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ESG Newsletter published on July 5, 2016

The Rise of Integrated Reporting

Guided by rigorous rules, financial statements have long been the battleground on which companies have had to expose the “truth” about what they do. Before the advent of the Financial Accounting Standards Board (FASB), there were concerns about limited financial disclosure. More recently, we are seeing growing concerns about limited disclosure on sustainability-related issues. Whether for traditional business issues or for sustainability considerations, reporting continues to serve as a powerful lever for investors and other stakeholders.

In response to these rising stakeholder demands, companies have been dedicating significant time and resources to developing detailed sustainability reports alongside their SEC-required financial statements. Unfortunately, many market observers argue that the proliferation of sustainability reports has primarily benefited the accounting firms that are retained to prepare them, while the value of this information to the investor community has remained in question.

This bifurcated world of corporate reporting has caught the eye of thoughtful investment analysts who integrate environmental, social, and governance (ESG) factors into their investment process. Increasingly, they are asking for integrated reports that provide information about material ESG factors alongside key business drivers. This is well-aligned with the field-building efforts led by the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC), which are catalyzing integrated reporting in North America and Europe, respectively.

But it is one thing to advocate for integrated reporting and something else entirely to encourage large multinational companies to implement this reporting philosophy. Even if a company’s leadership team can get behind the idea that material ESG factors “deserve” to be discussed alongside key business issues, it is still difficult to coordinate vast, globally dispersed resources toward the development of such reports. It is no surprise that the adoption of such reports has been slow.

In recent months, we have seen some movement toward integrated reporting. Most notably, General Electric, an iconic U.S.-based company, published its first integrated report in early 2016. This was a major milestone for the integrated reporting movement, demonstrating that a leading Fortune 500 company sees the merit in presenting material ESG factors alongside traditional business drivers. It also demonstrates that such a company has the capacity to develop an integrated report.

GE is not alone. We are starting to see companies from a broad range of sectors begin to integrate ESG factors into their reports to a varying degree. For example, Intel offers a brief integrated executive summary as a supplement to its still-separate financial report and corporate social responsibility (CSR) report. Unilever discusses sustainability as a key strategic priority as part of its annual report. And many other companies are developing their first integrated reports this year.

We are encouraged by this recent transition toward integrated reporting. As we continue to deepen our ESG integration efforts, we think this type of reporting is essential because it offers significantly greater visibility into the way companies are thinking about the linkage between material ESG factors and business priorities. While we will always rely on our own investment research and analysis, we believe that integrated reports help investors by reducing the time spent in gathering information, freeing up more time for the analytical work that drives intelligent investing.

More broadly, we think the rise of integrated reporting is a sign of an important paradigm shift. After many years of push-and-pull, companies and investors are increasingly moving in the same direction in order to achieve greater alignment between business objectives and sustainability objectives. This process may be slow and incremental, but it is nevertheless profound. We hope that, in due time, most companies will publish integrated reports, enabling investors to gain higher-quality insights about the multifaceted linkages between sustainability and business success.


DISCLAIMER: The material in this document is prepared for our clients and other interested parties and contains the opinions of Breckinridge Capital Advisors. Nothing in this document should be construed or relied upon as legal or financial advice. Any specific securities or portfolio characteristics listed above are for illustrative purposes and example only. They may not reflect actual investments in a client portfolio. All investments involve risk – including loss of principal. An investor should consult with an investment professional before making any investment decisions. This document may contain material directly taken from unaffiliated third party sources, including but not limited to federal and various state & local government documents, official financial reports, academic articles, and other public materials. If third party material is included, it is believed to be accurate, and reliable. However, none of the third party information should be relied upon without independent verification. All information contained in this document is current as of the date(s) indicated, and is subject to change without notice. No assurance can be given that any forward looking statements or estimates will prove accurate or profitable.