Erik Thomsen -January 2008
Sustainability Reporting: Ensuring Future Profits
Publicly traded companies have a fiduciary responsibility to provide sustainable profits to their shareholders whether realized through distributions and/or increases in share price. Shareholders invest in corporations they believe are most likely to provide the best returns. Share price reflects investors’ beliefs about the future prospects of a company. Investors evaluate company prospects by studying financial metrics.
Financial metrics however—such as sales, costs and earnings—largely represent past performance. Trying to predict a company’s future based solely on past financial performance is like driving at night using only taillights for guidance.
This is why even hard-nosed organizations have been saying for years, and in a variety of ways, that financial reporting alone does not provide enough information to evaluate the risks that may impact a company’s future profits. For example, the Organization for Economic Co-operation and Development (OECD) published an empirical study, which concluded “The usefulness of financial reporting has declined steadily over the past 20 years.” More recently, the chairman of the International Financial Reporting Standard IFRS said, “The future of financials is non-financials.”
A working definition of Sustainability Reporting
The purpose of this series is to explain an emerging trend in some types of non-financial reporting. That trend is most frequently called Triple Bottom Line reporting (TBL) or Sustainability Reporting (SR).
There are many implicit definitions for TBL and SR. Some use one or more of the terms (or their looser cousins, such as corporate responsibility, or stewardship) to refer to the act of reporting on good/philanthropic activities performed by the corporation. Others use one or more of the terms to refer to just about any collection of non-financial, typically textual, descriptions of the corporation.
In contrast, we use the terms TBL and SR to refer to the use of environmentally- and socially-oriented non-financial metrics and their financial impact to enhance management reporting: both internal and external. We use the term “metric” in a very specific sense—something objectively evaluatable (whether directly measured or calculated) that can be compared across space (divisions, product groups, populations, geographies, companies) and time. Objective evaluations are the basis for auditing and eventually trust. Comparability across space and time is the basis for benchmarking, and eventually best practices.
