…or should the role be replaced by a ‘Chief Value Officer,’ as suggested by Marga Hoek in her new book, New Economy Business? A CVO role would focus on broader value creation and is responsible for integrated reporting and integrated thinking within the organization.
Many voices are suggesting we rethink our form of capitalism, and in this wake the groundswell for the topic of Integrated Reporting as proxy for Integrated Thinking is ever increasing, and new momentum was added in recent weeks:
Larry Fink — CEO, Blackrock — world's largest asset management company
Larry Fink recently wrote a letter to the chief executives of S&P 500 companies and large European organizations stating ‘…one reason for investors’ short-term horizons is that companies have not sufficiently educated them about the ecosytems they are operating in, what their competitive threats are and how technology and other innovations are impacting their businesses.’ He continued asking ‘…every CEO [to] lay out for shareholders each year a strategic framework for long-term value creation.’
Sandra Peters, Head of Global Financial Reporting Policy at CFA Institute, responded by stating, ‘Efforts by the International Integrated Reporting Council (IIRC) to develop a framework for reporting value creation seem very much in-line with what Mr Fink is suggesting.’
Marc Benioff — CEO, Salesforce — the ‘world’s most innovative company,’ according to Forbes
From Marc’s blog: ‘The business of business isn’t just about creating profits for shareholders — it’s also about improving the state of the world and driving stakeholder value. Businesses must focus on serving the interests all stakeholders — customers, employees, partners, suppliers, citizens, governments, the environment and any other entity impacted by its operations.’
Paul Polman — CEO, Unilever
Paul recently endorsed Integrated Reporting by stating ‘…businesses face a series of new imperatives — social, human, environmental, financial — and Integrated Reporting helps to put them in context.’ Unilever is one of over 1,000 businesses globally to be guided by the principles of Integrated Reporting and integrated thinking.
Bill McDermott — CEO, SAP — global market leader in enterprise application software
‘For those among us that dream of leading our companies toward economic, environmental, and social sustainability, Integrated Reporting is a key part of the plan that will get us where we need to go.’
The timing here is important. In Europe, for example, the new EU directive PE-CONS 47/14 — requiring around 6000 European organizations to disclose non-financial information — will go into effect in 2017. The EU commission added an amendment stating that ‘…through adopting Integrated Reporting, businesses can go ‘a step ahead.’ '
The above quotes are indications that tracking and disclosing ESG performance to create short-, mid- and long-term value is essential. It recognizes that businesses draw from 6 capital forms (as defined by the IIRC) and produce output for each of them. With ESG becoming an essential aspect of business management and investor analysis, an Integrated Report, if done right, represents ’a concise communication about an organization’s strategy, governance, performance and prospects leading to the creation of value over the short, medium and long term.’
But Integrated Reporting is only meeting its purpose if used as a proxy to demonstrate integrated thinking and decision making within the organization itself; away from a stand-alone sustainability strategy to a holistic business strategy that is sustainable over the long run.
Bob Massie from Sustainable Solutions Lab, in his new article ‘Welcome to the ESG Evolution,’ argues that we can only get there by recognizing that businesses draw from many forms of capital and how value should be understood broadly across – and the fact that the deepening understanding of how value is created ‘becomes unstoppable.’
Shifting Investor Perspectives
The narrative above is not necessarily new. What is new is the building momentum and the shift within the investor community. A few examples that indicate that we are crossing the chasm:
A new study from Stanford University and the Universities of Auckland and Pretoria shows the positive association between Integrated Reporting and both stock liquidity and firm value. South Africa is now in its 5th year of the Integrated Reporting mandate, and the data used in this study show a higher market value based on two factors:
- Investors revising their estimates for future cash flow because of better understanding of an organizations materiality and connection to strategy and business model through Integrated Reporting
- Managers making better decisions base don integrated thinking as a result of their compliance mandate
Next Generation Management, the London-based investment management firm founded by Al Gore and David Blood, has long advocated that companies should end quarterly financial reporting and start producing integrated reports. Their holistic, design-oriented approach to sustainable investing showed 12% returns recently, ‘…significantly beating the average for global-equity managers of about 7% annually.’
Arabesque Management, the Anglo-German investment management firm, was recently described as the 'A Tesla of finance.’ Arabesque integrates environmental, social and governance data with quantitative investment strategies. Central to Arabesque’s investment process is the integration of non-financial ESG information into fundamental and quantitative financial models based on ‘... providing a portrait of the future of a company’s ability to generate cash flow and profits.’
Osmosis, a UK-registered Investment Management LLP, developed their own proprietary MoRE (Model of Resource Efficiency) assessment methodology based on an organizations natural resource efficiency. The theory behind the model is that the characteristics of strong management is reflected in the focus on long-term economics, environmental and social sustainability. One theory baked into the methodology is that the efficient use of energy and water, and the minimization of waste are proven economic indicators of an organizations efficiency leading to improved financial returns. Osmosis believes that it can identify those businesses by objectively and quantifiably identifying sustainable behavior in the management and culture of an organization.
The examples above are just a few representative examples of an observed increasing number of asset managers leveraging ESG-related metrics for investment decisions, and shows the increasing role of Integrated Reporting in this context.
Eumedion, representing the interest of institutional investors in the Netherlands, reported recently that more than a third of Dutch listed companies are working towards the adoption of Integrated Reporting.
If you are representing an organization that has not spend time thinking about these trends, this might be the right time to get started. In a world that becomes more and more transparent, every organization needs to report not only the risks to their shareholders, but to all stakeholders and the rest of society.
Many see the US market lagging behind in this thought process, but maybe its time for the leaders across all industries to proactively get more engaged in order to to stay relevant in a shifting landscape.
And to be clear: Existing SEC rules are broad enough to mandate US companies to disclose sustainability information. Many argue that US companies already have an obligation to disclose material sustainability issues to meet existing SEC ruling.
‘Integrated reporting is where an organization explains how it is going to create value. It is a concise communication of value. It explains how a company will be a viable thriving entity in the short, medium and long term. It is not just about financial profit.’ — Paul Druckman, CEO, IIRC
Full disclosure: I am an associate of the IIRC and part of the www.fronesys.com advisory team.