By Guest Author: Dr Rory Sullivan

There is growing support for the idea that companies should produce ‘integrated reports’ that explain how factors such as climate change, resource use or human rights will affect their current and future performance. The argument is that a more holistic approach to reporting – where companies combine their annual report with their corporate responsibility or sustainability report – would provide benefits to companies and to their investors by helping properly embed sustainability-related issues into companies’ decision-making and encouraging companies and investors to consider business strategy and performance in the round rather than solely focusing on short-term financial performance.

While the argument in favour of integrated reporting is clear, it is important to be realistic about the actual contribution that integrated reporting will make to the creation of more sustainable businesses.

First, integrated reporting is unlikely to change investors’ approaches to valuing companies. The reality is that no matter how high quality the information provided by companies, investors are likely to continue to pay little or no attention to this data. Most analysts pay little attention to any form of narrative reporting and are particularly sceptical about the investment value of any reporting on social and environmental performance, seeing much of the information in narrative reports as ‘irrelevant, “useless” or worse’. Moreover, given that the vast majority are incentivised to focus on short-term performance, most analysts do not believe that additional data on long-term strategy or sustainability performance will enhance their ability to make investment decisions over the time-frames that are of interest to them.

Second, there is a risk that a focus on integrated reporting will divert companies from providing information that is relevant to wider stakeholders, not just investors. In fact, there have been criticisms of a number of companies producing integrated reports on exactly these grounds, i.e. that they do not provide sufficiently granular or detailed information for stakeholders other than investors.

Third, integrated reporting may actually stall rather than encourage consideration of environmental, social and governance (ESG) issues into investment decision-making. The problem is that investment integration (‘enhanced analysis’) remains very much in its infancy. It is therefore unsurprising that investors have started with relatively simple measures of corporate responsibility performance (e.g. does the company produce a corporate responsibility report or not) and with an almost obsessive focus on those aspects of performance that are most obviously financial material (e.g. the implications of emissions trading for European electricity utilities). We have, to date, seen relatively little attention being paid to many important aspects of corporate responsibility performance, either because indicators have yet to be developed, because the precise relationship between these issues and company performance not been established or because the quality and consistency of corporate reporting on environmental and social issues varies a great deal, from sector to sector and from company to company. This is starting to change. Investors are starting to pay greater attention to the quality of information being provided by companies and are starting to explore how corporate responsibility information can be used to assess companies’ quality of management, to benchmark companies on the basis of their management systems and processes, and to compare companies on the basis of their environmental or social performance (e.g. greenhouse gas emissions per unit of turnover).

In conclusion, in the enthusiasm to encourage integrated reporting, we run the risk that investors become less rather than more interested in environmental, social and governance issues. The reason is that integrated reporting is likely to see companies pay less rather than more attention to providing comprehensive and high quality data on their corporate responsibility performance. Investors, in turn, are likely to pay less attention to corporate responsibility issues because of the inevitably limited data sets that will be provided in integrated reports, and because the data provided elsewhere are likely to be inadequate for the purposes of investment decision-making. Perhaps more concerning is that integrated reporting is likely to limit rather than enhance the potential for investor engagement to drive improvements in corporate responsibility performance; without high quality data it is difficult to make meaningful comparisons between companies or to hold companies to account for their performance.

About the Author

Dr Rory Sullivan is the author of Valuing Corporate Responsibility: How Do Investors Really Use Corporate Responsibility Information? (Greenleaf, 2011).  He is a Strategic Advisor to Ethix SRI Advisers and a Senior Research Fellow at the University of Leeds. Until 2009 Rory was Head of Responsible Investment and Insight Investment Management.

This is an updated version of an article – ‘Is Integrated ESG/Financial Reporting Really the Future?’ – published on Responsible-Investor.com on 25 March 2011.

Last Updated: 24 August 2011