Most reports neither provide information that is useful to investors nor data that enables a robust assessment of a company's performanc

Rory Sullivan for the Guardian Professional Network

guardian.co.uk, Monday 4 April 2011 11.05 BST

The previous articles in this series argued that, even though investors are frequently not particularly interested in companies' corporate responsibility performance, there is a growing expectation that companies will produce corporate responsibility reports. Yet, it is probably fair to say that most reports are not seen as useful to investors, with the two most common problems being that they neither provide information that is actually useful to investors nor data that enables a robust assessment of the company's performance to be made.

In this article I would like to offer three practical proposals that would not only make a dramatic difference to this situation but should be relatively straightforward for all companies producing corporate responsibility reports to implement.

The first is that companies must be explicit about which social and environmental issues they see as being of most relevance to investors. Put another way, companies should explain which issues are financially material (ie financially significant over the short to medium term), which are of strategic importance and which of operational importance. They should also define the timeframes over which these assessments are being made, acknowledging that the relative importance of issues is likely to change over time.

Being clear about materiality should enable companies to explain the importance of environmental and social risks and opportunities in the context of their business strategy, their key value drivers and their short- and long-term financial performance. Companies should also be prepared to explain which issues are not seen as material, and the reasons for these decisions. This is probably the critical challenge. Companies have been unwilling to be so explicit about materiality because they have not wanted to be held to account if other issues are subsequently shown to be material, and they have not wanted to antagonise other stakeholders by suggesting that other issues are in some way less important.

Second, companies should provide more information on their stakeholders. Specifically, companies should identify the stakeholders they see as being of particular importance, explain how they have engaged with these stakeholders, detail the specific issues raised by these stakeholders, and describe the actions that they have taken in response. It is striking that the fashion in corporate responsibility reporting has moved so strongly away from reporting on specific stakeholder needs and interests, notwithstanding the growth in stakeholder assurance processes. The reasons are unclear but may reflect the relative lack of responsiveness of companies to the specific issues raised by stakeholders.

Third, companies could do a much better job of facilitating investor understanding of the data provided in corporate responsibility reports. At present, most data falls short of the quality necessary for investors to be able to build consideration of social or environmental performance into their investment models, to compare different companies or even to robustly assess trends in an individual company's performance over time. There are various reasons. Some are practical and probably inherent to corporate responsibility reporting for the foreseeable future: evolving performance metrics, relatively underdeveloped data gathering and quality assurance systems, the inevitable trade-offs between cost and precision, and the very significant uncertainties in many of the techniques used to generate data.

While acknowledging these realities, there is much that companies could do to increase the utility of the information that they do provide, in particular through being explicit about the scope of their reporting and the limitations in the data and other information that they provide. In relation to the scope of reporting, companies should explicitly define the scope of their reporting (eg does it cover all parts of the business, are specific countries not covered) and the implications of any exclusions for the reported data. In relation to data, companies could do much more, perhaps on their websites, to explain the uncertainties and limitations in their reported data, through providing a comprehensive description of how they have produced this data (in terms of calculation protocols used, assumptions and estimates made and data sources used) and through commenting on the uncertainties in the reported data.

In conclusion, the central message from the three articles in this series is that investors are paying much greater attention to corporate responsibility performance and are likely to increase their demands for better quality and more relevant corporate responsibility information from companies. This presents a huge opportunity for companies to engage their investors in wider discussions around the longer-term prospects for the business. However, for this to happen, the quality and rigour of the information provided in corporate responsibility reports must first be significantly improved.

Dr Rory Sullivan is the author of Valuing Corporate Responsibility: How Do Investors Really Use Corporate Responsibility Information?(Greenleaf), published on 15 March 2011.