Look who’s reading your Sustainability Report

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As India Inc. begins to adopt Sustainability reporting,  investors are likely to be combing through it and select winners from  the rest.In these reports businesses share about efforts  undertaken by them to engage their stakeholders and to preserve the environment they operate in.

When  analyzed, the Sustainability Reports reveal a linkage between the  nature and quality of disclosure and the financial attractiveness of the  business. This linkage is especially strong in certain sectors related  to Services, Extractive industries and those related to Energy  production. There is room to start making the argument that the  Sustainability Reports should get far more attention than what they have  received so far.

Linking financial attractiveness and Sustainability Reports

In a recent study, cKinetics, analyzed the sustainability disclosure and investor attractiveness of leading listed companies. The focus within the listed companies has been on the 100 largest  businesses in India: which are bellwethers for the rest of the  industry.

Information from the Sustainability reports and annual  reports was extracted and the quality of disclosure on 35 parameters was  assessed. For the same companies, their financial attractiveness was  also evaluated based on an analysis of their cash flow, stock price, dividend payout, debt-to-equity and other key metrics.

The analysis revealed that greater the extent of disclosure and reporting, greater was the financial attractiveness.

Picking winners

ReportingIs there an investment opportunity to be made looking at  the Sustainability Reports? In the cKinetics analysis, three sectors in the top 100 companies, stood  out as having the strongest linkage between disclosure and financial  attractiveness:

  • Service Sector companies including software companies and financial institutions
  • Extractive industries including mining, oil and gas, mineral extraction, aluminum and steel companies
  • Energy and Utility companies

On mapping India’s leading disclosers against the sectors above, a  view emerges on companies that are benefitting more from disclosing  their Sustainability related performance (see table). As a corollary, newer investment opportunities would arise by identifying companies in  these sectors that are planning on implementing a Sustainability roadmap  and then disclosing on them.

2 Areas to track and watch

In looking at the Sustainability reports, 2 key things stand out: a. Quality of disclosure, and the assurance that goes along b. Timing of disclosure

Quality of disclosure:

An analysis of the disclosure levels of the top 100 listed companies  for the years 2009-12, reveals that while disclosure on governance  parameters averaged at 53%, the average disclosure on Environmental and  Social indicators stood at a dismal 15% and 14% respectively, reflecting  that the information on these parameters, especially, is glaringly  inadequate. This is an area to watch and track, especially because these  can be quite material to a company’s performance.

Timing of disclosure:

The time lapse between the fiscal year end and the time when the  companies come out with their Sustainability report has been decreasing.  For the 3 years that cKinetics tracked the information, the time period  has reduced from 332 days to 289 days. As more firms gear up for  Sustainability reporting, this number is only going to reduce further.

Policy is going to accelerate Sustainability Reporting

Earlier this year, the Securities and Exchange Board of India (SEBI) mandated the 100 largest listed companies (by market capitalization) to  provide a Business Responsibility (BR) report which would form part of a company’s annual reports/filings.

For the Public Sector Undertakings (PSUs), the Department of Public  Enterprises (DPE) has made focused efforts to promote sustainable  development and also created more disclosure through the mandatory CSR Guidelines and Guidelines on Sustainable  Development.

In addition, the Institute of Chartered Accountants of India (ICAI)  has undertaken significant work to define the framework for  Sustainability Reporting in India.

The Global Reporting Initiative (GRI) set up 1 of its 5 global focal  points in India in 2010 with an aim to promote and support  sustainability reporting by businesses in India, which is seeing increasing acceptance in India (India Inc has the most comprehensive use of  GRI’s Guidelines, in terms of level of disclosure and external assurance  – 78% of GRI reports from India boast of maximum standard disclosure  and external assurances, as compared to a world average of 24%)

Also, the CII’s ITC Centre of Excellence for  Sustainable Development (CII CESD) and World Wildlife Federation (WWF)  India, in partnership with CDP India, has been reaching out to 200 companies in India and has  seen an 55% increase in reporting since the first effort in 2007.

This  trend of having stakeholders actively engage to get companies to proactively report is only going to increase. Many of these stakeholders  would be from the financial community that use a lot of this  information to pick winners!

About the author: Pawan Mehra is the Managing Director of cKinetics, a sustainability advisory firm based in N Delhi, India and Palo Alto, California, USA. This article originally appeared in Sustainability Outlook

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