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February 24, 2005
Tale of Two Reports: Sustainability Yearbook Compares Extra-Financial to Financial Reporting
by William Baue
Published jointly by Sustainable Asset Management and PricewaterhouseCoopers, the yearbook shows
how adding extra-financial data to a financial report increases buy recommendations.
SocialFunds.com --
The Sustainability Yearbook 2005 released earlier this month by socially responsible
investment (SRI) research firm Sustainable Asset Management (CPLCB.CO), a global medical devices
producer with award-winning financial and extra-financial reporting.
 PwC edited all the non-financial information out of
Coloplast's report to create a typical financial report, then gave different investment analyst
teams copies of either the original context-rich report or the pared-down report. Given only two
hours, each team had to forecast revenues and earnings, make a buy or sell recommendation, assess
the company's relative risk, and give a rationale for their recommendations. The more expansive
report yielded lower revenue and earnings forecasts than the truncated report.
Hypothesis
disproved? "Not really," PwC answers.
"Despite the lower forecasts, 60 percent of the
analysts with more complete information recommended buying the stock," PwC continues. "By
contrast, nearly 80 percent of the analysts with less complete information recommended selling the
stock."
In other words, the financials alone paint a picture of overvaluation warranting
an offload, while the bigger picture reveals latent value worth capitalizing on. The example
illustrates how companies can gain from extra-financial reporting. Shareowners stand to gain too
from more comprehensive knowledge of intangible assets that can create value.
Both SAM and
PwC also stand to gain from demonstrating the value of extra-financial reporting, as both have a
stake in the growth of so-called corporate sustainability practice and reporting. The yearbook
introduces both organizations' approaches.
SAM takes a secular approach to sustainability
that does not address ethical or ecological implications but rather holds that social and
environmental challenges present both risks companies can manage and opportunities they can seize
to create competitive advantage. SAM manages the Dow Jones Sustainability Indexes (DJSI), a set of
global SRI benchmarks.
PwC takes a very broad approach, providing consultation on how best
to communicate extra-financial issues through its ValueReporting
Framework. The ValueReporting Framework comprises four categories: market overview, strategy
and structure, managing for value, and performance. Environmental, social, and ethical issues
explicitly factor into only the performance category.
So neither organization promotes
sustainability in its strictest definition of operating within the world's carrying capacity.
However, both firms provide important support for corporate movement in the direction of
sustainability.
The bulk of the yearbook provides overviews of sustainability
performance in the 60 industry sectors SAM covers, assessing 1460 companies, more than a third
(542) of which actively filled out SAM's questionnaire. The overviews include a narrative
describing industry driving forces, industry-specific criteria, a list of companies qualifying for
inclusion in SAM's investment universe, and industry-level results of SAM's Corporate
Sustainability Assessment.
These final results are broken down into best, lowest, and
average scores as well as by economic, environmental, and social dimensions. For example, the
aluminum industry fared particularly well, with the best score breaking the 80 percent barrier, the
lowest score (of qualifying companies) almost reaching 80 percent, and the average score of all
assessed companies in the universe breaking 60 percent. However, the number of companies assessed
was only four, with only one of those failing to qualify for the SAM universe.
On the
other end of the spectrum, SAM assessed 92 banks that earned an average score of just more then 40
percent. Of these, less than half (39) qualified for investment, with the best score reaching
almost 80 percent but the lowest score amongst qualifiers just surpassing 40 percent.
The
yearbook also includes in-depth examinations of three sustainability issues: corruption and
bribery, human capital, and water. The corruption and bribery profile, based on data from 979
companies across all economic sectors and regions assessed by SAM in 2004, showed that almost three
quarters (74 percent) of companies address bribes in their business principles in some form.
However, only a little more than half (54 percent) of the policies address direct or indirect
political contributions, and less than a third address charitable contributions or sponsorships.
"[T]he latter can be used as subterfuge for bribery and must be covered by the business
principles," SAM states. "To counter corruption, transparency is a prerequisite."
However, only 13 percent of the companies publicly disclose their contributions and
sponsorships, and only 10 percent disclose their political contributions. Moreover, SAM research
reveals scant coverage of corruption and bribery issues along the supply chain.
"[T]he
'Achilles heel' for approximately 80 percent of all companies analyzed are the supply side and
joint ventures," SAM states. "With regard to the latter, most of the companies only start
implementing policies for joint ventures when their stake is greater than 50 percent, even though
past cases have demonstrated that a company can already suffer a reputation damage from a minor
stake."
©
SRI World Group, Inc. All Rights Reserved.
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