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Non-Financial Data is Material: the Sustainability Paradox

Texaco Hill in the Flint Hills, Kansas. Photograph by Jim Richardson/National Geographic Stock
Texaco Hill in the Flint Hills, Kansas. Photograph by Jim Richardson/National Geographic Stock

By Eric Roston

You might think any corporate data that helps investors weigh the value of a company would be called "financial information," right? Not so. Welcome to the world of "non-financial information."

Five U.S. companies in 2011 expanded their financial disclosures -- information required of publicly traded companies -- to include data about environmental performance, employee and community relations, and corporate governance. Investors, nongovernmental organizations and even some governments are increasingly seeking this information as it relates to business risks and opportunities. Non-financial information, it turns out, can have a pretty big impact on financial performance.

So here's the paradox: If non-financial data, such as greenhouse gas emissions per dollar of revenue, is included in a financial report for investors, how can it still be called non-financial? Institutional investors and companies aren't yet making the leap to calling greenhouse gas emissions, percentage of female executives or other ESG metrics "financial." But they are increasingly considering them to be material.

Combining this so-called non-financial information with legally mandated disclosures is called integrated reporting, a practice that emerged from the widespread publication of corporate sustainability reports. It requires a deep knowledge of what's strategically important to a company.

A company might disclose data on any of dozens of metrics beyond conventional balance-sheet accounting, whether they are "integrated" or released in a separate format. Practitioners collectively refer sustainability reporting as ESG, for the three major categories of data -- environmental, social and corporate governance.

The amount of non-financial information flying around the marketplace is overwhelming and growing. The main delivery mechanism is the corporate sustainability report, or the corporate responsibility report, or the citizenship report, environment report, corporate social responsibility report "or some title that fits," as Hank Boerner put it. Boerner is chairman of Governance & Accountability Institute, Inc. The group collects and analyzes companies' disclosures, and is the U.S. data partner for the Global Reporting Initiative (GRI), a widely used framework for producing sustainability reports.

Boerner's organization has completed its tally of U.S. sustainability reports for 2011 -- the conventional, feel-good variety, not necessarily integrated with balance sheets. The numbers themselves aren’t as significant as the jumbled snapshot they offer to investors -- who expect standardized disclosures that are generally comparable from company to company and industry to industry.

Companies and nonprofits in the U.S. issued 242 reports last year, 228 of which came from corporations or their U.S. subsidiaries. Thirty-one company reports were assured by an independent auditor.

GRI guidelines were followed by 186 companies, about 44 percent more than in 2010.

The five U.S. companies who combined traditional and sustainability data into one "integrated" report were Clorox, Northrup Grumman, SAS, Genentech and Polymer Group Inc.

Companies considering integrated reporting are determining what information is "material" to their business, according to a recent Deloitte report. The U.S. Securities and Exchange Commission said in 1999 that "a matter is 'material' if there is a substantial likelihood that a reasonable person would consider it important." This definition hasn't changed with the advent of sustainability disclosure and integrated reporting. The rest of the world has.

The Securities and Exchange Commission issued guidance to public companies in early 2010, clarifying the circumstances in which public companies should disclose information related to climate change. Apple is the most recent company to discover that global supply chains and intense public interest make worker conditions, even at far-flung factories, material.

Expectations that the U.S. would enact a greenhouse gas law motivated sustainability efforts until 2010, when legislation failed in the Senate. The drive hasn't diminished, but its impetus has changed. Global companies increasingly see sustainability strategy as a path to long-term profitability. "There is a macro trend here that will not change, and it has nothing to do with regulation," Kathy Nieland, U.S. Sustainable Business Solutions Leader at PwC, said today in a telephone interview. "It has to do with population growth, climate change and commodity and resource limitations."

Visit www.bloomberg.com/sustainability for the latest from Bloomberg News about energy, natural resources and global business.

-0- Apr/13/2012 22:54 GMT

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