Don't just count the pennies - Sustainability column
Sustainability columnDon’t just count the penniesA few months ago, sports equipment company Puma came up with something novel: an environmentprofit and loss statement. A summary, in other words, of the cost to the environment of Puma’sbusiness operations and those of its suppliers, expressed not just in metric tons of carbon dioxide orcubic meters of water, but in something accountants and financial analysts find far more tangible:millions of euros. The bottom line: Puma cost the environment last year just over EUR 94 million.Subtract that from the company’s ‘conventional’ net profit – EUR 202 million – and you come out withan overall gain of EUR 108 million.The question is: does Puma’s approach provide a more accurate picture of the company’s performance?Certainly, the experiment points up an intriguing question, and one that has fascinated economists: Howexactly do you measure the success (or otherwise) of a company?Of course, twenty or thirty years ago, the answer would havebeen obvious: by the money a company makes or by the price ofits shares. These days, that’s changing. Alongside profitability, Plotting a coursecompanies now regularly stress their commitment to some less Integrated reporting is currently in theeasily-defined principles – ‘responsible behavior’… ‘sustainable hands of a body called the ‘Internationaldevelopment’… ‘the long-term interests of stakeholders’… Integrated Reporting Committee’ (IIRC).‘contribution to society as a whole’. The IIRC’s job will be to bring together rules for financial accounting and those governingLoss of trust sustainability reporting.None of these concepts, of course, can be found in a conventional Membership includes not only IASB – theprofits & loss statement. The cost to the environment. Constraints International Accounting Standards Bureauon natural resources. The way companies treat their customers or – and the Global Reporting Initiative (GRI), which sets sustainability reportingemployees. None are captured by traditional accounting standards, but also representatives from themethods. big four accounting firms, regulators and a number of companies, including Nestle,What’s more, profit & loss statements tend to be backward- Coca-Cola, Microsoft, Tata and Aviva.looking. Companies with poor employee motivation, for example, Work has only just begun, and the bestare more likely to have poor customer service. But that will only guess is that a fully integrated frameworkshow up if and when there is an impact on sales. won’t be ready until sometime in 2014 or 2015.Add to that a loss of trust since the financial crisis in officialaccounting, and all this is starting to spawn some radical new In the meantime, companies such as Philips,thinking. Companies have started to look more closely at other United Technologies, Novo Nordisk and Puma have already adopted integratednon-financial measurements – how effective their employees are, financial and non-financial reporting.for example, or whether their customers would recommend theirproducts or services. These measurements, they argue, can be AEGON will take its first step next year with the publication of an integrated Annualdirectly tied to financial performance. More engaged employees Review.
lead not only to improvements in customer service, and (fingers crossed) higher sales; they also make iteasier to recruit the talented staff companies need to guarantee their futures. When it comes to makingstrategic decisions, these indicators are important – potentially as important as more familiar financialmeasures.More complete viewThis idea – of integrating financial and non-financial – is gaining ground. Regulators, accountants andcompanies are now sitting down to find a way of merging international financial reporting rules andguidelines currently used for reporting sustainability (see separate box). The result – integrated financialand non-financial reporting – could be with us in the next 3-5 years. It’s still early days – but, ifsuccessful, integrated reporting would, in theory, increase corporate accountability. Big oil companies,for example, would have to report not only the profits they make, but also the cost of those profits tothe environment, and explain what they were doing to limit those costs – just as they would currently ifthey experienced a sharp increase in, say, salary costs or capital investments.Exactly what shape integrated reporting will eventually take isn’t clear; Puma’s idea of an‘environmental profit and loss statement’ may fail to catch on. Still, the ultimate objective of integratedreporting is one worth pursuing: providing a more complete view of what companies are doing, howtheir businesses are performing, and revealing the costs and benefits of those businesses not just toshareholders, but to everyone who has a legitimate stake in the company’s success.The views and opinions expressed in this document are solely those of the author and do notnecessarily represent those of AEGON N.V. This document is for information purposes only andany reliance you place on such information is strictly at your own risk. AEGON N.V., its affiliatesand the author cannot be held responsible for the accuracy or reliability of the contents of thisdocument.