Beyond finance: Coming Clean

Images of grey, bean counting accountants may not seem to mesh with the more colourful world of sustainable business. But the number-crunchers could be crucial to the way the latter is reported – and how seriously the information is received. Investors and the media are often sceptical of companies’ claims to be anything more socially responsible than a profit generator. But as wider social concerns take centre stage, accountants argue that by using their ”hard” number and analytical skills, this seemingly ”soft” side of corporate reporting can be read as more than PR.

Anita Skipper, head of corporate governance at Morley Fund Management, is blunt: ”If you don’t measure it, people who read it don’t really believe it.”

Mike Barber, an audit partner at Deloitte, says: ”This isn’t a fashion fad – businesses that do this well integrate it into their business model.... Companies are getting good at explaining how they think they touch the environment. They’re good at saying what they think they need to do to improve their operations, but the difficulty is expressing that as numerical targets against which they can be measured.”

EU directives now force companies to report on relevant environmental issues and include performance indicators, while the UK Companies Act requires directors’ general duties to include the impact the company has on the environment and local communities. But even in PR terms, sustainable business can no longer be considered a side issue and public perceptions of a company’s acceptance of its wider responsibilities matters. ”Companies have a lot of relationships with consumers – they can be shareholders, employees, customers or people who live near a company’s operations,” says David Christopherson at Black Sun, a corporate reporting consultancy. ”Reputation is a big issue.” A survey by Black Sun earlier this year showed that most companies feel increased transparency in the narratives of their reports had helped boost investors’ and analysts’ understanding of their business.

”Companies will always have their problems but they’re more likely to get the benefit of the doubt if they’re seen to be transparent,” says Geoff Lane, a partner in PwC’s sustainable development team. ”You’ll always have some outliers, of course, but the majority will give them credit for being open.”

A decade ago, specific reporting on sustainable business issues was limited. Five years ago, it had become more commonplace, led by sectors such as mining and oil and gas, which were partly thrust into the reporting spotlight by a range of environmental pressure groups. ”When social and environmental concerns started to become an issue, companies felt it was a lose-lose – that it was about single interest groups – while in fact, it has become more and more advantageous if you can meet expectations on this as it becomes mainstream,” explains Ms Skipper.

According to Black Sun, 48 per cent of the FTSE 100 are moving beyond ”boiler-plate” reporting on the topic and linking their stated values to their overall strategy. But the quality of reporting sustainable business issues, even among big companies, varies, both in terms of what information is included and its value to investors. Ms Skipper says there is confusion about what a company ought to be disclosing, and who it is aimed at. ”Investors, customers, employees – they all want something different, so a company needs to focus on developing a well thought out disclosure plan for corporate reporting around what is material and relevant to it as a company,” she says.

”Companies who are trying will start by saying, for example, that they sponsor an Aids clinic and that they’ve given them $5m. It is a start, but the thing to do is to pull that and their other sustainable business work into something meaningful. It would be a lot better if they could link that to why they’re doing it – there might be a brand or a sales rationale. They need to give that so people understand why it is important.”

Environmental reporting is becoming particularly common. According to a 2006 study produced for the Environment Agency, 96 per cent of companies surveyed mentioned the environment, up from 89 per cent two years previously. However, less than half the companies produced statistics and figures, and less than a quarter provided quantified disclosures.

”It doesn’t have to be huge – we’re looking for material impacts, we don’t want a huge environmental report from a software company, for example,” says Neil McIndoe, head of corporate services at Trucost, an environmental research company that produced the Environment Agency’s report. ”We do have a degree of sympathy for companies – not only do they have to do all this but they still have to make something and turn a profit, too. But once you get the data, you can start to manage and do things about it.”

Yet for many companies, uncovering the numbers is still a problem. In some cases, it is a matter of pulling together disparate information that does at least exist. In others, it involves devising measurements and then figuring out how to produce and collect the data. ”In a lot of cases, the information doesn’t yet exist,” says Mr Barber. ”For example, if a retailer was looking at its energy efficiency, I’d be very surprised if it knows the efficiency rating of all its stores.”

But even when companies are producing data, it can be hard for investors to make any meaningful comparisons. ”Many companies produce reports setting out their sustainability strategy and details of their performance in areas such as water, energy use and carbon emissions,” noted the Prince of Wales Accounting for Sustainability Project, which produced its first report on the topic last year. ”There is, however, no definitive guidance on the measurement bases that businesses should adopt, and no real consistency in the form of their reporting.”

Some of this is down to the inherent difference between companies. It is also a result of the fact that this form of reporting is new and the process will take time to settle down. Accounting experts think some sort of standardisation will develop as a result of corporate competition, as some companies closely measure their perceived performance against their rivals. But even if a company has the numbers and reports them, it may still not be enough – accountants say it will depend how the numbers are vetted on their way to the public.

There is no mandatory process for how the numbers are made public. Some go through board-level committees, some are audited – in a non-statutory sense – by accountants. Others might only put the numbers through the communications team.

”We tell non-executive directors to be wary if the data only went through the communications function – that’s not to say they’re not doing their job, but they would have a different stance from a risk management committee,” says Mr Lane. ”The governance is improving and I know we sound like anoraky accountants, but we want to see it go through real due diligence.”

With the regulation already in place and increasing pressure from investors on the topic, it seems the bean-counters will be getting their way on this one.

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