Leading and Lagging Countries in Contributing to a Sustainable Society

To determine the extent to which corporate and investor behavior is changing to contribute to a more sustainable society, researchers Robert Eccles and George Serafeim analyzed data involving over 2,000 companies in 23 countries. One result: a ranking of countries based on the degree to which their companies integrate environmental and social discussions and metrics in their financial disclosures.
by Robert G. Eccles & George Serafeim

Editor's note: Please see related story, Corporate Sustainability Reporting: It's Effective.

To what extent companies contribute to a sustainable society is a question increasingly important, not only to the companies themselves, but also to investors, the countries they do business in, and civil society in general. But it is a difficult question to answer, with standards just now emerging in the form of "integrated reports" that help companies disclose corporate sustainability efforts just as they do financial data.

Are these efforts yielding results? We wanted to determine the extent to which corporate and investor behavior is changing. We did so by analyzing data from more than 2,000 companies in 23 countries, and then ranked those countries based on the degree of integration of corporate environmental and social performance with financial performance. On the investor side we looked at the number of times investors accessed environmental and social data on Bloomberg terminals and ranked countries based on the number of "hits," accounting for the size of each country's capital market. We also developed a call to action to spur greater global sustainability practices.

Integrated Reporting Advances

Integrated reporting is an emerging management practice that involves the integration of a company's required financial report with its voluntary (except for a few countries) corporate social responsibility or sustainability report. Sometimes referred to as One Report, integrated reporting is the combination in a single document of the material measures of financial and nonfinancial—environmental, social, and governance (ESG)—performance and the relationships between them. Sustainable strategies for a company that contribute to a sustainable society for all of us increasingly depend on a mutually reinforcing relationship between financial and nonfinancial performance.

Integrated reporting is about more than a document. It is also about a more integrated company website that leverages the Internet to provide detailed information, along with analytical tools, that is of interest to shareholders and other stakeholders. The Internet can also be used to increase the degree of dialogue and engagement with all stakeholders. Integrated reporting is as much about "listening" as it is about "talking."

Since integrated reporting is still in its early stages, just what it means to issue an integrated report is not yet well defined. At least five US companies—AEP, KKR, Southwest Airlines, Pfizer, and United Technologies Corporation—declare that they practice integrated reporting. Natura, Novo Nordisk, and Philips are acknowledged leaders in integrated reporting and have been doing so for at least three years. Approximately 270 companies using the Global Reporting Initiative's G3 Guidelines are self-declared integrated reporters. As of March 1, 2010, approximately 450 companies listed on the Johannesburg Stock Exchange must file an integrated report or explain why they are not doing so.

These numbers, while small relative to the total number of publicly listed companies in the world, show that interest in integrated reporting by companies is rising. This suggests that efforts to develop a framework for integrated reporting, such as the current initiative of the International Integrated Reporting Committee (IIRC), will be welcomed by the corporate community, since such a framework will give useful guidance to a management practice that is already happening.

Integrated reporting represents a significant change in corporate behavior, since it requires a more holistic view regarding financial, natural, and human resource allocation decisions, and the interdependencies between them. It also means taking a longer-term view, since improved financial performance from better use of natural and human resources usually isn't reflected in the next quarter's earnings. Thus integrated reporting requires a change in the behavior of investors: They must take a longer-term view and more explicitly incorporate ESG metrics into their financial models, thereby transforming them into business models.

The State Of Integrated Reporting

In order to determine the extent to which corporate and investor behavior is changing to contribute to a more sustainable society, we analyzed the state of integrated reporting in 23 countries. In collaboration with Sustainable Asset Management (SAM), we used its proprietary database of 2,255 companies and reports by SAM analysts, who evaluated whether key performance indicators and narrative information regarding environmental and social performance were integrated with the presentation of financial information.

We then created an index ranking each country in terms of the degree of integrated reporting for each of environmental and social performance, dividing the countries at the median between High and Low. (We created this index by taking for each country the difference between the percentage of companies that integrate both narrative information and key performance indicators and the percentage of companies that integrate neither one.)

In order to determine the extent to which investor behavior is changing, we used data made available to us from Bloomberg showing the number of times in two quarterly periods that investors accessed a long list of environmental and social performance metrics. Although six months is a short period, the total number of hits was approximately 34 million, so we believe it is a robust measure of investor interest. Of course, we don't know whether investors who actually looked at these data make investment decisions based on them, but we believe it is a reasonable assumption that investors who take an interest in ESG data are more likely to integrate that data in their investment decisions. We created an index ranking based on the number of hits controlled for the total stock market capitalization of all listed companies in each country, dividing countries at the median between High and Low.

Sustainable Or Unsustainable?

Based on this analysis we were able to classify countries, for each of environmental and social performance metrics, into the following categories:

  • In Sustainable countries—such as Germany and the United Kingdom—there was a high degree of integrated reporting by companies and a high level of investor interest in the respective nonfinancial performance metric. Companies and investors in these countries are on the vanguard of integrated reporting and should continue to exercise leadership in order to help create a more sustainable global society.
  • In Unsustainable countries—including China, Hong Kong, and South Korea—there was very little integrated reporting by companies and very little interest by investors in nonfinancial performance metrics. These countries need a regulatory shock in order to break out of the equilibrium they are in. Because neither investors nor companies are paying much attention to ESG issues, it is unlikely that market forces will be sufficient to generate a change in behavior.
  • In Sustainable Companies countries—such as Brazil, South Africa, and Sweden—there is a high degree of integrated reporting by companies but very little interest by investors in nonfinancial performance metrics. Companies in these countries need to educate investors on the importance of nonfinancial metrics in evaluating company performance and making investment decisions. Investors can leverage experiences from investors in other countries and learn emerging practices on ESG integration and engagement.
  • In Sustainable Investors countries—such as India, Japan, and the United States—there is very little integrated reporting by companies but a high level of interest by investors in nonfinancial performance metrics. Investors in these countries need to demand more integrated reporting by the companies they invest in. Companies need to actively engage with various stakeholders and identify and report in an integrated way the material ESG topics for their business.

An important point to note about these rankings is that they are a relative comparison of countries. They do not measure the degree to which different countries contribute to a sustainable society in an absolute sense. Even the countries that rank high on the indices might still have a lot of work to do to effectively engage and address the environmental and social problems they are grappling with.

Table 1
Company Integration and Investor Interest in Environmental Performance

Company Integration and Investor Interest in Environmental Performance

Table 2
Company Integration and Investor Interest in Social Performance

Company Integration and Investor Interest in Social Performance

Call To Action

When Table 1 (environmental performance) is compared with Table 2 (social performance), most countries are in the same category for each of these metrics. This includes the United States, which ranks lowest in the degree of integrated reporting by companies but ranks ninth out of the 23 countries in terms of degree of investor interest. This contradicts the assertion of many US executives that investors don't care about nonfinancial performance.

The result for South Africa, classified as Sustainable Companies, is also notable since it is the first country to mandate integrated reporting starting this year. It will be interesting to see if investor behavior will change in response. The same is true for France, where companies with more than 5,000 employees are required to produce integrated reports after 2012, under the Grenelle II Act.

Executives, investors, public officials, NGOs, and members of civil society in each of these countries need to challenge and consider these results. If they believe they have been classified incorrectly, they need to generate data of their own making the case. But if they agree with our classification, they need to take the necessary actions according to their classification.

No country stands alone, and we cannot have a sustainable society without the active commitment of every single country on our one planet Earth.

    • Robert Searle
    One possible way to find how environmentally, and ethically sustainable companies are is via a form of electronic monitoring of transactions used in advanced stage Transfinancial_Economics....

    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited
    Good companies committed to long-term growth have a basic ambition to be trusted. They target inclusive growth covering shareholders, all other stakeholders, society and the environment in which they operate. Their annual and periodical progress reports are integrated and cover financial as well as non-financial developments.
    By way of Integrated Reporting (IR) an enterprise demonstrates the linkages between its strategy, governance and financial performance as also the social,environmental and economic context in which it operates. By reinforcing these connections, IR helps businesses to take more sustainable decisions and enable investors and other stakeholders to understand how the enterprise is really functioning.
    There are no specific guidelines for IR and hence it is not mandated in most of the countries. Wherever it is, there is no surety that all enterprises comply. In my view, IR is an enterprise-specific tool the immense benefit of which needs to be understood.
    The tables presented in the article are noteworthy for the country wise conclusions drawn. Yes, in India, investor interest is high but the quality of products available leaves much to be desired.
    • S P S Sabharwal
    Integrated reporting on Energy and material resources consumption patterns and projects implemented on their savings will be useful in reducing the impending global destabilisation and fury of nature and its impact on our earth.
    • Zhongchao Ma
    I do not see the government of P.R. China interested in adopting regulations to improve sustainability.

    A "regulatory shock" could not come from such a corrupt government, where each member is intimately connected to others. They may be more interested in less radical process which poses less threat to their position of power.

    I agree that stabilization is something which the leaders must recognize (or already do) for the good of Chinese people in the future. The effects of destabilization have had a profound effect on the Chinese population: obsession with vanity, wide spread depression, anxiety, and other mental diseases which lead them to live generally unhappy and empty lives. It's time that we take a stand and fight for a better life!
    • Jeff Ballinger
    • activist
    It's hard to argue with the "reporting" ethos that you aptly sum up as, "provide detailed information, along with analytical tools, that is of interest to shareholders and other stakeholders". But, we must draw a bright line distinction between that info that is voluntarily given and requests for info that are rebuffed. Please see the human trafficking case here: http://protectvietworkers.wordpress.com/activities/ - when I directed an inquiry to Nike for details about the scope of settlement terms (did it extend beyond the 1,200 workers at the Malaysian HYTEX factory?), I was stonewalled. The fact that Nike would certainly qualify as a "leader" in reporting yields the inescapable conclusion that info is given only when it is "safe" and mainly to burnish the corporation's CSR image.
    • Anonymous
    The report claimed,
    "When Table 1 (environmental performance) is compared with Table 2 (social performance), most countries are in the same category for each of these metrics"
    but actually is not the case of Italy. Can you give us more information about that?
    • Jack Lampka
    • Environmental Program Manager, High tech company
    This is an interesting approach to rank countries in terms of environmental mindset. So far, I've been using OECD's paper recycling rates across the world to compare customers' willingness to take environmental actions, but this ranking provides another view.

    I'm wondering if the integrated reporting could be translated into customers' needs for environmentally conscious brands. For-profit companies would not provide sustainability reporting for altruistic reasons. They are after all "for profit" and there is anything wrong with that. So, they provide information about their environmental activities, because it's requested by their customers. This ranking of integrated reporting represents then customers' needs for environmental brands across these countries. Is that a fair conclusion?
    • Gundappa Srinivas
    An appeal to all to introduce this bill in the parliament

    I beg with folded hands and offer my heartiest begging pranams and namaskar to all of you to please introduce this bill, please dear all of you pleaseeeeeeeeeee

    Public Social Responsibility -Deduction From Salary And Profits/Turnover.

    The Latest Reports From Various World Organization States That There Are More Than 500 Million People In India In Very Poor Living Conditions. Also More Than 250 Million People Don't Get One Full Meal Per Day.

    On The Other Hand We Have Seen That Central Government Employees Who's Pay Is Being Raised By Huge Percentage, Corporate, Businessmen Are Also Making Huge Money Which Is Evident By Such Demand For Apple I-Phone, Cities Being Flooded With Luxury Cars, More Gold Sale, Etc.

    The Need Of The Hour Is To Involve Heart, Soul, Mind Of All Those Middle Income, Upper Income, Rich People To Work For The Up-Liftment Of The Down Trodden. Many of them want to help but they are unaware, also the more charity you do the more better blessings from God you will have.

    All Salaried People In Government, Public, Private Whose Total Allowance Is More Than Rs.10,000/= Per Month, Henceforth They Will Have To Pay Minimum 1% To Maximum Their Choice CSR Contribution. From Their Monthly Salary This Will Be Deducted. A List Of Very Good And Noble Organizations Involved In Various Welfare Schemes Will Be Listed And Employees As Per Their Choice Can Donate The Money To Their Choice Welfare Organization. Directly The Amount Will Go To The Philanthropic Organization Account. Hundreds Of Good Organizations Are Doing Very Sound Social Service, They Need Further Boost Which Will Come Through This Contribution.

    The Same To Be Done To All Kinds Of Business People, Who Will Also Have To Do The Same Contribution Based On Their Profits. Infosys, WIPRO And Others Having Their Own CSR Organizations Can Request Their Employees To Contribute The Same To Their Foundation. All Business People Whose Business Exceeds 1 Crore Per Year Will Come Under This Contribution.

    Our Hon. MPs, MLAs And Those People Who Are Getting Pension Exceeding Rs. 10,000/= Per Month Also Has To Pay 1%.

    Hope The Citizens Of Mother India Known For Their Broadmindedness Positively Contribute To This Scheme And Thus Help The Poor Have A Better Life.
    Yours loving

    • Anonymous
    Interesting researching! Just a small comment: in France, the disclosure of CSR information will probably be mandatory for companies with more than 500 employees (and not 5,000) in the aftermath of the Grenelle ll Act..
    • Disha Kant
    • Company secretary
    It is interesting to note the investors interest in integrated reporting. Integrated reporting demonstrates companies relationship between policies, strategies relating to stakeholders and their actual implementation
    • Darren Johnson
    • Owner, PixieGifts
    I am interested to know how these Integrated Reports will be audited.

    I like the idea of companies being accountable for more than the profits or losses they make. However, some argue that all information about a company is reflected by the share price.

    For example James Hardie, a large company in Australia was embroiled in a long and messy legal case with sufferers of asbestiosis. The negative publicity was immediately reflected in the share price.

    If news such as the Nike example above were front page items, surely this would also reflect on Nike's net worth.

    Great report by the way.