The Relationship Between Integrated Reports and Sustainability. Why Diversity & Inclusion is Now Essential in Integrated Reports (Part 1)

As integrated reports gain prominence as a key tool for communicating corporate value, the importance of effectively conveying a company's diversity and inclusion initiatives within these reports is also increasing. At the same time, many companies likely face concerns such as, "We produce an integrated report, but we're unsure if its quality is truly sufficient," or "We don't even know what constitutes a good integrated report."

Therefore, this time, we spoke with Koji Kinoshita of the Sustainability Promotion Office at Dentsu Group Inc. on the theme of "What constitutes a good integrated report?" Furthermore, he also discussed the relationship between initiatives related to diversity and inclusion—which are particularly important now—and integrated reports.

What is the purpose of an integrated report? And what makes a "good integrated report"?

Q. First, I'd like to ask a very basic question: What exactly is an "integrated report"?

Kinoshita: Generally speaking, an integrated report is a document that summarizes a company's value from both perspectives: "quantitative financial information such as sales and assets" and "qualitative information representing the company's strengths, such as corporate governance, CSR, intellectual property, management philosophy, and human resources."

Personally, I've worked primarily in the CSR field, and my impression is that integrated reporting gradually gained traction in Japan around 2015. It was originally based on the framework proposed by the IIRC (International Integrated Reporting Council), and now Japan publishes a significant number of integrated reports globally.

As for why they spread so rapidly in Japan, even before integrated reporting became established, corporate CSR departments were producing "CSR reports" or "sustainability reports." Meanwhile, listed companies invariably have an IR department that creates "annual reports" for investors. The integration of these two types of reports formed the basis for the "integrated report," which then became established and continues today.

Furthermore, the expansion of "ESG investing" likely played a role in this background.In the past, investors made decisions based solely on a company's sales and profits, focusing on short-term growth potential. This approach was too narrowly focused on the immediate future. Instead, investors needed to look at a company's potential from a longer-term perspective. This led to the adoption of investment decisions based on the perspectives of "Environment," "Social," and "Governance." This is the concept behind ESG investing.

Integrated reports address this investor demand. The traditional annual report focused solely on financial information and business activities, while the CSR report summarized initiatives in areas now considered "ESG." The integrated report emerged by combining these two, aiming to report on the company's fundamental value.

Q. I see. So what makes a "good integrated report"?

Kinoshita: It's crucial for the report to clearly communicate to readers how the company effectively utilizes and combines its various factors—human capital, environmental capital, and other forms of capital—within its operations to drive growth. It must also show what outputs are generated from this. Here, the readers are essentially investors. Therefore, the report needs to demonstrate the company's future potential and provide solid reassurance to enable investors to have confidence in the company.

However, it's truly "easier said than done," and not many companies genuinely achieve this. The key lies not just in disclosing annual financial results or CO2 emissions, but in how the company paints its future vision and presents the factors that support it.

Therefore, investors and rating agencies often emphasize that "merely combining an annual report and a CSR report is meaningless." What matters is the "value creation story" – how the company leverages its fundamental strengths for growth. Furthermore, it is essential to outline how progress is measured and evaluated alongside the mid-term management plan, and how the company looks ahead.

Why Diversity & Inclusion is Emphasized in Integrated Reports

Q. So there's been a shift where information previously seen as part of CSR has become critical decision-making material for investors. However, this is just my personal impression, but in the past, CSR was often perceived more as charitable activities—initiatives not directly tied to corporate growth. Is that no longer the case?

Kinoshita: It's true that not long ago, there was a perception that "CSR = something done with surplus funds," and as a CSR officer, I felt a sense of shame about that.Today, it's no longer just about generating profits. As corporate entities operating within society, we're expected to demonstrate how we utilize our assets and generate value. Key elements within this framework include reducing environmental impact and achieving carbon neutrality, alongside fostering an environment where diverse individuals recognize and respect each other while leveraging their unique strengths. This is precisely what drives our "Diversity & Inclusion" initiatives.

Q. You mentioned "Diversity & Inclusion." In the CSR domain, there's an image that so-called "social contribution activities" are outward-facing, while Diversity & Inclusion is inward-facing. Do you consider these inward-facing activities also crucial elements for corporate growth?

Kinoshita: That is precisely the root of a company's growth potential. While short-term outlooks can be seen in financial results, what about the medium to long term? For example, in the service industry, most companies don't have large-scale production facilities. For such companies, their human resources are often their production facilities. In uncertain times, there's concern about whether a company without diverse talent can respond effectively to unexpected situations.The view is that companies with greater diversity have more potential for growth than those with homogeneous workforces. In other words, companies advancing diversity and inclusion are seen as more resilient to change. For instance, companies practicing diverse management—rather than having workforces dominated by men of the same age or only Japanese employees—are evaluated as having greater strength to prevail in inter-company competition.

In recent years, more companies in Japan have begun issuing integrated reports. This trend stems from the movement to consolidate existing "CSR reports" and "annual reports," coupled with growing interest in ESG investing. Today, efforts to reduce environmental impact and advance diversity and inclusion are seen as fundamental drivers of corporate growth, becoming major points evaluated by investors.

So, what are the key points when actually creating an integrated report? We'll explore that in detail next time.

• The Relationship Between Integrated Reports and Sustainability. Why Diversity & Inclusion is Now Essential in Integrated Reports (Part 2)