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WHAT EXACTLY AN I NT EG RATED report signifies to its audience has been evolving through four continuous, overlapping phases of "meaning-making" (Figure 2.1). The first, Company Experimentation, began in the early 2000s with a handful of companies' efforts to produce their first integrated report. This phase is the initiation in practice of the idea of integrated reporting. Consultants, academics, and other experts instigated the second phase, which we call Expert Commentary, when they began to establish basic principles about integrated reporting based on observations of companies' practices. Including lessons about the costs, benefits, and challenges of integrated reporting and how to overcome them, this theory-building phase started in the mid-2000s. In the late 2000s, the third phase, Codification, began. It is centered on the development of frameworks and standards by nongovernmental organizations (NGOs) working with other actors in the movement, like companies, investors, and accounting firms. The fourth and most recent phase, Institutionalization, is based on influencing the regulatory and market environment to make it more conducive to the practice of integrated reporting. Starting in the early 2010s, this phase is built on laws and codes of conduct. In this chapter we will focus on the first two phases and introduce the third, which is further discussed along with the fourth phase in Chapter 3.

FIGURE 2.1 Four Phases in the Evolution of Meaning of Integrated Reporting

Four Phases in the Evolution of Meaning of Integrated Reporting


Eccles and Serafeim (2014) have argued that integrated reporting is superior to separate financial and sustainability reporting in its performance of both the "information" and "transformation" functions of corporate reporting.1 "Corporate information that is more decision-useful is more likely to encourage all these counterparties to transact with the company and, all else equal, to transact with a company at better terms,"2 they wrote. In other words, the information function affects resource allocation decisions of parties who do business with a company, but without allowing for feedback to the company from these counterparties. In contrast, "the transformation function relaxes this assumption, allowing for engagement and activism from the counterparties. The counterparties receive and evaluate the information. Where they see opportunities to influence corporate behavior to their benefit, and potentially to the benefit of the corporation, they actively try to bring change."3 By affecting the resource allocation decisions of the company itself, "This engagement, activism, and change process enables a company to transform."4

Although supporters of integrated reporting vary in the relative importance they allocate to these two functions, they were implicit in the concept from its very earliest stages.

Like many new management ideas, integrated reporting began in practice.5 When companies began to produce integrated reports in 2002, the notion of combining financial and nonfinancial data in a meaningful way arose in the same way as scientific ideas whose "time has come"—independently and simultaneously. The earliest integrated reporters were two Danish companies, Novozymes and Novo Nordisk, and a Brazilian company, Natura, all of whom gave essentially the same reason for the change: sustainability issues were now essential to the long-term success of the business, and integrated reporting was the best way to communicate about this. The integrated report's meaning lay in its capacity to help a company communicate that it was managing sustainability from a business perspective, and that it did not merely represent, to use a term from economics, a "transfer payment" from shareholders to stakeholders. Because integrated reporting was a nascent practice, general understanding of what it meant—or represented—was shallow. Consequently, further questions regarding report content and structure arose, focusing primarily on the information function. Although sustainability reporting guidance from the still-young Global Reporting Initiative (GRI) existed, at the time there was nothing to guide a company in what constituted an integrated report.

Despite the fact that the first companies to produce an integrated report differed in their report execution, many issues identified by these pioneers continue to be topical today. Materiality and stakeholder engagement (core to the transformation function) was challenging then, along with the questions of whether any kind of assurance should be provided on the report, the extent to which the Internet could be leveraged to supplement the paper report, the boundary of the report, the importance of intangible assets, understanding the relationship between financial and nonfinancial performance (often termed "ESG" performance because it refers to environmental, social, and governance factors), and the related struggle of going from a "combined report" to a truly "integrated report."

In 2008, a Dutch company (Philips) and an American company (United Technologies Corporation) raised further questions by issuing their first integrated reports.6 The experience of Philips illustrates the evolutionary path of integrated reporting, and the intentions of United Technologies Corporation raise the issue of whether integrated reporting means less overall reporting by the company.

While the former is important for assessing the momentum of the movement today, the latter highlights a concern some advocates of sustainability reporting have voiced about integrated reporting: that in forcing concision, it will reduce the amount of information provided to stakeholders who represent civil society.

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