In the highly competitive and rapidly changing economy, staying ahead of the curve can be vital to the fate of a company. A focus on intangible assets has been an integral part of investors’ analyses of a corporation, but there’s a growing trend that has put some companies ahead of the game.
In order to compete, companies now need to be cognizant of their triple bottom line—environmental, social and economic performance. According to a study done by the Investor Responsibility Research Center (IRRC) Institute, shareholder support for environmental and social actions has doubled since 2005.
Shareholders are now challenging boards, more than ever before, to improve their extended disclosure around hot-button social issues. Environmental and social proposals lead all other major proposal categories of shareholder proposals according to Ernst & Young. These proposals also receive the highest levels of approval, especially those targeted at sustainability in companies facing corporate governance issues or if they seek higher levels of disclosure. Voting patterns provide convincing evidence that investors link a company’s social and environmental policies to its financial performance. Starbucks shareholder’s recently demanded sustainability initiatives in a resolution voted on at the Starbucks annual shareholder meeting.
This growing trend and number of proposals has expanded the role of the CFO and IR department. IR communication needs to provide more in-depth sustainability reports. CFO’s and IRO’s must stay up to date on sustainability initiatives across the organization. As corporate social responsibility issues have become intertwined in business strategies, more and more companies have begun to disclose their sustainability efforts.
According to the Governance & Accountability Institute’s 2012 Corporate Corporate ESG/Sustainability/Responsibility Report the number of S&P 500 companies reporting sustainability efforts has doubled last year, growing from 19% in 2011 to 53% in 2012. This reporting not only pleases investors, but also adds to company’s competitive advantage and bottom line. Sustainability disclosure allows companies to build trust with their investors and the community, and allows them to gain access to new investors who practice sustainable and responsible investing. Sustainable efforts give companies a competitive edge in the marketplace. “Green” practices allow them to differentiate their brand while incurring reduced costs from reduced use of energy and raw materials.
While these disclosures are not yet regulated, companies are reaping the benefits of getting ahead on this trend. They are protecting their freedom to operate by getting ahead of the issues facing their respective industries. They circumvent the threat of regulation by managing these issues themselves.
This trend will only continue, as more and more companies respond to the pressure to disclose social and environmental information from shareholders and competition. While the pressure won’t let up, sustainability reporting will face the same problem other intangibles face, lack of comparability and consistency in measurement. This reporting is voluntary, and companies use different guidelines in their reporting. Investors going forward will be faced with the challenge of how to compare one green initiative with another.