THE FUTURE OF FINANCE BLOG

Book Review: A Clarion Call for Corporations to Implement Integrated Value Reporting

December 22, 2009

One of the greatest obstacles to the rechanneling of financial flows toward investments that serve a more just and resilient economy is what can only be called the primitive state of corporate integrated value reporting. It is now of course common practice for companies to produce sustainability or CSR reports alongside their financial reports. And a handful of companies are now beginning to issue their financial results and CSR reports under one cover. But in their book One Report, Robert Eccles and Michael P. Krzus have issued a clarion call for companies to embark on something far more ambitious and transformative: collecting, analyzing and presenting their financial and nonfinancial data in such a way that their interrelationship is transparent to all stakeholders. Eccles and Krzus maintain that a corporation that produces One Report as defined in this more dynamic sense, sends a clear signal to all stakeholders that it is “taking a holistic view“ of their interests, even as those interests may, depending on the timeframe, compete with one another. “One Report challenges management to be much more granular about how they are ‘doing well (for shareholders) by doing good for stakeholders,’” say the authors. “One Reporting” also demonstrates a company’s serious commitment to “continuous improvement” in the integration of its financial and sustainability results, they maintain. But most critically, this kind of integrated value reporting begins to provide a powerful asset allocation framework and discipline for both companies and their investors as they grapple with assessing the complex tradeoffs and payoffs when companies invest in sustainable practices and initiatives.

Eccles, a member of the faculty of Harvard Business School, and Krzus, a partner with Grant Thornton in its Public Policy and External Affairs Group, highlight the small but growing universe of companies now aspiring to produce One Reports. These include the Danish biotech company Novozymes, which started producing One Report in 2002 and Novo Nordisk, which follows the Global Reporting Initiatives’ G3 Sustainability Reporting Guidelines and actively engages its stakeholders via an interactive web game called Enviroman, to assess the often tough tradeoffs the company faces in attempting to curb its carbon emissions. The Brazilian cosmetics company Natura began issuing One Report in 2004 and has created a “wiki” that allows customers and other stakeholders to dialog with the company on issues relating to sustainability of its products and processes. The Van Gansewinkel Group, a privately owned company based in the Netherlands that turns garbage into energy and which is looking to launch an IPO in the near future, adopted One Report not only for its internal management value but to prepare itself for the level of transparency that it expects will soon be required of all public companies. In 2009, United Technologies Corporation was the first of the 30 members of the Dow Jones Industrial Average to publish One Report. In reviewing the state of nonfinancial reporting today, the authors note that more and more companies are reporting key performance indicators (KPIs) of sustainability. For example BMW is now reporting its progress in reducing water consumption, disposed waste, and volatile organic compounds per vehicle produced. Using a methodology developed by the European-based consulting group Sustainable Value, a 2003 study of the auto industry’s water use suggests that BMW’s water efficiency measures created 3 billion Euro in value based on the difference between its profits of 923 Euro per cubic meter of water consumed and the industry average of 96 Euro in profits per cubic meter of water consumed. Ricoh, the Japanese copy maker, which does not yet produce One Report, has nonetheless established its Year 2050 Extra-Long-Term Environmental Vision based on “a perception that advanced nations need to reduce their environmental impact to one-eight of the fiscal 2000 levels by 2050.” Ricoh has committed to reducing its greenhouse gas emissions by 30 percent from fiscal 2000 levels in 2020 and by 87.5 percent by 2050. The few companies that are producing One Reports have a distance to go before they have achieved true integration of their results. Eccles and Krzus point out that in the case of UTC, for example, “what is missing on these pages is a more specific argument for exactly how operations and sustainability objectives are related to each other, along with metrics providing the evidence that they are.” The authors also note that this is true of most companies that practice One Reporting, and this represents the “single greatest challenge” to truly integrated reporting. The real essence of One Report is in describing what management believes to be the relationships between key financial and nonfinancial metrics,” say Eccles and Krzus. They note that according to a 2008 KPMG CSR survey only 16 percent of G250 companies attempted to quantify “the value of corporate responsibility performance specifically for their analysts and

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investor stakeholders.” The authors say that in order to provide this kind of analysis in a meaningful way companies need to marshal considerable internal resources to answer three key questions: (1) which ESG topics represent opportunities to improve financial performance? (2) which ESG topics represent risks and cause spending to protect against risk that would erode shareholder value? and (3) which are costs to shareholders that the company will incur to create value for stakeholders? As they note in each case these questions may be answered in different ways depending on the timeframe. The movement to promote standardization in integrated value reporting is being supported by the International Integrated Reporting Committee, a partnership of the Prince’s Accounting for Sustainability Project (A4S) and the Global Reporting Initiative (GRI), created in August 2010. The IIRC’s website invokes the statement of The Prince of Wales that we are “battling to meet 21st century challenges with, at best, 20th century decision making and reporting systems.” The IIRC’s remit “is to create a globally accepted framework for accounting for sustainability: a framework which brings together financial, environmental, social and governance information in a clear, concise, consistent and comparable format. The intention is to help with the development of more comprehensive and comprehensible information about an organization’s total performance, prospective as well as retrospective, to meet the needs of the emerging, more sustainable, global economic model.” Interesting online peer-to-peer discussions on the topic of integrated value reporting are also taking place at networking sites like Integrated Value on Linkedin. Eccles and Krzus admit that integrated value reporting is a new idea and it is possible to anticipate that it will meet with resistance from some quarters of the sustainability community. For example, they suggest, critics may argue that integrated reporting will potentially undermine certain corporate sustainability initiatives because it “reinforces companies acting only for ‘instrumental or ‘utilitarian’ reasons and not for the common good in and of itself.” As a result companies may be reluctant to implement sustainability measures that might be revealed through the integrated report to be destructive of shareholder value, particularly when viewed over a short-term horizon. However, the authors counter-argue that, with or without an integrated report, management will often have to make difficult choices when over the short-term shareholder and other stakeholder values are at odds. Integrated reporting will serve to assist management in making those decisions in a more informed way, the authors maintain.

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