Insights
International Integrated Reporting Framework: The Value Creation Story
By Mr. Satyan Jambunathan, Chief Financial Officer, ICICI Prudential Life Insurance
It was really in the aftermath of the 2007 financial crisis that the idea of the new reporting framework took shape. Huge unrest had erupted across the globe due to the system’s over-dependence on gains for the short-term completely overlooking the need to address more pressing long-term issues such as climate change, inequality, a safe working place, a decent wage, and community development. This led global leaders to push towards a more holistic reporting framework, which would provide necessary information to all stakeholders.
In line with conversations globally, in India too discussions to move from measuring an organisation's growth purely on financial strength to measuring the value creation process have been gaining traction across board rooms in the last decade. There is a growing acceptance of moving beyond the short-term, quarter-on-quarter results to measuring a company’s long-lasting social and ecological footprint.
Over the years, SEBI has played a crucial role in putting in place more relevant, transparent, and comprehensive disclosure norms for companies. Integrated Reporting Framework established by the International Integrated Reporting Council is one such initiative that seeks to provide relevant information to stakeholders about how companies create value in the short, medium and long term through efficient use of capital.
The integrated reporting framework rests on three fundamental pillars:
Use of capitals as input to create value: The council has expanded its over-reliance of financial capital substantially to include Natural Capital, Social Capital, Human Capital, Manufactured Capital, Intellectual Capital and Financial Capital.
Value-creation process: The manner in which an organisation creates value by using each of its capital for all its stakeholders.
Outcome of the process: The eventual value created for the organisation, stakeholders, other constituents, and the impact on each of the capital.
Significance and Inter-dependence of Capitals
Ownership of different kinds of capital is key to a firm’s prosperity. Some forms of capital, if unique, can become a firm’s competitive advantage and their services can be centred on it. Capital can change form and quantity as it flows through organisational processes. For example, the intellectual capital value goes up when a company develops a new proprietorship technology, and social capital can go up with effective stakeholder management and incentives.
Purpose of Integrated Reporting
The prime objective of the integrated reporting framework is to focus on what is truly integral for business success – integrated thinking, understanding material determination central to the business, and the relationship between capitals in the process of value creation. These concepts help organisations to articulate their stakeholder-focused strategy and in the process help identify the key areas to focus on in the future. This integrated way of thinking can substantially influence the value an organisation creates.
So, why is it essential to adopt the integrated reporting framework in the Indian Context?
Attract foreign investments: According to the World Investment Report 2018, about two-thirds of the investments made in developed countries in 2018 had factored in specific requirements like corporate disclosures, adherence to labour laws, respect for human rights of workers and respect for international environmental and social legislation. In addition, portfolio investors worldwide are increasingly removing non-adhering companies from their portfolios.
Reputation management: In this hyper-connected world that we live in, businesses cannot afford to overlook their intangible assets like trust, goodwill and brand recognition. They must come across as firms with the best-in-class internal governance structures. Therefore, modelling their annual report along the integrated reporting framework guidelines is vital from a reputation management perspective.
To drive better performance: Any company that meticulously charts its value creation story through the six capitals mentioned under the integrated reporting framework will come across loopholes, which, if fixed, could yield substantial benefits on their balance sheet. In a Harvard Business Review article, Professor Robert G. Eccles, Professor Loannis Loannou, and Professor George Serafeim took a sample of 180 companies and classified them into high and low sustainability groups. Companies in the high sustainability batch had started voluntarily adopting sustainability policies since 1993.
On evaluating both these groups of companies on corporate governance, stakeholder management, stock exchange performance, and various other indicators, it was found that companies belonging to the high sustainability group outperform their competitors on every parameter by a long margin.
Better ESG information to stakeholders: There has been a negative perception among stakeholders and regulators that corporates do not provide adequate disclosure of their business impact on the environment, society and their immediate stakeholders. As investors globally are placing a higher priority on these issues, corporates have to determine a more holistic way of disclosing these risks. Integrated reporting provides the much-needed framework for organisations to integrate financial and ESG data to provide the necessary information on their materiality risks, corporate risk and corporate strategy.
We at ICICI Prudential Life Insurance Company realise the importance of not being bound by short-termism and have modelled our FY2021 Annual Report, on the lines of the integrated reporting framework. We meticulously charted all the resources that we rely on to create value for our stakeholders. Vital elements of our value creation process include product conceptualisation and development, customer services and claim management, digitalisation, prudent fund management, branding & marketing, distribution, policy underwriting and reinsurance.
Our core values such as customer first and humility helped us evaluate and use our resources to get the best outcome possible. For instance, our input in the form of CSR contribution under the social and relationship capital for the FY2021 was ₹ 109.8 million while the outcome has been 159,000 people imparted with skill livelihood training. To read about all our six capitals and their impact including the complete value creation story, please click on the link below and navigate to page no. 43.
