By Robert Ludke
March 15, 2012
There is growing pressure on companies to give public audiences - such as investors, regulators, employees and consumers - a full and complete picture of their operations. No longer does a quarterly or annual report containing the key financials suffice. Instead, the public wants information such as: insights as to why certain investments were made and others were forgone; the steps being taken by leadership to ensure the company is acting in a responsible and sustainable manner; and whether or not the company’s non-financial performance encompassed in its environmental, social and governance (ESG) initiatives are benefitting its financial performance.
In other words, mere compliance with current reporting requirements is insufficient in providing the public with a comprehensive understanding of a company’s long-term value.
As a recent KPMG paper noted, forward-thinking executives are increasingly realizing that actively communicating a more complete picture of a company’s performance is a benefit rather than a liability: “More corporations are recognizing that there is value and opportunity in a broader sense of responsibility beyond the next quarter’s results; that what is good for people and the planet can also be good for the long term bottom line and shareholder value” (Expect the Unexpected: Building business value in a changing world, KPMG, 2012).
Thus, it is no longer a question as to whether or not the actions of companies should benefit both shareholders and the planet. Instead, the key question is: “How do companies actively and transparently communicate their efforts to benefit both shareholders and the planet?” The answer is an integrated report - a single document or communications platform such as a website that conveys both financial and non-financial performance.
Every company listed on a stock exchange is required to issue, on at least an annual basis, a financial performance report. Working within the parameters of applicable accounting standards and regulations, companies report their income statement, balance sheet and notes to the financial statements. In order to promote their reputation, many companies actively demonstrate how they more broadly benefit society by producing a CSR or sustainability report, describing their ESG initiatives.
Typically these two reports are completely separate from one another, covering different material and prepared by different teams.
Companies around the world such as Phillips, Southwest Airlines, United Technologies and Natura have begun the process of integrated reporting for several reasons.
First, they realize the public is expecting more disclosure about corporate activities. Although Europe is ahead of the rest of the world in the public’s expectation of corporate transparency, the gap is closing. According to recent research conducted by Hill+Knowlton Strategies, more than two-thirds of Americans hold corporations directly accountable for their actions, agreeing that public backlash against a company’s actions can seriously harm its bottom line even if that company doesn’t deal directly with the public.
Second, management teams are coming to the realization that sustainability impacts the bottom line. Integrated reporting helps define the relationship between financial and ESG metrics - an important factor as investors increasingly strive to accurately evaluate these connections as they seek to maximize their return on investment.
According to a November 2011 study by Harvard Business School professors Robert Eccles and George Serafeim, along with Ioannis Ioannou of the London Business School, found that companies that operate in a sustainable manner have a higher rate of return on investment compared with those that do not.
Specifically, the authors found that when the rate of return on investment in 90 so-called “high sustainability” companies was matched to the rate of return for their 90 “low sustainability” peers, investing $1 in the beginning of 1993 in a portfolio of firms with a focus on sustainable operations would have grown to $22.60 by the end of 2010. In contrast, investing $1 in the beginning of 1993 in a portfolio of traditional companies that paid little attention to long-term sustainability would have grown to $15.40 by the end of 2010 (The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance, Harvard Business School, 2011).
Lastly, Southwest Airlines in particular understood that integrated reporting provides companies with a single platform on which to communicate these efforts to all of its stakeholders. Rather than expecting investors, employees and other public audiences to sift through a variety of information in competing reports, an integrated report provides a clear, concise picture of the overall financial and reputational health of a company.
There is no doubt that integrated reporting is the next frontier of best reporting practices. As of March 1, 2010, the Johannesburg Stock Exchange requires all companies listed on that exchange to produce an integrated report. Regulation in Denmark, Norway and Sweden mandates sustainability reporting to varying degrees.
While the U.S. government may not be mandating increased corporate disclosure, large investors are pushing for greater transparency on financial and non-financial performance. For example, investment funds such as CalSTERS, CalPERS, BlackRock and Goldman Sachs Asset management are signatories of the United Nations Principles of Responsible Investment that requires, among other things, that the signatories seek appropriate disclosure on ESG issues by the entities in which they invest.
These requirements and growing public expectations mark the beginning of an emerging trend: integrated reporting will soon become an issue of compliance, mandated either by federal legislation, stock exchange listing requirements or investment guidelines.
Robert Ludke, is senior vice president, Public Affairs at Hill+Knowlton Strategies in Washington, DC. He provides strategic public affairs, media relations and messaging counsel for a variety of national and international clients in financial services, energy, international trade, sustainability and other issues. He can be reached at [email protected].