Figure 24.1 Total scores per company
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Insights about inclusiveness and integrativeness
Peter Beusch and Axel Nilsson
Introduction
Non-financial reporting has increased considerably among stock exchange listed companies over the past 30 years (Eccles and Krzus, 2010). However, until the latter stage of the last century, most social and environmental reporting was found in annual reports. Since then, companies have started to produce separate sustainability or corporate social responsibility (CSR) reports (De Villiers et al., 2014). Over time, there has been significant growth in these stand-alone reports (Eccles and Krzus, 2010; Hahn and Kühnen, 2013) as information in the annual report is tailored mostly for shareholders and creditors only (Eccles and Krzus, 2010; De Villiers et al., 2014).
Regulation in this area is changing with the EU recently adopting a directive on non-financial reporting that will force all large entities to provide information on non-financial matters (European Commission, 2016). In Sweden, all large organizations will be affected by the law that came into effect on 1 December 2016. The companies affected will have to either report on non-financial matters or explain why reporting is not relevant (EY, 2015).
During the last decade, the amount of information in separate reports has increased and there is a risk of information overload, which makes understanding the important linkages between the different parts of the reports more difficult for readers (De Villiers et al., 2014). It has therefore been argued that for these reports to be meaningful, they must be better integrated (Eccles and Krzus, 2010). Thus, there have been various attempts and initiatives to combine both financial and non-financial performance management and its reporting (De Villiers et al., 2014).
The Integrated Reporting <IR> framework of the International Integrated Reporting Council (IIRC) is one such framework. In 2011, it issued a discussion paper regarding its proposal for a new way of reporting and at the end of 2013 a first version of it was published (IIRC, 2016). The IIRC’s vision is to use IR to bring capital allocation and corporate behaviour together with the overall goal of financial stability and sustainable development. Its mission is to bring IR and thinking into mainstream business practice as the norm in both the private and public sectors (IIRC, 2016). Originally, the intention was to replace annual reports with integrated reports (IIRC, 2011; De Villiers et al., 2014), but this idea has been dropped (Flower, 2015).
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The IIRC states that it wants to reduce silo reporting, reduce duplication, and improve the quality of information to capital providers with the intention of bringing about a more efficient and productive capital allocation (IIRC, 2016). Other potential benefits of IR include a longer-term focus than financial reporting, increased understanding of the importance of sustainability information and better integration within organizations (Roth, 2014).
The IIRC’s <IR> framework has six capitals that are used to shape the discussion of ‘value creation’. These are: financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital, and natural capital (IIRC, 2013). Companies issuing integrated reports do not have to adopt these particular capitals or explicitly report on them. Their main purpose is to serve in the value creation discussion as well as acting as guidelines to help companies think about all forms of capital they use or affect (IIRC, 2016).
The IIRC is neither a standard setter nor a regulator in Sweden, which means that adopting IR is voluntary (PwC, 2013a). Integrated reporters with more inclusive capital models might well face lower cost of capital or reduced information asymmetry (EY, 2015). Alternatively, even though IR is relatively new, companies might choose to adopt it for the purposes of legitimacy or institutionalization (De Villiers et al., 2014; Van Bommel, 2014).
IR and intellectual capital (IC) have many similarities as they share common objectives, that is, to use corporate reporting to communicate value creation (Mouritsen et al., 2001; IIRC, 2013). Dumay et al. (2016, p. 168) therefore believe that one can draw “on how IC research has developed over time, to investigate how IR research is developing now and in the future”. Although IR research has increased strongly in number of publications since the release of the first official <IR> guideline in December 2013, Dumay et al. (2016) argue that most of this research belongs to the first stage of development and thus focuses “on raising awareness of a specific research field’s potential” (Petty and Guthrie, 2000, p. 155). Dumay et al. (2016, p. 178) recommend moving beyond this first stage of mostly normative research to test the IIRC’s rhetoric by gathering “robust evidence in support of its further development” since empirical findings so far are “fragmented and inconclusive about <IR>’s benefits”.
This chapter is an attempt to follow this call as it provides an account of disclosure of capital overall and IC more specifically in annual reports of large Swedish companies and in relation to the IIRC’s six capitals concept. In doing so, the chapter explores and discusses the real achievements of a possible shift from a “financial capital market system” to an “inclusive capital market system” (Coulson et al., 2015, p. 290) that recognizes the interconnection between, for example, finance, knowledge and other resources, the systems of governance that enable this, and extends accountability beyond financial transactions (Mio, 2016, p. ix). The research question is: what do large Swedish companies disclose in terms of the IIRC’s six capitals concepts, how has this developed over time, and what patterns have emerged?
Literature review
The purpose of the following literature review is to outline the key elements of the IIRC’s <IR> framework connected to the six capitals concept and illustrate the claimed benefits of this way of communicating with stakeholders. Critique of doing so is provided as well as the findings of the few studies that have investigated the six capital concepts.
The <IR> framework and the six capitals
The major vision of the IIRC (2013) is a world where integrated thinking is part of contemporary business practice in both the public and private sectors. Integrated thinking is defined “as the active consideration by an organization of the relationships between its various operating and functional units and the capitals that the organization uses or affects” (IIRC, 2013, p. 2). Integrated thinking is supposed to consider all factors that affect the ability to create value and the connections between them. The IIRC (2013) claims that these factors include, among others, inputs in terms of the six capitals, a company’s business model and how it fits with the environment, activities, performance, output, and outcomes.
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The <IR> framework states that the primary recipients of integrated reports are creditors and lenders, or “providers of financial capital” (IIRC, 2013, p. 4), but that an integrated report benefits all stakeholders with an interest in the value creation capabilities of an organization. The IIRC takes this definition to include a range of stakeholders such as employees, customers, suppliers, policymakers, regulators, and local communities (IIRC, 2013). The <IR> framework is further described as a principles-based framework by the IIRC (2013), aimed at achieving a balance between flexibility, prescription, and comparability. Consistent with this aim, the framework does not prescribe any specific performance indicators or measurement methods. It is up to the supplier of information to decide what is material to include, how to measure it, and how to disclose it. However, the IIRC (2013) believes that a combination of quantitative and qualitative information is required to best report on the value creation capabilities of an organization. The purpose of an integrated report is not to monetize the value of an organization at a certain point in time, the value of what is created, or the effects on the capitals (IIRC, 2013).
Chapter 2 in the <IR> framework describes the fundamental concepts that form the basis for the requirements and guidance found in the rest of the framework. It explains that value is not created by an organization alone. It is influenced by the external environment, created through relationships with stakeholders and dependent on various resources. It is the resources and relationships that are used or affected by an organization that are referred to by the IIRC (2013) as the six capitals. The capitals can also be considered as ‘stocks of value’ that an organization uses, creates, or affects when undertaking business. The overall value of the capitals is not fixed over time, in other words the IIRC does not see the capitals as a zero-sum game. The capitals are affected through business activities and there are activities that cause decreases to some capitals and increases to others (IIRC, 2013).
The claimed benefits of IR
IR is supposed to contribute to reporting improvements as increased integrated thinking and the integration of various sources of data will help companies adopt a more long-term view of the impact of their decisions on various capitals (Roth, 2014; Tweedie, 2014). However, the full value of IR can only be reached when it succeeds in articulating the links that exist between financial and non-financial performance and outcomes (Eccles and Serafeim, 2014). Short-term investors are the group with the least incentive to consider the effects of their companies’ actions on other stakeholders, thus IR is least likely to be of interest to them (Tweedie, 2014). To really promote long-term investment, more regulatory incentives are needed as IR might be used to legitimize short-term actions as being part of a longer-term agenda (Tweedie, 2014).
Roth (2014) goes down the same regulatory path as Tweedie (2014) to put corporate sustainability information in front of analysts and highlights its importance for financial decisions. He argues that many analysts simply ignore separate corporate sustainability reports. This is supported by Ferns et al. (2008) who evaluated the ability of sustainability reports to reach and persuade their audience. They found that few people actually referred to the sustainability reports. Low credibility is stated as a possible reason for this outcome. The authors also claim that companies might have lost sight of the positive aspects of sustainability disclosures. Instead of using them as a way to build trust, they are issued as responses to the corporate pressures of not being worse than rivals.
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It is claimed that switching from separate reporting to IR helps advance senior managers’ understanding of sustainability performance because it is no longer the domain of a separate CSR department (Roth, 2014). Trying to figure out how to integrate a range of information is also beneficial for the overall organization (Eccles and Serafeim, 2014) and brings communication benefits because a better alignment between reported information and investor needs is expected. For that to happen, however, investors will require a better understanding of how financial and non-financial performance is managed by organizations, which separate reporting fails to provide (Eccles and Serafeim, 2014).
Therefore IR has the potential to become a catalyst in developing a common language for reporting and for improving risk management since organizations have to assess the connections between the capitals (Roth, 2014). When reaching its full potential, the IIRC’s six capitals concept could aid a shift from ‘financial capital markets’ to ‘inclusive capital markets’ (Coulson et al., 2015, p. 290), where the word inclusive should be taken to signal that resources other than those covered by traditional accounting are instrumental to long-term financial performance. Coulson et al. (2015) believe that encouraging companies to consider all forms of capitals they use, and the interconnectedness between them, helps to advocate for a shift from short-term to long-term thinking and from silo reporting to IR. Even if companies are not required to adopt the same definitions of capital as those presented in the <IR> framework, the IIRC hopes that the definitions will help companies think about what capitals they use (IIRC, 2013).
Critique of IIRC’s <IR> approach
Monetization and more quantitative measures could be useful tools, alongside qualitative information, to gain a better understanding of the capitals (Coulson et al., 2015). However, being too focused on assigning the capitals a monetary value means that there is a risk of cementing the economic understanding of capitals, possibly contradicting a broader understanding of what value is and the purpose of integrated thinking (Coulson et al., 2015).
Brown and Dillard (2014) believe that the IIRC is mistaken in pushing for a ‘business case’ understanding of sustainability, an approach that has been common in the past to appeal to powerful business people. By highlighting a win–win situation, this approach has been somewhat successful in achieving incremental changes, but has failed to achieve more fundamental changes to established assumptions, processes, and techniques. One such example is the dominance of the capital market perspective in accounting standard setting. Brown and Dillard (2014) believe that fundamental changes need to be accomplished if we are to transit to a more sustainable society.
Both Cheng et al. (2014) and Flower (2015) make similar criticisms of the IIRC’s framework as they see a focus on investors and creditors at the expense of other stakeholders. Flower (2015), in addition, stresses that while the IIRC recognizes both private costs and social costs and externalities, firms will only have to report on these if they have an impact on the value creating capabilities of the firms themselves. He further criticizes the lack of obligations in the framework. When comparing the framework to the IIRC’s press release and discussion paper, he notes that the IIRC has retreated from imposing obligations on the firms reporting under IR and questions the ability of IR to have much of an impact on the financial reporting of companies today.
A prerequisite for achieving sustainability is that the overall stock of capital should not decrease as a result of business activities (Flower, 2015). Since a company is not obliged to adopt the same classification as the IIRC, the definitions of some of the capitals exclude certain components of the total capital base. For instance, regarding manufactured capital and natural capital, Flower (2015, p. 7) argues that only objects that are important for the firm’s production process would be included, potentially excluding the negative effects of a range of objects otherwise included in the total capital.
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In the <IR> framework, it is stated that while companies aim to create value overall, there might be cases where value creation in one area causes value destruction in another and whether the total effect on the overall stock of capital will be positive or negative depends on the perspective taken by the preparer (IIRC, 2013). The IIRC’s framework (2013) accepts trade-offs between the capitals, but Flower (2015) argues that trade-offs are problematic because of the measurement of the capitals. He also believes that trade-offs involving a decrease of natural capital will almost never be in the interest of society as a whole.
Cheng et al. (2014) also discuss the trade-offs between the capitals and they conclude that there is a risk of great subjectivity when assessing the overall impact of a company’s actions on the capitals. They believe that it might be difficult for organizations to explain some of their capitals in ways other than through “insubstantial narratives” (Cheng et al., 2014, p. 98). When assessing the trade-offs that can happen between the capitals, how should one explain the choices made without “turning the disclosure into thinly veiled, self-promoting justification” (Cheng et al., 2014, p. 98)? A final point of concern in Cheng et al.’s (2014) reasoning is that natural capital needs not necessarily to belong to a company, which means that decreases in natural capital do not have to be borne by the owners. Rather, stakeholders will bear the costs of decreases in natural capital. The authors therefore question the relevance of this information to the primary users, the investors and creditors, if they are not affected by decreases in natural capital.
When assigned a monetary value on the capitals, there is a danger that this is placing resources into the economic system that is partially responsible for destroying them. On this topic, Barter (2015) argues that natural capital is not to be seen as just one of the six capitals, rather it should be seen as a master set of which the other capitals are subsets. The reasoning behind this argument is that there is not a perfect substitutability between natural capital and the other, human made, capitals. Barter (2015) believes that when natural capital enters into the boardrooms, there is a risk of the concept hindering more radical solutions to environmental challenges. The author fears that when applying economic logic to nature, life forms with low economic value may be lost. Besides, assigning value to complex ecosystems is not an easy task; it might be that we are likely to trade ‘sense for cents’ but the problem is that “what makes economic sense is not always right and what is right is not always economic” (Barter, 2015, p. 372).
Studies on the IIRC’s capital concept
There have been few empirical studies of the <IR>framework and the capital concept. In a content analysis of 22 annual and sustainability reports from UK companies and semi-structured interviews with senior managers, Robertson and Samy (2015) investigated the potential adoption of IR in the UK. The authors found that there is limited linking between financial and non-financial reports, hampering their usefulness. The authors believe that IR, therefore, might have a relative advantage over existing reporting practices, which would be beneficial for the diffusion of IR. They also reveal that several companies are positive about IR and that they are starting to integrate their reporting consistent with the <IR> framework. The authors point to UK specific legislation requiring companies to produce strategic reports that have some similarities with IR. They believe that legislation might benefit the diffusion of IR, at least in the UK. The authors also point to the complexity in IR regarding the measurement of the capitals as there is a lack of guidance from the IIRC but also a lack of studies in the area of value creation under a multiple capital models (Robertson and Samy, 2015).
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A study that investigated capitals disclosure in South Africa was undertaken by Setia et al. (2015). They compared annual reports of 2009/2010 with the integrated reports of 2011/2012 for 25 companies listed on the Johannesburg Stock Exchange (JSE). In 2010, a regulation change that included IR as a listing requirement on the JSE came into effect, forcing listed companies to present integrated reports on a comply or explain basis. Setia et al. (2015) use the timing of this regulation change for comparison purposes. Capitals included in the study were human capital, natural capital, IC, and social and relationship capital. They found a significant increase in the disclosures of information on social and relationship capital in integrated reports compared to annual reports. For the rest of the capitals, however, there were no statistically significant increases. The authors believe that this could indicate that companies employ symbolic management in search of legitimacy and they question whether corporate behaviour has improved because of IR or whether it is empty rhetoric.
Setia et al. (2015) also found that companies that disclosed relatively little information prior to the regulation were those that improved the most, which indicated that the regulation had lowered the dispersion of the extent of disclosures. The results of the study suggested that the regulation had been successful in causing companies to disclose more non-financial information, which should be of interest for policymakers considering mandating IR (Setia et al., 2015).
Eccles and Serafeim (2014), on the other hand, used a sample of 124 integrated reports produced by companies that took part in the IIRC’s pilot programme or that are listed on the JSE to provide an overview of the disclosure of information related to the capitals. A content analysis using a four-point scoring system was applied. The authors found that manufactured and IC were the two capitals for which the least amount of information was disclosed. However, roughly 70 per cent of the reports were given a score of 2 or 3 for those capitals, meaning that the information was considered moderately detailed or detailed.
The most reported capital was financial capital, where roughly 85 per cent scored a 2 or a 3, followed by natural capital. The authors considered the relatively weak results for manufactured capital to be attributable to the relative decline in the importance of manufactured assets in the modern, knowledge-based economy. However, they did not present an explanation for the results regarding IC. The strong reporting of financial capital is attributed to its longstanding regulation, while the state of natural capital reporting could be explained by the rising pressure on companies to disclose environmental performance. The authors finish by stating that “a significant number of companies are still providing little capital-specific information even though these companies are considered leaders in integrated reporting” (Eccles and Serafeim, 2014, p. 11).
In a Swedish setting, PwC (2013b) studied large Swedish companies’ current reporting compared to the IIRC’s draft of the <IR> framework. PwC assessed the compliance for eight different areas derived from the content elements (e.g. business model, strategy, risks and opportunities, and outlook) of the framework. The results were mixed. For instance, most companies reported well on strategy and (financial) performance, while for governance the results were generally poor. Larson and Ringholm (2014) examined the compliance with the <IR> framework of Swedish listed firms, focusing on the content element governance. Their findings are similar to those of PwC (2013b), suggesting that there is still a long way to go with regards to governance disclosures. Most governance aspects were mentioned by a majority of the companies, but the descriptions were too short and too generic to meet information needs. They further found a highly significant positive relationship between size and level of compliance as larger companies tended to comply better with the <IR> framework. This finding is consistent with previous results that have shown that the amount of disclosure tends to increase with company size (Hahn and Kühnen, 2013; Frias-Aceituno et al., 2014). As larger firms tend to have greater need for external financing, increased disclosure can thus be used as a way to enhance the relationships between companies and capital markets (Frias-Aceituno et al., 2014).
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Research methodology
The method chosen for this study was a content analysis of annual reports as they are seen as the primary source of information (Eccles and Krzus, 2010). In addition, one of the IIRC’s initial aims was that IR would come to replace annual reporting (IIRC, 2011). Using annual reports also means that there is a possibility to backtrack and verify the data in case of uncertainty (Bowen, 2009). This study focuses on the capitals concept of the IIRC’s <IR> framework although there are other interpretations of IR, such as the King III report in South Africa (De Villiers et al., 2014). Should Swedish companies choose to produce integrated reports, for instance for reasons of legitimacy or through institutionalism, it is most likely that they would base them on the IIRC’s version. Furthermore, the capitals concept is chosen because it is a foundation for IR (IIRC, 2013) and because it is an issue not previously studied in a Swedish context.
In addition, this study focused on large, listed Swedish companies since size has been found to be a factor that influences the likelihood of voluntary disclosures (Hahn and Kühnen, 2013; Frias-Aceituno et al., 2014; Larson and Ringholm, 2014). Therefore, only companies listed on the OMX Stockholm 30 index were included. The OMXS30 contains the 30 most traded shares on the Stockholm Stock Exchange. However, financial institutions were excluded (four banks and two investment companies) from this study as their business models differ significantly from the remainder of companies in the sample. Additionally, since this study aimed to include the 2015 fiscal year, only companies that had published their annual reports prior to the data collection deadline (7 April 2016) were included (three more companies were excluded on this basis). Since Atlas Copco is listed twice (A and B shares), the final sample consisted of 20 companies (see Figure 24.1).
Given that IIRC’s <IR> framework and the capitals concept were published in late 2013, annual reports for each company for the years 2011 and 2015 have been chosen in order to make comparisons over time. A difference of four years – two years before, even before the IIRC draft was available, and two years after the introduction of the new <IR> framework – is assumed to fit well for that purpose. Thus, the total sample used in this study consisted of 40 annual reports. The method follows procedures as described by Miles and Huberman (1994) and Collis and Hussey (2014) and involves three steps: data collection, data reduction, and data analysis. Thus, this study employed a content analysis where the information disclosed in the annual reports was classified according to pre-set categories of items (Setia et al., 2015).
First, the 40 annual reports were collected from the companies’ websites. The next step was to determine how the data would be coded (Collis and Hussey, 2014). Since the aim of this study was to gain an understanding of the ‘what and how’ Swedish companies report in relation to the six capitals, these – and their definitions – were used as the basis for the coding. The <IR> framework and insights from the methods employed by Setia et al. (2015) were used for that purpose, which resulted in 25 items to be studied. The six capitals are not distributed equally. For instance, manufactured capital is only represented by two items (4 and 5) while social and relationship capital is represented by six items (16 to 21). This is because the <IR> framework includes different amounts of examples for different capitals. The level of aggregation in the definitions differs between the capitals so there is not an even distribution of items across the capitals.
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A systematic procedure for finding, selecting, and evaluating the text found in the annual reports was then applied in order to answer the ‘what and how’. This started with skimming the reports (first with help of the electronic word search function on the web and then with the help of a visual search/fast read through all pages in the annual reports) in order to find data that fitted the items determined. This data was then copied into a separate document, ordered by company, year, what capital it belonged to, and with a reference to the page number in the annual report where it was found. The definitions of the capitals formed the basis for the data selection. Moreover, during the classification, a scoring system was used to determine to what extent (how) the items were reported. This scoring system applied a three-point scale, similar to one in a previous study that used content analysis with a comparable purpose (Wang et al., 2013), namely zero points when an item is not mentioned at all, one point when an item is mentioned but not explained, described or further elaborated on, and two points when an item is described, explained, or elaborated on (for instance, it is linked to other capitals, its role in the value creation or its use is explained).1
To illustrate the coding a sentence from Assa Abloy (2015, p. 9)2 can be used: “Continuing professional development, skills and values are the basis for the Group’s success”. This relates to two capitals and three different items: item 11 ‘employee competence and capabilities’, item 14 ‘human resource development’, and item 21 ‘shared norms and common values’. Items 11 and 14 are classified as human capital, while item 21 is classified as social and relationship capital. It was decided that this short sentence would award Assa Abloy two points in each of the three items. The reason is that Assa Abloy, on pages 64 and 65, explains in more detail how and why ‘development, skills and values’ contribute to the success of the group. Moreover, as success can be interpreted as financial success, there is a link between financial capital on the one hand and human and social and relational capital on the other.
Descriptive results and analysis
The purpose of this section is to present the total scores for IR disclosure on capital of all companies. As can be seen in Figure 24.1, 14 out of 20 received a higher, 4 a lower, and 2 companies received the same total score in 2015 compared to 2011. Overall, the score increased by 11 per cent over the years (from 30.7 to 34.2, both out of 50), a change that is statistically not significant due to the small number of cases. The results show that there are large differences between the companies’ disclosures and between the different capitals reported on. The range in 2011 is between 15 and 38 points and in 2015 it is between 21 and 43 points.
When discussing the overall results per company, it is worth noting that six companies (Boliden, SCA, SKF, SSAB, TeliaSonera, and Volvo) reported on their ‘value creation models’ using all or some of the capitals. However, the degree of specification in the reporting differs strongly. For instance, SCA merely lists the capitals but does not define them or give examples of what is included. Boliden,3 on the other hand, provides more detailed information on what they consider to be part of their capitals. For instance, Boliden’s IC is comprised of patents, exploration rights, environmental permits, reclamation expertise, the new Boliden way philosophy, and R&D partnerships with universities, colleges of further education, and suppliers (Boliden, 2015, p. 6). For some of the capitals, such as financial and natural, Boliden also provides numbers such as 5.6 TWh of energy use. Boliden also provides a list of production outputs, economic and social effects, and environmental impact, in some cases described with numbers.
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Figure 24.1 Total scores per company
Figure 24.2 Total scores per item
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The rest of the companies are somewhere in-between SCA’s and Boliden’s reporting. SKF does not list all of the capitals and Volvo does not list them in the same way as the <IR> framework. Volvo splits its inputs and outcomes into economic, social, and environmental, with the capitals mentioned in the descriptions of each category.
The following more detailed observations have been made regarding disclosure across the six capitals in the annual reports, illustrated in Figure 24.2, which clarifies the total scores per item in relation to total annual reports studied. The following discussion also includes data calculated with help of the scoring system (0, 1, and 2 points) applied.
Financial capital and manufactured capital
All companies score the maximum six points for financial capital (‘equity, financial liabilities, earnings’) during both years, which is reasonable given the strong regulation of financial reporting. A similar, stable state of disclosure is also visible for manufactured capital, where 39 out of 40 annual reports received two points for both years on item 4 (‘buildings, equipment, and other tangible property’). However, Boliden’s 2015 annual report was the only exception here as it also scores on the rather ‘new’ item 5 (‘public infrastructure’), that apparently has not yet gained momentum in a Swedish context.
In terms of relating the capitals to each other, this must be done with caution. Manufactured capital, for example, suffers from the fact that item four is fairly aggregated. Had ‘buildings, equipment and other tangible property’ been three separate items, it is likely that all three would have scored the maximum points. In that case manufactured capital would also enjoy a higher total average score during both years. No clear development patterns, however, are identifiable over time (2011 versus 2015).
Intellectual capital
Regarding IC, the results show that there are quite large changes between the years. In 2011, the average score was 5.7 out of 10. Compared with the other capitals, this is slightly below average. However, in 2015 the average score had increased to 6.8 out of 10, which is an average score when compared with the rest of the capitals. Thirteen (13) companies received a higher, five a lower, and two the same score in 2015 compared with 2011. The 19 per cent increase is the second highest of all capitals disclosed.
In contrast to financial and manufactured capital, one of the five items listed under IC was readily available in the financial statements, namely item 6 (‘intellectual property’). Item 7 (‘technology and information systems’) was reasonably reported during 2011 with a score of 17 of 40. The increase of the disclosure of item 7 was the highest increase for any single item included in the study (59 per cent). Similar but weaker trends are visible for the rest of the items. Item 8 (‘research and development’) was already widely reported in 2011 but there was still an increase to 2015 (22 per cent). In fact, excluding the items that were found in the financial statements, item 8 (‘research and development’) was one of the most reported items during both 2011 and 2015. Item 9 (‘organizational structure’) and item 10 (‘processes, policies, and procedures’) were less well reported with scores that were among the bottom five during 2011 and still low in 2015.
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Human capital
The capital that showed the highest increase between the years was human capital, with an average 32 per cent increase. Fourteen (14) companies received a higher score in 2015 than in 2011 (four the same and two a decrease). The average score of 7.9 out of 10 in 2015 is the second highest after (the mandatory) financial capital. The items listed under human capital were in general well reported, especially during 2015, and increasing patterns over the years were about equal. Items 12, 14, and 15 all score reasonably high during 2011 and exhibit a fairly substantial increase during 2015. All three are among the best disclosed items of those not included in the financial statements. Item 13 (‘loyalty and motivation’) is somewhat less reported during both years but shows, similar to the other human capital items, a fairly large increase between the years.
Social/relationship capital
The average score for social and relationship capital in 2011 was 6.2 out of 12, which is below the average score overall. In 2015 the average score had increased to 6.9, hence somewhat below the average of 2015 score across all capitals. No trend is visible as eight companies increased, six decreased, and six had unchanged scores over the years. There is a large variety not only in the six different items listed under social and relationship capital but also in the trend. Items 16 (‘corporate culture’) and item 19 (‘relations with other stakeholders’, such as customers, universities, and governments), reported similar low numbers with 16 and 13 respectively in 2011, however, with big increases to 25 and 22 in 2015. This increase (56 per cent and 69 per cent) is the highest increase over the four years when measured in percentage terms. Item 21 (‘shared norms and common values’) was widely reported during 2011 but still with a slight increase in 2015.
On the other hand, item 17 (‘relations with competitors’) was and still is, unsurprisingly, one of the least reported items during both years. Among the companies that reported on the item, such as Nokia or Tele2, issues such as common infrastructure or licensing between competitors seemed to be common topics. The remaining two items, item 18 (‘relations with suppliers or distributors’) and item 20 (‘brand and reputation’) were well reported in 2011 but experienced a drop in score for 2015. The drop of seven points for ‘brand and reputation’ was the largest drop found in the study for any single item.
Natural capital
Finally, the average score for natural capital was 4.8 out of 8 in 2011 and 4.6 out of 8 in 2015. In 2011, this was considered an average score across all capitals but the decrease in 2015 results in a below average score. Natural capital was the only capital to show a decrease between the years; all others show increases or are stable. In terms of the number of increases and decreases, natural capital shows a different pattern from the other capitals. Six companies received better scores in 2015, nine companies received the same score, and five companies received a lower score during the second year included in the study. Item 22 (‘use of and impact on land resources’), item 24 (‘water resources’), and item 25 (‘energy usage’) were all fairly well reported in 2011 but decreased by 2–4 points in 2015, resulting in below average scores.
On the other hand, item 23 (‘use of and impact on air resources’) showed a slight increase in 2015 and was fairly well reported during both years, usually in the form of reporting on emissions of CO2. It is worth noting that regardless of whether the companies disclosed this information in the annual reports, some of them made references to their sustainability reports where these items were disclosed or further elaborated on. This indicates that information for these items might be available, even if that was not reflected in this study.
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Overall patterns and comparison with similar studies
Overall, from 2011 to 2015, there has been a 20 per cent increase in disclosure of non-financial and non-material (intangible) capital, which is broadly the former domain of what was called IC (e.g. Dumay et al., 2016). This is in line with earlier studies that report on an ever-growing importance of these capitals compared to, for example, manufactured capital (Eccles and Serafeim, 2014). The data from this Swedish study, however, does not support Eccles and Serafeim’s (2014) finding that manufactured capital has declined in importance as this has remained the same in this study. Rather, in Sweden, it is the disclosure of natural capital that has decreased somewhat, which is also the only easily discernible change in the ranking table (Table 24.1) between the two years studied. This decrease is surprising when thinking of the efforts of the IIRC (2013) and other important norm setters (e.g. the Natural Capital Coalition, 2017)4 in disseminating ideas regarding the disclosure of just natural capital.
When comparing the results for 2015 of this study with earlier findings, it is important to note the following. Setia et al. (2015) did not investigate financial or manufactured capital in their study of IR in South Africa, thus a comparison cannot be made for those two capitals. Eccles and Serafeim (2014) did investigate all capitals but looked only at ‘integrated reports’, which should be better aligned with the <IR> framework than annual reports investigated in this study. Setia et al. (2015) and Eccles and Serafeim (2014) also investigated other time frames/years and another country (South Africa).
This study mostly confirms the PwC (2013b) study that found that the areas investigated were reasonably well reported by large Swedish companies. Further, all companies in this study received the maximum points for their reporting on financial capital, whereas only 35 per cent of the reports received the maximum score in Eccles and Serafeim’s (2014) study. One possible explanation is that the methodology used in this study does not differentiate enough between what Eccles and Serafeim (2014) would call ‘moderate and detailed reporting’ as they used four scales. Another explanation is that Swedish annual reports are better aligned with the capitals concept of the <IR> framework than integrated reports, which seems unlikely.
Table 24.1 A ranking comparison
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Regarding the other capitals, the results of this study show some similarities and some differences with the results of Setia et al.’s (2015) study. Both studies find that the average disclosure of capital items has increased. However, Setia et al. (2015) found increases for all capitals they tested, while this study finds a small decrease (5 per cent) for natural capital.
Table 24.1 shows a somewhat shattered picture when comparing how the capital disclosure was ranked in the three rather similar studies (two columns for this study, one for 2011, and one for 2015). Clearly, financial capital was ranked on top and manufactured capital appears on the bottom of the ranking in the studies and the years where they are included. Regarding the other capitals (not tangible or financial), it seems that human capital disclosure ranks higher than the other capitals, and social and relationship capital ranks lower than the other capitals. Both, natural capital and IC do rank high and low in the different studies, thus no clear picture can be derived here.
Conclusions
The purpose of this chapter was to provide evidence of what Swedish companies disclose in their annual accounts in relation to the IIRC’s six capitals concepts, how this has developed over time, and what patterns that can be observed. The results show that the average score for all capitals disclosures combined increased by 11 per cent from 2011 to 2015. Moreover, of the six capitals, only natural capital decreased slightly. Therefore, the small change over the years and the small change in patterns of disclosure can only be interpreted in one way. So far, the IR discourse, in academia and in practice, following the introduction of the IIRC’s <IR> framework, has had very little impact on the actual disclosures made in Swedish OMX large cap listed companies.
The vague similarity of six of the companies’ value creation models with the <IR> framework, however, suggests that there is some association. The fact that the IIRC’s definitions of the capitals are vague and that the framework overall lacks obligations (Flower, 2015), therefore seems to be of little help in its adoption, at least in Sweden. It is therefore questionable whether it has already resulted in some sort of integrated thinking, which is IIRC’s long-term vision (IIRC, 2013, p. 2).
However, this study suggests that what was feared about the new <IR> concept on capital (e.g. Flower, 2015) has taken place – that externalities would not be sufficiently disclosed, or only in positive terms. The exception to this seems to be CO2 emissions, which is an area most likely influenced by other reporting frameworks, such as the GRI (references to the GRI are made in 26 annual reports and 7 of them contain GRI indicators). In addition, only in very few of the annual reports is some explanation provided as to links or relationships between the capitals (see Eccles and Serafeim, 2014) and none of the reports illustrated natural capital as a master set (see Barter, 2015).
Although not really the focus of this study, no references were found in the annual reports to the overall stock of capital, as discussed in Flower (2015). Similarly, nothing was found during the course of this study to assume that Swedish companies have answers to how to trade-off capitals as highlighted by Cheng et al. (2014) and Flower (2015). The disclosures provided in the annual accounts further indicates that Milne and Gray (2013) have a point in their criticism of the lack of focus on what sustainability really is and means when companies report on these matters as such information is missing in both years studied.
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All in all, there seems to have been small improvements only, thus no fundamental changes took place during the four-year period covered in this study in terms of multiple capital reporting – and most of these are attributable to an increase of disclosure (20 per cent) of non-financial and non-material/intangible capitals. The IIRC’s six capitals framework has, most likely, contributed somewhat to that development, but overall, voluntary reporting frameworks appear to have a limited impact on the ‘what and how’ of capital disclosures in annual reports in Sweden. This supports the ‘pessimistic’ view of Dumay et al. (2016) regarding IR as a concept, as the study suggests it has been difficult to translate into practice. The new EU-directives on non-financial reporting (European Commission, 2016), together with updated frameworks or templates of how to achieve ‘integrated reporting’ in organizations could mark a significant step towards more inclusive and integrated disclosure practices overall.
In terms of input, output, or even outcome of different capitals, but also specific items within each capital, little is shown and known today. In future research, it seems imperative to investigate if and how legislation helps to push forward changes in practice and what that means in terms of ‘inclusiveness and integrativeness’ (Coulson et al., 2015) and in terms of real value creation (Dumay et al., 2016) and, last but not least, the creation of real meaning. Such research may help solve the lack of knowledge regarding the fourth stage of IC research and practice as identified by Guthrie et al. (2012) and Dumay and Garanina (2013) but also the second stage of IR research (Dumay et al., 2016).
At this point in time it is obvious that ‘integrated thinking’ has only just started to penetrate the organizational culture of the investigated companies in Sweden, which supports the findings of Dumay and Dai (2014, p. 19) that changing entrenched cultures is difficult and time consuming. It seems there is still a long way to go until a systematic shift from a ‘financial capital market system’ to an ‘inclusive capital market system’ takes place in Sweden.
Notes
1 Detailed information on data collection, coding instructions, and analysis is available from the authors.
2 www.assaabloy.com/Global/Investors/Annual-Report/2015/Annual%20Report%202015.pdf (accessed 5 May 2016).
3 http://ir.boliden.com/afw/files/press/boliden/201603091670-1.pdf (accessed 5 May 2016).
4 http://naturalcapitalcoalition.org/ (accessed 28 January 2017).
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