There was a time when corporate responsibility information was considered strictly “non-financial” and not relevant to include in a company’s annual financial report. The stand-alone corporate responsibility or sustainability report as we know it today was born from those beliefs. But times are changing.
As KPMG’s 2017 Survey of Corporate Responsibility Reporting shows, more than three quarters of the world’s largest 250 companies now include at least some “non-financial” information in their annual financial reports. And where the largest firms lead, others inevitably follow. KPMG’s research also suggests that some countries are enthusiastically adopting the concept of completely integrated financial and “non-financial” reporting, in many cases nudged along by regulation or stock exchange guidelines. Over the last two years, we’ve seen big increases in Integrated Reporting in Mexico, Spain, Brazil and Japan, for example.
Furthermore, the conventional lines between “financial” and “non-financial” are not only beginning to blur, but in some instances are breaking down completely. For example, it’s important to recognize that the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) apply to the disclosure of climate risk in annual financial reports and not in corporate responsibility reports.
I believe this is the start of a shift that will gather pace in the next few years, even though our survey found that around three-quarters of companies worldwide don’t currently acknowledge climate change as financial risk in their annual reports, let alone provide investors with an indication of how value is at risk . The financial community will increasingly acknowledge that issues previously considered “non-financial” have clear potential to have a material impact on financial performance and value creation in both the short and long term. In time, I expect investors to ask for risk disclosure in relation to other environmental and social impacts such as water scarcity and human rights as these also come to be seen as financial rather than non-financial issues.
My message here is directed at Chief Financial Officers at corporations: the merging of financial and “non-financial” reporting will accelerate quickly in the next few years and it is the finance teams that will be expected to deliver the disclosures. The first step to effective disclosure is for finance teams to gain a sound understanding of the material environmental and social issues that have potential to affect the company’s financial performance.Most companies have resident experts who can help with this, namely their sustainability teams. So increased dialogue and collaboration between the finance and sustainability functions – which are too often separate and siloed – will be critical.
It is all about impact not just statistics
Traditional corporate responsibility reporting has focused on reporting statistics such as how many cubic meters of water a company has saved, how many tons of carbon it has reduced or how many employees it has sent on training programs. Such statistics increasingly lack real meaning without information on context and impact. The future of corporate responsibility reporting is all about communicating impact, not statistics. Investors need to know what impact corporate responsibility activity has on business performance. How has it helped to reduce risks, unlock opportunities or build capacity for future value creation?
We are also seeing a number of large institutional investors announcing intentions to align investment strategies with the UN’s Sustainable Development Goals (SDGs). Simply linking corporate responsibility activity thematically to the SDGs is not enough; these investors will want to know how companies are contributing to achieving the goals and what the actual impact of those positive contributions is. Similarly, they want to how company activities are exacerbating the challenges the SDGs seek to solve, and what that negative impact is in real terms. Such investment strategies will inevitably require impact disclosure from business.
Added to this, in the responsible investment space, impact investing is a growth area that is increasing pressure on companies to disclose their impacts on society in a measurable and comparable way. So my message to the corporate responsibility, communications and investor relations teams responsible for reporting is to go beyond statistics and explore how to assess and communicate impact. There are many promising initiatives and methodologies that enable companies to identify, assess and value their impacts. I believe there will be significant benefits for those who choose to lead in this field.
José Luis Blasco is Global Head of KPMG Sustainability Services.
Download the KPMG Survey of Corporate Responsibility Reporting 2017 from here.