Message 1: Used in combination, IR1 and G4 can have significant impact on measurement and disclosure by companies world-wide. Yet used non-aligned, and perceived to be competing, years of work on non-financial reporting and corporate sustainability may be lost. What would be first steps of linking the requirements for GRI-based sustainability reporting with those for IIRC-based integrated reporting? Some are suggested below.
Message 2: Do not define the added value of the IR by defining supposed weaknesses of the GRI. Some refer to GRI-based reporting as “non-strategic” and “backward-looking”, as opposed to the IR that is “strategic” and “forward-looking”. As explained below, this is a myth. Plus do distinguish between the content of a standard and how some apply it – a matter equally challenging for the IIRC.
Message 3: A central difference in approach between IR1 and G4 relates to the “B” word - “beyond” – one that leaves corporate lawyers nervous. Both IR1 and G4 provide for the possibility of reporting boundaries extending “beyond” those used for traditional financial reporting, “beyond” a legal ownership structure. IR1 qualifies this by adding: in as far as this implies material effect on “the ability of the financial reporting entity” to create value. The reporting company is the center of attention, whereas G4 has a broader (value chain and network) interest.
Message 4: Let stakeholders be. IIRC should avoid the dilemmas GRI took on, of seeking to be everything to everybody. The value of IR1 will lie in its ability to live up to its stated objective – communicating to providers of financial capital. Statements such as “can also be applied by public sector or not-for-profit organizations” and “benefit to all stakeholders” are misleading. The added value of G4 will be its ability to cater for the equally important but different needs of other stakeholder groups.
First, on next steps in alignment...
Aligning or linking the requirements of IR1 and G4 needs to advance the efficiency and effectiveness in reporting practices that the recent Memorandum of Understanding between the IIRC and GRI refers to as common purpose. First steps in this direction could be:
- Aligning the reporting principles of the two Frameworks, setting out and explaining how they differ yet complement;
- Grouping GRI indicators, notably empirical ones, in terms of the six capitals of IR1, making it easier for users to consider where sustainability reporting data should feed into IR development;
- Having mapped GRI indicators against the six capitals, consider what gaps remain and how related, commonly used indicators on e.g. manufactured and financial capital - found in annual financial statements – may fill these; and
- Explaining difference and complementarity between the respective materiality and content determination processes, helping reporters to erase areas of duplication and ensure that IR content is really the shorter, concise content for a specific user group that is complemented by additional content for a broader stakeholder audience.
Second, on strategy and the future...
As our analysis shows, and as those who have participated in the GRI process since the 1990s know, the GRI Guidelines have plenty of requirements related to strategy and forward-looking information. Its approach can be qualified as follows:
- For some this is about “sustainability strategy”, for others “business strategy”. Both IIRC and GRI refer only to “strategy”. IR1 does tend to speak more broadly in terms of “objectives”, whereas G4 tends to go into the details of “targets”. Yet the manner in which reporting organizations and stakeholders interpret “strategy” is up to their own preference as users of the two frameworks.
- While both frameworks refer to the “short, medium and long term”, the IIRC clearly has strong interest in the longer term. It remains to be seen to what extent confidentiality or competition considerations will allow reporting companies to be forthcoming in disclosing “challenges and uncertainties the organization is likely to encounter in pursuing its strategy”. Inevitably some would prefer to disclose this bilaterally with investors behind closed doors. This may leave year-after-year IRs presenting much strategic “fluff”, akin to the “clutter” that sustainability reports have been accused of presenting.
- As the Framework that lists performance indicators – for reporting on performance of the last / recent years – G4 content may leave the impression of being more “backward-looking”. The introduction of “Disclosure on Management Approach” by GRI in an earlier version of the Guidelines was, however, especially to (i) provide for forward looking statements (on approach), as well as to (ii) provide for the fact that not all sustainability topics can be captured in numbers or output indicators, but require a broader qualitative description of approach.
Third, on the “B” word and context...
There is much similarity between the six reporting principles of IR1 and the ten reporting principles of G4. Important is the GRI’s focus – as 2nd principle for defining report content - on “Sustainability Context”. When IR1 speaks of the “external environment” (as content element, not as principle), it is clearly more interested in impact of the external environment on the reporting business itself. IR1 does refer to “economic conditions, economic stability” as well as “contributions to the local economy” (e.g. taxes). As far is the outward dimension is concerned, the reach of "sphere of influence" is at stake. G4 provides greater coverage of not only direct but also indirect (economic and other) impacts, along with the extended value chain. G4 is at pains to put organizational performance in sustainability context.
Fourth, on target audience and stakeholders...
The primary user group of the IR is “providers of financial capital” – with special interest in long-term investors - whereas the GRI targets all stakeholder groups. It is not by accident that the first of the GRI’s ten reporting principles is “Stakeholder Inclusiveness”. When defining materiality, the G4 therefore refers to disclosure on topics that “substantively influence the assessments and decisions of stakeholders”, whereas IR1 refers to concise information relevant to “(providers of equity and debt capital) assessing the organization’s ability to create value”. The dependent variables that ultimately interest the providers of debt and equity capital are financial key performance indicators - most of which do not apply in the case of not-for-profit organizations.
Value chain: open to all?
Two key concepts for the two Frameworks are “business model” and “value chain”. The IIRC approach with business model explains an input-output model with the value creating use of resources, turning resource (capital) inputs into valuable outcomes. The center of attention is the reporting company. With its broader value chain focus, the GRI is putting a wider network of players at the center of attention. Its pre-final version of G4 defined value chain in broad terms – “parties that are linked by the organization’s activities, products, services, and relationships”. This implies more than common understanding in the business community of what the external value chain comprises. G4 appeared to imply a chain that is not limited to parties between whom there are commercial relationships. Any company would ask itself: Is the local authority or the regulator part of my value chain? Is an NGO part of my value chain? This reflects the broader “social responsibility” understanding that the GRI represents.
Right business model, wrong product?
IR1 asks about the “resilience” of the business model. One wonders: could a company have the right business model but the wrong (unsustainable) product? G4 asks e.g. - related to indirect economic impacts - about the impact of the use of products and services. This looks further downstream in the value chain at the sustainability of the product or service as such. The strategic focus of the IR1 probably deserves some elaboration on this. On business model IR1 does refer to key outcomes in terms of, among others, social and environmental effects. Applying this to product as such implies the sensitive (yet critical to investors) topic of whether some product ranges or industrial sectors are by definition less sustainable than others. There are new entrants, as well as old products and industries that need to be on the way out. Does IR1 provide for making this call, which SASB in the USA does with its sustainable industry classification?
Boxing, auditability and assurance
Requirements by the GRI may leave the impression of a mechanistic (tick the box) approach, whereas the IIRC has a more strategic approach – some would say philosophical, others would say business logical. On stakeholder engagement as principle area, the GRI e.g. asks about “how the organization identifies”, “how the organization responds” and how information is “accessible to stakeholders”. The IR1 on the other hand asks about the “quality of the organization’s relationships with its key stakeholders”. On governance the GRI e.g. asks “describe the governance structure” whereas the IR1 asks “how does governance structure support value creation”. The G4 approach lends itself to a more detailed, auditable approach, whereas the IR1 approach provides for the more brief, strategic description one would expect in a concise IR.
Trade-offs and dilemmas
Both Frameworks provide for a discussion on “trade-offs”, “dilemmas” or “conflicting requirements”. In the case of the GRI this relates to e.g. conflicting requirements by different stakeholder groups. The latter implies also the possibility of trade-offs between different capitals, which is of special interest to IR1. The IR1 raises the issue of trade-offs between different time frames (e.g. short versus long term – a challenge for investors), as well as trade-offs between the company’s capitals and those of others. The latter – our capitals versus those of others - implies issues such as externalities, which GRI captures as e.g. environmental or social impacts. IR1 provides for the possibility of any of the six capitals being seen as “immaterial” given the company’s circumstances. It is hard to imagine any company deciding any of the capitals being immaterial: e.g. “human capital is not material to our operations”?
Risks and opportunities cut both ways
Guidance on risks and opportunities make clear that G4 is covering both “impacts and dependencies” – and not only impacts as the IIRC Capitals Background Paper accuses sustainability reporting of doing. G4 e.g. asks for a description of risks and opportunities in terms of (i) impacts on sustainability and effects on stakeholders as well as (ii) impact of sustainability trends, risk and opportunities on the long-term prospects and financial performance of the (reporting) organization”. Its Technical Protocol for determining content (materiality) addresses the significance of impacts on the reporting organization as well as on its stakeholders. So both Frameworks appear to cover impacts and dependencies (e.g. on natural capital) well.
Materiality and report content
Both G4 and IR1 recommend processes with steps for determining materiality, report content and boundaries. IR1 describes it in terms of determining relevance, importance and finally prioritization. G4 describes it in terms of mapping a value chain, identifying relevant topics, prioritizing them and finally validating the result with reference to completeness (scope / range of topics considered). Considering the GRI’s love of due process, the detailed description of the process is expected. It is however strange to see IR1 ask for disclosure of “the organization’s materiality determination process”. One would expect the more concise IR to leave that description to sustainability reporting, with the IR only reporting the results of the process. Surely, that is what really interests investors and lenders?