Valuing non-financial performance: a European framework for company and investor dialogue
It was a catch-22 situation: investor surveys consistently suggested that more information about the non-financial performance of companies would support higher ratings, if only companies would provide such information. Equally consistently, surveys of companies showed they felt investors were ignoring or undervaluing the non-financial drivers. “We thought that if we established the underlying reasons for this disconnect, we would find a solution to it,” says John Swannick, Executive Director of EABIS[1].
In 2007 a two-year EABIS-funded research project set out to explore how the environmental, social and governance (ESG) performance of companies might impact on their performance drivers and how to improve the dialogue between companies and investors. Céline Louche, Professor of Corporate Responsibility at Vlerick Leuven Gent Management School, was part of the research team[2]. Working in parallel and closely interacting was the European Alliance for CSR Laboratory, which involves business practitioners and is led by Lloyds TSB[3] and Telecom Italia.
John Swannick: “We were also triggered by the observation that 80% of the value of the S&P 500 Index could not be measured in conventional accounting terms, i.e. the market value of the companies in that index was four times greater than the asset value shown in their balance sheets. Assuming this was also true for the other stock markets, 40 trillion USD of market value was not accounted for. It had to reflect the non-financial performance of those companies.” Céline Louche: “And research reinforced the intuitive idea of the business team that there is a relationship between non-financial and future financial performance.”
The research team developed a Value Creation Framework from which the Laboratory derived an operational version. The framework identifies the impact of six core non-financial performance drivers - human capital, customer relations, society & partnerships, environment, innovation and governance – relevant across markets and sectors. Performance in these areas is influenced by a wide range of company-specific ESG factors.
John Swannick: “Each company will have to assess which ESG factors are relevant and how they impact on performance. Interestingly, the contribution of the core non-financial drivers is often part of a company’s internal strategic rhetoric, yet CEOs are reluctant to articulate it to investors, not least because they feel they can’t quantify and monitor these drivers and are therefore not ready to commit to any forecasts derived from them.”
Céline Louche: “Today’s dominant convention in the investment community still doesn’t take into account the importance of ESG factors. The challenge is to break down this convention in a community that’s fairly resistant to change. The financial crisis may prove to have been the unwanted wake-up call.” “We need to build a critical mass of vanguard companies and investors to help put our framework into practice,” John Swannick adds. “That’s the scope of a follow-on project. Together with companies, investors, academia and other stakeholders, we’ll develop solutions to address the obstacles to implementation.”
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The full research report and the Laboratory report are available at www.investorvalue.org
[1] EABIS: the European Academy of Business in Society is an alliance of over 100 companies, business schools, academic institutions and affiliated partners committed to mainstreaming business in society issues into management practice, research and education.
[2] The research team consisted of academics from Vlerick Leuven Gent Management School, SDA Bocconi School of Management (Milan) and Cranfield School of Management (UK).
[3] At the time of the project, John Swannick was CR Manager at Lloyds TSB.
Published on 20/09/2010
