L16-Additional Reading SDlAJhKDN8 PDF

Integrated
reporting
Elevating value
6509 - EY Int Report v18.indd 1 09/05/2014 13:38

1 Introduction: An evolving view of value 1
1.1 What is integrated reporting? 1
1.2 Connectivity and integrated thinking 3
2 Changing corporate reporting 4
2.1 Limits of the current corporate reporting model 4
2.2 Toward integrated reporting 6
2.3 Background 7
3 Main aspects of the integrated report 8
3.1 The business model in an integrated report 9
3.2 The multiple capitals model: beyond financial capital 12
3.3 Strategy and key performance indicators 16
3.4 Risk and opportunity management 21
3.5 Materiality defined 22
4 Measuring value creation 24
4.1 Interaction between financial performance, intangible 25
value and externalities
4.2 Explaining the gap between net book value and 25
intrinsic value
4.2.1 Monetization of intangibles 27
4.2.2 Monetization of externalities 28
4.3 Impact of externalities on the value of intangibles 29
4.4 The value of measuring value 30
Appendices
i Monetization of intangibles in practice: case studies 31

ii Externality valuation in practice 38
iii Methods of economic valuation 48
Contact 49
We recommend that organizations take into account the guidance of the

International Integrated Reporting Council (IIRC) when carrying out an integrated
report. This paper gives relevant background for organizations to be able to
understand the journey of integrated reporting so far, the theory behind how
it will operate and some details on frameworks, guidelines and even regulatory
requirements that are emerging around the world. In addition, we offer our view of
how organizations can utilize KPIs and monetization, which goes beyond the guidance
of the IIRC framework.
For another version of this paper, which includes practical tips on how organizations
can implement integrated reporting, strategy and thinking into their processes, please
see our document Integrated reporting: tips for organizations on elevating value.
The IIRC has released a framework for integrated reporting. The full version of this,
which is mentioned within this paper, can be found at www.theiirc.org.

1
Integrated
reporting Introduction: an evolving view of value
In the last 35 years, the market value of
organizations has slowly shifted from a price
based largely on tangible assets to greater
emphasis on intangible assets. The concept of
value has fundamentally changed, and with it
the dynamics of the global economy.
To create value over time, today’s organizations of integrated reporting and, we believe, is the
need to actively manage a wider range of resources. direction for the future of corporate reporting. In
Intangible assets such as intellectual capital, research addition to financial capital, integrated reporting
and development, brand value, natural and human examines five additional capitals that should guide
capital have become as important as tangible assets an organization’s decision-making and long-term
in many industries. However, these intangible assets success — its value creation in the broadest sense.
are not universally assessed in current financial (Please see Chapter 3.2 for details.)
reporting frameworks even though they often
represent a substantial portion of market value. While integrated reports benefit a broad range of
stakeholders, they’re principally aimed at long-
A range of issues combined with intangible assets term investors. Integrated reporting starts from
influence competitiveness. Examples include: the position that any value created as a result of
regulation or deregulation, technology innovation, a sustainable strategy — regardless of whether
finite resources and consumer sovereignty (the it becomes a tangible or intangible asset — will
growing power of the consumer), and compliance translate, at least partially, into performance. Market
and legislation. Now, more than ever, creating value will therefore be impacted.
sustainable value for organizations depends on
two things:
Critical to integrated reporting
• Adapting to change and the challenges
and opportunities in their environments
is the concept of sustainable
value creation
• Effectively managing intangible assets,
which can represent a substantial portion Today, an organization creates value not
of market value only for its shareholders but also for the
society as a whole by means of a sustainable
In this paper we offer our vision on integrated strategy. This concept requires organizations
reporting and its role in value creation. We are to factor decisions, trade-offs and sacrifices
confident it will inform organizations that want to into their business model. For example, for
take their reporting to the next level, as well as help an organization to reduce its dependence
them articulate their unique value creation stories. on natural capital, it may have to sacrifice
These stories will ultimately help to attract investors financial capital to invest in the human capital
who demand clear performance analysis to assess capable of achieving this goal.
current and future prospects.
An organization may face the choice between
protecting its financial capital in the near term
1.1 What is integrated reporting? and increasing its profit potential in the longer
term. These decisions, if important, should be
Integrated reporting is a concept that has been set out in an integrated report and defined in
created to better articulate the broader range of the organization’s value creation objectives.
measures that contribute to long-term value and the This approach goes beyond the value reflected
role organizations play in society. in the annual financial statements and includes
the creation of intangible value and the impact
Central to this is the proposition that value is of an organization’s activity on society as a
increasingly shaped by factors additional to financial whole. It also includes a measurement, or
performance, such as reliance on the environment, at least a description, of how these impacts
social reputation, human capital skills and others. influence long-term shareholder value.
This value creation concept is the backbone

Integrated
reporting

Sustainable organizations create value by The chart below shows that the only layer of value
combining a broad range of resources controlled currently measured consistently by organizations is
by the organization or third parties. They are financial capital — usually through the annual report
increasingly expected to generate positive and accounts. This value is translated into dividends
outcomes for society that go beyond returns for for shareholders or stock price gains.
their shareholders or investors — outcomes that can
be instrumental in improving an organization’s long- The second layer encompasses shared value that
term financial performance. Understanding this co- benefits stakeholders directly related to the
creation and shared value process is fundamental to organization (employees, customers, suppliers,
integrated reporting. Other considerations include: public treasury, etc.). Shared value depends
extensively on factors such as employee performance,
1 An organization’s value creation potential depends operating permits and consumer confidence.
on its ability to identify all of the resources
available to it, whether tangible or intangible, The third layer describes the value that an
owned by the organization or third parties, and organization generates for society at large, even if
to align them with its corporate strategy it’s not directly linked to its business purpose. These
► externalities, as they are known, may be either
2 Any value created, including that which benefits positive or negative. An integrated report is broader
society as a whole, has the potential to impact than traditional approaches in terms of scope and
on the organization’s value and profitability time horizon. It should tell each organization’s
► unique value creation story for each of these areas
3 An organization that communicates its and include how:
strategy to the market and quantifies this ►
broader contribution may well be stimulating •► It creates value and for whom
value creation in itself. However, to increase
stakeholder confidence the information must • It measures and quantifies the layers of value
be credible. (This will be explained further ►
in Chapter 2.3.) • It identifies the value created at each level and
how it may affect future performance
1.2 Connectivity and

of Value integrated thinking
To tell a comprehensive value creation story,

integrated reporting requires organizations to
Layers of value
identify the interdependency between all
elements — internal and external — that materially
affect their ability to create value over time. Seeing
Externalities this connectivity requires integrated thinking as
Value for society opposed to “silo thinking.” All the operating and
and the environment functional units of an organization, as well as
the capitals that it uses to create value, must be
considered. This leads to integrated decision-making
and actions. The integrated report is the product of
the processes of connectivity and integrated thinking
Shared value in the organization. Integrated reporting is therefore
not just about the report, but about the process of
the organization’s unique approach to value creation.
To translate integrated thinking into integrated
reporting the organization should convey a holistic
Value captured by view of strategy, governance, performance and
the organization prospects. The integrated report should also
(The only layer of bridge time horizons. Therefore integrated
value currently reporting can be used as a governance tool for
measured consistently)
performance-oriented management.

2
Integrated
reporting Changing corporate reporting
The economy is facing a new value paradigm.
These changes, however, are not reflected in
the way we measure or report value. Traditional
corporate reporting models have failed to adapt
to an uncertain economy and account for the
increase in intangible assets. Traditional metrics
for measuring value and economic progress no
longer provide a complete picture.
A good example of this is gross domestic product 2.1 Limits of the current corporate
(GDP), the current yardstick for measuring economic
reporting model
growth and, indirectly, prosperity. However, GDP
fails to take into account increasingly important
Over the past 40 years, organizations have been
factors such as environmental sustainability or
disclosing an increasing amount of information to
social inclusion levels. There’s now growing cross-
satisfy the demands of stakeholders. Specifically,
border consensus on the need to enhance GDP
they have offered complementary information to
measurements with additional data and indicators.
providers of financial capital who increasingly view
the snapshot reflected by financial statements and
Corporate financial information faces similar
sustainability reports as inadequate.
shortfalls. It fails to reflect all the factors that may
have a significant impact on value creation. It too
Research performed by ACCA1 concluded
must be revised.
that investors say:
To create value, organizations increasingly rely not

just on their resources but the scarce resources
• A link is missing between current reporting,
belonging to society. Therefore, the value creation
business strategy and risk, and we do not
process is based on the principle of “shared costs.”
believe that sufficient information is
All economic activity consumes, to some extent,
provided to assess financial health
resources that belong to society. Consequently, the
►
value created by an organization should be shared
• ► urrent non-financial reporting is not
C
between its owners and society.
sufficiently relevant, and non-financial
information should be better integrated
If the “shared cost” is less than the “shared value,”
with financial information
the value created by the organization will show a net
positive balance. On the other hand, if the shared
• Qualitative policy statements are important
cost is more than the shared value, this will show
to assess financial materiality, but quantitative
a net negative balance. In private organizations,
key performance indicators (KPIs) are viewed
assuming that the ultimate measure of the success
as essential
of a competitive strategy is growth in shareholder
value, the equation becomes more complex. The key
• A
► ccountability mechanisms should be part
is to determine the extent to which shareholder value
of non-financial reporting, either through
creation depends on a contribution by society as a
new board oversight mechanisms, third-party
whole — and whether that contribution is sustainable
assurance and/or shareholder approval at
in the long term. In Section 4, from page 24, we
annual general meetings
elaborate on this theory and provide examples.
With organizations having the ability to create

value beyond that captured by financial statements,
there’s a need to find new ways to measure and
communicate value creation.
4 1
ACCA and Eurosif; What do investors expect from non-financial reporting?, June 2013

The information needed to evaluate an • he complexity of financial reporting standards
T
organization’s ability to create value sustainably requires increasing technical knowledge
over time cannot be gleaned from the prevailing ►
corporate reporting model. A number of arguments • The current economic, social and environmental
support this assertion: crises we face (e.g., recession, the income
► gap and climate change) are forcing us to think
•► Organizations are publishing a growing variety differently about the world and business
of increasingly extensive reports. However, ►
the information provided in them is disjointed. • The lack of a conceptual and regulatory
They’re often generated by different departments framework for non-financial reports means that
within the organization and are products of silo inconsistencies occur. Therefore, stakeholders
thinking instead of integrated thinking may find it difficult to compare reports on
many benchmarks
Page 2, Figure 2 ► ►
• Evolution of corporate reporting

Evolution of corporate reporting*
1960 1980 2000 2020 Projected
Financial Financial Financial

statements statements statements
Financial
statements
Financial
Management information
commentary
Management
commentary Governance
and Sustainability
remuneration information
Governance
and Management
remuneration commentary
Governance
and
remuneration
Integrated
report
Environmental
reporting
Sustainability
reporting
Source: Adapted from IIRC, Towards Integrated Reporting: Communicating Value in the 21st Century, September 2011
* In the future, integrated reporting could eventually replace existing

corporate reports. Organizations should be able to decide the
way in which it will be presented — for instance, as an overarching
document linking to various other reports, or as a single
stand-alone document covering all material aspects.

Integrated 2.2 Toward integrated reporting
reporting
• Financial reports fail to reflect an organization’s Markets move on information. The more forward-
ability to create value in the short, medium and looking and detailed information organizations
long term through efficient management of its provide, the more efficiently markets operate.
strategic resources Therefore, organizations need to explain their value
► creation goals from a new perspective: a view that
• An organization’s value is decreasingly derived accounts for both intangible and tangible assets and
from the tangible assets on its balance sheet and quantifies, whenever possible, the value they create
increasingly from its intangibles. The weight of from a broader economic, social and environmental
tangible to intangible assets has inverted over perspective. The chart on page 7 shows that volatility
the last three decades as shown below in valuation, which can overvalue or undervalue
an organization, can be lowered by increasing the
amount of information available to stakeholders.
These arguments illustrate how the current The ultimate goal is to enable investors to make
reporting framework falls short of stakeholders’ more efficient and effective decisions and bring an
needs and expectations and is insufficient for organization’s market value closer to its intrinsic
investment decision-making purposes. value. Integrated reporting does just that. Leading
organizations are adopting the concept.
Perspectives on integrated reporting
• ”An integrated report is a concise communication

about how an organization’s strategy, governance,
performance and prospects lead to the creation of
value over the short, medium and long-term.”2
• ”An integrated report is a holistic and integrated

representation of the organization’s performance
in terms of its finance and its sustainability.”3
• “Integrated reporting builds on the practice of

financial reporting, and environmental, social
and governance — or ESG — reporting, and equips
organizations to strategically manage their
Increasing value of operations, brand, and reputation to stakeholders
intangible assets and be better prepared to manage any risk that
may compromise the long-term sustainability of
• Increasing value of intangible assets
the business.”4
Components of S&P 500 market value
● Intangible assets
● Tangible assets
Components of S&P 500 Market Value

Source: Ocean Tomo, LLC, “Ocean Tomo’s Annual Study of Intangible Asset Market Value — 2010,” 4 April 2011
2
IIRC framework, “What is integrated reporting?”
3
Institute of Directors Southern Africa, “King Code of governance for South Africa 2009,” 2009
6 4
Professor Mervyn King, Press Release “Formation of the International Integrated Reporting Committee (IIRC),” 2 August 2010

2.3 Background
The concept of integrated reporting was introduced • In Brazil, the Sao Paulo Stock Exchange requires
in South Africa in 2009 through King III, the code listed companies to report non-financial KPIs on a
of corporate governance. The Johannesburg Stock “comply or explain” basis
Exchange adopted King III, and all listed companies
are now required to “apply or explain” the King III • In the UK, the Companies Act 2006 (strategic
principles, of which integrated reporting is one. report and director’s report) extends the scope of
mandatory non-financial reporting obligations for
Regulatory requirements around the world and listed companies
some listing requirements in different parts of
the world are heading in the same direction.
Requirements are emerging to increasingly disclose The IIRC, set up at the end of 2010, aims to
non-financial performance, such as: create the globally accepted integrated reporting
framework. Ultimately, an integrated report should
• In Germany, German Accounting Standard explain the reporting entity’s interrelated financial,
15 (GAS 15) includes disclosure requirements environmental, social and corporate governance
with respect to context, KPIs, risks and information. It should be presented in a clear, concise,
opportunities, forward-looking statements consistent and comparable manner. And disclosure
and corporate governance should be retrospective and prospective to better
match investors’ needs. By doing so, organizations
• In France, Grenelle II stipulates the inclusion of could improve their ability to access capital.
externally assured non-financial information in
annual reports
• In Spain, a regulator’s taskforce is working on

proposals for a new management report format
Increased
Page 4, Figure 4 disclosure
improves
investors’ estimates of the
• Increased firm disclosure improves investors’ estimates of the firm’s intrinsic value
organization’s intrinsic value
Organization value
Reduction of
information gap
premium
Overvaluation
Intrinsic
value
Undervaluation
Zero Low Medium High Full
Extent disclosure
Source: M. Rikanovic, “Corporate Disclosure Strategy and the Cost of Capital — An empirical study of large listed German corporations,”
based on the work of E.F. Fama, 30 June 2005

3
Integrated
reporting Main aspects of the integrated report
Integrated reporting is a management and
communication tool for understanding
and measuring how organizations create
value now and in the future. The goal
is not to provide more information, but
better information. It’s the information that
investors are increasingly looking for.
In keeping with the IIRC Framework, an integrated A number of organizations were already publishing
report should address the following questions: integrated reports before the launch of the IIRC
Framework in December 2013. These pioneers
•► Organizational overview and operating incorporate many of the concepts established in the
context: What does the organization do, IIRC Framework and clearly define the foundations of
and what are the circumstances under which how they create value. Included among them are:
it operates?
► •► The Crown Estate (UK)
• Governance: What’s the organization’s
•► SAP (Germany)
governance structure, and how does it support
the organization’s ability to create value in the •► Novo Nordisk (Denmark)
short, medium and long term? •► Port of Rotterdam Authority (the Netherlands)
•► Natura (Brazil)
•► Business model: What is the organization’s
business model, and to what extent is it a The Global Reporting Initiative (GRI) conducted
resilient one? a survey5 to assess current practices in relation to
integrated reporting and concluded that:
•► Risks and opportunities: What are the key
opportunities and risks that the organization
•► Large private multinationals are driving the
faces; how do they affect the organization’s
year-on-year rise in the publication of self-
ability to create value in the short, medium
declared integrated reports around the world.
and long term; and how is the organization
tackling them?
►
•► Countries leading the integrated reporting trend
include South Africa, the Netherlands, Brazil,
•► Strategy and resource allocation:
Australia and Finland.
Where does the organization want to go,
and how does it intend on getting there?
►
• Globally, the financial sector self-declares more
•► Performance: How has the organization integrated reports than any other sector, followed
performed against its strategy, and what are by the utilities, energy and mining sectors.
the key outcomes in terms of the capitals? ►
► • Integrated reporting is still a minority practice.
• Outlook: What challenges and uncertainties is the Only one out of five of the survey reports is
organization likely to encounter in pursuing its self-declared as an integrated report.
strategy, and what are the potential implications
for its business model and its future performance •► About one-third of these reports combine
and outcomes? sustainability and financial information together.
•► Basis of presentation: How did the organization

determine material matters on their characteristics,
like KPIs, as presented in the integrated report?
8 5
Global Reporting Initiative, “The sustainability content of integrated reports — a survey of pioneers,” 2013

3.1 The business model in an
integrated report
• About half of all self-declared integrated reports The business model is the vehicle that defines
are two separate publications — an annual report and executes an organization’s strategy and maps
and a sustainability report — published together out the process by which an organization creates
under one cover, with minimal cross-connection sustainable value over time. It should assess an
► organization’s long-term viability, value proposition
• The rest of the reports are sustainability reports and business strategy. It should enhance the entity’s
but self-declared as an integrated report without future resilience. According to the IIRC Framework,
showing a clear link between sustainability and the business model is based on the theory of
financial performance multiple capitals. This states that, in the new
economy, an organization can only build and sustain
•► Over 70% of the reports surveyed exceed value if it manages the full range of input capitals
100 pages efficiently and responsibly. The resources it uses to
build this value include:
To date, broad acceptance of integrated reporting •► Tangible items such as financial capital and
has been hindered. The delay in universal progress manufactured capital
is caused by a lack of consensus among companies,
industries and even countries as to what an •► Intangible elements such as relationships
integrated report should contain. Also, a debate with the community, human capital and
is ongoing as to whether it should replace existing intellectual capital
corporate reports. The IIRC Framework could provide ►
greater clarity and align the concept of an integrated • Other inputs or resources such as ecosystem
report for the vast majority. services derived from natural capital;
organizations can draw on these capitals for
free or in exchange for payment
The business model should identify the key inputs

that contribute to value creation. It should also
show how these are managed, the key value-adding
activities of the organization and the potential
outcome in terms of value creation over the short,
medium and long term. Within the business model,
value creation encompasses the products and
services produced by the organization (including
any by-products) as well as the external factors
which increase or decrease the value of the capitals
used and affected by it. Value creation or destruction
occurs through an increase or decrease in the value
of the organization’s tangible and intangible assets
and in the creation of positive or negative impacts
for the community (externalities) that can, in turn,
feed back to the organization’s value.

Integrated
reporting
When describing the business model in an • What are the inputs, i.e, the resources or capitals
integrated report the following series of questions on which the organization depends? They can
should be considered: be internal or external (e.g., funding model,
infrastructure reliance, people, intellectual
•► How does the organization define value? property, raw materials consumed, relationships
► or dependence on natural capital).
•► What are the organization’s mission and vision? ►
► •► What are the outputs? The products and services
• What’s the organization’s environment? produced by the organization.
► ►
•► How does the organization define strategy, and • What are the outcomes? Performance in terms
what resources does it use? of increasing or decreasing the value of the
► capitals as a result of product or service
• What are the main opportunities and challenges production. These outcomes may be internal or
faced by the organization? external (e.g., revenue and cash flow, customer
► satisfaction, tax payments, brand loyalty, and
•► What indicators are meaningful in terms of social and environmental impacts).
measuring the extent to which the organization ►
achieves its stated value creation goals? • What are the value-adding activities? The key
► elements of the organization’s strategy and
the related initiatives designed to lead to
value creation (e.g., strategic investments,
innovation, planning, design, production,
Page 5 service level agreements, relationship
management, differentiation factors).
• The business model
The business model
Value
added by
organization
Society Organization Organization Customer Organization Society
Source: Adapted from IIRC, “Interaction of business model with internal and external capitals”, March 2013 Source: Business model background for <IR>, IIRC
10

How should an organization define its The operating context and external factors should
mission and vision, and the external define the environment in which the organization
interacts. These include:
factors that shape its business model?
The business model, viewed as a web of processes •► The macroeconomic situation

devoted to the creation of value in the short, •► The availability of natural resources
medium and long term, needs to be aligned with
an organization’s mission, vision and operating •► The availability of social capital
circumstances. •► Market circumstances
•► The competitive landscape
The mission sets out an organization’s overarching
purpose and guides an organization’s management •► Technology
and employees in decision-making. It answers the
•► Supply chain
questions of what an organization does and how it
creates value. Once created, it should provide the •► Labor conditions
framework for designing an organization’s strategy •► The regulatory environment
and defining its target customers, products or
services, and unique value proposition.
An organization needs to continually monitor and
analyze these factors when defining and fine-tuning
its business model. It’s important that management
SAP’s integrated report for 2012 includes a good
takes the lead in providing required governance
example of mission formulation. It relates SAP’s
and oversight structures, since the integrated
mission to the role the organization plays
reporting concept of value stems from the notion
in society as an entity that creates value:
that the interaction between an organization and its
operating environment has become more intense
“Our mission is to help every customer
and mutually dependent.
become a best-run business. We do this by
delivering new technology innovations that
we believe address today’s and tomorrow’s
Anglo American plc includes socioeconomic
challenges without disrupting our customers’
indicators in its operating circumstances and
business operations.”
defines how these indicators impact its corporate
strategies and values. It includes economic
growth indicators such as GDP for its various
Vision reflects what the organization aspires
markets, and it tracks changing demand trends
to in the future.
in a global environment marked by crisis.
The Port of Rotterdam Authority formulated

the following vision for its Business Plan
Aegon, in its 2012 annual report, outlined
2011—2015:
the trends and new realities of its business
in the macroeconomic context, defining their
“The Port of Rotterdam Authority is fully
implications and indicating the risks and
committed to the continued development of
opportunities implied.
Rotterdam’s port and industrial complex so
it can become the most efficient, safe, and
“Trends and new realities described are:
sustainable in the world. The Port of Rotterdam
Authority is creating value for customers by •► An aging planet
developing chains, networks, and clusters, both •► An uncertain economy
in Europe and in emerging markets worldwide.
As an enterprising port developer, the Port of •► Crisis in the Eurozone
Rotterdam Authority is the partner for world- •► The way products are bought and
class customers in petro-chemicals, energy, sold is changing
transport, and logistics. In this way the Port
•► Winning trust
of Rotterdam Authority is enhancing the
competitiveness of the Netherlands.” •► A new working environment”
11

Integrated 3.2 The multiple capitals model:
reporting
beyond financial capital
Sustainable development requires a balance or by society and local communities (environmental

between economic progress, social advances and services, a talented workforce or key transport
environmental protection, which is the foundation of infrastructure). An organization may have access
the new value creation vision intrinsic to integrated to these third-party capitals without having to incur
reporting. This balance is increasingly important any direct costs, or it may have to consume other
because organizations draw from multiple capitals capitals, such as financial capital, before earning the
or resources that interact with each other to form a right to use them.
competitive strategy and unique value proposition.
This “multiple capitals approach” is the cornerstone Capitals may be classified as tangible or intangible.
of the economic system and development model in Intangible assets are defined as identifiable,
the new economy. non-monetary assets without physical substance.
The organization controls and holds these assets
The approach provides a new framework for for use in the production or supply of goods or
guiding decision-making that is underpinned by a services, for rental to others, or for administrative
series of principles: purposes. The tangible or intangible assets are
purchased or generated by the organization. They
•► The level of sustainability in an organization’s may even be owned by third parties. Prevailing
strategy and business model shapes its accounting regulations seriously limit the ability to
future performance recognize internally generated intangible assets on
the balance sheet. As a result, their valuations are
•► An organization’s business model and strategy “back stage” in financial statements. Integrated
should be designed to maintain and protect all reporting aims to change that by giving intangibles
stocks of capital over time and externalities a place in corporate reporting.
• The organization should analyze the impact of

its activities on each of its capitals and minimize AstraZeneca’s 2012 report highlights and states
any unsustainable dependencies the company’s dependence on the use of capitals
► in order to successfully deliver its strategic goals.
•► Any impact deriving from an organization’s
activity, internal or external, has the potential “The resources, capabilities and skills we have
to affect its future financial performance in the business and how we use them to
ensure a focus on:
The capitals store value that’s needed by • Research and development: the
organizations to create sustainable profit and discovery and development of innovative,
prosperity for society. These values can be differentiated and commercially
transformed, increased or decreased through the attractive medicines that make a real
activities and outputs of the organization. The IIRC difference to the health of patients
Framework identifies six capitals: natural, social and
relationship, human, intellectual, manufactured, and •► Sales and marketing: focused on the need
financial capital. The categorization is flexible, and of our customers — patients, physicians and
the IIRC Framework allows organizations to adopt payers — and undertaken the right way
other classification structures. For reporting
purposes, an organization should only identify the •► Supply and manufacturing: a reliable supply
individual capitals that materially contribute to or and manufacturing operation that ensures our
affect the value creation process and the long-term medicines are where they need to be when
viability of its business model. they are needed
There are different ways to classify the various •► People: a talented and diverse workforce
forms of capital used by organizations in the value with the right capabilities operating in a
creation process. Access to the capitals may be high-performance culture”
controlled by the organization (such as financial
resources, equipment, management skills and the
intangibles associated with brands and reputation)
12

13

Integrated
reporting
14

The new capitals
• Natural capital: serves as the basis and glue for Financial capital interacts extensively with the
the entire economic and social system. It provides other capitals. Organizations need to understand
resources that often cannot be replaced. And and reflect this interdependence in their integrated
it’s essential for the functioning of the economy reports. It’s important to show financial capital is
as a whole. Resources include water or fossil converted into other forms of capital — assigning
fuels, renewable natural resources such as solar value to the latter — and explain how these other
energy or agricultural crops, and the capacity of forms of capital will generate financial returns
the world’s carbon sinks — i.e., the air, forests and over the short, medium and long term
oceans — to neutralize or sequester the waste ►
generated by economic activity. When it comes to •► Manufactured capital: mainly comprises physical
determining whether natural capital is material to infrastructure such as buildings or technology
an organization, relevant factors must be brought equipment and tools. Manufactured capital may
to bear. These include the level of reliance on be owned by the organization or by third parties,
natural resources, the environmental impact of e.g., ports and other public infrastructure. They
its productive process, and what the organization contribute to an organization’s productive activity.
has to do to operate within the limits imposed by It follows that their efficient management can
the environment. reduce the use of resources and drive innovation
► that leads to greater flexibility and sustainability
• Social and relationship capital: the stock of
resources created by the relationships between
an organization and all its stakeholders. These
relationships include ties to the community,
How do the various
government relations, customers and supply capitals contribute
chain partners. Operating licenses, dependence
on the public sector or an unusual supply chain
to the value creation
may also be factors strategy?
►
• Intellectual capital: encompasses the intangibles
associated with brand and reputation that are The capitals available to the organization are
critical to the organization. It also includes increased, decreased or transformed as a result
resources such as patents, copyrights, of its value-adding activities. The connectivity
intellectual property and organizational systems, and interdependence among the various capitals
procedures and protocols. These can provide or inputs — specifically their influence on the
significant competitive advantages. They can organization’s long-term financial performance —
also have disadvantages, such as the negative should be communicated in an integrated report.
brand equity attributed to major polluters or
ill-reputed shareholders Moreover, not only do the capitals interact with
► each other, but they are also influenced by
• Human capital: refers to the skills and know-how external factors. These include the economic
of an organization’s professionals as well as their climate, technological progress, social changes and
commitment and motivation and their ability to environmental issues. Viewed from this perspective,
lead, cooperate or innovate. The success of an an organization’s ability to mitigate risks, adapt to
organization is tied to proper management of its change and interact with its shifting surroundings
teams and care for their motivation and well-being. is key. What’s more, the capitals can become an
Excessive employee turnover or inadequate internally generated intangible asset.
remuneration policies can damage reputations
and impair an organization’s ability to create value To understand how an organization uses its capitals,
► how they relate to each other and the influence of
• Financial capital: is the traditional yardstick external factors, it’s vital to define the strategy, and
of an organization’s performance. It includes a series of KPIs, to measure the strategy’s progress.
funds obtained through financing or generated
by means of the organization’s productivity. It’s
the pool of funds available to the organization for
use in the production of goods or the provision of
services, including debt and equity
15

Integrated 3.3 Strategy and key
reporting
performance indicators
Strategy formulation should describe the process Intangible assets have a value potential that depends
and tools earmarked for the creation of value for on how the organization defines its strategy and how
shareholders and other stakeholders, specifically those assets contribute to the organization’s value
customers, suppliers, employees and society as a creation goals. An intangible asset unaligned with
whole. The value created for the community is the the organization’s strategy may have no value.
result of the production of positive and negative
externalities. When the market is aware of the The success of a strategy depends, above all, on
externalities generated, the latter can also translate execution. This requires embracing a core tenet: it’s
into an increase or decrease of an organization’s only possible to manage that which can be measured.
value. Strategy must clearly set out the differential In a new economic environment where the ability to
value proposition for the customer and the adapt to changing environments and intangibles is a
community as a whole. focus, this principle requires specific value creation
measurement metrics.
The strategy must address questions such as:
This is where we believe KPIs can be useful in
addition to the narrative portion of the integrated
•► What does the organization do to create value for
report. KPIs measure financial and non-financial
its customers, the providers of financial capital
performance against targets and long-term value
and other stakeholders?
creation goals. They can also indicate what the
•► What outcomes does the organization strive for? organization’s outcomes are in terms of tangible and
• What capitals does the organization rely on? intangible value as well as value for society.
• How will the organization position itself in the KPIs can be used to measure performance and
value chain and in its operating markets? outcomes resulting from the use of tangible and
intangible assets as well as capitals the organization
doesn’t own. They relate to the organization’s
The strategy should mirror and articulate a balance critical value drivers and track the organization’s
between two things: first, short-term financial performance in the short, medium and long term.
performance; second, the sustainable creation of With correct KPIs the management team can focus
value in the medium and long term. It’s important on monitoring material matters, and investors
to distinguish the time horizons framing decisions can assess value creation. Creating KPIs enables
regarding the allocation or consumption of the organizations to understand how they can minimize
capitals. An organization’s strategy should also negative externalities and maximize positive ones.
reflect the choices needed when it comes to Ultimately this will support the performance of their
consuming resources. Often, the use of one capital intangible assets and by extension their value.
can deplete its value yet drive an increase in the
value of other capitals over time. It’s important to show how measurable indicators
(e.g., employee turnover, energy efficiency, media
The strategy should pinpoint the management coverage) impact the organization’s tangible and
processes and systems to mobilize and use all the intangible assets (such as brand and customer
resources (including external resources) within relationships). Why? Because it directly influences
the organization’s reach as efficiently as possible. shareholder value. For example, take KPIs related
References to the value creation chain that go to waste reduction generated in manufacturing.
beyond elements strictly controlled or owned by the The reduction of waste may indirectly measure
organization can enhance the strategic direction of the creation of external value through enhanced
the organization. environmental performance. The improvement
could result in an improved brand image. This in
The value of intangibles depends on the extent turn enhances customer loyalty and, by extension,
to which they link with the organization’s customer relations (an intangible asset).
objectives — or in other words, value creation
through connectivity. Any increase in their value
may eventually materialize by improving financial
performance through interrelated links. This
alignment and these interactions are key since
the measurement of the value of an intangible
can be cost-based, but it can also rely on other
performance indicators.
16

17

Integrated
reporting
18

Finally, communication is a crucial component of the European Academy of Business in Society
strategy and the value creation story. Naturally, it’s (EABIS) and the Sustainability Accounting Standards
vital that the entire organization is aligned with the Board (SASB).
organization’s strategic targets. However, it’s also
true that the market will only tend to recognize an In September 2010, the DVFA (Deutsche Vereinigung
organization’s intrinsic value to the extent that it für Finanzanalyse und Asset Management/
receives sufficient information. Moreover, reporting German Association for Financial Analysis and
how an organization creates intangible value and Asset Management), together with the European
a value for society may create additional intangible Federation of Financial Analysts Societies (EFFAS),
value as long as the communication is credible jointly published a paper outlining the ground rules for
and consistent. Integrated reports should disclose integrating ESG considerations into corporate reports.
the measurement methods used by management The document includes an extensive list of KPIs for
to calculate KPIs. This information is relevant each of the 114 subsectors presented.
to enable comparisons between organizations
and provide a clear understanding of the These same principles underpin the Global Reporting
organization’s performance. Initiative’s sustainability reporting guidelines that are
designed to enhance the quality, relevance, reliability
and comparability of the information disclosed in
Selecting sources of KPIs
corporate sustainability reports.
The IIRC Framework does not list specific indicators
Designing or implementing processes and systems
to be included in an integrated report. However,
to generate input for KPIs requires special
there are readily available sources for selecting KPIs
attention, especially for non-financial KPIs as they
in line with the broad concept of value creation.
tend to be new to most organizations. Showing
These KPIs are not only financial metrics but also
connectivity through KPIs often requires links
ESG indicators. They have or are being developed by
between systems that have not been linked to
organizations such as the Global Reporting Initiative,
Page 6, Figure 5 date. Creating solid processes and systems to
get the right information on KPIs requires time
• Connecting the dots and commitment from senior management.
Connecting the dots
Primary
objective
Financial
drivers
Core non- Increased Reduced Increased Brand Risk

financial sales costs cashflow value management
drivers
Key Human Customer Partnerships Environment Innovation Corporate

metrics capital relations governance
Employee Customer Public Carbon Product/ Ethical
engagement satisfaction perception emissions service integrity
development
Supply chain Waste Board
management management composition
ESG Life cycle
factors assessment
Absence rate Customer loyalty Opinion former Energy efficiency New products Numbers of
Staff turnover Retention perception Deployment of and services non-exec/
Media coverage renewables Value of patents independent
Health and safety Reputation directors
Fair restructuring Trust Community Waste reduction Customer
investment perception Equality
Training Price, product, Recycling and diversity
service quality Stakeholder Environmental Talent recruitment
Performance dialogue and retention Training and
management impacts development
Social impact Environmental Training
Equality Audit processes
and diversity Legal/regulatory breaches R&D expenditure
breaches Reporting and
Reputation transparency
Inclusion
Commitment Reputation
to customer Shareholder
Talent recruitment interests
and retention Anti corruption
policy/practice
Competitiveness
Source: Doughty Centre for Corporate Responsibility, Cranfield School of Management, “Sustainable Value EABIS Research Project: Corporate
Source: EABIS Research Project
Responsibility, Market Valuation and Measuring the Financial and Non- Financial Performance of the Firm”, September 2009 19

Integrated
reporting
Page 8, Figure 7
• Risk and opportunity management

Risk and opportunity management
Manage group
risk exposure
Group Group
Reporting strategic
strategy
objectives
Strategy
implementation
Market and and operation
credit risk
Risk-
Apply risk adjusted
Risk-based
Strategic
management strategic outcomes
direction
process choices
Risk-relevant
Operational and control and
functional risk response
Compliance
monitoring Investment and
project risk
Maximize certainty between aspirations, objectives and outcomes
• Considering the group’s strategic direction, • Aligned to the group’s strategic

we apply the risk management process to objectives, we apply the risk
inform the strategic choices we make management process proactively
to realize the expected outcomes
Source: Adapted from SASOL’s annual integrated report

Source: Adapted from Sasol, “Annual integrated report – better together… we deliver,” 30 June 2013
20

3.4 Risk and opportunity
management
Integrated reporting takes a broader approach to a positive relationship between risk management
risk and opportunity management than traditional maturity and financial performance.
frameworks. As a consequence, a strategy that
includes the identification and mitigation of risks With risk management a clear-cut value driver,
against the integrated reporting six capitals has it’s important to communicate it properly to
a direct impact on performance. It also has an the organization’s various stakeholders and
impact on reducing the gap between its market relate it to its corporate strategy. Investors,
and intrinsic values. regulators, shareholders and suppliers, among
other stakeholders, are increasingly calling on
Risks can be placed into four major categories organizations to enhance their risk management
according to the Committee of Sponsoring disclosures. However, there’s a recurring
Organizations of the Treadway Commission (COSO) discussion regarding how much risk information
Enterprise Risk Management model: strategic, should be disclosed to the market in terms
financial, operational and compliance. Risks related of risk identification and corporate strategic
to natural resources such as scarcity and risks response, and how this information can affect
envisioned for the future fall into the category of an organization’s competitive advantage.
strategic and operational risks.
Control over reporting and communication of
Enterprise risk management is seen as important to risk management information can help maximize
guaranteeing the viability of any corporate strategy value creation. Internally, it’s important that the
and, by extension, the value creation process. organization understands and is familiar with
Material risks that could have a significant impact existing risks and stringently applies the related
on the execution of the organization’s strategy and controls. This process should be overseen by its
its value creation goals should be incorporated board of directors and audit and control committee.
into the decision-making process with the aim of Externally, it’s vital that third parties understand the
reducing uncertainty with respect to achievement of key characteristics of the risk management model
operating results. and how the organization responds to the most
material risks.
Empirical studies show that organizations with
advanced risk management systems create more Decisions regarding what should be communicated,
value in terms of revenue, operating profits and and how, need to be handled by management.
Page 9,results against equity. Using a global, quantitative
Figure 8 And they must weigh the advisability of disclosing
survey based on 576 interviews with companies absolute figures/metrics versus the use of
• Compound annual growth rates 2004-2011 by risk maturity
around the world, EY assessed the maturity level of level such as the percentage achievement of
alternatives
risk management practices and then determined stated key risk indicators (KRIs).
● T
op 20%
Compound ● Middle 60%

● Bottom 20%
annual 2011 year to date
growth rates reported as of
18 November 2011
2004–2011
by risk
maturity level
Source: EY, “Turning risk into results: how leading companies use risk management to fuel better performance,” 2012
2011 Year to date reported as of 18 November 2011 Source: EY, Turning risk into results
21

Integrated 3.5 Materiality defined
reporting
Bearing in mind the characteristics of an integrated • Significance: an assessment of a matter’s

report, a proper materiality assessment is needed to significance requires evaluating the magnitude of
ensure that: impact (for matters that have occurred, currently
► exist or will occur with certainty) and the
•► The report is focused on those factors and probability of occurrence (for matters where
information that significantly impact the long-term there’s uncertainty about whether it will occur)
financial performance of the organization ►
► •► Prioritization: people charged with the
•► The report is concise and meaningful organization’s governance need to prioritize
the material matters based on their relevance
and significance
We believe that a matter is material if it’s of such
significance that it could substantively influence Determining materiality in an integrated report
the assessments and decisions of the organization’s requires the use of the above criteria or instance in
highest governing body or the providers of capital. a four-step model as depicted on the next page (see
Creating sustainable value for the organization’s page 23).
shareholders is the ultimate factor that will influence
the materiality assessment. This analysis needs to To pinpoint the material issues requiring disclosure, an
factor in the needs, interests and expectations of its organization needs to start with a broad list of issues
core stakeholders. related to the various capitals. This list is filtered down
as a function of:
Therefore, the materiality concept in the context of an
integrated report differs from the traditional definitions •► I► nternal factors: bearing in mind the ultimate goal
used in financial and sustainability reporting frameworks. of value creation and the risks emerging from the
Materiality in integrated reporting spans the entire enterprise risk management system
strategy of the organization, not just the current ►
financial or sustainability reporting frameworks. The •► External factors: the needs, interests and
latest GRI guidelines encourage a strict approach on expectations of stakeholders — society, sector
determining what is material in a sustainability report stakeholders or government bodies — by prioritizing
and provide a useful starting point for beginning a these matters
materiality analysis for an integrated report.6
This will determine the material matters that influence
According to the IIRC Framework the providers an organization’s ability to create value in the short,
of financial capital are the target audience of medium and long term. Both the material matters and
an integrated report. But they are not the only the process to define these will need to be disclosed in
stakeholders with a vested interest in assessing the its integrated report.
organization’s value creation potential. For a reader
of an integrated report to make such an assessment,
the organization should publish the material financial, In its integrated report for 2012, The Crown
social, economic and environmental inputs that allow Estate defined the process followed to identify
it to create value and that reveal the organization’s its material matters. It described its internal
ability to respond to a changing environment. Other and external factors, listing opportunity and
stakeholders’ views, besides investors’, should risk management, stakeholder relations and key
therefore be included in the decision-making process company principles and policies as its key internal
on what is material for the organization so long as factors and industry-wide issues, legislation and
they, in turn, have a financial impact. In addition, norms, and the issues raised through sector
meeting certain stakeholders’ expectations with organizations and panels as its external factors.
regards to specific forms of capital may impact the The Crown Estate concluded that its most material
organization’s value and therefore its long-term issues are its sustained and profitable growth;
financials (see case studies in Appendix i). optimization of the portfolio for long-term total
return; attraction, nurturing and retention of
The process of determining what is material and would best talent; attraction of suitable commercial
be disclosed in an integrated report should be based partners; health and safety; maintaining
on the following criteria: effective stewardship; reputation and successful
► “placemaking”; creating amenity value; the effect
•► Relevance: matters that have already impacted the of climate change; the availability of natural
organization’s strategy, business model or strategic resources; customer focus; organizational and
capitals, or may do so in the future management structure; the health of the UK
economy; and government policy.
6
Global Reporting Initiative, “G4 Sustainability Reporting
22 Guidelines: Reporting principles and standard disclosures,” 2013

Page 7, Figure 6
•The
Thesteps
steps toward
toward materiality
materiality
23

4
Integrated
reporting Measuring value creation
Value is created or destroyed by an organization
when it uses and affects the various capitals.
The capitals store value. And, although changes
in these stores are not reflected in traditional
corporate reports, they have the potential to
generate future cash flows for the organization.
Changes in the value of stores translate
into increased tangible and intangible asset
valuations and into externalities.
Externalities mean an organization’s impact — positive Externalities can be positive or negative depending
or negative — on society as a whole. Generally, they’re on the nature of their impact. They can affect the
not reflected in the organization’s financial reporting. economy in general (economic externalities),
They only show up on balance sheets to the extent society (social externalities) or the environment
they affect the capitals owned by the organization. (environmental externalities). For instance, the
Whereas stakeholders (including providers of production of renewable energy may reduce a
financial capital) are increasingly considering internal nation’s dependence on foreign energy (economic
and external non-financial factors when assessing an externalities), create green jobs (social) and
organization’s long-term prospects. More effective protect natural capital by reducing greenhouse gas
capital allocation decisions can also lead to better emissions (environmental).
long-term investment returns.
With natural capital increasingly scarce,
When externalities are positive, they can become environmental externalities are becoming a key
a source of competitive advantage and financial economic issue. Their significance was clearly
return in the longer term, which can have a place on illustrated by environmental data experts, Trucost.
balance sheets. In fact, an organization can turn the Trucost estimated that the environmental costs
production of positive externalities into an intangible caused by human activity on a global scale were
asset or a driver for increasing the value of existing around US$6.6 trillion, or 10.97% of world GDP, in
intangibles. For this to happen, an organization has 2008. By 2050, the figure could reach 17.78% of
to do three things: identify the externalities, estimate global GDP.
their value and communicate both to the market.
Page 10, Figure 9
•Annual environmental
Environmental impact costs
for the global economy in 2008
and projections for 2050
Fish
Timber
Source: Trucost
Source: Trucost Plc, PRI Association and UNEP Finance initiative: “Universal Ownership: Why environmental externalities matter to
institutional investors,” 2011
24

4.1 Interaction between financial 4.2 Explaining the gap between net
performance, intangible value book value, market value and
and externalities intrinsic value
Integrated reports enable organizations to tell their All investment decisions are preceded by an
unique value creation stories. To do that, they need exhaustive analysis of financial and non-financial
to identify and measure the intangible value and information focused on a single question: what
the externalities they generate as a result of their monetary value will an investment generate
business. Organizations also need to assess to what or destroy?
degree the externalities produced may also influence
intangible value. Some practical examples of this are In the case of listed companies, a company’s market
shown in Appendix i. capitalization should be a good proxy for its value.
However, the information currently available to
More importantly, organizations need to be able investors doesn’t tell the full story. This may generate
to describe the ability of both intangible assets a gap between intrinsic value, market capitalization
and externalities to generate future cash flows. and book value.
These can be measured using consistent and
generally accepted criteria and methodology, the As illustrated in the graphs on page 27, the gap
most common of which are listed in Appendix iii. between market value and book value is explained by
Determining that value and communicating it is the fact that investors, through the markets, sense
imperative to creating additional value. The process and acknowledge the existence of unrecognized
of communication can impact market value and intangible assets and externalities. The market
can bring it closer to the intrinsic value of the value also differs from an organization’s intrinsic
organization, as seen in the graphic on page 7. value, which is its target value. In a perfect and fully
transparent market where participants had access to
the same information, intrinsic value would coincide
with its market capitalization. Integrated reporting
helps to reduce the gap between intrinsic and
market values by identifying intangible assets and
externalities and assessing their monetary value.
Page 11, Figure 10
Interaction between financial
• Interaction between financial performance, intangible value and externalities
performance, intangible
value and externalities
Value of the
organization
Initiatives aligned with organization’s strategy
Future Intangible *
economic
value value
Linkages and value-creation cycle*
• The value of the organization is in part defined by intangible value. Therefore, correct communication of this value is also important.
25

Integrated
reporting
Page 13, Figure 12
• Purchase Price Allocation

Purchase price allocation
Consideration paid
Goodwill
Excess price
paid or
pre-PPA Intangible
goodwill assets
Equity market
value
Intangible assets
Equity book
value
Tangible
Tangible assets
assets Purchase
price
Long-term allocation
debt Long-term
debt
Working Working
capital Short-term capital Short-term
debt debt
Target’s assets and liabilities at book value Target’s assets and liabilities at ‘fair value’
(before the acquisition) (after the acquisition)
Fair value as defined by International Financial Reporting Standards (IFRS) 13.
26

4.2.1 Monetization of
intangibles
Measuring the contribution of intangibles to ►• Measurement of the increase in the value of

future cash flows is fundamental to integrated an organization’s human capital as a result
reporting and will help explain the gaps between of a career development and retention effort
book, intrinsic and market equity value. Under
current financial reporting standards, organizations In practice, it can be difficult to measure the
are required to recognize (and if material impact of isolated initiatives on the value of an
disclose) intangible assets acquired in a business organization’s intangible assets and, by extension,
combination as part of the purchase price allocation on its overall value. It’s possible that, at the time of
(PPA) process. Consequently, the intangible assets measuring the impact of a specific strategic action,
are only measured once for this purpose. there were influences from other initiatives,
positive or negative, that may have occurred
However, organizations would be free to go in the same timeframe.
further in their integrated report and disclose
the change in value of an intangible as a result However, the process of identifying and measuring
of any sustainable growth strategy or a specific intangible assets and communicating the outcome
initiative, making it convenient in certain cases to the market helps investors to:
to communicate the value of intangibles in an
integrated report. ►• Recognize, to a greater extent, the cash flows
||
that the organization is capable of generating
Appendix i includes case studies showing how in the future
intangible asset value can be measured and the
valuation methodologies used: ►• Associate the generation of these cash flows
with the various intangible assets that create
►• Measurement of the increase in brand value value on a sustainable basis
as a result of a corporate social responsibility
►• Perceive reduced investment risk
initiative
Page 14 •
Measurement of the increase in the value of
customer
• Valuing an relationships
organization’s at a assets
intangible major organization
from an environmental initiative
As with the PPA, This information allows

book value equals the market to adapt
intrinsic value capitalization to the
reported value
Value
Valuing an However, if the valuation

is not repeated (except for
organization’s impairment testing), the
three values tend to diverge again
intangible
assets
Page 15
• The effect of greater communication on market capitalization

Intrinsic value
Market capitalization
Net book value
Time Adjusted net book value
Potential market capitalization
Value
The effect Greater communication leads to

a lower perceived risk by investors,
of greater leading to higher valuations
communication
on market
capitalization
Intrinsic value
Market capitalization
Net book value
Time
Potential market capitalization 27

Integrated 4.2.2 Monetization of externalities
reporting
A wide variety of externalities can be produced as Until recently, most of these indicators were mainly
a consequence of business activity. The first hurdle tracked for internal purposes. Their oversight was
lies with acknowledging or identifying their existence. assigned to the business areas with the power to
When the externality is destroying society’s value influence performance. However, to boost the
(e.g., global warming, air pollution, urban congestion organization’s credibility among stakeholders,
or biodiversity loss), the organization’s challenge it’s increasingly important to communicate them
is how to mitigate the impact and develop a “profit appropriately, transparently and frequently,
and loss” approach — identifying mitigation costs both within the organization and externally.
and comparing them with the value to society of Communicating how the organization defines its
implementing mitigation actions. Having done that, KPIs, their significance to the strategic objectives
the organization can communicate its efforts to the and how they’re tracked and calculated will help
market. This may in turn contribute to protecting stakeholders better appreciate the organization’s
or increasing the value of its intangible assets performance, situation and prospects.
or decrease the importance of hidden intangible
liabilities. When activities generate positive Appendix ii provides some additional examples on
externalities, this gives a good opportunity to monetizing externalities.
effectively communicate the increasing value of the
intangible assets to the market.
Acciona and EDP, producers of renewable energy,

have developed a methodology to monetize
the value of renewable energy generation in a
number of economies including France, Spain, the
UK and the US. The scope of the work includes
the contribution of renewable energy in terms of
EDP’s growth, green jobs, energy security, CO2
emission reduction and the economic value of
energy security. The main goal of this exercise
is to protect their license to operate and public
policy support in certain markets.
Formula E Holdings has developed a

methodological approach to calculate the impact
of the company’s activity in accelerating the
development of the electric vehicle market
globally. This exercise allows the organization
to estimate the monetary impact of its role
in mitigating global warming or improving air
quality in large cities, for example. By providing
this value, sponsors are able to gauge the
strength of the positive environmental attributes
they are seeking to attach their own brands to,
thus making the company more attractive for
sponsors, and therefore for investors.
28

4.3 Impact of externalities on the
value of intangibles
As previously mentioned, to completely unlock its • Access to more favorable valuations in bidding
intrinsic value, an organization needs to convert its for operating licenses or public tenders, paving
positive externalities and the actions to mitigate the way for operating cost savings within the
negative impacts into intangible value. organization as well as geographic and sales growth
►
Potential approaches to estimate the impact of the •► The sharing of savings along the supply chain when
externalities produced by an organization on the suppliers manage to enhance their performance
value of intangibles include: ►
•► Reduced risk of energy dependence and natural
•► The ability to relate the externalities generated capital depletion/scarcity
with the share price performance ►
► • Reduced compliance costs vis-à-vis future
• The generation of customer loyalty or brand regulations and access to new market niches
equity by means of enhanced consumer
perception thanks to the reputation earned The graphic below shows how externalities can
by an organization when it generates positive be measured to demonstrate higher revenues,
externalities or reduces negative ones improved productivity and cost savings.
►
Page 16, Figure 15
• Enterprise value
Environmental
Social policy
Enterprise value marketing
Retention of the Product innovation,

employees and talent new market
attraction niches, etc.
Impact value
Brand Enterprise of the
organization
value value in the
environment
Reputation Environmental due How prepared the Externalities

diligence, occupational organization is
risk prevention for an unstable
climate
Health, occupational
and environmental risks Resilience
29

Integrated 4.4 The value of measuring value
reporting
Measuring value creation is not so much a since some organizations currently also benefit
theoretical discussion anymore. There is a clear from investors not understanding their full
trend toward organizations displaying their value (negative) impact on certain externalities. This is a
in new ways. However, we recognize that there challenge we believe could be overcome by either
are challenges organizations must first overcome reporting improvements or require organizations to
to effectively measure and monetize their value. communicate negative externalities.
To start with, there are many techniques, but no
consensus, on how to measure and monetize key Despite these challenges, we support moving
impacts particularly natural and social capital. This toward a more holistic picture of an organization’s
lack of a global monetization guideline therefore value, including measuring and monetizing it. Most
limits consistency and comparability of monetized importantly, monetization clearly demonstrates
outcomes between organizations. There is however the extent of the positive or negative impacts on
a number of movements aiming to create more each of the capitals caused by the value-adding
globally accepted frameworks for this type of activities of the business model. It also assists in
information. For example, the Natural Capital the strategic decision-making process of ensuring
Coalition is trying to form a standard for valuing that growth in one’s value capital doesn’t depend
natural capital in business.Secondly monetizing (at least excessively) on the destruction of another
externalities poses a challenge as it’s heavily based capital’s value. Ultimately, it also serves to provide
on assumptions. That is why organizations should stakeholders with a clear and concise answer to their
be transparent in explaining their assumptions and recurring question: “what’s in this for me?”
what kind of limitations they have in terms of access
to data. Another challenge arises with financial
reporting requirements in major financial centers.
In some regions, there may be limitations on what
can be disclosed in terms of monetized value within
an integrated report. The IIRC should continue
discussions with regulators about these limitations.
Finally, revealing excessive detail regarding
monetized value can be seen as a risk, especially
Page 17
•Quantifying
Qualifying externalities
externalities
5% to 20% +27% $19

premium productivity billion
• The premium charged for • Impact of telecommuting, in • Potential benefits

selling “greener” goods addition to savings on fuel, of video conferencing by
CO2, office space and 2020 for US and UK
traveling time businesses, in addition to
CO2 emission cuts
Source: Accenture, Survey
of 250 Senior Executives, May 2012 Source: Telework Research Network, 2010 Source: Carbon Disclosure Project, 2010
30

Appendix i
Monetization of intangibles in
practice: case studies
Case study 1: The “relief from royalty” method, the most

commonly used brand valuation approach, is based
Increase in brand equity due to on the premise that the owner of a brand obtains
higher brand recognition as a benefit from holding it instead of having to pay
a result of a corporate social a royalty for the use of a third-party brand. Brand
value is thus the present value of the stream of
responsibility (CSR) initiative
future royalty savings. To estimate the stream of
royalties, royalty rates are analyzed for comparable
industry brands or trademarks.
The royalty charged for the use of a brand tends

to be correlated to that brand’s main value drivers.
In the example below we see how higher brand
recognition on the part of the general public leads
to higher royalty charges for its use by third parties
and, therefore, higher brand value.
Page 18, Appendix 1
• Brand equity
Relief from
royalty method
1. We analyze comparable royalties in

C
the industry to determine the correlation
with possible value drivers (e.g., brand
recognition). E
Brand recognition
B 2. We rank the brand we want
x
A to value according to its brand
recognition, resulting in an
D estimated royalty rate.
F
G
H
3. By multiplying the royalty
rate by the forecast sales of
that brand’s products, we can
estimate the yearly savings
the organization has by owning
3% 6% 9% the brand instead of licensing it.
The value of the brand is the
Royalty rate (% over sales) present value of the sum of
the future royalty savings.
A-H are comparable brands to the brand being valued

31

Integrated
reporting
In this case, the orgainzation championed a merit-

based foreign university scholarship program that
proved highly popular among young university-goers
and their families and peers. The initiative garnered
widespread media coverage and was quickly
associated with the sponsoring firm’s brand.
A year after the initiative, the organization measured

its brand positioning in an independent ranking
of brands. Recognition levels were used as the
KPI. According to the independent study, the
organization’s brand had climbed from 28th to 10th
place. In a fresh valuation of the brand in the wake of
the CSR initiative, the royalty used to calculate the
organization’s “relief from royalties” was higher than
the rate used in the valuation exercise performed
prior to the initiative. This suggests that, all other
things being equal, the organization’s brand has
Page 19, Appendix 1increased in value.
• Increasing brand equity
Measuring the value

creation in the brand
The implemented initiative allows for

higher brand recognition which, in
turn, makes the brand comparable
with a brand with a higher royalty C
rate (all other things being equal)
E
Brand recognition
B
A
D
G
F
Royalty rate (% over sales)
A-H are comparable brands to the brand being valued
32

Case study 2:
Increase in the value of an
organization’s customer relationships
thanks to an environmental initiative
The “multi-period excess earnings” method is the For example, client relationships based on
most common and widely accepted approach to long-term contracts will have a higher value
valuing the intangible assets deriving from customer than those with no contract base.
portfolios. It consists of estimating the present value
of the “excess earnings” attributable to the customer In this example, the organization undertook an
portfolio over the useful life of the asset. initiative that delivered a 25% reduction in the
volume of GHG emissions generated in the
Excess earnings can be defined as the production of its core product. The organization
difference between: communicated this environmental achievement to
the media. It highlighted that the initiative made
•► The after-tax cash flows attributable to the its core product the most environmentally
customer base in existence on the acquisition date friendly of its class.
►
• The cost implied by the capital invested in all the Following the initiative and media campaign, the
other assets (tangibles, intangibles and working organization measured customer relationship.
capital) used to maintain the customer relationship Customer loyalty was used as the KPI. The survey
results showed that 45% of those polled claimed that
► he value of the resultant intangible asset
T they would continue to use the organization’s
corresponds to the present value of this excess product even “if there were a similar product on the
of earnings over the useful life of the asset. The market that cost up to 15% less.”
higher the risk of the cash flows, the lower their
present value. With this initiative, the organization managed to
reduce the natural attrition rate of its customer base,
Page 20, Appendix 1 thereby increasing the value of this intangible asset.
In this example, an initiative aimed at mitigating
• Customer cash flow over time negative externalities has turned into an increase
in the organization’s intangible value through the
communication process.
Measuring value creation
in customer relationships
$
As a result of client attrition, cash flows
attributable to the existing client
relationships tend to drop. The more loyal
the customers, the flatter the curve will be,
and therefore the higher the cash flows
Cash flows produced by existing customer relationships
produced by that intangible asset.
As a result of the fall in attrition, the cash

flows expected in the future increase.
Time
33

Integrated
reporting
Case study 3:
Increase in the value of an
organization’s human capital as
a result of a career development
and retention effort program
The most widely used method for valuing human A highly specialized workforce, requiring specific
capital as an intangible asset is to measure its training, will be more valuable than a workforce
replacement cost. To do so, it’s necessary to without any such specialist know-how. This is
estimate all of the costs the organization would reflected in the higher required training costs.
have to incur in order to substitute its existing Similarly, an organization whose workforce’s most
employees, including recruiting, hiring and valuable contribution is its experience will require
training costs, among others. a longer period of time (therefore higher costs) to
replace if these experienced people move on.
Often, the most significant cost item is the time
elapsing (measured in terms of wages) between The value of the intangible asset in this case is
the time a new employee starts on the job and the the sum of all of the costs needed to replace the
moment they attain the required level of know-how organization’s human resources as a whole.
and expertise.
Page 22, Appendix 1
Human capital
• Human capital
opportunity opportunity cost
cost
Cost of on-the-job learning and tacit

knowledge to reach an employee’s full
productivity potential Training expenses Recruiting costs
• The more difficult it is to replace a

workforce in its current state of productivity,
engagement, motivation, etc., the greater
its value. This is based on the premise that
a quality workforce contributes to the
future cash flows of the organization.
34

|| |
In the case at hand, an organization sustaining In the year after the organization announced
an annual employee turnover rate of over 30% the decline in its turnover rate, it was acquired
(a KPI measured regularly) set in motion a raft by a private equity firm that mentioned in the
of measures designed to enhance employee career press that “the quality of the organization’s
development and retention. When this KPI was human resources was the highest of any of the
remeasured three years after the initiative, its organizations we looked at. We are fully confident
annual turnover rate had fallen to 19%. Moreover, that, with their experience and motivation, we will
the internal promotion of the organization’s manage to bring the organization to the global
employees had given them a command of leadership position it deserves.”
the organization’s products and markets that
surpassed that of any competitor. This concept is depicted in the chart below:
Page 23, Appendix 1
Measuring value
• Measuring creation
value creation in the workforce
in the workforce
● V alue of employees at
Value of employees
at productivity
full full productivity
potential
Value created in potential
● Training expenses
the workforce as ● Recruiting costs
a result of the Training expenses
initiative
Recruiting costs
Value of the Value of the

workforce before workforce after
the initiative • Initiative the initiative
35

Integrated
reporting Appendix ii
Externality valuation
in practice
Business case The organization’s need

Valuing human capital To support its HR strategy, a large multinational
wanted to know the monetary impact of social
Monetizing the effects of changes changes in the organization. For instance, it wanted
in social KPIs to place a value on changes in employee engagement
and retention.
EY’s approach
The approach consisted of two phases:
1. Identifying and quantifying interactions

around social KPIs
2. Monetizing changes in KPIs (e.g., what is

the $ effect of a 1% increase in employee
retention?)
Phase 1 Phase 2
• Qualitative analysis of • Cost analysis of

forces around KPIs organization’s initiatives:
how much needs to be
• Quantification of impact of spent to improve
organization’s initiatives the KPI by X%?
on KPIs
• Effect analysis of changes
• Analysis of quantifiable in a KPI (e.g., productivity
effects of KPIs (e.g., rises by X%, what does
productivity) this mean in terms of
revenue?)
36

Value from our approach
• Ability to leverage available literature on We used quantitative methods to measure
social performance interactions around KPIs, e.g., the relationship
between staff engagement and their productivity.
•► Innovative use of available HR data from the
organization to identify trends and interactions This approach allows:
•► Validation of hypotheses through working

•► Quantification of the links between predictors and
groups and interviews at every level of
outcome variables
the organization
►
►
• Measuring if the links are statistically significant
►
• Identification of the nature of the relationship
(linear, exponential, etc.)
Illustration of qualitative analysis

of interactions around a given KPI
Incentives Effects
Social HR KPI
Key quantitative indicators
Organization’s key tool to with direct impact on turnover
enhance retention rate and operational costs
Remuneration strategy
 Productivity rate
Bonus system
Sales turnover
Share ownership, employee 
participation plan
Fair treatment
Management quality
 Service quality
Sales turnover (customer loyalty;
Manager training  recommendations from client)
manager assessment (3600 and Retention rate
associated reward) 
 Employee turnover rate
Cost of replacement (recruiting;
Career opportunities
training; temporary loss of
Internal mobility
productivity)
Promotion
 Sales turnover (recruiting staff
renewal and innovation)
37

Integrated
reporting

Eco-premium of green products An international hotel chain wanted to know the
costs and benefits of ISO 14001 environmental
Demonstrating the benefits of certification of its hotels. In particular, to what
environmental certification extent does certification attract customers and
increase sales?
EY’s approach
Four studies were conducted in parallel to evaluate
the impact of ISO 14001 certification:
• Water and • Study of correlations between certification and

energy resource consumption across 300 hotels
consumption
• Environmental • Survey of 230 hotels to measure the costs and

opex/capex workload for implementing environmental certification
• Statistical comparison of customer KPIs of 300

• B2C sales certified hotels versus 200 non-certified hotels
• Interviews with 26 account managers on

• B2B sales
46 key accounts
38

• Demonstration of the impact of ISO 14001
certification: reduction of water and energy
consumption, increase of B2B sales, B2C
customer satisfaction
►
• ROI estimation of ISO 14001 certification
►• Recommendations for environmental

management systems
►
Page 25
Page 25
B2C customer
• Demonstrating satisfaction:
the benefits of environmental certification
certified versus non-certified
Page 25 • Demonstrating the benefits of environmental certification
hotels five years after certification
• DemonstratingGeneral
thesatisfaction
benefits of environmental
Recommendation
certification
Value for money
General satisfaction Recommendation Value for money

ª Certified hotels
ª Control
● Certified hotels
group of hotels
ª Certified
● Control grouphotels
hotels
General satisfaction Recommendation Value for money ª Control group of hotels
B2C customer
satisfaction:
ª Certified hotels
B2C customer
ª Control group
certified versus
of hotels
satisfaction:
non-certified
certified versus
7,505 7,366 7,161 6,952 5,849 5,712 hotels 5 years
non-certified
B2C customer
after certification
7,505 7,366 7,161 6,952 5,849 5,712 hotels 5 years
satisfaction:
certified versus
Difference of 2.7%* Difference of 3%* Difference of 2.3%* non-certified
7,505 Difference
7,366
*=Statistically of 2.7%*
significant
7,161 Difference
6,952 of 3%* 5,849 Difference
5,712 of 2.3%* hotels 5 years
*=Statistically significant
Difference of 2.7%* Difference of 3%* Difference of 2.3%*
Environmental Estimation of workload for
training ª Before certification
*=Statistically significant
and awareness ª Additional workday after certification
Environmental training implementing certification ª Before certification
Collect
andand archive
awareness ª Additional workday after certification
records — HR
Collect and archive
Estimation of workload
● Before certification
Environmental
Environmental records
training — HR
training ª Before certification
for implementing certification
● Additional workday after certification
andsessions
awarenessfor employees ª AdditionalEstimation
workday afterof workload
certification
Environmental training for implementing certification
Preparation
Collect and
and archive
sessions forfollow up of
employees
environmental
records — HR internal audit
Preparation and follow up of Estimation of workload
Environmental Collect
environmental and archive
internal
training audit for implementing certification
sessions forrecords
employees— room keeping
Collect and archive
Preparation and Preparation
records
follow up and
of follow
— room keepingup
environmental internalof certification
audit audit
Preparation and follow up
Collectand
Collect and archive records
ofarchive
certification —
audit
restaurant and bar
records — room keeping
Collect and archive records —
Collect
Preparation andand restaurant
archive
follow and bar
up records —
maintenance/technical
of certification audit
Collect andCollect
archive and archive
records — records —
environmental
restaurantmanagement
and bar system
environmental Collect and archive
management system
records — reception
Collect and archive
recordsof
Information
Collect and archive records —— clients
receptionon
environmental
environmental management system issues
Information of clients on
Collect and archive
environmental issues 1 2 3 4 5 6 7
records — reception
Information of clients on Total 1 2

workload in days 3 4 5 6 7
environmental issues
Total workload in days
1 2 3 4 5 6 7
39
Total workload in days

Integrated
reporting

Valuing environmental risk The organizer of an electric racing competition
in Europe wanted to measure the potential
and resilience “sustainability value” generated, through supporting
Measuring business sensitivity the electric vehicle (EV) market.
to environmental factors ►
EY’s approach
A four-stage approach for estimating the
organization’s potential boost to the EV market
and translating this contribution into
positive externalities.
• EV • Analysis of different EV market share evolution

scenario scenarios; consolidation into a vision of three
analysis different evolution scenarios
• Barriers • Analysis of barriers for EV development;

analysis measuring the influence of barriers in different
EV development scenarios
• Impact • Quantifying the extent to which organization’s

on EV actions address barriers for EV development,
market and hence boost EV market share
• Global • Translating company impact into measurable

value externalities (e.g., employment, CO2 emissions,
created health, consumer surplus)
40

• New perspective on EV market and
organization’s role
►• Estimation of organization’s potential

sustainability value (fuel savings, health,
employment, CO2 emissions, etc.)
►• Strategic recommendations for organization

Page 28
to reach its sustainability impact objectives
through its actions
• Promoting sustainability impact and “extended value”
►
• Initial cost of the car • The relative influence of

• Pricing
Understanding of EV
• Running costs of the car
each barrier on EV market
barrier 20% •
•
Maintenance
Residual value of the vehicle share is quantified by
market barriers and considering three criteria:
their relative strength • Battery capacity 1 Potential impact on

• Car performance, the EV penetration
• Technological especially durability
barrier 24% • Charging time success
• Battery performance (cycles)
2 Complexity and the

• Charging time effort needed to
• Consumer awareness, overcome the barrier
• Social
22% to achieve mass-
“eco-aspiration”
barrier • Range anxiety
• Safety: noiseless driving production by 2020
electrocution risk
3 Influence of barrier
• Grid capacity on the other
• Charging infrastructure
• Infrastructure evaluated barriers
barrier 15%
Page 28 • Climate regulation (CO2)

• Air quality regulation (NOx, SOx)
• Regulatory
sustainability19%
• Environmental impacts
• Promoting barrier impact and “extended value”
(Well-to-Wheel)
• Uncertain government incentives
and support
The organization’s Green growth Social Environmental

“extended value”
measured by its 77million €25 billion 4.0 billion
economic, social
• additional EVs sold
savings oil barrels
and environmental €431billion • on health care costs from
pollution reduction
• equivalent to 2.5 years of
Japan’s current consumption
externalities savings
• for consumers of fuel
energy (NPV)
Quality of 900 million
life improvements tonnes of CO2 eq
€142 billion • significant quality of life
improvement in cities
• equivalent to 2 years of
Italy’s emissions
• extra sales in the car industry
42,000 €13.9 billion

permanent jobs saved
• created in the car industry • on CO2 costs (NPV)
€X
billion
Global value
creation 41

Integrated
reporting

Valuing externalities The organization wanted insight into the external
costs and benefits of renewable energy policy
Measuring the potential externalities measures that are not yet accounted for in the
of renewable energy policies decision-making process (job creation, GDP,
energy security).
►
EY’s approach
Wind technology was selected as the reference
renewable energy source and was compared to
Combined Cycle Gas Turbine (CCGT). For six
countries and the entire EU27, the following
work was done:
Micro-analysis: • Estimation of capex, opex, fuel cost and

up-front price of each CO2 costs
source of energy • Calculation of the levelized cost of energy
in € per kWh
Macroeconomic • Computation of the turnover, global value

analysis: added and jobs created
economic benefits • Direct, indirect and induced economical effects
of each source • Additional effects (security of supply, wind
integration costs, etc.)
Bibliographic Impact of wind power on electricity

analysis spot prices
42

• Insight into socioeconomic effects •► Comparison of net costs when integrating all
of wind energy for several EU countries external costs
•► Analysis of the contribution of windpower •► Calculation of impact of wind energy on

to energy security for several EU countries electricity cost
Page 29
Page Comparison
29 of levelized cost of
• Business Case: valuing externalities
energy, including environmental
and social costs and benefits
• Business Case: valuing externalities
Wind
integration Security
costs of supply
Wind GDP GDP

integration Security
creation of supply creation
costs
100
GDP GDP
creation creation
100 Induced
80 Induced
CO2 Indirect
Opex Induced
80 Induced
(levelized)
60 Indirect Direct
Indirect
CO2
Opex 42.4
(levelized)
60 Indirect Fuel Direct

40 42.4
€/MWh€/MWh
Capex Direct Fuel

40 13.1 Net
20
Capex Opex costs
Direct
Net
13.1
20 costs Capex Net
0 Opex costs
Net
Wind Wind
costs Capex
CCGT CCGT
0
Wind Wind CCGT CCGT
Analysis of tax revenues
ª Wind
(levelized)
in different countries
ª CCGT
ª Wind
(levelized)
ª CCGT
tax return/€
return/€
cents invested
invested
27 26 51 16 33 11 52 19 29 9 27 12
€ cents€tax
27 26 51 16 33 11 52 19 29 9 27 12
UK France Spain Germany Poland Portugal
UK France Spain Germany Poland Portugal
● Wind
● CCGT 43

Integrated
reporting

Valuing environmental risk A real estate owner, primarily renting offices,
wanted to:
and resilience
Measuring customer •► Segment its customer base (tenants)
sensitivity of business according to sensitivity to energy performance
to environmental factors •► Measure the risk of losing tenants due to poor
energy performance
►
EY’s approach
EY developed a three-step approach:
1. Consolidate available data and establish

energy efficiency metrics for each building
in the asset base
2. Develop a scoring system for segmenting

tenants according to their sensitivity to
energy performance
3. Identify tenants who are at most risk of

cancelling or abandoning the contract
• Consolidate For each asset in the organization’s portfolio,

performance consolidate performance metrics such as:
data
• Energy consumption per square meter
• Energy expense per square meter
• Segment Based on interviews with organization relationship

tenant base
managers, score the degree to which each tenant
is sensitive to his or her office’s energy performance
• Identify Identify risks of losing tenants, in particular

tenants tenants who are:
at risk
• Sensitive to energy performance
• Renting office space with poor performance
• Close to the end of their lease agreement
44

• Identification of segments of customers
sensitive to energy efficiency and valuation
of the risk faced by the organization of having
office space with poor energy performance
•► Integration into B2B marketing strategy ►

of energy performance and tenant sensitivity
to energy performance
►
building 1 Identifying tenants at risk of cancelling

or abandoning the contract (early
adopters who are most sensitive to
Tenants at risk of being
energy efficiency, but working in offices
with poor energy performance)
lost in the near term
790 End of lease agreement
● Within 2 years
Tenant A, building 1
Tenant E, building 5 ● Within 3 years
t B, building 690
2 ● Within 4 years
Energy performance (kWh Ep/m2year)
Tenants at risk of being

590
Tenant F,in the near term
lost
building 6
t C, building 490
3 Tenant E, building 5
Tenant B, building 2
Tenant F, Surface
building 6
390 Tenant C, building 3 10,000m2
t D, building 4 5,000m2
290
Tenant D, building 4
Tenant G, building 7 1,000m2
Tenant G, building 7
190
20% 10% 25%
15% 20% 25%
Energy performance improvement potential by 2020
provement potential by 2020
45

Integrated
reporting

Valuing impact on reputation The organization wanted to study the sustainable
value of its CSR policy and measure the extent
Measuring the impact of CSR to which CSR has enhanced its intangible capital:
policy on intangible capital licenses, technologies, brand reputation,
processes, know-how, customer base, partnerships,
suppliers, etc.
►
EY’s approach
Our approach consisted of delineating the
organization’s intangible asset inventory and
connecting the benefits of CSR policy with shared
value creation and intangible asset appreciation.
• Intangible • Identification of intangible resources controlled

asset by the organization (brand, know-how, licenses)
inventory
• Identification of external intangible resources
(suppliers, customer base, partners, state)
• Intangible • Study of each intangible component: virtual

asset operating account, balance sheet, cash flow
accounting
• Effects
• Distribution of value created through CSR policy
of CSR
across the intangible asset inventory
policy
46

• Vision of value added through CSR policy This is underpinned by a SWOT analysis. The
and the impact on enhancement of analysis included an estimate of the monetized
intangible assets changes in value of intangible assets as mentioned
in the SWOT analysis.
•► A multidisciplinary team combining
CSR advisory, HR, stakeholder consultation
and quantitative modeling to achieve the
best results
Page 27
• Measuring the impact of CSR policy on intangible capital

Economic analysis of CSR policy,
intangible capital and shared
value creation
Economic analysis Shared value

of CSR policy creation
Mapping and inventory of intangible capital
Mapping Mapping Inventory Consolidation

(organization (internal vs. and and Benefits Losses Net impact
vs. society) external) measurement reporting
Society External Society

(industry, resources (collective Distribution of
country, (shared goods impact according to
world) values and and other intangible capital
externalities) stakeholders)
Intangible
capital
Stakeholders resources
Organization (directly linked) (strategy Intangible capital
(itself and without CSR) (strategy with CSR)
stakeholders Society
directly Internal
resources Organization stakeholder
linked to its organization
shareholders) (captured (intangible
value) assets)
47

Integrated
reporting Appendix iii
Methods of economic
valuation of externatilities
Page 30
• Main
Main valuation techniques
valuation
techniques used in
measuring externalities
Total
economic
value
• Use values • Non-use values
• Revealed preferences • Stated preferences
• Dose — response/production function*
• Market • Avoidance • Hedonic • Travel cost • Contingent • Choice

prices costs pricing method valuation modeling
• Benefit transfer
Source: Pearce, Atkinson, Mourato, “Main valuation techniques,” Cost-benefit analysis and the environment: Recent developments: The Stages
of a Practical cost-benefit analysis, February 2006
* Dose response/production function approach is not a valuation technique per se, but it is an important element of several of the valuation
approaches (e.g., dose response function may be used to establish the link between air pollution and health effects).
48

Contact
EY Climate Change and Sustainability Services
For further information on integrated reporting and other EY Climate

Change and Sustainability Services, please contact:
Area leaders Integrated reporting specialists

Juan Costa Climent Hugo Hollander
Global, Europe, Middle East, Global, Europe, Middle East, India
India and Africa (EMEIA) and Africa (EMEIA)
T: +34 9 1572 7381 T:+31 88 40 74059
E: hugo.hollander@nl.ey.com
Christophe Schmeitzky
Europe, Middle East, India Hester Touwen
and Africa (EMEIA) Global
T: +33 1 4693 7548 T: +31 88 40 7 3115
E: christophe.schmeitzky@ E: hester.touwen@nl.ey.com
fr.ey.com
Brendan LeBlanc
Steve Starbuck Americas
Americas T: +1 617 585 1819
T: +1 704 331 1980 E: brendan.leblanc@ey.com
E: stephen.starbuck02@ey.com
Matthew Bell
Mathew Nelson Asia-Pacific
Asia-Pacific T: +61 2 9248 4216
T: +61 3 9288 8121 E: matthew.bell@au.ey.com
E: mathew.nelson@au.ey.com
Kenji Sawami
Japan
T: +81 3 4582 6400
E: sawami-knj@shinnihon.or.jp
Lucia Argüelles
Global
T: +34 93 366 3709
E: lucia.arguelles@es.ey.com
49

EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and advisory
services. The insights and quality services we deliver help build trust and
confidence in the capital markets and in economies the world over. We
develop outstanding leaders who team to deliver on our promises to all
of our stakeholders. In so doing, we play a critical role in building a better
working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of
the member firms of Ernst & Young Global Limited, each of which is a
separate legal entity. Ernst & Young Global Limited, a UK company limited
by guarantee, does not provide services to clients. For more information
about our organization, please visit ey.com.
About EY’s Climate Change and Sustainability Services

Governments and organizations around the world are increasingly
focusing on the environmental, social and economic impacts of climate
change and the drive for sustainability.
Your business may face new regulatory requirements and rising
stakeholder concerns. There may be opportunities for cost reduction
and revenue generation. Embedding a sustainable approach into core
business activities could be a complex transformation to create long-term
shareholder value.
The industry and countries in which you operate as well as your extended
business relationships introduce specific challenges, responsibilities and
opportunities.
Our global, multidisciplinary team combines our experience in assurance,
tax, transactions and advisory with climate change and sustainability
skills and experience in your industry. You’ll receive a tailored service
supported by global methodologies to address issues relating to your
specific needs. Wherever you are in the world, EY can provide the right
professionals to support you in reaching your sustainability goals.
© 2014 EYGM Limited.

All Rights Reserved.
EYG no. AU2354

ED none
This material has been prepared for general informational purposes only and is not intended to
be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for
specific advice

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Integrated

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i Monetization of intangibles in practice: case studies 31

We recommend that organizations take into account the guidance of the

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1.2 Connectivity and

To tell a comprehensive value creation story,

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To create value, organizations increasingly rely not

With organizations having the ability to create

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• Evolution of corporate reporting

1960 1980 2000 2020 Projected

Financial Financial Financial

* In the future, integrated reporting could eventually replace existing

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Perspectives on integrated reporting

• ”An integrated report is a concise communication

• ”An integrated report is a holistic and integrated

• “Integrated reporting builds on the practice of

Components of S&P 500 Market Value

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• In Spain, a regulator’s taskforce is working on

Zero Low Medium High Full

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•► Basis of presentation: How did the organization

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The business model should identify the key inputs

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The business model

Society Organization Organization Customer Organization Society

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The business model, viewed as a web of processes •► The macroeconomic situation

The Port of Rotterdam Authority formulated

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Sustainable development requires a balance or by society and local communities (environmental

• The organization should analyze the impact of

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Core non- Increased Reduced Increased Brand Risk

Key Human Customer Partnerships Environment Innovation Corporate

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• Risk and opportunity management

Maximize certainty between aspirations, objectives and outcomes

• Considering the group’s strategic direction, • Aligned to the group’s strategic

Source: Adapted from SASOL’s annual integrated report

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Compound ● Middle 60%

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Bearing in mind the characteristics of an integrated • Significance: an assessment of a matter’s

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Initiatives aligned with organization’s strategy

Linkages and value-creation cycle*

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