Sustainability and Integrated Reporting
1 Introduction
Chapter 1 established that an organisation has non-financial objectives as well as financial ones, and that a non-financial objective is only an objective if it is quantified, dated and measured. This chapter is about the measuring — and about the frameworks that exist so that one organisation's measurement can be compared with another's.
Three things follow, and they are the shape of the chapter. First, the financial statements cannot do this job, and it is worth being precise about why (section 1). Second, the common vocabulary in which organisations now express their sustainability objectives is the United Nations Sustainable Development Goals (section 2). Third, three bodies publish guidance on how the resulting performance is reported — the Global Reporting Initiative, the Integrated Reporting Framework and the International Sustainability Standards Board — and they are written for different readers and answer different questions (sections 3 to 5).
Scope — what this chapter is for in F3.
F3 examines sustainability as an objective: outcome A1c asks you to advise on non-financial objectives, including enhancing the value of the non-financial capitals and the Sustainable Development Goals. The detailed mechanics of sustainability and integrated reporting — and IFRS S1 and IFRS S2 in particular — belong to F2 (section D) and E3. What is needed here is enough of each framework to know what it is for, what it measures and what it therefore proves about whether an objective has been met. Where more depth is wanted, F2 chapter 20 has it.
The chapter’s introduction is on video; the rest of the chapter is only half covered.
Sustainability and Integrated Reporting – Introduction: it says of the non-financial capitals that “there’s nothing there that you specifically need to learn about them”. F3A1c names them expressly and Section 4 teaches all six. It also carries a dated political aside.
2 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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3 Sustainability as an objective: the Sustainable Development Goals
The Sustainable Development Goals (SDGs) are the 17 goals, supported by 169 targets, adopted by the member states of the United Nations in 2015 in the 2030 Agenda for Sustainable Development. They are addressed to governments, but they have become the common vocabulary in which organisations express their own sustainability objectives — which is why the F3 syllabus names them under "advise on non-financial objectives".
The 17 goals are conventionally grouped under five headings, and the grouping is a more useful thing to carry into an exam than a numbered list:
Grouping | What the goals in it are about | Where an organisation usually touches them |
People | Poverty, hunger, health and wellbeing, education, gender equality | Employment terms and pay, health and safety, training, diversity, the conditions in its supply chain |
Planet | Clean water and sanitation, responsible consumption and production, climate action, life below water, life on land | Emissions, energy and water use, waste and packaging, materials sourcing, land and biodiversity impact |
Prosperity | Affordable and clean energy, decent work and economic growth, industry, innovation and infrastructure, reduced inequalities, sustainable cities | Investment and job creation, innovation and product development, infrastructure, pay ratios |
Peace | Peace, justice and strong institutions | Anti-bribery and anti-corruption, tax transparency, governance and ethics |
Partnership | Partnerships for the goals | Collaboration with suppliers, customers, governments and industry bodies |
Using the SDGs in objective-setting is a three-step discipline, and each step is where an exam scenario goes wrong:
Select the goals that are material to this organisation. An energy-intensive manufacturer and a professional services firm have different impacts and should choose different goals. A report claiming a contribution to all seventeen is normally claiming nothing, and a report claiming one the organisation cannot affect is worse than silence.
Translate each chosen goal into the organisation's own objective. "Climate action" is not an objective. "Reduce Scope 1 and Scope 2 emissions by 25% against a 20X4 baseline by 20X9" is one, because it is quantified, dated and owned. This is the step that turns a global goal into something a financial manager can manage and a board can be held to.
Report against it, so that the claim can be tested. That is what the frameworks in sections 3 to 5 exist to standardise — without them, every organisation reports a different measure and none of the claims can be compared.
The SDGs also connect the two halves of Chapter 1's argument. Each goal an organisation adopts bears on one or more of the capitals: decent work and gender equality on human capital; innovation and infrastructure on intellectual and manufactured capital; climate action, clean water and life on land on natural capital; reduced inequalities and strong institutions on social and relational capital. Enhancing a capital and contributing to a goal are usually the same act described from two directions.
SDG-washing.
The commonest criticism of SDG reporting, and a fair one to make of a scenario, is that an organisation maps its existing activities onto goals after the event, illustrates each with a photograph and a story, and sets no target that could be missed. Three questions test it: which goals were not selected and why; what the measure is; and what happens if the target is not met.
4 Who sets the rules
Until recently organisations reported non-financial information however they wished, with very little guidance. Guidance now comes from three sources. They are complementary rather than competing, and the fastest way to keep them apart is to ask who each is written for.
F2 chapter 20 covers this material at greater depth, including IFRS S1 and IFRS S2, which F3 does not examine.
4.1 The Global Reporting Initiative (GRI)
This recording predates the 2027 syllabus. Its first half — why the annual report falls short and what the GRI is for — is sound. The second half teaches the 2013 version of the guidelines, replaced in 2016 and again in 2021; translate it as you go.
Options: the “core” and “comprehensive” options no longer exist.
Disclosures: its “general standard disclosures” are now GRI 2 General Disclosures, in the five groups the table below lists. Its “specific standard disclosures” — the management approach and the indicators — are now the management of material topics under GRI 3, and the Topic Standards.
Material aspects: these are now material topics, determined under GRI 3. Both examples below turn on the GRI 2 / GRI 3 split, so take it from this section.
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 (§3.3) 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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4.2 The Integrated Reporting Framework and who now owns it
One long recording covers integrated reporting and both of its examples.
Integrated Reporting and Examples: it names the IIRC as the current custodian of the Framework. Custodianship moved to the Value Reporting Foundation in 2021 and to the IFRS Foundation in 2022 — the key box above is the examinable position. It also says “those seven separate capitals”; there are six. Its supporting evidence is dated to a 2009 survey.
Where it is right: it gives the Guiding Principle names correctly, and the mnemonic it teaches for the content elements is right.
Notes-only: the International Sustainability Standards Board — Section 3.3 — is on no recording.
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.
4.3 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.
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 |
F3 does not examine the content of IFRS S1 or IFRS S2. What matters here is the third column of that table: the ISSB's lens is financial materiality — sustainability matters that affect the entity's own cash flows, access to finance and cost of capital. That is the direct link between a sustainability objective and the financial strategy this paper is about, and it is why a non-financial objective is a financial manager's business and not only a reporting matter.
5 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.
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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6 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.
6.1 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.
6.2 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. |
Two principle names that are routinely written wrong
The first principle is strategic focus and future orientation — the word "future" is part of the name, and it is the part that makes the principle mean anything. The second is connectivity of information — "of", not "and": the principle is about the connectedness of the information itself, not about connectivity as a separate item alongside information. Both are printed wrong in some older material, and one of them changes the meaning.
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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6.3 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? |
6.4 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. |
7 Using the frameworks to set and evidence non-financial objectives
Everything above is reporting. F3's interest in it is narrower and more practical: the frameworks are what make a non-financial objective evidenced rather than asserted. Three uses, in the order a financial manager meets them.
The question being asked | Which framework answers it | What it gives the objective |
What impact does the organisation have on the economy, the environment and people, and how is it managing it? | The GRI Standards — impact materiality, all stakeholders | A standardised set of topics and disclosures, so the organisation's own measures can be compared with those of others and across years |
How does the organisation create value over the short, medium and long term, across all six capitals? | The Integrated Reporting Framework — value creation, providers of financial capital | A structure that forces the trade-offs between capitals into the open, which is precisely what an objective across capitals has to manage |
Which sustainability matters could affect the entity's own cash flows, access to finance and cost of capital? | IFRS S1 and IFRS S2 (F2 section D) | The bridge from a non-financial objective to the financial strategy: these are the matters that reach the cost of capital |
The management behaviour behind all three has a name, and F3 candidates should know it because it is what stops a set of objectives across six capitals from being six unrelated targets.
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.
For a financial manager the practical consequence is the one Chapter 3 develops: an investment, financing or dividend decision taken on financial grounds alone will have consequences for the other capitals, and those consequences are now measured, reported and read. Integrated thinking is what turns that from a reporting problem into a decision-making discipline.
Financial statements report recognised, measured, past transactions, so they cannot show whether a non-financial objective has been met. The Sustainable Development Goals give organisations a common set of headings for their sustainability objectives; the GRI Standards, the Integrated Reporting Framework and the ISSB's standards give them three different ways of reporting performance against those objectives, written for different readers. The <IR> Framework's six capitals are the vocabulary the F3 syllabus itself uses when it asks you to advise on enhancing the value of the non-financial capitals.
8 Test your knowledge
Two quick checks before you move on: work through the flashcards to fix this chapter’s terms and definitions, then sit the objective questions for exam-style practice. Both mark themselves and explain the answers as you go.
Sustainability and Integrated Reporting
22 questionsAnswer the questions one at a time. Your progress is saved so you can leave and come back.
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