Leading asset owners say fundamental part of integrated reporting is “unworkable”

Joint submission from major institutional investors

A group of leading global assets owners has combined to say that one of the fundamental ideas behind Integrated Reporting – the notion of nonfinancial ‘capitals’ – is “unworkable”.

A key element of Integrated Reporting, which is being developed to combine sustainability and financial reporting, is the idea that all organisations depend on various forms of capital – not just financial but manufactured, intellectual, human, social/relationship, and natural. It is one of the project’s declared ‘fundamental concepts’.

But some of the world’s leading responsible investment institutions, in a joint submission to the International Integrated Reporting Council, the body which is coordinating the project, say the idea is simply not viable.

“The draft framework seemingly presents value creation as an aggregate value of all the capitals, which in our view is unworkable,” the group says.

They add: “It is unrealistic to expect investors to accept unsatisfactory returns on their financial capital in exchange for positive returns on other forms of capitals, as the draft framework seems to suggest.”

The investors agree that the concept of ‘the capitals’ is helpful in illustrating the “broad sources” of value underpinning companies’ financial performance and that they can have a significant effect on the ability of a company to sustain value over time. However, they add: “But the draft framework should recognize that investors ultimately look for a satisfactory return on their financial capital. Different forms of capital are not completely fungible.”

The investors behind the submission are Dutch pension giants APG and PGGM, AustralianSuper, the California Public Employees Retirement System (CalPERS), the Florida State Board of Administration, South Africa’s Government Employees’ Pension Fund and Railpen and USS Investment Management of the UK.Other institutions such as the BT Pension Scheme, Hermes Equity Ownership Services and Norges Bank Investment Management use identical wording in their own submissions.

APG, Hermes, the GEPF and Railpen are participants in the project’s pilot programme for investors which is chaired by Hermes EOS Chief Executive Colin Melvin.

While supporting the notion of a variety of capitals in principle as a helpful model, the investors say metrics are not well developed and need to be improved.

Indeed, the use of the term ‘capital’ by the Integrated Reporting project in this way has triggered “substantial discussions” within the group – which makes it clear that they still consider it vital that companies operate responsibly.

But the institutions caution against “artificially monetizing” the nonfinancial capitals. “We consider it in most cases implausible to create a mono-causal link between one factor and profit.”

The group’s view is not shared by all investors. The UK’s Local Authority Pension Fund Forum, for example, argues that the different capitals are “fundamental to companies’ value creation”, although it too acknowledges that indicators need to be improved. US sustainable fund manager Calvert Investments reckons they are “a good representation of the key areas that investors need to evaluate”. And Eurosif, the European Social Investment Forum, is very supportive of the concept of capitals suggested by the framework, while Natixis Asset Management said the approach was “relevant and complete”.

The IIRC said it has received 359 submissions and is not yet a position to comment formally on them. But it said: “We accept that challenges, including the ones identified in this submission, have been raised. However, we don’t believe these undermine the central planks of IR.”

The draft was launched in April 16 this year and went out to consultation. It is expected that the final version will be released in December. IR draft framework