Integrated reporting and sustainability reporting
The financial statements are a complete account of one thing: the transactions and events that meet an accounting standard's recognition and measurement criteria. They are not an account of everything that makes an organisation valuable, and they were never meant to be. This chapter is about the two things that have grown up beside them — the Integrated Reporting Framework, which tells a value-creation story across six kinds of capital, and sustainability reporting, which since 2023 has had its own IFRS standards.
1 Why the financial statements are not enough
Financial statements are backward-looking, transaction-based, and confined to what can be recognised and measured reliably in money. Three consequences follow, and none of them is a criticism of the accounts:
they report what has already happened, and investors are trying to judge what will happen next;
they record exchanges, and much of what an organisation depends on is never exchanged — the trust of a community, the knowledge in its people's heads, the condition of the river it draws water from;
they recognise only what meets a definition and a measurement test. IAS 38 forbids the recognition of internally generated brands, mastheads and customer lists, and of research expenditure; so the more successfully a technology company builds intellectual capital of its own, the less of it appears in its statement of financial position.
So an organisation with excellent financial results may be depleting the very things that produced them, and the accounts will not say so. That is the gap the reporting frameworks in this chapter exist to fill, and it is why a modern set of objectives is not purely financial:
What is not in the accounts | Why it matters to future performance |
|---|---|
Human | The workforce, its skills and its retention. A stable, motivated workforce means less disruption, deeper knowledge and lower recruitment cost; none of that is an asset in the accounts. |
Intellectual | Ideas, systems, processes, brands and organisational knowledge. They may meet the general definition of an intangible asset and still be prohibited from recognition when internally generated. |
Natural | The environmental resources the business consumes and the impact it has. Financial statements have never shown this, and increasingly it is what determines an organisation's licence to operate and its cost of capital. |
Social and relationship | Relationships with customers, suppliers, communities and regulators. Better relationships produce better financial performance, usually with a lag, and their absence is normally noticed only after they have gone. |
Non-financial objectives
Which of the following are examples of non-financial objectives?
Select ALL that apply.
A reduction in staff turnover of 10%
A growth in earnings per share of 4%
A reduction in the company's carbon footprint by 25% over the next 5 years
An increase in share price of 5%
An increase in company charitable donations of 10%
A reduction in the number of staff sick days to below the national average
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2 Who sets the rules
Until recently organisations reported non-financial information however they wished, with very little guidance. Guidance now comes from three sources, and F2D1a asks you to describe the role of each. They are complementary rather than competing, and the fastest way to keep them apart is to ask who each is written for.
2.1 The Global Reporting Initiative (GRI)
The GRI is an independent international organisation founded in 1997. Through its Global Sustainability Standards Board it publishes the GRI Standards, which are the most widely used sustainability reporting standards in the world and are voluntary.
The GRI's lens is impact materiality: it asks what impacts the organisation has on the economy, the environment and people, including impacts on human rights. Its audience is every stakeholder — employees, communities, regulators, customers, investors — not investors alone. That is the single distinction to hold on to, because the ISSB's lens (§2.3) is the opposite way round.
The GRI Standards are built in three layers:
Layer | What it contains |
|---|---|
Universal Standards | GRI 1 Foundation — the purpose of the standards, the reporting principles and the requirements for reporting in accordance with them; GRI 2 General Disclosures — disclosures about the organisation and its reporting practices, its activities and workers, its governance, its strategy, policies and practices, and its stakeholder engagement; GRI 3 Material Topics — how to determine material topics, and how to report the management of each of them. |
Sector Standards | Standards for particular sectors — oil and gas, coal, agriculture and so on — naming the topics likely to be material to organisations in that sector. |
Topic Standards | Standards for individual topics, grouped as economic, environmental and social, which an organisation applies to whichever topics it has determined to be material. |
The general disclosures (GRI 2) and the management of material topics are different things and are in different standards. GRI 2 describes the organisation, how it is governed and whom it talks to. How the organisation manages each of its material topics is required by GRI 3, not by GRI 2 — which is exactly what both of the GRI examples below turn on.
Global Reporting Initiative (1)
An organisation is preparing a sustainability report in accordance with the GRI Standards.
Which of the following are groups of disclosure required by GRI 2: General Disclosures?
Select ALL that apply.
The organisation and its reporting practices
Activities and workers
The management of material topics
Governance
Strategy, policies and practices
Stakeholder engagement
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Global Reporting Initiative (2)
Which of the following are disclosures required by GRI 2: General Disclosures?
Select ALL that apply.
The entities included in the organisation's sustainability reporting
External assurance of the sustainability report
The management of material topics
Governance structure and composition
The approach to stakeholder engagement
Remuneration policies
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2.2 The Integrated Reporting Framework and who now owns it
The Integrated Reporting Framework — usually written <IR> — was developed by the International Integrated Reporting Council (IIRC) and issued in 2013, with a revision in 2021. Its audience is primarily providers of financial capital, and its subject is how the organisation creates value over the short, medium and long term.
Its custodianship has changed, and this is examinable.
Who owns the <IR> Framework
The IIRC merged into the Value Reporting Foundation in 2021, which was in turn absorbed into the IFRS Foundation in 2022 — so the <IR> Framework now sits with the IFRS Foundation, alongside the International Sustainability Standards Board (ISSB) and its IFRS Sustainability Disclosure Standards. Do not describe the IIRC as the current standard-setter.
2.3 The International Sustainability Standards Board (ISSB)
The ISSB was established by the IFRS Foundation in November 2021 and issued its first two standards, IFRS S1 and IFRS S2, in June 2023. It consolidated the work of several earlier bodies, including the Sustainability Accounting Standards Board, the Climate Disclosure Standards Board and the Task Force on Climate-related Financial Disclosures, whose four-pillar structure it adopted (§6).
The ISSB sits alongside the IASB under the same IFRS Foundation, and the distinction between them is the one students most often blur: the IASB sets IFRS Accounting Standards — IFRS 15, IFRS 16, IFRS 18 and the rest of this paper. The ISSB sets IFRS Sustainability Disclosure Standards — IFRS S1 and IFRS S2. IFRS S1 is not an accounting standard and does not change a single number in the financial statements.
The ISSB's lens is financial materiality: it requires disclosure of sustainability-related risks and opportunities that could reasonably be expected to affect the entity's prospects — its cash flows, its access to finance or its cost of capital. Its audience is the primary users of general purpose financial reports: existing and potential investors, lenders and other creditors.
The three bodies, side by side:
GRI | <IR> Framework | ISSB | |
|---|---|---|---|
What it publishes | The GRI Standards | The Integrated Reporting Framework | IFRS Sustainability Disclosure Standards (IFRS S1, IFRS S2) |
Written for | All stakeholders | Primarily providers of financial capital | Investors, lenders and other creditors |
Materiality lens | Impact — the organisation's effect on the economy, environment and people | Value creation across six capitals | Financial — effect on the entity's own cash flows, access to finance and cost of capital |
Output | A sustainability report | An integrated report | Sustainability disclosures within the general purpose financial reports |
Custodian | The GRI, through the Global Sustainability Standards Board | The IFRS Foundation (since 2022) | The IFRS Foundation |
Status | Voluntary | Voluntary | Voluntary unless a jurisdiction makes it mandatory — several have begun to |
3 Integrated thinking
F2D1b asks you to explain integrated thinking, and the mistake to avoid is treating it as a synonym for integrated reporting. It is not a report; it is a way of managing.
Integrated thinking
The active consideration by an organisation of the relationships between its various operating and functional units and the capitals that it uses or affects. It leads to integrated decision-making and to actions that consider the creation, preservation or erosion of value over the short, medium and long term.
The contrast that makes it stick:
Integrated thinking is the management behaviour — deliberately considering the relationships between the organisation's units and all six capitals when taking a decision, instead of managing in silos.
Integrated reporting is the output — the periodic report that communicates the value-creation story to providers of financial capital and other stakeholders.
The Framework treats the first as the foundation of the second: an organisation that does not think this way has nothing coherent to report, and an integrated report assembled at the year end by collecting narrative from departments that never spoke to each other is exactly the cluttered, self-congratulatory document the Framework was written to replace.
What it looks like in practice:
resource-allocation decisions are taken against their effect on every capital, not only on this year's profit — training spends financial capital to build human capital, and the decision is made in those terms;
trade-offs are made explicit rather than discovered later: an emissions target that constrains output, a price cut that buys market share at the cost of supplier relationships;
performance measures and incentives span the capitals, so a manager cannot hit a financial target by quietly depleting a non-financial one;
the business model — how inputs become outputs and outcomes — is a shared description that the whole organisation recognises, not a diagram drawn once for the annual report.
4 The six capitals
The Framework describes the resources and relationships an organisation uses and affects as the capitals: stocks of value that are increased, decreased or transformed by its activities and outputs. There are six.
Capital | What it covers | Measurement and disclosure issues |
|---|---|---|
Financial | The funds available to the organisation: equity, debt, and cash generated by operations. | The one capital the financial statements already measure reliably — and even here the accounts show the pool of funds, not how well it is being renewed. |
Manufactured | Physical objects used in production or service provision: buildings, equipment, infrastructure — including assets owned by others that the organisation uses. | Carrying amount is cost less depreciation, which says nothing about condition or capability; leased and shared infrastructure may not appear at all. |
Intellectual | Knowledge-based intangibles: patents, copyrights, software, systems, procedures and protocols, brands, and organisational knowledge. | IAS 38 prohibits the recognition of internally generated brands and of research, so the most valuable intellectual capital is invisible in the accounts. There is no agreed unit of measurement for it. |
Human | People's competencies, capabilities and experience, their motivation, and their alignment with the organisation's values and governance. | People are not assets and cannot be recognised. The usual proxies — turnover, training hours, engagement scores — measure inputs and sentiment rather than value, and are barely comparable between organisations. |
Social and relationship | Relationships within and between communities, stakeholder groups and networks: trust, shared norms and behaviours, and the social licence to operate. | The most subjective of the six, usually reported by narrative and example. Its value tends to become visible only at the point it is lost. |
Natural | Environmental resources and processes: air, water, land, minerals, forests, biodiversity and ecosystem health. | Measurable in physical units — tonnes of CO2e, cubic metres of water — but converting those to money needs contested assumptions, and the boundary question (how far down the value chain does the organisation count?) has no settled answer. IFRS S2 has now standardised part of this for climate; nothing else is standardised. |
The syllabus lists the fifth as social and relational capital; the Framework itself says social and relationship capital. They are the same capital.
Six items in no obvious order are hard to recall under exam pressure. The initials spell SHINFM — Social and relationship, Human, Intellectual, Natural, Financial, Manufactured — which is enough of a hook to check a list of options against. Anything not beginning with one of those six letters is not a capital, and that alone eliminates most distractors.
Four measurement and disclosure problems run across all six, and they are the substance of what F2D2 asks you to explain:
No common unit. The six are measured in money, in people, in tonnes and in narrative. They cannot be added together, so there is no equivalent of a balance sheet total for the capitals.
No prescribed metrics. The Framework names the capitals but does not say how to measure them, so two organisations reporting on the same capital rarely report the same thing — and neither does the same organisation from one year to the next.
Little or no assurance. Financial capital is audited. Most disclosure about the other five is not, which limits the reliance a user can place on it.
Trade-offs are the interesting part and the hardest to present. The information a user actually wants is what was given up to gain something else — and that is a judgement, over a time horizon the report has to choose.
This chapter’s one recording predates the 2027 syllabus. It is a short drill made for the earlier F3 paper: it works this example and the Guiding Principles example in section 5.2 by elimination, using the SHINFM mnemonic, and its answers are right. Its references to “your F3 exam” and to a next chapter on financial management belong to that paper. Who sets the rules, integrated thinking, the Content Elements, the Framework’s benefits and limitations, and IFRS S1 and S2 are covered only in these notes.
The Capitals
The Integrated Reporting Framework defines the resources and relationships of an entity as the capitals.
Which of the following are defined by the Integrated Reporting Framework as capitals?
Select ALL that apply.
Materiality
Human
Sustainable
Conciseness
Intellectual
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5 The Integrated Reporting Framework
The purpose of the Framework is to establish Guiding Principles and Content Elements that govern the overall content of an integrated report, and to explain the fundamental concepts that underpin them. It is principles-based: it does not prescribe key performance indicators, measurement methods or the disclosure of individual matters.
An integrated report is a concise communication about how an organisation's strategy, governance, performance and prospects, in the context of its external environment, lead to the creation, preservation or erosion of value over the short, medium and long term. It may be a standalone report or a distinguishable, prominent and accessible part of another report — but for a report to state that it is prepared in accordance with the Framework, those charged with governance must acknowledge their responsibility for it.
5.1 The fundamental concepts
Three concepts underpin everything else:
The capitals — the stocks of value the organisation depends on and affects (§4).
The value creation process — the business model, by which inputs drawn from the capitals become business activities, outputs and outcomes.
Value creation for the organisation and for others — value created for the organisation itself (financial returns to providers of financial capital) and value created for others (customers, suppliers, communities, the environment), which feeds back into the capitals and so into the organisation's own future returns.
Read the diagram round the loop. Inputs are drawn from the capitals; the business activities transform them into outputs — products, services, by-products and waste; the outcomes are the consequences of those outputs for the capitals, internal and external, positive and negative. The outcomes then change the stock of capitals the organisation has to draw on next period. This is why an organisation cannot report performance meaningfully without saying what it did to the capitals: the loop is the business.
5.2 The seven Guiding Principles
The Guiding Principles underpin the preparation and presentation of an integrated report, informing the content and how it is presented.
Guiding Principle | What it requires |
|---|---|
Strategic focus and future orientation | Insight into the organisation's strategy and how it relates to value creation and to the use of and effects on the capitals. |
Connectivity of information | A holistic picture of the combination, interrelatedness and dependencies between the factors that affect value creation — not a set of disconnected sections. |
Stakeholder relationships | Insight into the nature and quality of relationships with key stakeholders, including how and to what extent the organisation understands and responds to their needs. |
Materiality | Disclosure of information about matters that substantively affect the organisation's ability to create value over the short, medium and long term. |
Conciseness | Enough context to be understood, without less relevant information. This is the principle that most obviously pulls against completeness. |
Reliability and completeness | All material matters, positive and negative, in a balanced way and free from material error. |
Consistency and comparability | Presented on a basis consistent over time and in a way that enables comparison with other organisations to the extent it is material. |
The principle that explains why the Framework exists at all is reliability and completeness. Earlier attempts at narrative reporting — management commentary, and in some jurisdictions a statutory operating and financial review — grew cluttered and tended to accentuate the positive. Requiring the negative as well as the positive, in a balanced way, is the direct answer to that.
The Guiding Principles
The Integrated Reporting Framework establishes both Guiding Principles and Content Elements.
Which of the following are defined by the Integrated Reporting Framework as Guiding Principles?
Select ALL that apply.
Manufactured
Materiality
Social and relationship
Conciseness
Reliability and completeness
Business model
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5.3 The eight Content Elements
The Content Elements are the categories of information an integrated report includes. The Framework frames each as a question, which is the most useful way to remember them.
Content Element | The question it answers |
|---|---|
Organisational overview and external environment | What does the organisation do, and what are the circumstances under which it operates? |
Governance | How does the organisation's governance structure support its ability to create value? |
Business model | What is the organisation's business model? |
Risks and opportunities | What are the specific risks and opportunities that affect the organisation's ability to create value, and how is it dealing with them? |
Strategy and resource allocation | Where does the organisation want to go, and how does it intend to get there? |
Performance | To what extent has the organisation achieved its strategic objectives for the period, and what are its outcomes in terms of effects on the capitals? |
Outlook | What challenges and uncertainties is the organisation likely to encounter, and what are the implications for its business model and future performance? |
Basis of preparation and presentation | How does the organisation determine what matters to include, and how are such matters quantified or evaluated? |
5.4 Benefits and limitations of the Framework
This is a named topic in its own right, and it is the part most likely to be examined as discussion rather than recall.
Benefits | Limitations |
|---|---|
One report and one story: financial and non-financial information are connected rather than presented in separate documents that never refer to each other. | Voluntary in most jurisdictions, with no enforcement mechanism — an organisation that reports badly, or not at all, faces no sanction. |
Forward-looking: outlook is a required Content Element, so the report has to say something about what comes next. | Principles-based with no prescribed metrics, so comparability between organisations — and for one organisation over time — is poor. Consistency and comparability is a Guiding Principle, not a rule. |
Concise: the discipline of prioritising forces management to decide what actually matters. | Conciseness and completeness pull against each other, and the balance struck is the preparer's judgement. |
It promotes integrated thinking: preparing the report changes how the organisation is managed, which is a larger benefit than the document itself. | Five of the six capitals have no reliable measurement basis, so much of the content is narrative and subjective. |
It makes trade-offs between capitals explicit, and so manageable. | Most integrated reports carry little or no external assurance, so a user cannot rely on the non-financial content as they can on audited figures. |
It supports better dialogue with providers of financial capital, and a clearer value-creation story may reduce perceived risk and therefore the cost of capital. | A real risk of selective, positive-only reporting — the very fault earlier narrative reporting had, and the reason the reliability and completeness principle exists. |
It gives non-financial performance a place in the annual reporting cycle, alongside the numbers. | The primary audience is providers of financial capital, so it is not a full stakeholder-accountability report. That gap is what the GRI Standards fill, which is why the frameworks coexist. |
Preparation cost and management time, which fall hardest on smaller organisations. |
6 Sustainability reporting: IFRS S1 and IFRS S2
In June 2023 the ISSB issued its first two standards, effective for annual reporting periods beginning on or after 1 January 2024. They are IFRS Sustainability Disclosure Standards, not IFRS Accounting Standards, and they change no amount in the financial statements. What they do is bring sustainability information inside the general purpose financial reports, on a standardised basis, for the first time.
Where the sustainability disclosures sit
An entity reports its sustainability-related financial disclosures as part of its general purpose financial reports, for the same reporting entity as the financial statements and at the same time as them. They are not a separate document published later.
6.1 IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information
Objective. To require an entity to disclose information about its sustainability-related risks and opportunities that is useful to the primary users of general purpose financial reports in deciding whether to provide resources to the entity.
Scope. Sustainability-related risks and opportunities that could reasonably be expected to affect the entity's prospects — that is, its cash flows, its access to finance, or its cost of capital, over the short, medium or long term. The words do a lot of work: a matter with no plausible effect on those three things is outside IFRS S1, however important it may be to other stakeholders. That is the financial-materiality lens, and it is the boundary between IFRS S1 and the GRI Standards.
Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of those primary users — the same materiality definition the IASB uses, applied to a different subject.
Where no IFRS Sustainability Disclosure Standard applies specifically to a risk or opportunity, IFRS S1 directs the entity to use its judgement and points it to other sources, including the disclosure topics in the SASB Standards.
6.2 IFRS S2 Climate-related Disclosures
Objective. To require an entity to disclose information about its climate-related risks and opportunities that is useful to the primary users of general purpose financial reports — the same test as IFRS S1, narrowed to climate.
Scope. Climate-related risks and opportunities that could reasonably be expected to affect the entity's prospects. IFRS S2 splits the risks in two:
Physical risks — the direct effects of a changing climate. Acute physical risks are event-driven (flood, storm, wildfire); chronic ones are longer-term shifts (sea level, water availability, temperature).
Transition risks — the effects of moving to a lower-carbon economy: policy and legal change, technology, market and consumer shifts, and reputation.
IFRS S2 also requires disclosure about climate resilience, supported by scenario analysis: the entity has to say how resilient its strategy and business model are to climate-related changes, and how it reached that assessment.
6.3 The four pillars — the structure of both standards
IFRS S1 and IFRS S2 organise their core content identically, on the four pillars the Task Force on Climate-related Financial Disclosures established and the ISSB adopted. Learn the four and you have the shape of both standards:
Pillar | What must be disclosed |
|---|---|
Governance | The governance processes, controls and procedures used to monitor, manage and oversee the risks and opportunities — including which body or individual is responsible and how it is informed. |
Strategy | The approach to managing the risks and opportunities, and their effects on the business model, the value chain, strategy and decision-making, the financial position, financial performance and cash flows, both currently and over the short, medium and long term. |
Risk management | The processes used to identify, assess, prioritise and monitor the risks and opportunities, and whether and how those processes are integrated into the entity's overall risk management. |
Metrics and targets | The metrics and targets used to measure and manage the risks and opportunities and to track progress, including any set by law or regulation. |
Under the metrics and targets pillar, IFRS S2 requires disclosure of greenhouse gas emissions measured in accordance with the Greenhouse Gas Protocol, split into three scopes:
Scope | What it covers |
|---|---|
Scope 1 | Direct emissions from sources the entity owns or controls — its own boilers, furnaces and vehicles. |
Scope 2 | Indirect emissions from the generation of the energy the entity purchases and consumes. |
Scope 3 | All other indirect emissions in the entity's value chain, upstream and downstream — purchased goods and services, transport, and the use of the entity's products by its customers. Usually much the largest of the three, and much the hardest to measure. |
IFRS S2 also requires industry-based metrics, so that entities in the same industry disclose comparable measures, and disclosure of the proportion of executive remuneration linked to climate-related considerations.
Why Scope 3 is where the argument is
Scope 1 and Scope 2 are largely within the entity's own measurement systems. Scope 3 depends on data from suppliers and on assumptions about how customers use the product, so it is estimated rather than measured, is rarely comparable between entities, and can dwarf the other two — for a bank or a retailer it is almost the whole footprint. It is also where the boundary question from §4 reappears: how far along a value chain does an organisation's responsibility run?
6.4 How the three fit together
The three frameworks answer three different questions about the same organisation, which is why an organisation may use all of them and why the syllabus asks about all of them:
The GRI Standards ask what the organisation does to the world, and answer to everyone.
IFRS S1 and IFRS S2 ask what sustainability does to the organisation's cash flows, access to finance and cost of capital, and answer to investors and lenders.
The Integrated Reporting Framework asks how the organisation creates, preserves or erodes value across all six capitals, and ties the two directions together into one story.
None of them changes an accounting number. Their common effect is to put alongside the audited financial statements a body of information about the things those statements cannot recognise — which is exactly where this chapter began.
Financial statements report recognised, measured, past transactions, and much of what makes an organisation valuable is none of those things. Three bodies fill the gap: the GRI sets impact-focused standards for all stakeholders; the ISSB, part of the IFRS Foundation alongside the IASB, sets IFRS S1 and IFRS S2, which require investor-focused sustainability and climate disclosures inside the general purpose financial reports on four pillars — governance, strategy, risk management, and metrics and targets; and the Integrated Reporting Framework, now also owned by the IFRS Foundation and no longer by the IIRC, tells a value-creation story across six capitals — social and relationship, human, intellectual, natural, financial and manufactured — through seven Guiding Principles and eight Content Elements. Integrated thinking is the management behaviour behind the report, not the report itself. The Framework's strengths are connection, conciseness and foresight; its weaknesses are that it is voluntary, unassured, and has no prescribed metrics, so comparability is weak.
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