Look who’s reading your Sustainability Report
/
As India Inc. begins to adopt Sustainability reporting, investors are likely to be combing through it and select winners fromthe rest.In these reports businesses share about effortsundertaken by them to engage their stakeholders and to preserve the environment they operate in.
Whenanalyzed, the Sustainability Reports reveal a linkage between thenature and quality of disclosure and the financial attractiveness of thebusiness. This linkage is especially strong in certain sectors relatedto Services, Extractive industries and those related to Energyproduction. There is room to start making the argument that theSustainability Reports should get far more attention than what they havereceived so far.
Linking financial attractiveness and Sustainability Reports
In a recent study, cKinetics, analyzed the sustainability disclosure and investor attractiveness of leading listed companies. The focus within the listed companies has been on the 100 largestbusinesses in India: which are bellwethers for the rest of theindustry.
Information from the Sustainability reports and annualreports was extracted and the quality of disclosure on 35 parameters wasassessed. For the same companies, their financial attractiveness wasalso evaluated based on an analysis of their cash flow, stock price, dividend payout, debt-to-equity and other key metrics.
The analysis revealed that greater the extent of disclosure and reporting, greater was the financial attractiveness.
Picking winners
Is there an investment opportunity to be made looking atthe Sustainability Reports? In the cKinetics analysis, three sectors in the top 100 companies, stoodout as having the strongest linkage between disclosure and financialattractiveness:
- Service Sector companies including software companies and financial institutions
- Extractive industries including mining, oil and gas, mineral extraction, aluminum and steel companies
- Energy and Utility companies
On mapping India’s leading disclosers against the sectors above, aview emerges on companies that are benefitting more from disclosingtheir Sustainability related performance (see table). As a corollary, newer investment opportunities would arise by identifying companies inthese sectors that are planning on implementing a Sustainability roadmapand then disclosing on them.
2 Areas to track and watch
In looking at the Sustainability reports, 2 key things stand out: a. Quality of disclosure, and the assurance that goes along b. Timing of disclosure
Quality of disclosure:
An analysis of the disclosure levels of the top 100 listed companiesfor the years 2009-12, reveals that while disclosure on governanceparameters averaged at 53%, the average disclosure on Environmental andSocial indicators stood at a dismal 15% and 14% respectively, reflectingthat the information on these parameters, especially, is glaringlyinadequate. This is an area to watch and track, especially because thesecan be quite material to a company’s performance.
Timing of disclosure:
The time lapse between the fiscal year end and the time when thecompanies come out with their Sustainability report has been decreasing. For the 3 years that cKinetics tracked the information, the time periodhas reduced from 332 days to 289 days. As more firms gear up forSustainability reporting, this number is only going to reduce further.
Policy is going to accelerate Sustainability Reporting
Earlier this year, the Securities and Exchange Board of India (SEBI) mandated the 100 largest listed companies (by market capitalization) toprovide a Business Responsibility (BR) report which would form part of a company’s annual reports/filings.
For the Public Sector Undertakings (PSUs), the Department of PublicEnterprises (DPE) has made focused efforts to promote sustainabledevelopment and also created more disclosure through the mandatory CSR Guidelines and Guidelines on SustainableDevelopment.
In addition, the Institute of Chartered Accountants of India (ICAI) has undertaken significant work to define the framework forSustainability Reporting in India.
The Global Reporting Initiative (GRI) set up 1 of its 5 global focalpoints in India in 2010 with an aim to promote and supportsustainability reporting by businesses in India, which is seeing increasing acceptance in India (India Inc has the most comprehensive use ofGRI’s Guidelines, in terms of level of disclosure and external assurance- 78% of GRI reports from India boast of maximum standard disclosureand external assurances, as compared to a world average of 24%)
Also, the CII's ITC Centre of Excellence forSustainable Development (CII CESD) and World Wildlife Federation (WWF) India, in partnership with CDP India, has been reaching out to 200 companies in India and hasseen an 55% increase in reporting since the first effort in 2007.
Thistrend of having stakeholders actively engage to get companies to proactively report is only going to increase. Many of these stakeholderswould be from the financial community that use a lot of thisinformation to pick winners!
About the author: Pawan Mehra is the Managing Director of cKinetics, a sustainability advisory firm based in N Delhi, India and Palo Alto, California, USA. This article originally appeared in Sustainability Outlook
Please leave your comments below as it helps generate some meaningful discussion for change.
Related articles
- The future of integrated sustainability reporting (greenbiz.com)
- The Future of Sustainability Ratings (impact.webershandwick.com)
