The third panel of the First Annual Sustainability Investment Leadership Conference addressed how investors judge sustainability information when assessing a company’s value. The conversation also covered the quality of reporting and its role in corporate culture.
Data Quantity—and Quality
Karp stressed the importance of the private sector to the global economic recovery and the need for companies to work with investors to formulate “a new social contract for companies that ‘get it’ and aspire to raise the bar for themselves and those around them” through innovation and research into what stakeholders want from integrated reporting.
Turning to Curtis Ravenel, she quoted former Bloomberg CEO Dan Doctoroff’s statement that “the quality of the ESG [environmental, social, and governance] data out there is crap.” Ravenel agreed with the sentiment, if not the phrasing, saying, “I think the difference is that data, as we all know, has become unbelievably accessible. The challenge is making that data actionable or usable.” Both qualitative and quantitative data will need to work together in integrated reporting to present a full, useful picture of total value. “Remember that efficient market theory says that capital will be allocated efficiently given all available information,” he said. “And we don’t have the right amount of information.”
Karp asked Arthur Radin whether, as annual reports have gotten longer, the signal is being lost in the noise. Radin noted that he has written about what he calls “disclosure overload.” “It is expensive and useless,” he said. “I live in fear that we’re doing the same thing with the sustainability reporting.” He characterized current reports as little more than pretty pictures that were unknown or unused by those he knew in the investment community.
Karp followed up by asking whether determining materiality based on industry made sense. Radin agreed: “I think, frankly, we need to step back and start with what is material, what is significant, before we write more regulations.”
Karp then asked Georg Kell about boards of directors’ responsibility regarding disclosure. Kell opined that CEOs increasingly understand that the world is changing with regard to the importance of transparency, natural assets, and governance. “CEOs want their boards to back them in their progressive strategies,” he said, “but often directors of boards are actually very much exposed to short-term pressure. And often it’s the boards that actually hold back CEOs.”
Karp then asked Michael Kraten for examples of boards finding incentives for long-term, sustainable thinking. By way of analogy, Kraten said that management can be steered towards sustainability thinking without using the word “sustainability,” but instead focusing on what they are already worried about.
Karp then asked Jan C. Childress how companies can foster a culture of innovation while dealing with volatility. Childress first noted that European investors have historically been more involved with and receptive to sustainability issues than their U.S. counterparts. Regarding progress in the United States, he said, “In 2012, corporate governance officials were sort of isolated. By 2013, we started to see evidence they were talking to one another. By 2014, they had coalesced, not only within the United States but also with their European counterparts. By 2015, they were having joint meetings with their portfolio managers.”
The Relevance of Reporting
Karp then turned to “greenwashing,” the practice of companies providing token sustainability information or promises that lack depth. Radin remarked that none of the sustainability reports he had seen included assurance reports, making them “often less useful than an ordinary Form 10-K.”
Ravenel added that most sustainability reports are not designed for investors. “I think the integrated reporting movement is trying to move the things that are relevant to the investor community. And I use the term ‘relevant’ more than I use ‘materiality.’ The reason why I think sometimes we narrow ourselves too much around materiality is that it focuses on events in the very near term, really a year. And we don’t know in some cases that this information will be material in the future.”
Karp then asked about companies’ progress in accurately quantifying “prefinancial” sustainability data. Kell was optimistic regarding companies’ devotion to sustainability, saying, “We are dealing with issues the corporate world was not used to dealing with, and now we’re trying to find measurements. The field is messy, but the information progress is phenomenal.”
Kraten stressed the importance of sustainability information permeating the entire corporate culture, saying, “Put the sustainability report down, pick up their annual report. Look at the management’s discussion and analysis, and if you see meaningful sustainability information there, then you can feel much better about it.” He continued, “Look for companies that are doing something that they really don’t have to do, simply because they find it helpful or supportive of their corporate philosophy and mission.”
Childress added, “When I talked about corporations having to take their lumps, sometimes the lumps that we take are purely internal. For instance, our CFO is a very consistent man. He wants to make sure that the numbers are precise and that they will withstand scrutiny. And that is a difficult thing when you migrate from financial reporting to operations and on to environmental health and safety. What’s happening in our company is that all this stuff is starting to become integrated. But it’s not without pain.”
“The challenge is making that data actionable or usable.”
Are CPAs Ready?
A question from the audience concerned the trend of businesses departing from GAAP and whether CPAs are prepared to take responsibility for non-GAAP information, including sustainability data. Radin answered, “I think the accounting profession is in a unique position. We are trusted. This is a real field that we have expertise in. And I think we belong in this field.”
