Identifying the Value of Sustainability Through Integrated Reporting

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Identifying the Value of Sustainability Through Integrated Reporting

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Tuesday, May 13, 2014 - 2:35pm

According to an April 2013 report by the Investor Responsibility Research Institute, only seven companies on the S&P 500 Index currently publish an integrated report, or one that quantifies sustainability programs in terms of bottom line impact. Doing so, however, could be a winning strategy for companies seeking to drive business value through sustainability, according to Bill Gaffigan, Senior Practitioner with Geosyntec Consultants Inc. We spoke with him this week to better understand the current integrated reporting landscape and to understand the opportunity this approach holds for publicly held companies.

Q: To kick us off, could you please explain what integrated reporting is and what its potential value is to shareholders?

BG: When you talk about integrated financial reporting, what you’re talking about is combining the sustainability report with the annual shareholders report, which goes out to the shareholders at the annual meeting. It’s not a 10K or a 10Q, but anything you provide to shareholders, you’re accountable for under law.

It’s 2014 and there is really no place to hide. There’s a desire for this information and some of the most important stakeholders for this information are investors, who are in the market every day making decisions about interacting with your company. Doing integrated reporting and showing where you can create opportunities through sustainability programs brings these issues into focus for investors and other very data-hungry individuals.

Q: How do sustainability programs impact the value of a company?

BG: When it comes to understanding the value of a company, there are two sides to that coin: One of them is risk and the other is opportunity. If you look at a traditional framework of the value of the company, you can increase that value by either increasing the income or decreasing the risk. When there’s something that’s measurable and that’s something that’s moving in a direction that reflects the potential for increased profits, decreased expenses, reduction of risks, then those are the things that get the attention of the investment community and those who are managing into the future of the company.

Q: Integrated reporting seems to be a good tool for understanding the bottom line impacts of sustainability, but it is not yet common practice. Why do you think that is?

BG: Companies are still fighting against the headwind of an economy that is not fully engaged. There’s mixed signals about how strong a recovery we have and when that’s the case, the primary concern falls back to, ‘Are our basic, standard expense and revenue generation activities taking place?’ So I believe that it’s going to take place over time.

In addition, there’s been a set of regulations related to financial disclosures that bring criminal penalties for people at all levels of the organization. In very large corporations you’ll see that the general operations managers have to sign off on the profit and loss statements; Controllers down at the plant level have to sign off on them all the way up to the CEO to make sure everyone is linked together on the numbers that are reported to the Securities and Exchange Commission to ensure accountability.

So that’s another part of it. If you’re saying it’s integrated and you’re putting it out there, are you creating a liability for yourself, which you certainly won’t have if you create a sustainability report?

Q: What makes the seven companies who are issuing integrated reports different?  

BG: Across the entire world, 70 percent of companies do some type of sustainability reporting.  Quite a few of them report a portion of the Global Reporting Initiative (GRI), but among the S&P 500, only seven have made the decision to go to integrated reporting. When somebody in the executive suite looks at the information at a strategic level and says, “This is important for us to understand our environment of risks and opportunities”, then multiple departments join in. They’re more willing to put an effort in to supply information that’s sustainability-related because it raises their profile in the communications and it can make life easier. I guess that’s the definition of a culture, one that’s dealing and trading in information like that, and you’ve got a top-down approach that’s very valuable.

If you look at a company like Unilever, I would rate them probably number one in the world when it comes to transparency. When you read the statements that the CEO makes, he says: "We’re going to grow the top line of this company by X." And it’s not a small amount. "We’re going to create profitability of Y." And it’s not incremental.  "And at the same time, we’re going to be reducing our impacts on land, water and air by Z.” Well, some people would say, "You’re doing something that’s putting you at risk of reducing the value of your company by doing things at the same time.” His proposition is that: "That’s not true. We’re going to do things to innovate through this because we’re all working in the same direction and it can be done."


This post originally appeared on NAEM's Green Tie blog.

Keywords: Finance & Socially Responsible Investment | Finance & Socially Responsible Investment | IRRCI | Integrated Reporting | National Association for Environment Management | SRI investing | Socially Responsible Investing | Sustainable Investment | esg | integrated sustainablity reporting | materiality