The climate risk tsunami is still out in the ocean but the timing and force of its landfall is uncertain. Attention from investors is increasing as they do more to understand climate risk, and increasingly flex their muscles to help ensure fossil fuel companies respond (see “Greens in pinstriped suits” in The Economist).
Part of the climate risk problem is rooted in the age-old challenge of transparency—transparency over the potential risk and opportunity of climate change and, in the case of fossil fuel companies, the risk that fossil fuel reserves might cease to be considered as assets in the future.
As should be the case in a market system, investors are getting active. Some ExxonMobil investors recently proposed a resolution to publish an annual assessment of long-term portfolio impacts of public climate change policies. And other investors across industries and sectors are taking similar actions.
This is a transparency problem that integrated reporting is designed to fix. An integrated report is largely forward looking, and linked to strategy and business models. It ultimately demonstrates how a company is creating value over time.
Unfortunately, the Association of Chartered Certified Accountants’ Filling the Information Black Hole: How Are Fossil Fuel Companies Reporting on the Stranded Asset Risk? found that integrated reporting has not appeared to result in greater disclosure in relation to carbon related “stranded assets”. The ACCA research covered 11 fossil fuel companies for the 2014 reporting season.
Given the International Integrating Reporting Framework was only released in December 2013, the ability of integrated reporting to have already influenced the way these companies report on stranded assets and related matters is limited. However, many of these fossil fuel companies are not producing integrated reports so the challenge isn’t only sufficient time.
This is not to say that these companies are not disclosing any information on the risks and opportunities of climate change, as well as implications such as stranded assets. For example, both Shell and ExxonMobil have provided separate statements outside of their year-end reporting on the risks they face from climate change. Their economic, social, and environmental impacts are also highlighted in distinct sustainability or citizenship reports, which can provide useful information.
The problem is that these disclosures are not delivered in the context of the organization’s strategy, governance, performance, and prospects. Integrated reporting should lead to material disclosures on climate risks—ones that affect the organization’s ability to create value in the short, medium, or long term.
This reporting problem is down to a lack of transparency, and where there is disclosure it is ad hoc and fragmented and not clearly linked to the business model reality of the company. Consequently, climate related disclosure comes across as specious to some investors and stakeholders.
Integrated reporting responds to the challenge of transparency and inaccessible reporting. Where climate risks are linked to trends and issues in the external environment, and to the strategy and business model of the company, stakeholders can make their own judgment call on how well they think climate risk and opportunity is being dealt with.
The position of the fossil fuel companies seems to be based on a premise that energy demand will continue increasing and fossil fuels, particularly gas and oil, will be needed to support global economic growth, at least in the medium term. This transition phase is seeing many of the largest fossil fuel companies investing in energy efficiency and solutions based on new technology. The energy demand from society is arguably not the fault of the fossil fuel companies. Investors can make their own judgments on whether they wish to bear this risk and, ultimately, can buy, hold, or sell stocks in these companies.
The point is that integrated reporting, if done well and based on integrated thinking, will greatly help influence the allocation of market capital and credit.
Integrated reporting’s premise is that it requires integrated thinking, which leads to better decisions not just better reporting. Integrated reporting arose out of concerns about corporate behavior, sustainable development, and the resilience of organizations. Integrated thinking involves a changed mindset, purpose, and multi-capital approach. Ultimately, mainstream investors and others will be looking at a company’s capacity for integrated thinking.
So it is interesting that some of the fossil fuel companies are showing a propensity for many of the key aspects of integrated thinking. Joining the Dots: Decision Making for a New Era, a recent report from Chartered Global Management Accountant (CGMA) on integrated thinking, includes Simon Henry, CFO of Royal Dutch Shell and a professional accountant, talking about Shell’s efforts to improve its integrated thinking. Henry says Royal Dutch Shell is using integrated thinking in various areas and perspectives, including breaking down silos and being leaner; taking a longer-term perspective; enhancing insights from data; and improving the decision-making capability of senior executives.
Shell’s focus on developing its integrated thinking in the context of taking a longer term perspective and responding to challenges and uncertainties in the business environment provide a solid platform for producing an integrated report. An integrated report allows the governing boards of such companies to tell their own narrative of the material matters that will affect their ability to sustain themselves over time, and how they are responding to these. In this light, an integrated report can then support a candid conversation between the company and its investors, and other stakeholders
