Evolution
of
responsible
business

The implications for sustainability reporting - from burden to business as usual

With responsible business firmly in the mainstream but audiences often sceptical, how is it influencing reporting and how might it evolve?


This article initially appeared in Evolution of the Annual Report, Communicate magazine.

 

The evolution of responsible business and the implications for reporting

Responsible business is firmly a mainstream business concern and frequently driven not only from the Chief Executive down but also the grass-roots up. What was once seen as an add-on or, worse, an unacceptable obstacle to driving the next quarter’s returns, is now widely seen as long term value enhancing.

Few businesses so far have followed the lead of the likes of Unilever and National Grid in moving away from quarterly reporting. But many, perhaps most, large businesses are seeking to tell their responsible business story more effectively- especially through core communications like the annual report.

Responsible business drives return

Responsible business correlates strongly with superior financial performance in the overwhelming majority of studies. McKinsey cites evidence[1] indicating almost 9 out of 10 academic studies show that companies with high ratings for Environmental, Social and Governance performance (known as ESG) outperform the market in both the medium and long term. So businesses’ desire to better communicate their approach to responsible business is far more than just ethical window dressing; it’s material to their value.

There remains a gap between expectations and ability to respond

Despite the increasing expectations on businesses to address and report on responsible business issues, there remains a gap between expectations and businesses’ ability to respond. PwC’s recent CEO survey[2] highlighted overwhelmingly that CEOs are prioritising long term over short term profitability and that they are expected to address ‘wider stakeholder needs’. Both statements had over 80% agreement.

However, almost half also agreed that additional costs are a barrier to addressing stakeholder expectations. A third cited conflict between stakeholder interests and financial performance expectations.

Investors care about responsible business-and incentives may be the key

In parallel with its CEO survey PwC sought the views of over 400 investment professionals[3] across 18 countries. Almost 2 in 3 (63%) investors surveyed defined business success by more than financial profit. But almost half (49%) indicated that misaligned performance incentives are a barrier to responding to stakeholder expectations. In contrast, fewer than 1 in 5 (17%) of CEOs cited this.

Further legislative changes on responsible business reporting are unlikely in the short term

Legislation has attempted to provide improved disclosure and comparability on issues such as the gender pay gap and human rights. Given the amount of the UK Government’s time that will be dedicated to weighty matters of state in the two years following triggering of Article 50 (likely to be March 2017) we do not expect further major changes in reporting legislation within that period. While anything could change at the end of that period, we expect corporate reporting to be relatively low down the list of priorities.

The FRC seeks greater transparency on culture

The Financial Reporting Council, however, has been seeking to drive forward more effective reporting on the impact of culture through its July report on corporate culture and boards. The report observes that 80% of total corporate value is now accounted for by intangibles such as intellectual property, customer base and brand (compared with 20% 40 years ago). The report provides 7 key observations to drive better connections between purpose, culture, strategy, measurement and incentives. In short the FRC recommends that leaders and boards need to be accountable in their approach, rigorous in their measurement and robust in their leadership and incentivisation.

Given feedback on the report will inform the FRC’s Guidance on Board Effectiveness in 2017, now would seem a good time for reporters to review their approach to responsible business disclosure in their annual reports. Of course, if reporters seek to discuss ideas I would love to hear from you at [email protected].


 

[1] http://www.pwc.com/gx/en/ceo-agenda/ceosurvey/2016/investor-survey.html

[2] http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-insights/profits-with-purpose-how-organizing-for-sustainability-can-benefit-the-bottom-line

[3]http://www.pwc.com/gx/en/ceo-agenda/ceo-survey-2016.html