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Build trust and create long-term value Highlights

Today investors need a clearer picture of company strategy and risk, beyond only what the numbers in your financial reports provide.

As businesses change in response to global megatrends, integrated reporting lets you better articulate strategy.

The process brings operational benefits like improved alignment around short- and long-term performance goals.

Start by considering how financial and non-financial factors influence the way your company creates value.

About five years ago, American Electric Power (AEP) made a surprising discovery: Its investors were seeking insight on non-financial business matters beyond what was included in the annual financial report. In response, the company integrated its financial and sustainability reporting, producing a single annual report that presents a view of how the company creates financial and non-financial value now and how that will evolve in the future.

The company has now produced four such reports. And during that time, AEP has made another discovery: integrated reporting combined with proactive stakeholder engagement has changed how the company operates. For example, as the company considered carbon capture and storage projects, stakeholders asked questions such as how the approach might raise prices for customers if it were commercialized. Explains Sandy Nessing, AEP’s managing director of sustainability, “When you’re reporting it and you’re thinking about all of the different aspects of something it starts to pull it all together.”

Is your company prepared for a similar change—both to meet investor and other stakeholder needs and reap the benefits of being a more cohesive organization?

Why integrated reporting, why now?

An integrated report is a concise communication about how a company’s strategy, governance, performance, and prospects—in the context of its external environment—lead to the creation of value in the short, medium, and long term.1

• Growth may depend upon it.Seventy-four percent of global CEOs saythat measuring and reporting total non-financial impacts contributes to long-term success.2

• Many companies are part way there.Our 2013 review of 400 companies revealedthat 68% incorporate at least some non-financial priorities in their core strategies.3

• It could attract long-term investors. Newevidence indicates companies that practiceintegrated reporting have more dedicatedand less transient investors.4

1 IIRC, International Integrated Reporting Framework, 2013.2 PwC, 17th Annual Global CEO Survey, 2014.3 PwC’s benchmarking study of reports, 2013.4 G. Serafeim, Integrated Reporting and Investor Clientele, 2014.

April 2014

10Minuteson integrated reporting

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Board

CSO

COO

CEO

CFO

CRO

Financial reporting

Integrated reporting

Do I understand the company’s finances?

What resources does our success depend on—including money, goods, intellectual property, people, relation-ships, and energy and raw materials?

How did my company perform financially in the last 12 months?

How does our business create value in the short, medium and long term? Are there unexpected issues that could damage public trust?

Is my reporting compliant?

How complete is the picture I’m giving to my stakeholders about my company’s short-, medium-, and long-term risks?

Has each department provided its part of the report?

Have my finance, sustainability, investor relations, corporate gover-nance, legal, and marketing teams worked together to develop metrics related to my company’s strategy?

Does my sustainability reportingmeet stakeholder expectations?

Exactly how does our sustainability performance contribute to strategic business goals?

How effective are my financial systems and processes?

Are non-financial measures reliable, credible, and produced timely enough for decision-making?

At a glance Integrated thinking—and reporting—change the questions executives ask, from shorter-term and fractured to more forward-looking and holistic.

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People and skills

Technology

Consumer behavior

Sustainability and climate change

Role of government

Sustainable sourcesof energy

Products/services

Innovation

Supply chain

Business model change

New marketopportunities

Changes toconsumer

demand

New product/service

offerings

Changes tocosts/pricing

Company leaders see a wide range of factors impacting their businesses over the next decade

Q. What’s the next big thing that you think will impact your business, industry or society over the next 10 years?

Q. Why do you think it will do so?

Base: 2,053Source: PwC, 17th Annual Global CEO Survey, 2014.

Communicate what really matters

Growth today is all about change—companies are reinventing themselves, entering new markets, or even creating new ones, as they pursue new revenue and face new risks.5 Yet for all the transformation, there isn’t always a lot of transparency. And as we saw in the 2007–2009 financial crisis, information asymmetry can have disastrous results.

Investors are increasingly considering non-financial risks, such as human resource issues, intellectual capital, and resource scarcity. Two-thirds of participants at our 2013 Investor Exchange said that these types of factors impact their views on investment risks and returns.6

When investors and companies think capital, they don’t mean just financial assets anymore. They consider everything that a company uses to create value, including intangibles, which now make up 80% of companies’ value.7 These value creators are what the International Integrated Reporting Council (IIRC) calls the six forms of capital: money, goods, intellectual property, people, relationships, and natural resources like energy and raw materials.8

For example, the Sustainability Accounting Standards Board is outlining industry-specific material environmental, social, and governance factors.9 Provisional standards for the US healthcare and financial services industries are newly available.10

5 PwC, 17th Annual Global CEO Survey, 2014.6 PwC, Investor Exchange 2013 highlights, September 2013.7 Ocean Tomo LLC, Annual Study of Intangible Asset Market Value, 2010.8 IIRC, International Integrated Reporting Framework, 2013.9 Sustainability Accounting Standards Board, Conceptual

Framework, 2013.10 http://www.sasb.org/standards/download.

Better insights into your business

Integrated reporting is about moving to a more aligned understanding of the interplay between financial and non-financial factors. There’s now evidence that suggests companies with superior performance on corporate social responsibility strategies leads to better access to finance.11 They may also be valued more highly by investors.12 Why? Strong performance can improve relationships with internal and external stakeholders, reducing costs for oversight and incentives. It also makes companies more transparent and accountable—both desirable qualities for investors.

As AEP’s Sandy Nessing, puts it: “The more that people understand and know about your business, the easier it is to do business with them.”

11 Cheng, Ioannou, and Serafeim, Corporate Social Responsibility and Access to Finance, 2011.

12 Elliott et. al., The Unintended Effect of Corporate Social Responsibility Performance on Investors’ Estimates of Fundamental Value, 2014.

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Thinking in a new way

Global megatrends that are reshaping business

Respondents ranking one, two, or three from five total options.Base: 1,344.Source: PwC, 17th Annual Global CEO Survey, 2014.

81

60

81

59

46

40

Please rank the top three global trends from the following list, which you believe will transform your business the most over the next five years. (Percent of respondents.)

Technological advances

Shift in global economic power

Resource scarcity and climate change

Demographic shifts

Urbanization

Seven years ago, Clorox decided that the global trends of health and wellness and sustainability, among others, would guide its corporate strategy. As a result, the company launched Green Works®, a line of naturally derived, plant-based cleaners, and acquired the Burt’s Bees® business, a maker of natural personal-care products. With its entrée into the green space, Clorox also developed a corporate responsibility strategy to formally measure its sustainability progress. As Clorox executed on its strategy, demonstrating that sustainability contributed to value creation, the company realized that integrated reporting was a natural extension. Explains Aileen Zerrudo, Clorox’s director of corporate communications: “We were getting a lot of questions about the business impact of sustainability. With the integrated report, the rationale was to demonstrate a holistic picture of the company’s total performance.”

In fact, Clorox’s approach to its 2013 integrated report was to show a stronger connection between financial and nonfinancial metrics. While prior reports were structured around its five “pillars” of corporate responsibility—People, Products, Performance, Planet, and Purpose—the company’s 2013 report centers on Clorox’s integrated business strategy. It features a section for business model, highlights short- and long-term goals, and provides external assurance of key nonfinancial metrics.

Sharing your big strategic moves

Companies that pursue integrated reporting as a way to better communicate their strategy and how they create value, realize that it requires a change in the way they work. We like to say that integrated reporting fosters integrated thinking—a holistic and forward-looking understanding of the business. Companies that practice integrated thinking consider and then communicate how megatrends and other external drivers impact strategy, how non-financial factors relate to financial performance, and how those relationships may change in the future.

Charles Nichols, group controller at Unilever, observes: “There are enough highly publicized examples of market failures where companies have destroyed inordinate amounts of value because investors, and in some cases, the boards, haven’t really understood the business model and been able to ask the right questions at the right time.”13 That’s why starting in 2009 Unilever developed an integrated business strategy—one that aims to double the business while reducing the company’s environmental impact. In 2012, the company moved to integrated reporting, an important way for Unilever to communicate to investors and other stakeholders how it is progressing against the objectives laid out in its business strategy.

13 PwC, World Watch, Issue 2, 2013.

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Improving operations, holding teams accountable

93%

Interestingly, integrated thinking—and reporting—have a way of fixing fragmentation or strengthening connections within the business. As HSBC’s group chief accounting officer, Russell Picot, characterizes it, integrated reporting “provides a unifying, integrating force within a company. The CEO, the major business heads, and the department heads are getting into a room and discussing how they create shareholder value and how they communicate that to the market—and that’s really powerful.”14

Companies that are piloting integrated reporting have found that it’s created better communication between departments responsible for strategy, controls, IT, investor relations, finance, sustainability, and communications, among others.15 This, in turn, has led to other benefits, including more focus on the company’s material issues, more alignment around strategic goals, and a better understanding of performance gaps and opportunities. For example, as part of AEP’s integrated reporting process, the company routinely brings together parts of the business that might not otherwise interact. At the start of its move to integrated reporting, a meeting between its facilities and sustainability groups resulted in an initiative to reduce the company’s own energy use. The result over the five-year period? A $16 million savings from reduced consumption—electricity that could be sold to its customers or the wholesale power market rather than used for internal operations.

14 PwC, World Watch, Issue 2, 2013.15 Black Sun, Understanding transformation: Building the business case for

integrated reporting, 2012.

Better information sharing

Once different groups begin to work together more closely through the integrated reporting process, they may find they need a way to more easily share information. This may require rethinking processes for collecting and analyzing data. For example, integrated reporting requires financial and non-financial key performance indicators (KPIs) to be based on similar scopes, timeframes, and units of measurement. Ultimately, aligning financial and non-financial systems and processes can create a leaner, more streamlined organization.

More informed decision-making

Integrating financial and non-financial data also means that company leaders have more consistent, reliable, and complete information to work with. As an example, looking at operational costs and environmental impacts side-by-side can reveal efficiency opportunities. This type of access to integrated information can help management make more informed and strategic decisions.

…of companies pioneering integrated reporting say it helps remove barriers between departments.Source: Black Sun plc, Understanding transformation: Building the business case for integrated reporting, 2012.

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Are you ready for integrated reporting?

We recognize that companies responding to the challenge of integrated reporting are working in uncharted territory. And as they reshape and broaden their reporting, they will be working in areas where reporting frameworks and standards are often in the early stages of development and less defined.16

A good starting point is to ask: How well do we communicate how non-financial factors influence the way our business creates value? Are these reflected in our strategy and our reports to stakeholders?

Identify the key themes of your value creation story…

Determine the most critical non-financial risks and opportunities. These will become the key themes for your integrated strategy and report. For example, some companies may be exposed to resource scarcity risks or positioned to take advantage of demographic changes or technological advances. Focusing on a few key themes can help you construct a concise and powerful narrative that tells your company’s unique value creation story.

…then decide how to measure them

Next you should determine what financial and non-financial information can support this narrative. Keeping an open mind is critical, as this may include data you do not yet report or collect. For example, some leading companies quantify the financial value of their key social and environmental impacts. PwC provides a framework for doing this called

16 PwC, Inspiring trust through insight, 2014.

Total Impact Measurement and Management.17 Translating non-financial factors into a common monetary currency can help track and compare performance over time. It is important to prioritize the data that best supports your company’s key value creation themes, as effective integrated reports are concise and focused.

Next, make a plan and act on it

Integrated reporting takes time. Successful companies develop roadmaps for where they want to be in three, five, and even ten years. To achieve fully integrated reporting, your value creation story should be supported and reflected in your company’s mission statement, strategy, KPIs, and targets. Any discussion of risks and opportunities should focus on the main themes of the narrative. Your financial and non-financial systems and processes should be aligned and/or combined. And to be confident in the quality of your report, you should eventually integrate non-financial data with your financial reporting process.

17 PwC, Measuring and Managing Total Impact, 2013.

Integrated reporting will require more active involvement from all your functions

Base: 44.Source: BlackSun Plc, Understanding transformation: Building the business case for integrated reporting, 2012.

0 20 40 60 80 100

No involvementSome involvementActive participation/fully involved

Sustainability/corporate

responsibility

Corporate communications

Investor relations

Legal/company secretariat

External affairs

Finance

Marketing

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To have a deeper discussion about integrated reporting, please contact:

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