Richard Karmel examines the role of the UNGPs in Integrated Reporting

Having assisted and worked with a number of high profile companies in successfully implementing corporate human rights programmes, Richard Karmel of Mazars looks at the role of the United Nations Guiding Principles in Integrated Reporting.

What is Integrated Reporting?

The ethos behind Integrated Reporting is that it makes the connectivity of information about how value is created within companies over time. It is aimed primarily at the providers of financial capital, but should benefit all stakeholders interested in the organisation’s ability to create value.

The International Integrated Reporting Council has stated that Integrated Reporting is there to help “direct financial capital to sustainable business” which is to “support broader societal interests by undertaking long term, as well as short and medium term, value creation within planetary limits and societal expectation (1).”

Given that the annual report is generally the most widely read publication of a company, we would expect the main facets of Integrated Reporting to be covered within this publication. However, there is one over arching factor that needs to be taken account of when including information within the annual report; it is that of conciseness.

The annual report shouldn’t be seen as a ‘catch-all’ repository of information such that the important messages are lost amidst the clutter of other information.

Human capital and social and relationship capital are key to a company’s value

Two of the six capitals that Integrated Reporting refers to as being key to a company’s value creation are those of human capital and social and relationship capital.

Human Capital

Integrated Reporting suggests that companies need to consider whether there is internal “alignment with and support for an organisation’s government framework, risk management approach and ethical values (2).”

Social and Relationship Capital

Integrated reporting suggests that this is the organisation’s “ability to share information to enhance individual and collective well-being.” This includes “the trust and willingness to engage that an organisation has developed and strives to build and protect with internal stakeholders” and “an organisations social license to operate (3)”.

Companies should ‘know and show’ in line with the UNGPs

Now, turning to the United Nations Guiding Principles on Business and Human Rights (UNGPs). The principle philosophy behind the UNGPs is that of “Know and Show” i.e. organisations need to understand the impacts, and their potential impacts, that they could cause on human rights and communicate this understanding to relevant stakeholders.

By demonstrating its understanding, the organisation will need to have undertaken a form of due diligence in order to ascertain whether it is managing its key risks, not only to itself, but those of affected individuals, communities, suppliers and others. To do this it will need to demonstrate meaningful engagement with these interested parties.

Fairer reporting has long-term financial gains

Given that the UNGPs propose reporting of companies’ understanding (the “showing” part of “know and show”), it would seem to make great sense to align these human rights disclosures with those identified as part of Integrated Reporting.  By doing this, organisations will have the opportunity to articulate how greater stakeholder engagement is leading to the creation of value for the company.

This will provide greater insight, not only to the risks to be faced by the company, but also to the long term prospects of that company.  An organisation, which fairly reports on the findings of its stakeholder engagement, is more likely to be able to provide the reader with a clearer view over its long-term financial picture rather than one that doesn’t.

The financial reporting is essentially the rear view mirror whilst the non-financial reporting (including human rights reporting) puts the financial reporting in context and should provide the reader with a clear view of where the company is going.

Two of the aims of Integrated Reporting are to:

  1. Improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital
  2. Enhance accountability and stewardship for the broad base of capitals (financial, manufactured, intellectual, human, social and relationship, and natural) and promote understanding of their interdependencies.

Consequently, disclosure of the company’s human rights performance aligned with the UNGPs will promote greater understanding of key risks that the company is facing and also how it is dealing with them and also provide the reader with a clearer view of the strategy to create value in the future.

Richard Karmel

Mazars LLP

(1) 3.4 IIRC Basis for Conclusions

(2) 2.15 IIRC Integrated Reporting Framework

(3) 2.15 IIRC Integrated Reporting Framework