Investor Driven Sustainability Reporting
/Nearly every month, and for the past several years, I teach a classroom of students how to use the various reporting Standards and Frameworks (GRI, CDP, SASB, etc.) to publish their organization’s sustainability report. Many of these students are first time reporters working on behalf of a publicly traded company. So I begin my courses by asking them why their organization has decided to report.
For many years, the reasons they were giving ranged from noble to pragmatic:
“We are leading by example.”
“It’s the right thing to do.”
“We have a wonderful sustainability story to share.”
“Our competitor just published their sustainability report.”
“We want to use a single publication to respond to all the vendor questionnaires we get.”
“We want to avoid or delay a shareholder resolution.”
“A ratings agency will give us a better score if we publish one.”
In the last two years, however, the reason for reporting is almost universal:
“Why has our company decided to publish a sustainability report? Our investors are asking for it.”
Most reasons given in the past as drivers were not powerful enough on their own, as is investor interest, to convince a board or executive leadership to dedicate the time and resources needed to publish a sustainability report in addition to an annual financial report - they were not “making a CEO case.” But most importantly, none of the old reasons capture a key motivation which compels companies to report on their sustainability performance:
“Our valuation is increasingly determined by our Intangible Asset Market Value.”
Sure, this phrase doesn’t roll off the tongue, and the jargon may seem foreign if you are not accustomed to considering an investor’s point of view, but its power makes it worth committing to memory. Let’s unpack what it means, using layman’s terms.
Tangible Assets vs. Intangible Assets
The term “valuation” is the value of an asset - such as a business - based on the price that would be paid for it if it were sold at a certain time. For a publicly traded company, this price depends on numerous factors which are a combination of both tangible assets and intangible assets.
Tangible Assets include:
Cash-On-Hand
Accounts Receivable
Inventory
Real Estate
Equipment
Existing Contracts
Intangible Assets include:
Social License to Operate
Trade Secrets
Brand Value
Patents
Customer Data
Self-Developed Software
Financial Capital represents a group of tangible assets while Intellectual, Human, and Social Capitals are categories of intangible assets. Traditional accounting methods make quick work of monetizing a company’s tangible assets, whereas intangible assets are less amenable to those techniques.
Intangible Assets Boost Corporate Value
Here’s where this gets interesting. Studies [1] show that the market value of publicly traded companies in the United States has swung from initially having tangible assets as their primary driver, to today having intangible assets be the dominant component of corporate value.
For the S&P 500, the Intangible Asset Market Value has grown from 20% of a company’s value in 1975, to 80% in 2015.
If traditional accounting methods poorly monetize intangible assets, then what can you use to adequately communicate your company’s market value since your annual financial report isn’t telling the whole story? Enter the Investor’s ultimate case for sustainability reporting.
Investors Demand Sustainability Disclosures
The savvy investor knows that the market value of a company can be significantly impaired by the mismanagement of its intangible assets. As a result, investors are demanding transparency and metrics for a company’s sustainability performance.
Sustainability reporting shows investors that you are aware of and proactively managing the impacts of sector-specific and industry-specific issues [2] that are material to your stakeholders, such as:
Climate Change
Energy Management
Water Management
Materials Management
Product Life-Cycle
Human Trafficking
Diversity and Inclusion
Metrics-based sustainability reporting allows investors to audit a company’s sustainability performance.
Adopting a standardized framework for reporting, like GRI, SASB, and CDP, can be an effective way to communicate to investors that both your tangible and intangible assets, and your risks, are managed satisfactorily.
If you are interested in learning how to develop a metrics-based sustainability plan, or use the various reporting Standards and Frameworks (GRI, CDP, SASB, etc.) to publish your organization’s sustainability report, a sustainability reporting course or one-on-one training is the best way to start.
KERAMIDA provides Sustainability Reporting Training to organizations throughout the U.S. as a CDP Accredited Provider and GRI Certified Training Partner. We offer small group training courses as well as one-on-one CDP Disclosure review sessions.
For more information about our Sustainability and ESG Consulting Services, please call us today at (800) 508-8034 or contact us here.
Contact:
Becky Twohey, Ph.D.
Vice President, ESG Strategy, Planning and Reporting
KERAMIDA Inc.
Contact Becky at btwohey@keramida.com
