Co-operative Financial Services (CFS) is a medium-size banking and insurance business with its roots firmly in the north of England and the 19th century. But in one respect at least it is a 21st century world leader. In a ranking of firms’ non-financial reports, CFS came out top, ahead of second-placed Novo Nordisk, a Danish drug company, and BP, the British oil giant. The ranking, published this week, has been prepared by the United Nations Environment Programme and SustainAbility, a consultancy, “in partnership with Standard & Poor’s” (S&P), the first time a credit-rating agency has been involved.
In their non-financial reports, firms volunteer an overview of their “environmental and social impact” during the previous year. Since the last such ranking, in 2002, many more firms have chosen to produce non-financial reports. At the same time, it is claimed, their quality has increased — as, less happily for the environment, has their length. British American Tobacco’s (BAT) runs to some 200 pages.
What was, ten years ago, a quirky, voluntary fringe practice is now becoming mainstream — in Europe, at least. Only two American firms are in the top 20 (HP and Ford), but several of Europe’s biggest businesses are there (BP, BT, Royal Dutch/Shell, Unilever). The British government is proposing that big quoted firms be required to publish some form of such accounts annually. It had intended to introduce the requirement next year, but last month was persuaded that businesses need more time to take on board the implications.
The practice started largely in response to pressure from non-governmental organizations (NGOs), which claimed, often contentiously, that many firms lacked social and environmental responsibility.
Yet even as NGOs are becoming more cynical about what firms are producing, some investors now think it is (or could be) a valuable source of information, such as about business risks in a swathe of areas not included on standard financial balance sheets. “We are not social activists; we’re independent risk assessors,” says George Dallas of S&P. The information in non-financial reports “contributes to building up a company’s risk profile.” And although it has still not been convincingly demonstrated that good environmental and social practices create value for shareholders, it is clear, says Mr. Dallas, that bad ones can destroy it. Exxon’s cavalier attitude to the oil spillage from the Exxon Valdezdrove customers away from its pumps.
The style and content of non-financial reports vary greatly. Some firms spend much time and effort giving out information of uncertain value. Among its targets for this year, for example, CFS aims to maintain its CO2 emissions from energy use at less than 0.7kg per customer account — a curiously meaningless statistical correlation.
Others undermine their publication’s credibility by saying one thing and doing another. BAT, for example, says, “We believe that relevant and meaningful information about our products should continue to be available.” Yet the firm makes it very difficult to gain access to the 6m-7m pages of documents about its marketing that litigation by the state of Minnesota forced it to put on the public record.
Currently these can be viewed — by appointment only — at a depository in Guildford, a town some 30 miles south of London. At the end of October, a five-year effort to get around this obstruction, led by the London School of Hygiene & Tropical Medicine, the University of California and the Mayo Clinic, ended with the launch of an independent website where about 1 million pages of documents can be viewed.
The only tool standardizing non-financial reports is the Global Reporting Initiative (GRI), a broadly supported checklist of dozens of questions to which almost all of the best reporting firms pay lip service. Rob Lake, head of socially responsible investment engagement and corporate governance at Henderson Global Investors, says “the GRI framework is a good one”. But firms can (and do) choose carefully which of its questions they answer.
One which particularly interests investors such as Mr. Lake is the GRI’s request for a geographical breakdown of taxes paid. (Whether most shareholders really want this made public, given the hostile publicity that low bills might attract, is debatable.) Yet only Anglo-American attempts to provide such a breakdown. BAT, which goes through the GRI list methodically, bluntly states its tax data “are not reported by country”, and leaves it at that. Yet it is happy to report how many cubic meters of water it uses for every million cigarettes it makes (7.84, if you’re interested).
The only audit performed on these reports is an “assurance statement”. Many of these are written by the army of consulting firms that has arisen in response to this new business opportunity. CFS uses four different such firms to “provide audit and commentary” on its 2003 report.
The big accounting firms are now developing this side of their business. BP’s assurance statement is prepared by Ernst & Young, the auditor of its financial accounts. Despite the suspicion that Ernst & Young might not wish to antagonize such a big audit client, its report is in places critical. “We consider that BP could have covered the following subject areas in more depth,” it says, listing among other things the adequacy of its pension provision for employees, and legal challenges over its $3 billion pipeline from Baku on the Caspian Sea to the Mediterranean port of Ceyhan.
The art of non-financial reporting is evolving and “evolution is always messy”, says John Elkington, the chairman of SustainAbility. Firms have been free to disclose only what they wished. But if investors follow S&P in recognizing “the importance of non-financial disclosure in the overall assessment of a company’s risk profile”, that may not be good enough.