Interconnecting financial and sustainability information: does the multi-capital approach explain adherence to the IIRC framework?

ABSTRACT

Integrated Reporting (IR) is a major innovation encompassing both financial and sustainability information. The multi-capital approach that characterises the International Integrated Reporting Council (IIRC) framework aligns with resource dependency theory. On this basis, we design a disclosure index to assess adherence to the IIRC framework in Down Jones Sustainability Europe Index (DJSEI) company reports, and examine whether the value drivers embedded in the capitals explain it. We posit that integrated corporate thinking drives business practices and is reflected in the communication strategy through IR. Results confirm a high degree of use of the framework. Regarding the multivariate analysis, natural capital has a significant and positive association with the level of adherence; but human-related capital is negatively associated, mainly due to intellectual capital. Firms that state following the IIRC guidelines adhere more to the framework. This highlights the need for framework clarification to prevent IR misuse as an impression management tool.

KEYWORDS:

• IIRC
• integrated reporting
• six capitals
• sustainability reporting
• Dow jones sustainability Europe index

JEL CLASSIFICATION:

• M41
• M48

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. This term encapsulates the corporate social responsibility (CSR) notion and is normally used nowadays to refer to non-financial as well as environmental, social and governance (ESG) information. In this paper, we consider them to be synonymous.

2. It is remarkable that in 40 years (from 1975–2015), tangible assets have declined and gone from representing 83% to 16% market capitalisation in the S&P 500 index (Ocean Tomo, 2017).

3. Directive 2014/95/EU has led to profound changes in the way organisations communicate with all stakeholders on different matters related to the organisation, the environment and society as a whole. However, it was considered insufficient due to the lack of comparability of the information reported by companies.

4. Note the change of name from non-financial reporting to sustainability reporting, an expression that has also been adopted by the ISSB.

5. The CSRD establishes a phased entry into application of the ESRS. Companies already obliged by the NFRD should apply them in January 2024, other large companies the year after (2025), listed SMEs in 2026, and non-EU companies with branches/subsidiaries in the EU in 2028.

6. The IIRC and the Sustainability Accounting Standards Board (SASB) merged in June 2021, and together created the Value Reporting Foundation (VRF); in August 2022, the VRF completed the consolidation with the IFRS Foundation. See: https://www.ifrs.org/news-and-events/news/2022/11/ifrs-foundation-announces-membership-of-ircc/?utm_medium=email&utm_source=website-follows-alert&utm_campaign=immediate.

7. In the request for information published in May 2023, ISSB consults on the agenda for the next two years and one of the four suggested topics is integration in reporting. See: https://www.ifrs.org/news-and-events/news/2023/05/issb-seeks-feedback-on-its-priorities-for-the-next-two-years/.

8. Under the impression management argument, it is assumed that managers consciously use corporate reports, either voluntary or mandatory, as an impression management instrument to strategically manipulate users’ insights and decisions (Merkl-Davies & Brennan, 2007, 2011).

9. These papers are the ones directly related to our purpose, but we should also mention two other relevant papers. Christensen et al. (2021), who do a comprehensive literature review with the aim of identifying the potential economic consequences of a sustainability reporting requirement for US companies, and Korca and Costa (2021), who aim to provide a research agenda on the basis of Directive 2014/95/EU.

10. As pointed out by one of the anonymous reviewers, we note that the framework and content elements of the index do not provide a balanced indicator of the two reporting domains, financial and sustainability. In fact, although the elements in ‘organisational overview and external environment’ and ‘governance’ are mainly related to sustainability reporting, other elements only contain some aspects related to sustainability issues, such as B5, B7, and B8 in ‘business model’, S6 in ‘strategy’, and P2 and P5 in ‘performance’.

11. Regulatory Quality: assessment of perceptions of the ability of a government to formulate and implement sound policies and regulations that permit and promote private-sector development. Rule of Law: assessment of the perceptions in which agents have confidence and abide by the rules of society, particularly the quality of contract enforcement, property rights, the police and courts. Control of Corruption: assessment of the perceptions to which public power is exercised for private gain. The three of them range between −2.5 and 2.5, with higher scores corresponding to better outcomes. Available at: www.govindicators.org.

12. It should be considered that in the period under study the UK was in the EU.

13. Our results remain consistent to the elimination of the three observations with negative book value.

Additional information

Funding

The work was supported by the Ministerio de Ciencia e Innovación, Madrid, Spain [PID2020-117792RA-I00]; Ministerio de Ciencia e Innovación, Madrid, Spain [PID2019-111143GB-C33, PID2020-117792RA-I00].