January 1, 2019

Telling Their Value-Creating Stories: Why Asset Owners Should Use The Integrated Reporting Framework

“In this information-saturated age, integrative thinking may be a necessity if we are to find our way past the multiple binds in which we find ourselves. It shows us a way past the binary limits of ‘either-or’ thinking, and thus improves the odds of success…..”.

Roger MartinFrom his book “The Opposable Mind”

“Integrated thinking takes into account the connectivity and interdependence between a range of factors that affect an organization’s ability to create value over time. Integrated Reporting improves the quality of information available to stakeholders, promotes a more cohesive and efficient approach to reporting, and enhances accountability and stewardship for the broad base of capitals used by the organization.”

The International Integrated Reporting Council (IIRC)

“Understanding that stories about value creation are around us everywhere is essential for the future of capitalism. Our greatest challenge is to define and measure collective contributions to wealth creation, so that value extraction is less able to pass as value creation. The idea that price determines value and that markets are best at determining prices has all sorts of nefarious consequences.”

Mariana MazzucatoFrom her book “The Value of Everything”


About this Letter

Some Letter topics pop up unexpectedly in the spur of the moment; others are the result of months or even years of forethought. This Letter fits into the latter category. Roger Martin’s 2007 book “The Opposable Mind” started me thinking about the power of integrative thinking over a decade ago.i He argues that we are born with minds that can hold two conflicting ideas in constructive tension….which we can use “to think our way through to a new superior idea”. With this background, I welcomed the formation of the International Integrated Reporting Council (IIRC) in 2010. The more I learned about the IIRC initiative, the more I became convinced of the relevance of media guru Marshall McLuhan’s dictum that ‘the medium is the message’.ii The very act of choosing to tell its story using the medium of integrated thinking sends the message to an organization’s stakeholders that it cares deeply about creating sustainable value for them.

The third quote above comes from Mariana Mazzucato’s new book “The Value of Everything”. She warns us to be careful with the word ‘value’. Sometimes price is a good proxy for value, sometimes it is not. Her example relevant to this Letter is the highly profitable financial services industry. She asks if that high profitability is due to the industry creating a lot of value, or whether it is just very good at extracting value from customers for the benefit of the people that work or are investors in it? A serious question for the leaders of the asset owner community to ponder.iii

The goal of this Letter is to help leaders in the asset owner sector see that integrated reporting is indeed a case of the medium being the message. While its original application was in the corporate sector, as asset owners are stewards, its application there is even more important. Asset owner stewards need to be seen taking the lead in integrated reporting. The Letter provides a brief history of the IIRC initiative, adapts the Integrated Reporting Framework to the asset owner context, and shows how its adoption can be a value-creating catalyst for asset owner organizations, their stakeholders, and the common good.

About the IIRC and its Framework

The IIRC was formed in 2010 to build a globally-accepted framework to produce clear, comparable information about how organizations create value over time. This led to the introduction of the <IR> Framework in December 2013. Today, the Framework is supported by leaders in the international investment, accounting, regulatory, and academic communities, and is being used as a template by a growing number of organizations around the world.

The Framework was the subject in the August 2014 Letter and again in the May 2018 Letter. The Letters argued that the Framework was not just helpful for corporations, but for asset owner organizations as well. The Letter conclusions were that initial efforts by pension funds to use the Framework showed the potential to materially improve stakeholder communications in a number of ways, but that more work needed to be done to turn that potential into reality.iv This Letter identifies that work and offers a roadmap to get it done.

Adapting the Framework to an Asset Owner Context – 7 Guiding Principles

The <IR> Framework sets out seven Guiding Principles in the creation of an Integrated Report. Our asset owner adaptation thoughts are added (in bold italics):

  1. Strategic Focus and Future Orientation: explain how organizational strategies will create stakeholder value in the shorter and long terms and the related use of capital resources. For asset owners that explanation should start with the purpose of the financial assets under its control, who the key stakeholders are, how risks and rewards are defined and allocated, how intergenerational fairness is monitored, and how in that context micro ‘value’ is best defined and measured. Following Mazzucato, there is also the macro ‘value’ question of how effective asset management functions activate the ability of finance to positively impact the common good (e.g., through its stewardship activities as PRI signatories and through supporting the UN’s Sustainable Development Goals).v
  2. Connectivity of Information: paint a holistic picture of how various factors integrate to create value over time. For asset owners such a picture would include an explanation of how the organization’s own capital resources (e.g., its financial assets base, its human and intellectual capital, its network capital, its IT capital, and its physical capital) and ‘common’ external capital resources (e.g., air, water) combine to create both micro and macro ‘value’. 
  3. Stakeholder Relationships: describe the stakeholders, their relationships to the organization, and their fiduciary duties to them. For asset owner organizations key micro stakeholders likely include some combination of current and future asset beneficiaries, retirees, workers, employers, and taxpayers. It a macro level, it becomes society at large.
  4. Materiality: provide information on matters impacting the organization’s ability to create value over time. For asset owners, key success drivers would include political stability, the rule of law, clear organization mandates, good governance, and an absence of wealth-extracting agency issues and costly artificial constraints.
  5. Conciseness: use no more words than necessary. And thus fight natural tendencies towards ever greater detail and complexity.
  6. Reliability and Completeness: include all material matters with balance and accuracy. Yes!
  7. Consistency and Comparability: present information to enhance comparability over time, and to other organizations to extent possible. Yes!

These seven Guiding Principles should be embodied in seven Integrated Report Content Elements.

Adapting the Framework to an Asset Owner Context – 7 Integrated Report Content Elements

Again, our asset owner adaptation thoughts are added (in bold italics) to the Integrated Report content descriptions:

  1. Organizational Overview and External Environment: what does the organization do, and what are its context and circumstances? The asset owner organization invests the financial assets entrusted to it to support the organization’s obligation to cost-effectively generate a predictable payment stream to current and future asset beneficiaries (e.g., pension plan members, tax payers, endowment/foundation beneficiaries, etc.) in an inter-generationally fair manner. Further, it does so within the context of its stewardship obligations as a signatory of the PRI’s 6 Principles of Responsible Investment and the support of the UN’s 17 Sustainable Development Goals (SDGs).
  2. Governance: how does the organization’s governance structure support value creation over time? A carefully-created selection process ensures the asset owner organization has an ongoing, robust, effective governance process. The board member selection process      emphasizes both a sense of public duty and collective skill and experience in such fields as accounting, actuarial practices, business and financial management, information technology, and investment management. Key Board accountabilities include CEO hiring and evaluation, risk appetite expression and monitoring, compensation policy, and strategic plan approval and monitoring. The Board understands fiduciary duty and supports the organization’s mandate to create ‘value’ at both micro and macro levels
  3. Business Model: how does the organization create stakeholder value over time? Asset owner organizations create micro value for their stakeholders in three distinct ways: 1. By having sufficient assets to meet future payment obligations, 2. By matching broad asset risk exposure to the ability and willingness of asset stakeholders to bear it, and 3. By seeking out investment opportunities that generate higher long-term sustainable risk-adjusted rates of return than their passive alternatives.vi  A related question here is the organizational mix of insourcing versus outsourcing. At the macro level, value is created by integrating investment decisions with the organization’s PRI stewardship obligations and the 17 SDGs. 
  4. Performance: what did the organization achieve over the period in the context of its strategic objectives, and what were the impacts on capital resources? Given all the above, did the asset owner organization meet its payment obligations over the evaluation period? Does it have sufficient assets to meet future payment obligations? Are its asset risk exposures properly set? Are its active investment processes generating excess risk-adjusted rates of return in line with expectations and in line with its stated PRI stewardship obligations? How did the organization’s investment decisions impact the 17 SDGs?
  5. Risks and Opportunities: what are the key risks and opportunities and how are they addressed by the organization? What could happen on the future payment obligations side to make them higher than expected? Lower than expected? What could happen on the asset side to produce returns lower than expected? Higher than expected? What contingencies are in place to deal with these unexpected outcomes? What other risks and opportunities should the asset owner organization consider? For example, in relation to its human and intellectual capital? Its network capital? Its IT capital? Its physical capital? Or its reputation?
  6. Strategy and Resource Allocation: where does the organization want to go, and how is it going to get there? As an example, is the asset owner organization comfortable with its current governance and business models? With its current array of capitals and their quality? With its risk assessment and mitigation procedures? With its relationships and reporting protocols to stakeholders? If not, what improvement actions will be taken?
  7. Outlook: what challenges and uncertainties does the organization face in achieving its strategic objectives? What are the implications for its business model and future performance? Given everything that has been addressed in Content Elements 1-6, these final two questions should almost answer themselves!

    Addressing the Elephants in the Asset Owner Board Room

    Why should every asset owner organization in the world use the <IR> Framework to tell its value-creating story? Because it forces the leadership of these organizations to constructively address the possible elephants in their board rooms. Here are five:

    1. Value-creating in asset owner organizations can take place at two levels: micro and macro. It is not a matter of choosing one over the other, but of integrating both perspectives into a seamless whole.
    2. Decisions must be based on the balanced consideration of the interests of all organizational stakeholders, not just some.
    3. Effective organization governance is a critical success driver. Thus governance effectiveness must be measured and reported.
    4. Business model clarity and capital resource adequacy are also critical success drivers. Thus they too must be clearly addressed in integrated reporting.
    5. Performance reporting must be directly integrated with the stated internal and external value-creating ambitions of the organization.

    It takes a positive, constructive medium to send stakeholders messages about how an asset owner is addressing these five strategic challenges. The <IR> Framework fits the bill.vii

    Keith Ambachtsheer   


  1. Roger Martin and I continue to be colleagues at the University of Toronto’s Rotman School of Management.
  2. Attributed to the late University of Toronto Professor Marshall McLuhan, deemed ‘Prophet of the coming Information Age’. He predicted the advent of the Internet 30yrs before its invention.
  3. See my views on this topic in the October Letter titled “Saving Retail Retirement Savers: What It Will Take”.
  4. The May 2018 Letter assessed how closely the 2017 Annual Reports of the California State Teachers’ Retirement System (CalSTRS) and the Ontario Teachers’ Pension Plan (OTPP) adhered to the Integrated Reporting Framework.  The Letter concluded that diligent use of the Framework would materially improve stakeholder value in a number of ways, especially in the case of CalSTRS.         
  5. A recent study by Maastricht University Professor Rob Bauer et al. titled “Get Real!” indicated the majority of members of a Dutch pension plan favored the explicit use of sustainable investment practices in managing the plan’s financial assets.
  6. A recent study by Harvard University Professor George Serafeim titled “Public Sentiment and the Price of Corporate Sustainability” shows that sustainability rankings are increasingly reflected in stock prices, unless overshadowed by negative short term market sentiment. The implication is that to be useful, equity valuation models need to be regularly updated to reflect changing investor behaviour.
  7. With some modifications, the Framework can be equally effectively used by asset management organizations.


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