Capital is defined as ‘wealth in the form of money or other assets’, so why is it that so often when we report within our business that it is purely from a financial perspective? When valuing a business, so many different factors are taken into consideration, such as the reputation of the business, the customer base, the age of the business, the strength of the teams and the product or service that the business provides. Why is this same, well-rounded approach not being taken when reporting within the business itself?
Integrated Reporting was created by the International Integrated Reporting Council (IIRC). This is a coalition of investors, companies and regulators that grouped together to enhance accountability and trust amongst businesses in addition to improving the flow of information and transparency as globalisation increases. This was created in response to the announcement of the United Nation’s (UN) Sustainable Development Goals (SDGs), which are 17 goals that aim to promote sustainability and sustainable practices across the globe. Whilst for many businesses, especially ones working at much more of a national or local level, Integrated Reporting might appear too ‘blue sky’, it is interesting to understand this new way of reporting and see how it could be distilled down to work for your business – especially, to promote sustainability and the UN’s SDGs.
An Integrated Report aims to show how a business, or an organisation, creates value in different ways over time – through both quantitive and qualitative information. It does this through applying the Six Capitals framework, which encourages you to look outside of purely the financial wealth of your business and evaluate the other resources that you are rich in or that you should cultivate. Value is not created within an organisation or business alone; it is influenced by the external environment, the relationships with stakeholders and is hugely dependant on many varying resources and suppliers – this is especially true in construction.
“Quite simply, Integrated Reporting is considered by many to be the future of corporate reporting.” – Deloitte
Figure 1 – Image: Integrated Reporting
What are the Six Capitals?
The Six Capitals interconnect and link, together they tell a holistic and accurate value creation story of a business. These Capitals are not all necessarily owned by your organisation, as they can also include those that you use. They consist of:
The collection of funds that are available to an organisation or business to use to produce goods or provide services. These funds can be obtained through financing such as debt, equity or grants or generated through operations or investments.
Financial Capital is the common thread that binds all of the Six Capitals together. It is also the easiest to measure.
Physical objects that are produced by humans (not naturally occurring objects) that are available to an organisation to produce goods or provide a service including: buildings, equipment, or infrastructure.
If your business sells a product, your Manufactured Capital could be as simple as the machines that you own (or hire out) to produce your product. Your Manufactured Capital is often the tangible evidence of your Financial Capital – e.g. a jazzy head office.
Tangible organisational or industry knowledge including intellectual property such as copyrights, patents, software, rights and licences. This Capital also includes tacit knowledge, systems, procedures and protocols that are unique to the business.
In construction, but also across many industries, it is your Intellectual Capital that really sets you apart from other companies. It is essentially all of the knowledge and experience that the business has – and this is what makes you unique.
Ultimately staff, but more specifically their competencies, capabilities and experience. The alignment that staff have to the governance framework of the business, risk management approach, ethics, understanding and promotion of the strategy is also important here.
Investing in and seeing the value of your Human Capital, which is supported by the strengths of your Intellectual Capital, will ensure the stability of your other Capitals.
Social and Relationship
The network of relationships and communities that your business holds, including stakeholders, investors, customers and other groups. This is intrinsically linked to the brand and the reputation that the organisation has built.
Social and Relationship Capital is integral to your business generation (/business development) and will have a huge bearing on the projects that you win and the customer base that you establish.
All renewable and non-renewable environmental resources and processes that provide goods or services which support the prosperity of an organisation. This could include air, water, land, minerals, forests, biodiversity and ecosystem.
Sustainability is a growing focus in the construction industry, with businesses increasingly looking at ways that they can have a positive impact on the environments that they work in. Analysing your Natural Capital will allow you to have a clearer view of how your business interacts with the natural world.
All organisations rely on various forms of capital to be successful, however, these stocks of value are not fixed over time and they will fluctuate according to a range of different factors. For example, a business would see an increase in their Financial Capital when they make a profit, or a business would see an increase to their Human Capital when a member of staff completes some job-specific training. However, this will mean a reduction of their Financial Capital as they have spent money on the training.
How to measure the Capitals?
Every construction business uses KPIs to measure their progress on projects against certain targets and aims, these could be developed further to allow measurement against the Capitals. Another useful tool here is monetised metrics.
However, the point of an Integrated Report is to show how value can be created and stimulated over time and so it is important that KPIs and metrics are not analysed and reported on in isolation. They should be looked at in comparison to each other and they should be looked at regularly.
Start by brainstorming around each of the Capitals, finding examples of how they apply to your business model. Don’t just think about everything that you currently do, think to the future and how you envisage your business expanding. You also may find that some of the Capitals don’t really apply to your business – and that is absolutely fine.
Why should I bother using Integrated Reporting?
Starting to use the Integrated Reporting method now will allow your business to be more proactive, rather than reactive. Furthermore, the more that this integrated thinking is embedded into your business, the easier it will be for information to flow into reports, analysis and ultimately into decision-making.
Looking holistically at your business will allow you to simultaneously future proof it. Integrated Reporting brings together all of the information about your business’ strategy, governance, performance and prospects, whilst allowing reflection on the commercial, social and environmental context in which you operate in. In reality, you are likely already reporting on these things but possible not in a conjoined way. Producing an Integrated Report will encourage you to look not just at the physical debt, equity and assets but also all the varying parts of your business to ensure that you are prepared for different eventualities.
Ensuring that your business reports on things other than finances is highly valuable when bidding for new work. It will save your workforce a tremendous amount of time when taking part in bids if you already have access to stats and figures on a range of things within your business. Sustainability is now becoming so heavily embedded in the bid process that it is highly likely you will have to prove your environmental impact in some way or the other.
Likewise, Corporate Social Responsibility, community engagement and social value are all buzz words circulating in the construction industry at the moment. Looking at your Natural and Human Capital is such a simple way to evaluate what your business is doing and what needs to improve. For example, a huge scheme at the moment – which will inevitably be negatively impacted by the coronavirus pandemic – is the skills gap. Businesses are being encouraged to look at the ways in which they can encourage younger generations to get involved in the industry, as the majority of the workforce in construction is almost reaching retirement age. As a result, we will soon find ourselves with a skills shortage and a reduced workforce. Moreover, many main contractors are now requiring that SMEs and even suppliers demonstrate their contribution to the skills gap – through providing apprenticeship placements, training sessions, workshops, and even going into schools to promote the benefits of working in construction. Rather than waiting to be asked for this information, it would be so valuable to already be working on these types of schemes and reporting on them proactively.
What are the benefits?
- Allows the strategy and business model to be better articulated and contextualised.
- Encourages the entire business to think in an integrated way – stops departments working in silos and promotes collaboration.
- Improves the internal processes of the business so that the decision-making processes can be improved also.
- Links non-financial performance of the business directly to the business itself – increasing accountability and transparency.
- Creates one single report that is easy to access by whoever needs it, plus information will be conveyed clearly and concisely.
- Demonstrates the value of the business to stakeholders and investors through identifying and measuring non-financial factors.
- Helps to identify risks and opportunities for future development easily.
If the coronavirus pandemic has taught us anything, then it is surely to expect the unexpected. And therefore, to prepare for the unexpected. If you continue to just report on the financial aspects of your business then how can you get a full view of both your business, and its position within the wider society?
Integrated Reporting does recommend a framework and a methodology to report within, but it is important to note that this can be used how you see fit for your business. It is as much about the integrated thinking that comes as a result of reporting, then the actual reporting itself. This new method will encourage you to think about how your organisation does business and how it creates value over the short, medium and long-term and it is definitely worth getting informed now so that your business does not fall behind.
Image credit: iStock.com/baona