In the current economic situation, demonstrating the relevance of non-financial performance in the dialogue between companies and investors is a more timely challenge than ever, concludes a major report released by EABIS and CSR Europe in support of the EU Alliance for CSR. This view was also recently endorsed by European Commission Vice-President Guenter Verheugen.
The report is the first significant output from a unique business-academic-stakeholder collaboration. Lloyds TSB and Telecom Italia have led a group of businesses to develop a set of principles and recommendations in consultation with investors, trade and sectoral bodies, accounting organisations and other key stakeholders.
In parallel, Cranfield School of Management has coordinated a leading research team involving SDA Bocconi, Vlerick Leuven Gent and the University of Lille to identify latest knowledge and practice in the field. The research work has been supported by €100K in funding from EABIS’ Corporate Founding Partners – IBM, Johnson & Johnson, Microsoft, Shell and Unilever – and additional sponsorship from Lloyds and Telecom Italia.
The consultation report and overall project seek to demonstrate links between a wide range of environmental, social and governance factors and the financial performance of business through a filter of core non-financial value drivers, such as human capital, innovation and corporate governance. Through a better understanding of the causes of the long-term value of companies, investors can better identify winners and losers based on non-financial performance.
Based on the framework elaborated by the project, a number of principles have been identified to guide the practical implementation of the framework:
- The focus on a small number of core non-financial performance drivers, key metrics and relevant ESG factors is more likely to fit with individual companies’ existing management models.
- Core non-financial drivers, key metrics and relevant ESG factors need to be integrated into individual business management systems so the credibility of data and any forecast performance can be more easily accepted by investors.
- Where the link between key metrics and ESG factors can be calibrated within an individual business, that business is more likely to want to better measure, manage, and incorporate its performance against those ESG factors in its dialogue with investors.
- Core non-financial drivers and key metrics need to be directly linked to individual business strategies so they are material to investors and incorporated into their valuation models.
- Where core non-financial drivers and key metrics have a direct impact on financial performance, then the ESG factors contributing to those core non-financial drivers also impact on financial performance.
- Establishing a relationship between the key metrics and a wider range of ESG factors will enrich companies’ strategic commentary on non-financial performance and the materiality of ESG factors for investors.
- Key metrics based on widely established and robust business data collection processes across markets and sectors will enable effective company and investor dialogue.
- Identification of the core drivers of non-financial performance and associated key metrics will facilitate more effective communication and investor saliency.
- A critical mass of companies articulating the importance and demonstrating the materiality of non-financial performance will be a major catalyst for increased investor saliency.
- The effective communication of non-financial performance is a prerequisite for enhanced long-term value creation.
Commissioner Verheugen said: “I hope that the work of this laboratory can contribute to a quiet revolution in the way that enterprises who wish to can measure and communicate their non-financial performance… There is indeed no other powerful incentive to consider the strategic role of corporate responsibility than an investor able to value the role that it plays for the future prosperity and sustainability of a business.”
To access the Interim Report and other materials, please visit www.investorvalue.org. Visitors to the site also have the opportunity to provide online feedback and reactions to the project leaders.
- 1. Valuing Non-Financial Performance: A European Framework for Company and Investor Dialogue
- 2. Enhanced Analytics for a New Generation of Investor: How the Investment Industry Can Use Extra-Financial Factors in Investing
- KPMG International survey of corporate responsibility reporting 2008
- Cranfield School of Management
- SDA Bocconi
- Vlerick Leuven Gent School of Management