Hunt for the ‘holy grail’ of corporate reportingDecember 2011
Corporate reporting as an activity is evolving along with the ever rising demands of stakeholders and others. But can integrated reporting bring the transparency and openness being called for?
The global emergence of corporate reporting was designed to encourage an open and honest approach to the disclosure of financial and non-financial information. So far, the practice has had mixed success, with many companies communicating their performance less than transparently – conceding a few failures to enhance credibility, with others being concealed.
But the range of stakeholders interested in company reports is growing. It is not just keen investors using corporate disclosure to make investment decisions. Campaigners and NGOs, analysts, rating agencies, opinion formers, academics and students, a company’s own staff, customers and other businesses along the supply chain now pay an interest in corporate reports. And, in light of scandals and a global recession triggered by large companies taking economic risks, stakeholders are savvier and asking more challenging questions.
“Transparent communication is less about donning a corporate hair shirt and more about openly explaining the uncertainties faced in implementing strategies that could be derailed by factors such as climate change, social upheaval and the vagaries of government policy,” says UK-based consultancy Two Tomorrows. And it is by facing up to these challenges – and being transparent – that companies can gain the competitive edge.
There is certainly an impetus for change. In the UK, a group of politicians and business leaders known as the Aldersgate Group is lobbying the government to force large companies to report on their CO2 emissions, for example. Given that 95% of the Global Fortune 250 companies now report on corporate responsibility issues, “surely legislation is just a small step to formalise what everyone is doing and ensure that it is done with the due weight of law,” says Paul Dickinson, executive chairman of the Carbon Disclosure Project.
During the last 50 years, campaign groups such as WWF and Greenpeace have successfully challenged companies’ environmental, social and ethical performance. For instance, in its latest campaign, ‘Dirty Laundry’, Greenpeace criticised Nike, Puma and Adidas, among others, for using toxic chemicals in the manufacturing process of their clothing ranges.
Whether consumers are environmentally-concerned enough to abandon their favourite brands remains to be seen, but it is a risk that Puma and Nike do not want to take. As a result of the Greenpeace campaign, both committed to work with their suppliers and eliminate all toxic chemicals from their supply chains and products by 2020.
But it isn’t just NGOs making extra demands. Investors are waking up to companies’ environmental, social and governance (ESG) performance. A recent KPMG study claims that 70% of the buy-side investment community say that annual reports are helpful when it comes to picking stocks to cover. And according to the US Investor Responsibility Research Institute, requests for ESG data has almost caught up with requests for financial and strategic issues. In the US, there is $2.5tn in assets being managed under policies that explicitly incorporate ESG criteria into investment analysis, according to the US Forum for Sustainable & Responsible Investment.
“Ask investors what kind of financial information they want companies to publish and you’ll probably hear two words: ‘more’ and ‘better’,” says Ben McClure, a US consultant with Bay of Thermi, which specialises in finding investment for launch companies. “But let’s face it, the financial statements of some firms are designed to hide rather than reveal information – and investors should steer clear of companies that lack transparency in their business operations, financial statements or strategies.”
So, it’s not just about providing more information. It’s about offering the right information. “We have so much more information than we used to, but does that mean we can make better, more informed decisions?” asks Terri Campbell, a senior investment officer with Liberty Mutual Group. “We’re always going to ask for more information. But if you don’t like a company and you think they’re either fudging the accounting or not being truthful, you just sell their shares. You don’t spend the time saying, ‘How can we make this process better?’”
The requirement for open and honest reporting goes beyond the financials, of course. For BP, previously hailed as a leader in corporate responsibility disclosure, responding to the Gulf of Mexico oil spill has become all pervasive. The company’s website now details how it is changing and how it will go about “re-earning and keeping the trust of society”. And it also reports on risk management in distinctly different terms. “There is significant uncertainty in the extent and timing of costs and liabilities relating to the incident, the impact of the incident on our reputation and the resulting possible impact on our ability to access new opportunities,” it states.
Demand is rising for information of material importance. “Customers and governments are not interested in more information or more reports,” says Joan Fontrodona, professor of business ethics at Navarra University’s IESE Business School. “What civil society is seeking is trustworthy, relevant and understandable information about how a company runs its business.”
Much of the debate around compulsory non-financial reporting hinges on materiality. In accounting circles, the rule of thumb is that an issue is material if it affects profits by more than 5%.
But very few of the issues covered by traditional sustainability reports (such as waste, energy and carbon) have the potential to do this in the short term and many warrant inclusion on the basis that they affect overall company strategy as resources, markets or legislation change.
A further question is: to whom is the information material? In the past, companies have answered this by saying their annual report applies to shareholders. This view is shifting, with many commentators stating that all stakeholders should be catered for, including staff, local communities and suppliers.
So what does the future hold? Companies have produced corporate annual reports and accounts (ARAs) for years, but it is the evolution of sustainability reporting that is capable of providing an insight into what the future of ARAs might look like.
In 1992, just 30 sustainability reports were produced globally. By 2008, that number had risen to more than 3,000 and, last year, almost 6,000. Most of these come from European or US-based companies, but a rising number of Japanese, Australian and Chinese companies now produce standalone reports that address ESG issues. Interestingly, around one-fifth of all companies that report each year are doing it for the first time.
Worried that paper-heavy reports might become a CSR issue in themselves, more companies are utilising new media as a distribution tool – not just as a place to post report PDFs but also to create new ways of communicating to a wide range of stakeholders.
There are many advantages, not least the ability to include more content in the absence of space restrictions, an option to add video or audio, or more easily organise content to cater for different stakeholders. “Online opens doors to new insights and human emotional elements,” says John Santoro, VP of stakeholder communications at Pfizer.
The web isn’t seen as a panacea to solve reporting issues. You still need a strategy to get people to visit the website and all of the challenges surrounding what information to include remain. But it has given companies the chance to develop interesting ways of planning their communication, combining print and new media and producing summary reports with more in-depth information online, for example.
Insurance business Aviva’s main issue was integration. It has to deal with financial information collected from 27 countries and wanted its report to adhere to the new business brand proposition of ‘one Aviva, twice the value’. The company kept it simple. The report is easy to navigate and includes a specific section addressing retail investor concerns and a private shareholder section. Users can also download their own report pack and review the financial statements in Excel format.
The business has also thought through the requirements of its shareholders. Visitor numbers to Aviva’s online annual report have grown steadily since 2005, up 52% year-on-year. Interestingly, 75% of those that went online last year to see the report also downloaded the PDF of the printed version.
The evolution of sustainability reporting has been quick. It now resides at the point where integrated reporting looks ever more attractive to businesses keen to prove that ESG issues are so embedded in their corporate strategy thinking that it makes sense to combine their financial and non-financial reporting. The greater the integration, the better the report. But integrated reporting is about more than a document. It is about leveraging the web to provide more detailed explanations of interest to particular stakeholders, as well as engaging in dialogue with shareholders and other stakeholders.
Globally, fewer than 250 companies have decided to adopt an integrated reporting approach – less than 5% of the total output of sustainability reports. Much debate centres on whether information needs to be ‘integrated’ or merely ‘connected’, whether a report should comprise a single or several information sources, and how such a report should be assured.
George Serafeim, from Harvard Business School, believes that “through integrated reporting, companies develop a better internal understanding of the relationship between financial and non-financial performance. And companies also receive the external benefit of a greater shared consensus among shareholders and stakeholders of the company’s objectives”.
But Roger Cowe, a consultant with Context Group, argues that it is “impossible” to meet the needs of all audiences in a single document. “Sustainability reporting addresses many audiences. Even well-integrated reporting cannot be a substitute for sustainability communications with other stakeholders,” he says. “Putting sustainability and financial reporting together isn’t necessarily the holy grail it is cracked up to be.”
The global economic downturn, climate change, the depletion of natural resources and a growing population, among other things, mean that governance, strategy and sustainability have become inseparable.
Stakeholders are waking up to the fact that people, planet and profit are inextricably linked – and that financial reporting is no longer sufficient on its own to make an informed assessment about the sustainability of a business.
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