Promote Transparency

Why should an organization expend resources on reporting?

Sustainability indices are a rite of passage.

Initial listing on a sustainability index won’t translate to increased profits, but getting de-listed is the equivalent of a doctor having his or her medical license revoked.

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Earning a spot on a reputable sustainability index can be a major achievement for firms – but it’s difficult to translate into better earnings. Studies show that being added to a social index does not increase a company’s share price. However, when a company is removed, its stock takes a hit.
A study of firms listed to and de-listed from the Calvert Index between 2000 and 2005 found companies lost 1.2% of their market value in just two days following their delisting.

Takeaway
When a company earns its rite of passage onto a sustainability index it does not mean the company is entitled to take a breather. Keep advancing sustainability initiatives. Establish metrics that help you identify where to make the biggest impact.
Source: Doh, J.P., Horton, S.D., Horton, S.W. & Siegel, D.S. (2010). Does the market respond to an endorsement of social responsibility? The role of institutions, information and legitimacy. Journal of Management, 36, 1461–1485.
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Integrated reporting boosts returns.

Companies that integrate environmental and social activities into financial reporting demonstrate stock price returns 5% higher than peers.

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A study of 180 US firms included 90 firms that the researchers deemed “high sustainability” and 90 that were “low sustainability” firms. High sustainability firms voluntarily adopted and disclosed environmental policies. Their low sustainability counterparts adopted and disclosed almost no such policies.

Firms that implemented environmental and social activities and then integrated them into financial reporting experienced 4.8% higher returns compared with less sustainable peers – over a period of nearly two decades. These high sustainability firms also saw superior performance in return on assets (ROA) and return on equity (ROE), as well as lower turnover rates.

Takeaway
Integrated reporting demonstrates that environmental and social factors are core to your business. Key stakeholder groups will value your openness and investors will better understand the associated risk—or lack thereof.
Source: Eccles, R.G., Ioannou, I., & Serafeim, G. 2011. The Impact of Corporate Sustainability on Organizational Processes and Performance. Working paper 12-035, Harvard Business School.
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Markets reward disclosure.

Companies that voluntarily disclosed their role in a scandal saw 23% smaller stock price declines than companies outed by others.

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In 2006, numerous companies were caught changing dates on stock options grants to capture lower stock prices; these date changes remained undisclosed.

Firms that voluntarily disclosed their involvement in the backdating scandal experienced stock price declines of 23% less than firms that were exposed by others.

However, timing is critical. Disclosing too early is dangerous as well; firms that waited to disclose saw stock price declines of less than half of those firms that disclosed early (-1.81 versus -4.41%).

Takeaway
Don’t give third parties the advantage by letting them speak for you. Be honest about mistakes rather than waiting for third parties to expose them. Understand the framing of the issue to strategically and transparently communicate it in a timely fashion.
Source: Janney, J. & Gove, S. 2011. Reputation and Corporate Social Responsibility Aberrations, Trends, and Hypocrisy: Reactions to Firm Choices in the Stock Option Backdating Scandal. Journal of Management Studies 48:7.
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Case Study

How Reporting Yields Progress

Teck Resources Limited

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In 2005, a group of socially responsible investors filed a shareholder resolution to request that Teck use the Global Reporting Initiative (GRI) framework for its annual sustainability report. The resolution prompted higher accountability and greater transparency.
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Framework

Create a reporting roadmap with
CPA Canada's Starter's Guide to
Sustainability Reporting
.

STARTER'S GUIDE TO SUSTAINABILITY REPORTING

What should I report?

Tangible results.

Reporting real environmental achievements will boost market value. Communicating targets means little to investors.

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In a study of 174 energy-intensive companies, firms that achieved emission reductions had higher market values than more carbon-intensive peers.

While lowering emissions did not affect the firm’s balance sheet, researchers found that firms with lower carbon emissions had higher Tobin’s q values than firms with higher carbon emissions. Tobin’s q is a ratio that captures the difference between a public company’s market and book values. This indicates that investors are willing to pay more for stock in a low-emitting company than a high-emitting company.

Companies that reported only on emission targets had lower return on equity and lower market value than companies who achieved their goals. Researchers concluded that preparing to achieve goals often comes with immediate costs, but no return. As such, goal-setting does little to drive investor interest.

Takeaway
Bolster shareholder interest by reporting on activities that already achieved a positive material effect on your company. Don’t abandon process-based initiatives and targets, but focus less on communicating what you plan to do another day.
Source: Busch, T. & Hoffmann, V. 2011. How Hot is Your Bottom Line? Linking Carbon and Financial Performance. Business & Society 50(2) 233-265.
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Certification and the environment.

Markets react best to announcements around ISO certification and philanthropy.

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A study of 340 large firms between 2004 and 2006 revealed markets responded best to specific environmental initiatives. Researchers examined 780 media announcements about the organizations’ environmental activities spanning 14 daily business publications. They found that environmental philanthropy and ISO 14001 certification received the most positive attention. Announcements concerning voluntary emissions reductions also received high levels of attention, but these were found to have a negative impact on financial performance.

Positive attention to green charity and ISO 14001 certification resulted in financial gains, generating returns that were 0.46% and 0.35% above average, respectively. Conversely, announcements of voluntary emissions reductions negatively impacted financial performance, with a mean abnormal return of -0.95%.

Authors concluded that philanthropy and ISO certification signal goodwill and good reputation, while emissions reductions beyond regulatory compliance may not be in shareholders’ best interest.

Takeaway
Announce only the initiatives that resonate with the market and your shareholders. Keep in mind that results trump targets when communication with your stakeholders.
Source: Jacobs, Brian W., Vinod R. Singhal and Ravi Subramanian (2010) An empirical investigation of environmental performance and the market value of the firm. Journal of Operations Management, 28: 430-441.
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