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.
The continuing rise in prominence of those issues since 2012 suggests that corporations may be able to raise more capital by displaying a convincing commitment to ESG principles. Some companies, like real estate services provider Jones Lang LaSalle, see expanded corporate reporting as a competitive differentiator. To Christie Kelly, the firm’s CFO, expanded reporting is “just a tremendous opportunity” for the firm to add to the perceived value of the company.
Over the past three years, Kelly has been the co-chair of an effort at Jones Lang to integrate its public reporting. Unlike what she sees as the more unified approach of European-based companies, “I don’t see all that coming together in one nice document,” she says, “because we have to deliver a lot of these things at different times.”
Nevertheless, the company wants the entirety of its public reporting to reflect the company’s overriding strategies, values and principles. “Our code of conduct, integrity and transparency report, annual report, the corporate facts [statement] that a salesperson would take to a client — all of that would address the key themes around the premium value drivers in our business and how we measure them,” says Kelly.
Still, Jones Lang resembles many other companies in being a long way from actually putting expanded reporting procedures in place. Until 2013, in fact, proponents of integrated reporting tended to speak in broad generalities, providing scant specifics about how to achieve their lofty goals. In 2013, however, two efforts were launched that could provide corporate executives with significant guidance.
While they might share the same ultimate goal of increased nonfinancial reporting, the two projects couldn’t be more different in focus. In July, the San Francisco-based Sustainability Accounting Standards Board (SASB) announced its intention to provide a bevy of industry-specific standards aimed at buttressing existing U.S. financial statements. In contrast, the London-based International Integrated Reporting Council (IIRC) introduced in December a sweeping, all-industry framework that envisions a report separate from the financials.
While some experts see the two approaches eventually melding into one, it’s hard to see how that could ever happen. Unlike most efforts to add nonfinancial disclosures to financial reporting, SASB insists on working within the existing frameworks of the Securities and Exchange Commission and the Financial Accounting Standards Board. “For us, the integrated report is the 10-K,” Jean Rogers, founder and executive director of SASB, explains in a video on SASB’s website.
Since the 10-K and the 20-F (the annual report for foreign issuers on U.S. stock exchanges) already require “a balanced view of financial and nonfinancial information,” she said more recently, there isn’t any need to look beyond the forms already mandated for public issuers.
Instead, the standards setter, which has been in existence for two and a half years, wants to fill “that accounting infrastructure with the nonfinancial metrics,” she says. For example, the Management’s Discussion and Analysis of a pharmaceutical manufacturer might include three-year trends in the numbers of deaths caused by its products and in the numbers of product recalls along with revenue and expense trends.
Indeed, perhaps the most unique aspect of SASB’s effort is its verticals approach, in which the standards would be differentiated by industry. SASB is thus currently developing separate standards for the reporting of nonfinancial yardsticks for more than 80 industries in 10 sectors. In July, the board released standards for six industries within the health-care sector, and it plans to roll out ones for the financial services, technology and communications, nonrenewable resources, transportation, and services sectors this year.
The specificity of SASB’s guidance could give it more traction among investors and CFOs than that of the IIRC framework, proponents of the sustainability standards think. While corporate executives have been slow to engage in discussions about the IIRC framework, “SASB is a fast conversation with our clients right now,” says Kathy Nieland, the leader of PricewaterhouseCoopers’ U.S. sustainable business solutions practice and a member of SASB’s advisory council.
Once the industry standards are all issued, investors will be able to see what nonfinancial metrics are expected to be reported in a particular kind of business. “They may decide they want you to report that, whether or not the SEC says it’s required,” says Nieland. Further, she adds, a company may find that journalists are “reporting this information, and ultimately you find that you’re not well positioned against your competitors.”
The prospect of a lemming-like rush to disclose could strike fear into the hearts of finance chiefs, however. Although Jones Lang’s Kelly says she’s “impressed” by SASB’s efforts to break down nonfinancial disclosures by industry, she warns that “we also need to be careful that it’s not too much, and that reporting on this doesn’t take on a life of its own.”
In contrast, Kelly, whose company is a member of the IIRC, favors an approach articulated by the council in which corporations choose to make disclosures in a few selected metrics areas rather than be pushed to relay a large number of specific details. Unlike SASB’s standards, the IIRC’s integrated reporting framework doesn’t prescribe specific key performance indicators and espouses management judgment of what to disclose.
Boasting a corporate network that includes PepsiCo, Microsoft and Prudential Financial — but many more non-U.S. organizations — the IIRC wants companies to reveal information about six broadly conceived elements, or “capitals,” of their endeavors: financial, manufactured, intellectual, human, social and relationship, and natural.
Even with such wide latitude in what to disclose, however, U.S. senior executives are likely to continue to balk at the prospect of any more reporting requirements — even if they are voluntary. Over the past 20 years, the average number of pages in annual reports devoted to footnotes and MD&As has quadrupled, according to a 2012 report by Ernst & Young.
If that rate of increase continues, companies will devote more than 500 pages in annual reports to sustainability-related disclosures by 2032. “If I were a CFO,” observes Sam DiPiazza, vice chairman of the institutional clients group of Citigroup and a former chief executive officer of PwC, “I would say, ‘Don’t ask me to disclose anything else.’”