Information on business sustainability, beyond the purely financial data
In 1970 the Nobel Prize winner George Akerlof published his well-known article “The Market for Lemons: Quality Uncertainty and the Market Mechanism“. In this article he analysed how goods traded in the market can lose value in the face of the so-called asymmetry of information between buyers and sellers.
A misinformed customer is not willing to pay the price a seller expects. In the author’s own words: if the customer is not able to distinguish a high-end item (peach) from a low-end item (lemon), he will set an average price and will not be willing to pay the price the seller expects. The only solution is to provide as much information as possible so that the customer “revalues” the value and appreciates the difference.
If we take this theory to the financial markets, the result is that a company with complete and transparent information has a better chance of obtaining a fair value agreement with its client. For example, beyond purely financial information, if a company with an internal policy committed to the environment shares this information, it will be more highly valued in the marketplace and gain greater recognition.
Best Annual Report Awards
Work is underway in Singapore where they have tried to clarify what criteria should be included in this information for their capital market. To encourage this, since 1974 there have been awards for the Best Annual Report Award (ARA). Since then the aim has been to encourage more transparent corporate reporting that goes beyond the minimum requirements.
Among this information, the incorporation of sustainability reports that include the ASG criteria (environmental, social and good governance) stands out. This reinforces the idea that companies are a responsible part of the community, so that international investors increasingly rely on these criteria to make their investment decisions. Since 2018, the Singapore Stock Exchange has made it mandatory for all listed companies to include this information.
This means a break with the era in which financial information was the epicentre of annual reports and the only tool used in decision-making. Thus, the disclosure of this information will promote corporate responsibility, but it will also help companies to improve business risk management and achieve sustainable and sustained growth.
More reports with sustainability indices and higher quality
The efforts of a large part of Singapore’s business fabric to catch up on sustainability reports means that they are increasingly joining this trend.
But in addition to the increase in the number of reports, their quality has also improved. Those responsible for the awards emphasize that this year they are qualitatively better and a great effort has been made to give them visibility. This is the case of the giant Singtel, with a website dedicated to its sustainability report and an independent external guarantee from EY.
The big challenge: what should a sustainability report look like?
Compared to financial reports that follow the same globally accepted accounting standards, sustainability reports have various approaches and formats.
Experts recommend following the GRI guidelines, but the heterogeneity of data and the opacity of certain reports make them less objective. The Singapore Stock Exchange therefore encourages the continued search for a universally recognisable standard. If this is achieved, its mandatory nature will provide an excellent opportunity for companies to review their long-term sustainable strategies on a regular basis, thereby boosting the brand value and competitive advantages of their products or services.
In 2017, 78% of the world’s leading companies included corporate social responsibility in their reports according to the KPMG consulting firm’s report, The Way Forward. In Europe the trend is the same, although clear legislation is lacking. According to the European Commission’s document Towards a sustainable Europe by 2030, “in the last two years, the EU has strengthened the rights of shareholders and investors, helping them to understand financial and non-financial issues, allowing them to demand better accountability from companies”. It also recognises that “there is, however, scope to do more at all levels. At EU level, working to identify a range of concrete measures and solutions that can promote more sustainable business behaviour”.
Cover image: timJ