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Integrated Reporting: The (R)evolution of Corporate Reporting


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What is the future of corporate reporting? AEP's Sandy Nessing, managing director of Sustainability, spoke to an MBA class at The Ohio State University's Fisher School of Business on Feb. 29, 2012, about AEP's experience, why sustainability is a growth platform as well as a risk management strategy and what the trends are in corporate reporting.

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Integrated Reporting: The (R)evolution of Corporate Reporting

  1. 1. Integrated Reporting:The (R)evolution of Corporate ReportingSandy Nessing – Managing Director, SustainabilityThe Ohio State University – Feb. 29, 2012
  2. 2. Who We Are - AEP• 5.3 million customers in 11 states• 18,710 employees• One of largest U.S. electricity generators• Approx. 63 million tons coal delivered 2011• A leading consumer of natural gas (approx. 167 billion cubic feet in 2011)• 1 nuclear plant (2 units)• Renewable energy portfolio – 364 MW hydro – 586 MW pumped storage – 1,994 MW renewables (wind, solar)• Coal & transportation assets – Control +9,000 railcars – 2nd largest full service, dry bulk carrier in U.S. on inland waterways – Operate 1 active coal handling terminal with 18 million tons of capacity• 39,000 miles of transmission lines AEP Generation Capacity Portfolio – Includes 2,116 miles of 765kV lines – the backbone of the electric interconnection Coal/Lignite Gas/ Nuclear Other – (hydro, grid in the Eastern U.S. Oil wind, etc.)• 223,000 miles of distribution lines (overhead and underground) 65% 23% 5% 7%
  3. 3. AEP’s Footprint -- 2011 3
  4. 4. The New “Normal” for BusinessThe Business of AEP’s What’s Next Sustainability Experience in Reporting “Putting off an easy thing makes it hard. Putting off a hard thing makes it impossible.” -- George Claude Lorimer
  5. 5. THE BUSINESS OF SUSTAINABILITY Shareholders have a valid interest and a stake in a company’s total performance.
  6. 6. Sustainability is a Bottom-Line IssueThat People Really Do Care About• The CEO• The Board of Directors• Employees, retirees• Customers• Institutional investors, lenders, credit rating agencies• Environmental groups and other advocates you may only encounter in a courtroom or hearing room• Prospective employees• The media• Your ‘green’ customers• Labor leaders• Regulators, policy-makers, legislators• (Your friends, family)
  7. 7. It’s All About How You Act• Top reasons for acting sustainably: • Drives innovation • Grows revenues • Started as risk management platform; now a growth platform • Avoid shareholder resolutions • Improve business efficiency • Capture bottom-line cost reductions • Eliminate/reduce visits from regulators • Focus on value chain – how you impact external environment • Increased transparency up and down supply chain • To sell something green, you have to sell something of value to your customers
  8. 8. What’s At Stake?• Profits• Customers• Public support• Competitiveness• Opportunities for innovation and growth• Reputation• Trust and credibility• License to operate
  9. 9. Why Sustainability Belongs on the Balance Sheet• Capital markets need information, at the right time, that is clear and trustworthy.• The financial crisis raised fundamental questions • Were companies and markets as transparent as they could have – or should have – been?• Was there systemic risk that was masked? – What were the warning signs that were missed and why? – Could more transparent and complete reporting have connected the dots sooner?
  10. 10. Nonfinancial Performance Tied to Financial Health• Taking holistic view allows you to integrate risk, corporate governance and sustainability into the strategic and operational management of the organization.• This alignment of priorities demonstrates how your strategy has responded to material issues.• Value creation doesn’t come just from within; it is influenced by: – The external environment; – The relationships that we have; and, – The availability, quality and affordability of management resources, such as financial and human capital.
  11. 11. AEP’s Material Issues Defined• Issues material to our sustainability are those that: – Have or may have significant impact on the company’s finances or operations. – Have or may have significant impact on the environment or society, now or in the future. – Can substantially influence the assessments, decisions and actions of our stakeholders and shareholders.
  12. 12. The Stakeholder Revolution…• Everyone is a stakeholder• Expectations are high – Profits and positive societal contributions• Transparency reigns supreme – Information is power and you control the story – Eliminate misperceptions – Build trust, credibility
  13. 13. …Includes a Shareholder Revolution• Record number of resolutions filed in 2011• Governance expected to be top issue in 2012• Environmental, social resolutions increase• Corporate political spending a focus – Advocacy, lobbying activities• Commodity, construction, compliance risks to dominate• Shareholders want companies to be more transparent, proactive on broader range of issues to protect shareholder value
  14. 14. You Need A Strong Foundation &Clear Expectations of Performance
  15. 15. AEP’s Experience The road traveled is not always a smooth one.
  16. 16. How We Began• Environmental Report vs. Sustainability Report?• Had to make the business case• 2007 – 1st sustainability report; 1st stakeholder meeting• Painful at first – transparency very new• Never reported publicly on some issues• Followed Global Reporting Initiative (G3) framework• Piloted Electric Utility Sector Supplement
  17. 17. Stakeholder Engagement:A New Way of Doing Business• Commitment from the top• Sat across from NGOs we never had before – First face-to-face• We didn’t know all we thought we did – Misperceptions on both sides• Realized we had an opportunity• Now, it’s how we do business• “Voice” of stakeholder in our reporting
  18. 18. Engaging Coal Suppliers • Coal always a top stakeholder issue • Ongoing discussions led to commitment for survey – Environmental, safety and health performance • Followed up with stakeholder meetings • Brought suppliers face-to-face with NGOs for the first time – Passionate but respectful engagement • Surprised at what we learned – as were NGOs – Dispelled commonly-held misperceptions of coal industry – Clearer picture of the performance of our suppliers – Allowed AEP to begin laying the groundwork with stakeholders for a transformation of its fuel portfolio – Sparked exploration of voluntary standards for improving conservation outcomes on reclaimed mining land
  19. 19. What’s Next in Reporting? “If you are a company committed to the long term, and one of your ambitionsis to be trusted, you have no choice – integrated reporting is the way to communicate.” --Jim Singh, CFO, Nestle
  20. 20. Why Should Companies Report? There are many benefits to reporting – some quantifiable, some not.• Allows you to tell your own story• Engages skeptics and critics• Drives change inside, outside of company• Identifies risks, opportunities• Attracts capital• Increases shareholder value• Demonstrates and drives leadership• Drives internal capacity for continuous improvement• Supports recruitment, retention of best talent• Builds customer loyalty
  21. 21. Reporting and Performance• Transparency drives accountability• Top-level support indicates seriousness of commitment• Stakeholder engagement and how it’s used is important• GRI is preferred framework – focus on materiality• Qualitative AND quantitative results needed – Don’t just throw data out there without context
  22. 22. Investors Paying Attention More and More• Proliferation of ratings and rankings – DJSI, CDP, Goldman Sachs, Bloomberg• Analysts and investors seeking more ESG data, not less• Lack of standardization of surveys, methodology – Resource intensive, comparability challenging• The birth of the GISR – Understanding what is being measured and why – Bring convergence around core principles, content• How material is performance to financial results? – The ROI of sustainability
  23. 23. AEP’s Journey to Integrated Reporting 2004 2006 2008 2009 2010
  24. 24. Integrated Reporting Will Be The Norm• International Integrated Reporting Committee (IIRC)• Lots of disagreement over what it looks like – Concern progress of sustainability reporting at risk• GRI developing G4 as a bridge to integrated reporting – Companies on their own for now• Social metrics important but hard to quantify – Should be developed in conjunction with affected communities
  25. 25. Questions? Sandy Nessing – Managing Director, Sustainability Twitter: @Watts4U