Chief Executive Officer, FCLTGlobal
As the International Integrated Reporting Council celebrates its ten-year anniversary, we would like to congratulate the IIRC on the progress to date and offer some thoughts on momentum for the future.
The thinking behind integrated reporting is a fundamental driver of long-term value for companies. Some companies separate their reporting into two distinct spheres – financial and ‘non-financial’ – missing the opportunity to integrate broader thinking into core strategy. Similarly, some investors separate their analysis of traditional financials to evaluate a company from their analysis of a company’s sustainability profile, employee base, or governance. On both the company side and the investor side, strategies that incorporate broader thinking into core strategic or investment decisions are more successful.
So how can a ‘traditional’ investor incorporate broader thinking into their investment approaches?
Most equity investing today is quantitatively driven. Rather than the investors who read annual reports, meet with management, and make informed judgments about a company’s culture, leadership and strategy based on first-hand experience, the overwhelming amount of money today is managed by an algorithm or at least by a quantitatively driven process. Investors also like to compare companies over time and across sectors—and tend to be skeptical about companies’ varying metrics– so there is a real need for comparable metrics.
How this quantitatively-driven model of investing incorporates integrated thinking is a lynchpin of the current debate. While there are many important constituents for reporting and disclosures, institutional investors need metrics that are material to their decision-making.
FCLTGlobal’s mission is to rewire capital markets to support a long-term, sustainable economy. Our work concentrates on practical tools for investors and companies to drive long-term performance and measure progress towards long-term objectives.
This discussion on metrics and reporting is closely tied to that mission, and we have done extensive work in this area, in particular, testing draft metrics and disclosures in detail with many of the world’s largest institutional investors, focusing on those who make security-level buy and sell decisions.
For issuers and investors, there are some key considerations to address:
Qualitative or quantitative?
Some regulators emphasize the importance of principles–based disclosures or the ‘Management Discussion and Analysis’ section of reports. In our consultations, we found that investors overwhelmingly prefer quantitative metrics to written disclosures, which are harder to analyze and compare. Quantitative reporting in the form of numeric, machine-readable data and raw numbers (rather than ratios) makes disclosures much more useful for investors. And these numbers must be uniformly defined and consistently calculated to allow for accurate comparison.
Targeted at investors or other stakeholders?
Of course, there are many important stakeholders in most companies – customers, employees, suppliers, policymakers, investors and communities. While there may be overlap between what investors and other groups find relevant, investment decision-makers are seeking metrics that show trends in the company’s performance or risk management and which are likely to have a material impact on their long-term return.
As an example, investors today are interested in the composition of the board, the number of employees in various categories, the monetary value of environmental fines, and the amount invested in innovation – none of which is currently disclosed in standard ways globally. These non-traditional metrics are of clear value to investors and may well be of value to many other stakeholder groups as well.
Issuer disclosed or alternative data?
Investors build their views of companies based on a mosaic of information that includes both disclosures from the companies themselves and news from other sources – the media, ratings agencies, and alternative data providers, just to name a few. Investors will seek information on companies from the most credible and timely sources. Companies can choose to provide non-traditional metrics to investors or can let investors make their decisions based on others’ data. Understandably, most would prefer to control as much of their own narrative and data as possible.
In short, investors are seeking to incorporate non-traditional metrics and issues into their analysis of companies – and many are already using this information to inform their decisions. Companies can facilitate this effort by providing appropriate baseline reporting that could be assured by auditors and included in quantitative investment processes.
We see great momentum in the non-traditional reporting space, and we congratulate IIRC for their critical role in getting us to this place over the last ten years.