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November 05, 2004
Sustainability Reporting Improves, But Falls Short on Linking to Financial Performance
    by William Baue

A new benchmarking survey correlates the top 50 corporate non-financial reports to credit ratings, but reports themselves fail to link financial and sustainability performance.


In 1494, two years after Columbus discovered the so-called "new world," Fra Luca Pacioli (the "Father of Accounting") published the first financial report--a "ledger" of assets (receivables and inventories), liabilities, capital, income, and expense accounts. Five hundred years later, John Elkington coined the term "triple bottom line" to describe social, environmental, and financial accounting, and his sustainable development think-tank, SustainAbility, released its first survey benchmarking non-financial reporting.

Today, SustainAbility releases its sixth such benchmarking survey, Risk & Opportunity: Best Practice in Non-Financial Reporting, with longtime partner the United Nations Environment Programme (UNEP) and new partner Standard & Poor’s (S&P). The survey ushers in a new era, predicting the full integration of sustainability and financial reporting by 2010.

"[T]he convergence of the financial and non-financial worlds is now under way," the survey states. "But the bad news is that most companies still fail to identify material strategic and financial risks and opportunities associated with the economic, social, and environmental impacts captured by the 'triple bottom line' agenda."

Looking to jumpstart this process, the survey adds a new element explicitly linking sustainability reporting performance to financial performance. After performing its usual benchmarking of the top 50 non-financial reports in the world, the survey correlates the S&P credit rating of these companies to examine the financial performance of the best sustainability reporting performers.

"The Holy Grail in all this would be to find a direct link between a company's financial performance and its competence in sustainability reporting, hopefully with a link back to its governance structure," said Peter Zollinger, executive director of SustainAbility. "Frankly, we are still a long way off."

"However, when we looked at the S&P credit ratings of our Top 50, we did discover that the average rating was A- for the 41 (82 percent) with a credit rating, compared to the average credit rating of B- for companies in general," he explained. "And all our Top 50 companies with ratings beat that average rating."

While the survey cautiously makes this link (clarifying that there is insufficient evidence to call it causal), it chides companies for failing to address this link more comprehensively in sustainability reports.

Another new addition to the survey is a "materiality multiplier," which adjusts ratings of the Top 50 sustainability reporters based on their practices and processes for identifying issues that may prove material--in other words, likely to affect investment decisions. The explanation of how the tool functions is quite convoluted, but assuming the rationale makes sense, the results are sobering: the scores of the entire top 50 drops by 9 percent, and the ranking of companies is shuffled significantly.

Refocusing on the original intent of the survey, to benchmark non-financial reporting against 48 criteria in categories such management quality, social and environmental and economic performance, and accessibility and assurance, the results are more encouraging.

Top-rated sustainability reporter Co-operative Financial Services (ticker: CPBB_p.L) earned a 71 percent score to become the first-ever company to break the 70 percent barrier. The remaining reporters in the top seven--Novo Nordisk (NVO), BP (BP), British American Tobacco (BATS.L), BT Group (BTY), BAA (BAA.L), Rabobank (RABT.AS), Rio Tinto (RTP), and Shell (RD), are all based in Europe.

HP (HPQ), the top-scoring North American company, ranked eighth. New Zealand-based Manaaki Whenua, the top-scorer from the Asia-Pacific region, ranked fifteenth. Brazil-based Natura, the highest-ranking South American company, came in sixteenth. South Africa-based MTN Group ranked the highest of African companies, placing twenty-fifth.

The survey assesses that status of its ten predictions from its 1996 benchmarking survey, and finds significant progress in the transition from sustainability reporting as a public relations exercise to a function of corporate governance. However, the survey reports that many corporate boards still see a disconnect between robust governance and progressive sustainability performance.

The aurvey ends by outlining ten challenges facing sustainability reporters through 2010, including language clarification, better Internet reporting, continued focus on corporate governance, and tightening of standards, codes, and norms.

"The crux of the matter will be that these companies will increasingly try to integrate their financial and non-financial thinking and decision-making, in order better to understand and manage the dynamics of both," the survey concludes.

 

 
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