Investors want better data

Information about corporate sustainability performance, and how it is reported, has undergone a massive evolution in the last quarter of a century – at least in theory. In practice, the information delivered in company sustainability reports continues to fall short of what investors want.

This is frustrating for investors because it indicates that many companies have still failed to grasp the connection between sustainability and long-term business survival.

The majority of companies – about three quarters of the world’s top 25,000 – still provide no sustainability information, according to Bloomberg Data, leaving investors who are looking for evidence of strategic thinking in the boardroom with little to go on.

The simple lack of information was highlighted by Aviva, which manages assets worth more than €300bn, in its Sustainable Capital Markets Union Manifesto, published in December 2014.

Aviva argues that information is the lifeblood of capital markets, and if the information that market participants rely on is short-term and thin, then in turn these are the characteristics that will define the markets.

Even for companies that do report on sustainability, however, there is evidence of a disconnect between investors’ expectations and what companies consider to be good sustainability information.

Accenture, in a June 2014 study on the Principles for Responsible Investment, found that 57% of CEOs believe that their reports clearly set out their sustainability strategy and its link with business success. The same study found that 38% of CEOs say they can “accurately quantify the business value of their sustainability initiatives”. But only 9% and 7% of investors, respectively, agree with the CEOs’ views.

The key issue for investors is that companies should “better articulate the material value of increased sustainability to their business models and to their competitiveness”, according to Justin Keeble, managing director of Accenture sustainability services Europe. Apart from a few pioneers, such as Novo Nordisk, Philips and SAP, companies are still not making the connection.

Arguably, companies have a lot to get to grips with. Long-standing issues on the corporate agenda, such as managing environmental risks, are being supplemented by newer responsibility issues, such as cybersecurity and data privacy. But companies don’t need to report on everything. Identifying what is material is the first step.

The main gripes of investors, according to François Passant, executive director of the European Sustainable Investment Forum, are that companies provide too little information, provide a lot of non-material information or fail to put the information they provide into context, so that investors struggle to understand the connection with the long-term strategy.

Companies also fail to crystallise what is material into key performance indicators, or if they do, KPIs are hard to compare for different companies or across different time periods. In addition, international standardisation initiatives on material sustainability reporting remain at a relatively early stage.

Passant is in favour of integrated reporting as the answer to the lack of focus on material sustainability issues. Regulatory initiatives will help, such as new European Union rules that from 2017 will require listed companies with more than 500 employees to disclose non-financial information.

The rules are “comply-or-explain”, which should give companies a motivation to identify what sustainability issues are material to them, and should help focus their reporting.