The Principles for Responsible Investment (PRI) include among its commitments the undertaking by signatories that they will incorporate ESG issues into their practices and seek appropriate disclosure on ESG issues by the entities in which they invest. One practical illustration of this, not to be underestimated, is to simply ask investee entities during engagements: Do you do integrated reporting?
Over the last three years I’ve worked with asset manager Pury Pictet Turrettini (PPT) in the engagement of companies of the Cadmos Funds (Swiss, Europe and emerging markets). We applied the Buy & Care investment strategy of this Geneva-based PRI signatory, which among others is based on the principle of systemic engagement with management. Since 2017 we applied a new methodology as part of our integrated investment analysis, developed by PPT with the consulting firm Brugger and Partners. This involves assessing companies on key material topics, based on our analysis of their disclosures. Our analysts among others examined any reports – annual, sustainability and integrated – published by each company in the last year.
Companies disclose information through various vehicles. Some have their misgivings about the usefulness of any form of annual report. An illustration of using alternative vehicles was shown in August 2015, when on Black Monday global stock markets panicked over China. Apple CEO Tim Cook conveyed material information via CNBC television when responding to an email from their Mad Money programme host on implications for Apple. On top of emails going public and various other disclosure vehicles, the business performance information value chain include a whole range of actors from assurers and aggregators to researchers and raters before you eventually get to end users. Yet some form of an annual report remains a foundational document, and for the legal profession that Uber-document tends to be the statutory filing.
For those of us more interested in strategic developments and a long-term perspective on how a company creates value, the integrated report represents an ideal model that gives a synthesis or umbrella view of the health and direction of the enterprise. This umbrella function of the integrated report has been acknowledged by the International Federation of Accountants. But how can the quality of that integrated report be best assessed? What is the level of integration behind the report, in terms of processes, systems and governance?
In interpreting the analysis of various listed companies of the Cadmos funds, we considered various degrees of integration in reporting. Looking at what companies publish, the options range from publishing only a conventional annual report with some non-financial performance information online, to publishing an annual report and sustainability report without connection between the two, to publishing a combined report or annual report with some ESG-thematic chapters in it, to eventually the publication of an integrated report that among others makes the connection between use of different capitals in value creation. What makes a quality integrated report remains work in progress, for example assessed with reference to the core principles and content elements of the <IR> Framework.
What struck me in leading the investor engagements with companies, building on our assessment of integration, is simply asking the question: Why are you not doing integrated reporting? I have seen over recent years how posing the question has led some listed companies to undertake a process of developing their first integrated report. What makes the impact more powerful of course is if the question is asked to a group of managers from different departments (e.g. investor relations and sustainability). This is a simple but critical role that one would expect of responsible investors, in particular those interested in integrated investment analysis. It is a matter of influencing meaningfully by asking the right questions.
Dr CT van der Lugt is Senior Associate of BSD Consulting (Zurich) and Utopies (Paris) as well as Senior Research Fellow at the Centre for Corporate Governance at Stellenbosch University Business School (Cape Town). He leads content development for <IR> training provided by BSD as IIRC Global Training Partner.