Until recently, talk of “integrated reporting” and “sustainability” had a high probability of putting a CFO of a U.S.-based company to sleep. Sure, the corporation’s role in the environment, society and government has long been a hot topic at shareholder meetings. But when it came down to it, why should CFOs have cared about inserting such puffery into the nuts-and-bolts world of 10-Ks and proxy statements?
The only credible answer that advocates of integrated reporting could possibly give to a finance chief was that it could help make money and/or avoid risk. But hard data establishing a connection between good corporate citizenship and profitability has been sorely lacking. Auditors typically provide “a lower level of assurance” of nonfinancial information than they supply when they audit financials, notes Jeffrey Thomson, president and chief executive officer of the Institute of Management Accountants.
Regarding new disclosures of data and strategic information that go beyond traditional financial reporting, Corporate America tends to be a whole lot more hard-headed than its peers in the United Kingdom and Northern Europe, where there’s a strong push for companies to reveal the “value drivers” behind their financial results. A major reason for the resistance here is a liability system that makes senior executives, corporate lawyers and accountants wary of providing potential fodder for lawsuits filed by plaintiffs’ attorneys, many experts agree.
But there are also worries about revealing too much information to competitors.
“If I’m an investor,” says Thomson, “I’m not sure that I want a company that I’m investing in to reveal, at too disaggregate a level of detail, how it’s creating value in a competitively differentiated way.”
Despite such skepticism, however, interest in getting more information about the nonfinancial drivers of corporate valuations does seem to be on the rise among investors. And that, finally, appears to have piqued the interest of a growing number of companies. At such organizations, the question for CFOs may be shifting from “Why should I care about this?” to “How can I make it work for my company?”
Behind the Bottom Line
To be sure, only a bit more than one out of every nine professionally managed U.S. dollars are invested in assets governed by sustainable investing strategies, according to a study by US SIF: The Forum for Sustainable and Responsible Investment.
Yet the trend is clearly upward. In 2012, U.S.-based institutional investors took environmental, social and governance (ESG) criteria into consideration in the investment of aggregate assets of $2.48 trillion, a 23 percent rise since 2010, according US SIF’s most recent study.
That growth reflects “the near tripling of assets, particularly those held by public funds, that review governance issues relating to executive pay or the quality and accountability of boards of directors, or that avoid investments in companies doing business in Iran. Another factor is the increased prominence of environmental issues, particularly relating to climate change and carbon emissions,” according to the report.