EY Trialogue Sustainability Forum
- Dr Brian Chicksen is the Vice-President of Health at AngloGold Ashanti. He was previously the MD of the group’s health subsidiary where he established a clear healthcare value proposition for AGA and its employees. He is also an Adjunct Professor at the University of Cape Town with the Department of Chemical Engineering. Furthermore, Dr Chicksen holds an MBA, as well as his medical qualification, and has developed himself into a ‘Strategy Integration Specialist’. In this role, he works to improve the linkages between business strategy and sustainability.
- Theo Botha is a South African shareholder activist. He queries many companies in the area of good corporate governance, ethics, executive remuneration, environmental practices and BEE. Theo first decided to pursue shareholder activism after making a small investment in a life insurance company. He noticed that the company was making losses in the United States that it refused to disclose to the South African shareholders. He confronted the company, but had little success, and therefore took it to the media. After this, he says, “I suppose I became addicted to it”.
- Olga Constantatos is the Credit & Equity Process Manager at Futuregrowth Asset Management. She is responsible for the management of the credit and equity investment process, including managing the investment analyst team and ensuring that the credit and equity process generates good quality and high-yielding assets for our clients’ funds. Olga’s prior experience includes six years at Old Mutual as Head of Credit, and three years with Thesele Group as a deal executive.
According to a recent EY survey, investors are becoming more inquisitive about ESG (environmental, social and governance) information and utilise the integrated report as their primary source of reference. Yet feedback shows that there is some frustration at the lack of consistency and relevance of business information provided.
Whereas reporting standards and frameworks offer worthwhile principals and good practice guidance, when these are applied formulaically the essence of value creation is often lost. A common mistake is to prioritise reporting over strategy and practice – leading to information gathered and models developed purely to serve the reporting purposes of an annual integrated report. The information gathered is entirely disconnected from: strategic thinking on long term value creation; strategic risk and opportunity and associated day-to-day management decision-making.
2. Integrated thinking before integrated reporting
The panel indicated that there is still have a way to go before it becomes the norm for companies to undertake integrated thinking prior to integrated reporting. Brian further indicated that there are limitations to the IIRC framework and other reporting standards in that they can drive a compliance mindset, which in turn can be a barrier to forward thinking. Nonetheless, panellists agreed that the <IR> framework is underpinned by good principals such as materiality and clear and concise reporting which drive integrated thinking.
The world has changed in recent years, and traditional business management, largely based on financial analysis, is no longer sufficient. The value of intangible assets has now grown to over 84% of total market value for S&P 500 companies. In addition, the voices of stakeholders who are not necessarily large shareholders, have increased over the last 20 years. Dissatisfied communities, civil society (e.g. a Greenpeace disruption), and shareholder activists can effectively remove a company’s social licence to operate. Many top young graduates don’t want to work for environmentally or socially damaging businesses.
Due diligence has also changed – this has increased the pressure on companies to report on environmental, social and governance (ESG) aspects. ESG is a requirement for King IV, companies signing up to the UN PRI (Principals for responsible investing, and the Code for Responsible Investing in SA (CRISA). Furthermore, the updated Regulation 28 of the Pension Funds Act now states that investors should give “appropriate consideration to any factor which may materially affect the sustainable long-term performance of a fund’s assets, including factors of an ESG character”. Additionally, the IIRC and GRI Standards require companies to report on their whole value chain, and not just their internal operations.
Olga indicated that companies initially add ESG as a bolt on to decision making. Over time, however, factoring ESG into thinking and reporting becomes more integrated. A narrow focus on financial tools is no longer sufficient. Top companies are now balancing their performance and business decisions across several capitals, including natural, relationship, human, manufactured and intellectual.
If ESG not factored into a company’s thinking, Futuregrowth will demand a higher return in order to invest. Furthermore, their investment decision will likely be short term if the company has not demonstrated how they are going to grow their long-term value.
3. In practice, is the value creation message is being appropriately represented via the integrated reporting process?
Bond investors need to take long term decisions based on review of integrated reports. These investors are looking for a balanced assessment of company risks, and what companies are doing to mitigate these risks across all capitals. Regularly, however, the reports (the CEO statements in particular) are biased to positive stories and are not balanced. Furthermore, lack of integrated thinking leads to poor integration in the reports, with what directors say in one area differing from that in another.
Olga indicated that Futuregrowth rely on information that is publicly disclosed, as they are not embedded in the companies in which they invest. They need to see information on trade-offs in decisions – for example, Eskom’s use of diesel, to keep the countries power on, has resulted in massive debt. They also need the reports to provide a balanced view of the company, and how well it has dealt with challenges. Panellists recommended the Integrated Reporting Committee of South Africa (IRC)’s information paper: Achieving balance in the integrated report to provide guidance on balanced reporting.
4. Driving integrated thinking – the way forward
The beginnings of a shift in mindset from short term incentives, to longer term value is outlined in an article for the Harvard Business Review: The Error at the Heart of Corporate Leadership. The authors provide the example of an EU company that took the decision not to pay dividends to shareholders for three years, in order build liquidity for renewable energy. This decision lead to the company’s share price going up, rather than down – indicating that shareholders recognised that the company board was applying their collective mind and looking to generate value over the long term.
In order to drive integrated thinking, and ultimately integrated reporting, executive and management’s key performance indicators (KPI) need to be linked to ESG targets and goals. For example, Sasol has aligned their targets for reduction in CO2 emissions to the CEO’s KPIs. Theo stated that without CEO buy-in, ESG will not be aligned to. The panellists made the following suggestions for linking remuneration to ESG and business strategy:
- Close the top salary gap, while making the bonus variable. For example, if EBITA is good, a third of the bonus would be paid. Then if critical social development targets are reached, the remaining two thirds of the bonus could be paid. If sustainability targets are reached, high remuneration may be far more palatable to communities, civil society, and shareholder activists.
- Long term remuneration schemes (five to 10 years) would tie management into key process and ensure that they drive the relevant initiatives.
Brian indicated that 25% of AngloGold Ashanti’s executive remuneration is linked to the Sustainable Development Goals (SDGs
 Ocean Tomo. Intangible Asset Market Value Study. http://www.oceantomo.com/intangible-asset-market-value-study/
 The Error at the Heart of Corporate Leadership; Harvard Business Review; Joseph L. Bower and Lynn S. Paine; https://www.hbs.edu/faculty/Pages/item.aspx?num=52623