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February 24, 2005
Tale of Two Reports: Sustainability Yearbook Compares Extra-Financial to Financial Reporting
    by William Baue

Published jointly by Sustainable Asset Management and PricewaterhouseCoopers, the yearbook shows how adding extra-financial data to a financial report increases buy recommendations.

The Sustainability Yearbook 2005 released earlier this month by socially responsible investment (SRI) research firm Sustainable Asset Management (CPLCB.CO), a global medical devices producer with award-winning financial and extra-financial reporting.

PwC edited all the non-financial information out of Coloplast's report to create a typical financial report, then gave different investment analyst teams copies of either the original context-rich report or the pared-down report. Given only two hours, each team had to forecast revenues and earnings, make a buy or sell recommendation, assess the company's relative risk, and give a rationale for their recommendations. The more expansive report yielded lower revenue and earnings forecasts than the truncated report.

Hypothesis disproved? "Not really," PwC answers.

"Despite the lower forecasts, 60 percent of the analysts with more complete information recommended buying the stock," PwC continues. "By contrast, nearly 80 percent of the analysts with less complete information recommended selling the stock."

In other words, the financials alone paint a picture of overvaluation warranting an offload, while the bigger picture reveals latent value worth capitalizing on. The example illustrates how companies can gain from extra-financial reporting. Shareowners stand to gain too from more comprehensive knowledge of intangible assets that can create value.

Both SAM and PwC also stand to gain from demonstrating the value of extra-financial reporting, as both have a stake in the growth of so-called corporate sustainability practice and reporting. The yearbook introduces both organizations' approaches.

SAM takes a secular approach to sustainability that does not address ethical or ecological implications but rather holds that social and environmental challenges present both risks companies can manage and opportunities they can seize to create competitive advantage. SAM manages the Dow Jones Sustainability Indexes (DJSI), a set of global SRI benchmarks.

PwC takes a very broad approach, providing consultation on how best to communicate extra-financial issues through its ValueReporting Framework. The ValueReporting Framework comprises four categories: market overview, strategy and structure, managing for value, and performance. Environmental, social, and ethical issues explicitly factor into only the performance category.

So neither organization promotes sustainability in its strictest definition of operating within the world's carrying capacity. However, both firms provide important support for corporate movement in the direction of sustainability.

The bulk of the yearbook provides overviews of sustainability performance in the 60 industry sectors SAM covers, assessing 1460 companies, more than a third (542) of which actively filled out SAM's questionnaire. The overviews include a narrative describing industry driving forces, industry-specific criteria, a list of companies qualifying for inclusion in SAM's investment universe, and industry-level results of SAM's Corporate Sustainability Assessment.

These final results are broken down into best, lowest, and average scores as well as by economic, environmental, and social dimensions. For example, the aluminum industry fared particularly well, with the best score breaking the 80 percent barrier, the lowest score (of qualifying companies) almost reaching 80 percent, and the average score of all assessed companies in the universe breaking 60 percent. However, the number of companies assessed was only four, with only one of those failing to qualify for the SAM universe.

On the other end of the spectrum, SAM assessed 92 banks that earned an average score of just more then 40 percent. Of these, less than half (39) qualified for investment, with the best score reaching almost 80 percent but the lowest score amongst qualifiers just surpassing 40 percent.

The yearbook also includes in-depth examinations of three sustainability issues: corruption and bribery, human capital, and water. The corruption and bribery profile, based on data from 979 companies across all economic sectors and regions assessed by SAM in 2004, showed that almost three quarters (74 percent) of companies address bribes in their business principles in some form. However, only a little more than half (54 percent) of the policies address direct or indirect political contributions, and less than a third address charitable contributions or sponsorships.

"[T]he latter can be used as subterfuge for bribery and must be covered by the business principles," SAM states. "To counter corruption, transparency is a prerequisite."

However, only 13 percent of the companies publicly disclose their contributions and sponsorships, and only 10 percent disclose their political contributions. Moreover, SAM research reveals scant coverage of corruption and bribery issues along the supply chain.

"[T]he 'Achilles heel' for approximately 80 percent of all companies analyzed are the supply side and joint ventures," SAM states. "With regard to the latter, most of the companies only start implementing policies for joint ventures when their stake is greater than 50 percent, even though past cases have demonstrated that a company can already suffer a reputation damage from a minor stake."


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