real Estate

47%

Financial Services Industry

43%

Consumer Business

42%

Manufacturing

40%

Energy, Resources & Transport

36%

Technology, Media & Telecommunication

32%

Guiding principles

The prototype framework identifies six guiding principles that should underpin the preparation of an integrated report:

• • • • • •

strategic focus and future orientation; connectivity of information; stakeholder responsiveness; materiality and conciseness; reliability; and comparability and consistency.

The research shows a selection of the guiding principles to have been taken into account by most companies. Nevertheless, companies did not apply all guiding principles. The guiding principles the companies have applied in their reporting varied from company to company (average score 52%).

’’Connectivity of information leaves room for improvement’’ Strategic focus and future orientation Strategic focus and future orientation shows room for improvement. As mentioned earlier, both strategy and future orientation and how they interact were not always sufficiently specific to the company and/or they 60

were not disclosed clearly. As Rients Abma indicated earlier on (page 23), essential information has to be reported if long-term investment decisions are to be taken. Connectivity of information Our research shows that the connectivity of information in general is weak. 46% of reporting companies have separate annual and sustainability reports. Connectivity between these reports could be improved. A challenge also emphasized by Susanne Stormer (page 13). Two reports make it difficult to communicate one consistent message. Two examples of frequently lacking connectivity are: • the link between the stakeholder dialogue and the rest of the report content. • the connectivity between the overall strategy of the company, its strategic objectives and the KPIs and performance of the company. This finding relates to both financial and non-financial information. Stakeholder responsiveness The stakeholder dialogue surprisingly scored just above the 50% because the nature and quality of the relationships often remain unclear. Also, as discussed previously this stakeholder dialogue should be linked to the rest of the report’s content.

Materiality and conciseness Materiality was something few reporting companies assessed. Material in the light of the prototype framework refers to relevance and significance of the matters discussed in the report. Some of the companies do provide a clear materiality matrix to identify the material issues .Unfortunately the connectivity between that matrix and the issues discussed in-depth in the report remains mostly unclear. Most reports only contain focus areas for readers to identify the material matters, without a substantiation being given of how these matters were selected. Also, we observed the reports to be quite extensive and long, obscuring the connectivity and clarity of information. Reliability Reliability scored relatively high (64%). This is no surprise as 80% of reporting companies follow the GRI guidelines, for which reliability is one of the ten reporting principles. The guiding principle Reliability contains both the internal management approach and the external assurance by a third party. According to this guiding principle, states the IIRC, information should be complete and neutral. For example, where amounts are estimates this should be clearly communicated, the nature and limitations of the estimation process should be explained, or it should be noted that no errors have been made in selecting and applying an appropriate process for developing the estimate. Comparability and consistency Companies apply the guiding principle comparability and consistency on average to 52%. Reporting

companies structurally provide in average KPIs, with multiple year data. However, the score dropped because the reporting companies had often failed to disclose whether they used KPIs specific to their activity and whether they had used benchmarks Read more about our detailed findings on the Integrated Reporting content elements, guiding principles and our sector analyses in Shifting from long reports to reporting on the long term - Sector analyses.

52%

Average score comparability Sector

Content Element average score

Energy, Resource & Transport

59%

Consumer Business

55%

Manufacturing

53%

Real Estate

53%

Financial Services Industry

53%

Technology, Media & Telecommunication

47%

References

source quotes page 11 Black Sun (2012) ’’Understanding transformation – Building the business case for Integrated Reporting’’ page 51 Black Sun (2012) ’’Understanding transformation – Building the business case for Integrated Reporting’’

footnotes page 3 1 Deloitte CFO survey 2 The prototype framework is published by the IIRC (website: www.theIIRC.org page 8 The Prototype Framework is published by the IIRC (website www. theIIRC.org). 1

page 9 1 Black Sun (2012) ’’Understanding transformation – Building the business case for Integrated Reporting” page 41 1 The study examined the most recent communications for the year 2 The Prototype Framework is published by the IIRC (website: http:// www.theiirc.org/wp-content/uploads/2012/11/23.11.12-PrototypeFinal.pdf). page 45 Deloitte Commissarissen Survey, December 2011.

page 46 Deloitte Research, ’’Analyse Risicoparagrafen – Op weg naar inzicht en relevantie in 2012’’ [Analysis of risk paragraphs – The road towards insight and relevance in 2012], September 2012.

At Deloitte, we see Integrated Reporting as enabling a process which enhances and preserves long-term sustainability in all its dimensions, without unduly sacrificing short-term performance

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