Seb Beloe asks whether sustainability reports ever provide added value for investors?
When discussing the possibility of creating a sustainability report, the chief executive of a large US conglomerate said: “You want us to produce one of those corporate socialist reports?” This incredulous response may not be a typical reaction, but it does belie a deep-seated misunderstanding about the role and value of sustainability reporting.
Such reporting is a sizeable and growing industry. Corporate Register, which monitors the global output of corporate responsibility, sustainability and environment reports, estimates that, in 2011, there were approximately 6,600 such reports – up from fewer than 1,000 in 2001 and just 40 in 1992. But is all this effort really worth it? Do investors even read these reports?
Starting point
Many environment and social issues are directly relevant to a company’s ability to create long-term value for its shareholders. Whether it is increasingly scare resources affecting the price and volatility of commodities, population change driving skills shortages or the rapid evolution in technology that is enabling a more active and influential citizenry, the world is changing and companies need to respond.
Unfortunately, sustainability reports are often seen as an opportunity to spout trite public relations guff. They can also be very lengthy and are not always accurate.
A few years ago a large Italian utility reported carbon dioxide emissions of 122 billion tonnes. If you think that sounds like a lot, you’d be right – it is more than four times the entire planet’s production of CO2 in 2009. Unfortunately, this is not the only or even most egregious example.
ABB, a multiple reporting award-winner, was found to have overstated its sulphur oxide emissions by a factor of 1,000 for seven years, during which time it won many of its accolades. Meanwhile, Ford managed to both halve and double its water consumption in the same year (2006). What is perhaps more shocking than the errors themselves is the fact that no one spotted them for a long time.
These examples are now a few years old, and the quality of data and of reporting has, in general, improved markedly. In part, this is due to the growing importance that is attached to a firm’s performance on these issues.
Carbon is now priced in a growing number of global markets and is soon to be subject to mandatory reporting in the UK. Investors are slowly integrating critical social and environment issues into their investment models. Bloomberg, for example, now provides data on more than 120 ESG (environmental, social and governance) indicators for about 5,000 publicly-listed companies worldwide.
While there is no doubt that better quality data are more readily available, for many mainstream investors interest remains fleeting and is often limited to one or two critical issues, such as safety in the mining industry and carbon emissions in power generation.
This is particularly true for investors with short-term investment horizons. If an investor intends to hold a firm’s shares for a matter of months – the average holding period on the London Stock Exchange is around seven months – then most ESG issues would be considered irrelevant. However, for investors with longer-term investment plans these issues become more important.
Taking the long view
When a shareholding lasts for more than three or four years several factors – including a firm’s relationships with its stakeholders (regulators, employees, suppliers and local communities) and its operating expenses (energy, productivity, raw material use) – become critical in understanding whether it will create value.
Unfortunately, sustainability reports rarely address ESG issues in this way. This is largely because the audience for these reports is almost never clearly defined. In reality, they are a “catch-all” document designed for everybody and nobody.
That is not to say that no-one is interested, more that the report format is the wrong way to communicate sustainability data. Instead companies should disseminate this information through existing channels that make sense to the end user. For example, they could use marketing and advertising to connect sustainability credentials to customers; compliance submissions with regulators; procurement codes with suppliers; and annual financial reports with investors.
Efforts by the International Integrated Reporting Council to develop a global reporting framework are, at least from an investment perspective, particularly critical. The draft framework (consultation ends on 15 July) defines the key parameters of what corporate reporting, sustainability or otherwise, should look like. It focuses on communicating how organisations create long-term value in terms of financial, human, societal and natural capital.
