Great article in Sustainable Brands and the significance of non-financial reporting disclosure by companies and its direct relationship to investor behavior…
According to a recent Ernst & Young survey:
Investors are increasingly using non-financial performance to draw conclusions on value and to better inform their decisions, since it’s often a sign of operational excellence if a company shows they are handling environmental, social and governance (ESG) issues well. Over the long term, 92% of respondents believe that ESG issues — ranging from climate change to diversity to board effectiveness — have real and quantifiable impact.
81% of respondents say they now pay closer attention to non-financial disclosures as a result of recent compliance revelations of ESG expectations. And 89% agree that a sharp focus on ESG issues can generate sustainable returns over time.
The survey found that in the last 12 months, 68% of respondents said a company’s non-financial performance had played a pivotal role in their investment decisions, up from 58% in 2015. 60% of institutional investors say that their clients are now demanding ESG information; however, 73% said they conduct only informal assessments or no review at all.
Why is the reporting of non-financial information and the management of non-financial risk becoming so important to investors?
Importance of United Airlines, Social Media and Reputation Crisis Management..
An example of the importance of managing non-financial risk through disclosure is what happened to United Airlines last week… We saw the reputation of United Airlines destroyed in just the wink of an eye… less than 30 seconds. Yet the video of a man being beaten and dragged off his flight highlights a more serious information security risk. But nevertheless, the disclosure of controls to manage reputation risks through social media outlets is something few companies disclose in documents to the public or regulators.
In business, maintaining a good reputation can be tricky. All it takes is a corporate indiscretion or two, a faulty product or poor service provision, or a misjudged ad like Pepsi (Which cost millions of dollars) combined with an angry, web-savvy consumer or employee with a social media account and revenge in mind, and it’s time to brace yourself for a PR nightmare...
Back to United Airlines...
The short video recorded by a passenger with a cell phone permeated almost every social media site in the world. United Airlines has been tried, convicted, and sentenced in the court of public opinion.
The damage to United is very tangible and likely long lasting. At one point earlier in the week of the incident United Airlines had lost over a billion dollars in market cap. In addition to the ongoing furor in the United States, the video of the incident had been viewed by well over 100 million people in China (Dao is of Vietnamese dissent). Many of these viewers are now calling for a complete boycott of United Airlines.
Managing reputation risk is but one non-financial information item investors are now demanding that companies document in their disclosure process. What are other non-financial disclosure risks (besides reputation risk) investors are asking for companies to disclose?
What is non-financial information that companies should disclosed linked to its value that interests investors?
The EU has mandated that in additional to financial information – 6,000+ public companies must now disclose in their 2017 annual reports a brief description of a company’s policies and business practices in the following non-financial key areas:
Companies will also be required to report on due diligence and outcomes in these areas and explain the key risks for each. In non-financial disclosures, companies will likely need to report on how risks are being managed. It’s likely that companies will uncover many risks in their supply chains, especially since it can be difficult to gain visibility into the supply chain beyond tier one. In recent news reports, several EU companies have already been linked to corruption, modern-day slavery and environmental issues due to poor supplier performance.
In the United States we are seeing interest that CyberSecurity be also added to this list of non-financial disclosure because of the risks associated with a CyberBreach and its impact on stakeholders and customers.
But what is interesting is that regardless of what regulators mandate for non-financial information disclosure -- social media will ever be present and companies will be – like the United Airlines -- tried, convicted, and sentenced in the court of public opinion through social media unless they address these risks in a more public manner - possible through non-financial disclosures.
What the recent Ernst & Young survey shows is that many companies as well as investors are being proactive as it relates to the importance of managing risks associated with non-financial information disclosures and taking steps to communication direct actions to investors and the public on what these steps are… instead of spending millions of dollars like United Airlines or Pepsi to repair reputation damages.
Today management accountants are also taking responsibility for managing information which includes non-financial data as well as financial data through their performance management, budgeting, corporate governance, risk management, and internal controls activities.