Changing the nature of company reporting could drive huge change
“Rampant capitalism is capable of destroying the world”.
“We shouldn’t let the private sector run untrammelled – we need sound public policy to guide people and firms to do the right things”.
Strong stuff - you might assume these must be the quotes of a dangerous, radical thinker with a strong anti-capitalist viewpoint. Bernie Sanders, Jeremy Corbyn, maybe even Karl Marx himself? But no. This is Russell Picot speaking, chair of a large pension fund, and until his retirement a couple of years ago, Group Chief Accounting Officer for one of the world’s largest banks. Not a dangerous radical then, but a highly intelligent, cautious, thoughtful accountant.
Yet Picot is now one of the leaders, an evangelist even, in an area that could lead to profound changes in how businesses globally think, act and report. He was a Council member of the of the IIRC (the International Integrated Reporting Council), was co-chair of the Financial Stability Board’s Enhanced Disclosure Task Force (EDTF), and is a Special Advisor to the FSB Task Force on climate related financial disclosures (TCFD), chaired by Michael Bloomberg. He is also a Honorary Professor at Durham University, and was one of three authors (along with Carol Adams, Professor of Accounting at Durham and Paul Druckman) of the Sustainable Development Goals Disclosure (SDGD) Recommendations,
The common theme, apart from complicated acronyms, is how statutory company reporting should adapt in order to reflect the wider value that companies provide, including the actions they are taking relating to the United Nations SDGs. Reporting should also reflect the risks that firms face, particularly in the light of climate change and associated issues.
“As the chair of a large pension fund, I know that achieving good outcomes for our pensioners and future pensioners will rely on the market, and returns will obviously be better into the future if we have a functioning system. Firms that are healthy and think about the long term, who see the SDGs as both risks and opportunities, are those that are likely to prosper”.
But how should firms make these disclosures? They need to provide the assumptions which lie beneath their business strategies and processes. But these are often implicit, and need drawing out, as Picot explains. “Not long ago, a French nuclear power station needed to be shut down temporarily due to water shortages – there was an implicit assumption in that business that there would always be enough water for their cooling requirements”.
At the moment, Picot acknowledges that “it is the wild west out there in terms of disclosure” – there is still much to be done. “There is no framework for example for mapping the SDGs to company reporting”. The guidance he produced with Adams and Druckman is certainly useful and well worth examining, but he acknowledges it is quite high level - “it is not a detailed industry guide and doesn’t get into suggested metrics”.
Where does this all this leave the “traditional” focus on shareholder value? Isn’t that still what really matters? “There’s a growing recognition that shareholder value is not necessarily the right lens for looking at companies”, Picot suggests. It parallels the debate about whether GDP is the right measure at national level, or whether issues such as happiness and health matter at least as much to the nation’s overall position. He is also clear that consumer pressure is good, but not enough. There needs to be a regulatory policy framework to drive the right behaviours (hence his quote earlier).
How should procurement and supply chain management should play into this new reporting paradigm? For example, if a company outsources manufacturing to a developing country, it might use less energy itself, but it might now be the cause of more carbon emissions via an inefficient plant elsewhere, a plant that might even be staffed by slaves! How does that get reported in a transparent manner?
“These are sensitive issues. You might lose jobs locally, but create more in a location that really needs them. And as well as the factory’s carbon emissions, the transportation involved in your example is another issue. Globalisation is problematic, we really need to de-carbonise global supply chains. But in their annual reports, I expect companies to be discussing their supply chains where these are significant to their business model”.
However, this is work in progress. That aspiration hasn’t yet translated into clear guidance around how procurement with purpose issues will be measured and reported, for the purposes of these emerging reporting requirements. And of course, reports in themselves mean little. It is the actions that sit behind them that matter, and Picot expects to see “assurance down the supply chain, at the right level of detail, by inspection or other means”.
What does seem extremely likely is that procurement leaders will be finding CFOs and Boards wanting to engage more in terms of these issues, because of the reporting imperatives. That should include how supply chain and procurement programmes are delivering improvements across all SDG (or procurement with purpose) related areas. CFOs and other senior colleagues will be vital allies in the movement, and stronger reporting rules should help highlight why this agenda is so crucial, both internally in our organisations and externally to citizens, investors and customers.
(Note – the interview was conducted pre pandemic so we didn’t really talk about whether pandemic risk issues might impinge on regulations or reporting).