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09/27/2011

Investors Step Up Pressure for Integrated Reporting


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We live in a world of rapid human population growth and consumption,  heightened resource scarcity, and the attendant stresses placed by all these factors, not to mention our "business as usual" economy on the earth's ecosystem.   Corporations must acknowledge this and can no longer afford to operate without closely monitoring, managing, and disclosing their environmental, social, and [corporate] governance (ESG) risks—any one of which can explode into a crisis with very material financial consequences. Asset managers who fail to require the companies in which they invest to step up to the plate and take on this responsibility are rightfully being viewed as shirking their own fiduciary duty. 

The sorry state of public corporate reporting of ESG risks has recently been highlighted by Bloomberg’s addition of ESG data to its electronic financial database services.   As it turns out, Bloomberg analysts discovered, only about 24% of the 19,641 companies they researched reported any ESG data at all. And where the data did exist it was—with a few notable exceptions—of almost uniformly poor quality.

A number of leading  investment management groups are becoming increasingly impatient with this gap between what they know to be corporations’ nonfinancial hidden, but material, risks and corporations' transparency in reporting them. These investors say they can no longer responsibly assess the viability of a company’s business model unless that gap is closed.

Along with innovative corporations and other corporate stakeholders, these investment managers are in the vanguard of the “integrated reporting” movement. Integrated reporting advocates maintain that a sustainability report issued out of seprate silo from a company’s financial reports will no longer suffice. They want to see clear evidence—in a single integrated report—that a company embeds the management of the full spectrum of relevant risk, from the origins of the supply chain to post-consumer, into its day-to-day operations. They want to be assured that all stakeholders—not just shareholders—are taken into account in a company’s business practices. They believe that companies that take this holistic approach can transform their risks into competitive opportunities, and create greater long-term value for shareholders and the communities in which they operate.

Two noteworthy advances in the progress of the Integrated Reporting movement occurred in recent months. The International Integrated Reporting Committee (IIRC), a collaborative group of high level global corporate investment, accounting, securities, regulatory, academic, and standard setting leaders, announced that it is seeking comments through December 14, 2011, on a discussion paper, “Towards Integrated Reporting--Communicating Value in the 21st Century.” The paper will form the basis for an Exposure Draft that will outline a framework for integrated reporting.

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Rather than define integrated reporting in terms of key performance indicators, which the IIRC believes is best left to industry groups to sort out, the discussion paper is calling for a consensus on a flexible and broad definition of Integrated Reporting, outlined as follows: one that “brings together the material information about an organization’s strategy, governance, performance, and prospects in a way that reflects the commercial, social, and environmental context within which it operates. It provides a clear and concise representation of how an organization demonstrates stewardship and how it creates value, now and in the future. IR combines the most material elements of information currently reported in separate reporting strands in a coherent whole … showing the connectivity between them and explaining how they affect the ability of an organization to create and sustain value in the short, medium, and long term.”

The second advance for integrated reporting came in a speech made in Brussels in September by Steve Waygood, head of sustainability research for London-based Aviva Investors, at a meeting of the European Commission's Expert Group on Disclosure of Non-Financial Information by Companies.  Speaking on behalf of the 20th largest fund manager in the world, with over 300 billion Euros under management, Waygood asserted that “progressive voluntary [integrated reporting] initiatives have not been enough,” and called for a mandatory reporting requirement for nonfinancial disclosures. Aviva proposes, he says, “that large and listed companies should be required to produce an Annual Report and Accounts that integrates material sustainability issues throughout and that the quality of the integration—or explanation for its absence—be put to an advisory vote at the Annual General meeting and that investors be required to disclose how they voted.”

“For our part,” said Waygood, “Aviva has committed to integrate ESG data into our buy, sell, and hold investment decisions, into the feedback we transmit to the companies that we invest in, and into our voting at company AGMs.” Aviva was itself the first company in the UK, Waygood reported, to put is responsibility reporting to a separate shareholder vote in 2010.

Aviva is also proposing that all UN members commit at the UN's 2012 Earth Summit to develop a global framework requiring companies to produce an integrated report.  He will  be advocating for his proposals among fellow signatories of the Principals for Responsible Investment, an investor initiative in partnership with UNEP Finance Initiative and the UN Global Compact. (Over 900 institutional investors with over $30 trillion in assets have signed on to the PRI).

The IIRC initiative and Waygood’s speech indicate that the momentum for integrated reporting is clearly on the rise, and coming from a diversity of sources. “It is obviously very exciting to have an investor with Aviva’s reputation and resources come out so clearly in support for integrated reporting,” says Bob Eccles, professor of management practice at Harvard Business School and coauthor with Michael Krzus of One Report, Integrated Reporting for a Sustainable Strategy (reviewed in an earlier post). “I hope that the leadership shown by Steve and his firm will be followed by a number of other major institutional investors. Investors have the same level of responsibility for creating a sustainable society as companies do and there is an urgent need for them to get more involved in doing so.”

Susan Arterian Chang writes on sustainable investing and finance, and is Project Director of Capital Institute's "Field Guide to Investing in a Resilient Economy".

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