Using sustainability financial reporting to attract investors
Monday, September 14, 2020 1:30
By LOISE WANGUI |
Listed companies are required to publish annual audited financial reports and interim unaudited financial reports prepared in accordance with the International Financial Reporting Standards (IFRS). Investors rely on the financial reports to get a glimpse of the financial performance and fundamentals of the companies.
Generally, financial statements are voluminous and complex for most investors. In addition, most disclosures in the reports are often historical, quantitative and only depict the short- term performance of the company.
Gradually, issues of how companies impact the society they operate in- the environment, overall Environmental Social and Corporate Governance(ESG) structures- have increasingly become key for investors as they decide which companies to invest in. As much as financial performance is still very important, investors are turning to ESG frameworks that indicate long-term sustainability of businesses.
The Covid-19 pandemic has posed a real stress test to sustainability of businesses and the robustness of their operations. Business leaders have been forced to rethink and reimagine their vision of success, which was previously premised primarily on financial performance. Most listed companies, like other businesses, have been highly impacted by the pandemic. At the same time, investors, now more than ever are demanding information faithfully and accurately on the degree of impact of the pandemic on the listed companies’ business; the mitigation measures taken to ensure the ir sustainability as well as forecasts on operations of the business.
It should be appreciated that companies cannot predict, with precision, the effects of Covid-19 and that the actual impact largely depends on several factors beyond a their control and knowledge. However, investors have a right to this information as well as the sustainability fundamentals of those companies. Investors are now more informed and as the Covid-19 pandemic unfolds, there will be more scrutiny on the robustness, operational optimisation and sustainability of the business and operations of listed companies. Sustainability reporting would therefore be a vital tool for listed companies to bolster trust and confidence among investors and all stakeholders.
Going forward, companies, listed or otherwise that seek to differentiate themselves and are keen to stay relevant must make a quick shift from just financial reporting to integrated reporting. Integrated reporting enables a company to tell its story of positive societal and environmental impacts and contributions; its intangible assets and competitive advantages tied to ESG matters and financial performance including profitability and returns to its shareholders and investors. Now is the time for businesses to prove to investors the “S” in ESG, and those that hope to stay relevant have no choice but to reconcile the business’ worth beyond just a balance sheet.
This holistic approach will come with its own share of challenges, top of them being the shift in mindset from the traditional financial reporting. There is an urgent need to transform the thinking around ESG matters and integrated reporting.
For companies to create long-term value that will sustain them during and after Covid-19, their boards must empower management and investor base to bridge the information gaps around ESG and integrated reporting. Companies must also continually monitor the effects of the Covid-19 pandemic on the business performance and operations and provide accurate information in a proactive manner to investors and other stakeholders.
Health reporter Tegan Taylor may be one of the co-hosts of the ABC’s popular Coronacast podcast, but that doesn’t mean everyone is a fan of her work.
While she was home schooling her kids earlier this year, she got the following review in her six-year-old daughter’s Year 1 journal:
My mum dose croanacast.
We have to stay cwieyet for half an hour.
It is boring.
“I’m clearly raising a tough critic,” Taylor says.
ABC Science’s online team of specialist science, health and technology reporters have been reporting on the coronavirus pandemic since the virus emerged.
We published our first explainer on coronavirus on January 20 and, as the virus has spread around the world, many members of the team have been reporting on little else for the past few months.
“I remember in January I was still so focused on the health impacts of the bushfires that when this ‘mysterious viral pneumonia outbreak’ popped up in China, I didn’t think too much about it,” health reporter Olivia Willis says.
“That obviously changed pretty quickly, and since mid-February I’ve been covering nothing but COVID-19.”
From the start, we’ve been working closely with our colleagues in News to ensure the coronavirus explainers and in-depth health features we’ve been writing reach as big an audience as possible, and complement the rest of the ABC’s coronavirus coverage.
We’ve also been helping to check stories written by general reporters, who might not be as immersed in the intricacies of health reporting as we are.
“At times we’ve had to break our own rules, such as reporting on preprint data — normally we only report on data once it’s been published in academic journals (more about that later) — but we’ve always tried to be honest with the audience and explain what we do and don’t know.”
The challenges of covering an emerging public health emergency
ABC Science has always been a geographically dispersed team, with reporters working from the ABC’s offices in Brisbane, Canberra, Sydney and Melbourne.
So we’re perhaps more used to working remotely than most, although now that we’re all working from home our regular Zoom editorial meetings have seen more than one cameo appearance from partners, pets and progeny.
But the real challenges in covering this pandemic have come from the subject matter itself.
Often the only answer an expert can give us to a question we’ve asked is “we don’t know yet” and that’s frustrating for both us and them.
But we believe it’s important we also give you these insights into the scientific process, so when you’re reading one of our stories you know what we know from the latest research, what an expert is speculating on within their area of expertise and what we just don’t know yet.
Which is not to say the medical and broader scientific community have been resting on their laurels.
The number of papers published on COVID-19 has already surpassed 25,000, according to LitCovid, a curated hub of all the scientific literature on the virus, and I suspect a website bookmarked by many health and science reporters around the globe.
That also means the pace of reporting the latest research has been fast and furious.
While there are at least 200 different drugs being trialled as treatments, just a handful have hogged the headlines.
Keeping on top of the latest evidence — and spin (hello hydroxychloroquine) — is challenging even for medical researchers.
With scientists scrambling for a solution, much of the early information in the pandemic was based on incomplete science, and many results have been hastily uploaded to preprint servers like medRxiV and bioRxiv.
These servers help scientists quickly collaborate, but the studies have not been peer-reviewed and published in a journal.
In many cases we’ve chosen not to report on preprint research as the findings are very preliminary and have not yet been vetted by experts.
In the rare cases where we have, we’ve made sure to let you know the research isn’t yet peer-reviewed.
Of course, that doesn’t mean that everything that does get published in a journal is above reproach, as we’ve seen with some recent high-profile retractions of papers, but peer review is still the best system we have.
And as our knowledge of this coronavirus deepens, it’s natural that our understanding of the virus will also change as we accumulate more data.
That’s one of the key challenges of reporting on a situation that is constantly evolving.
With all of our coronavirus stories we’ve done what we always do, talk to independent experts who weren’t involved in the research to help us understand how this new work fits in with what we already know in this area, and to cast a critical eye over how it was done.
Independent experts also help provide crucial context to our stories, particularly in a situation like this where the Australian experience has been very different to what is happening overseas.
The pandemic is the only tale that people want to read about ideal now. But it is the exact same tale, every single working day. In an hard work to preserve items fresh, is the media resorting to ‘Goldilocks reporting’?
The COVID-19 pandemic needs Goldilocks reporting that’s juuust correct. But which is not what each day journalism is optimised for. In the now many years-lengthy war with the world-wide-web and social media, classic media has fought its corner every single early morning and evening by generating “news” all shouty: whatever the story, it gets to be news by becoming “TOO HOT” or “TOO COLD”.
In Australia the place so substantially journalism has been shaped by the News Corp tabloid tactic, there’s a shrug. “It is,” as Donald Trump famously explained to Australia’s Jonathan Swan before this week, “what it is.”
But in the moments we’re living as a result of, that also easily arrives across as the journalistic equivalent of shouting “FIRE” in a crowded cinema (remember those?) creating panic and distress — and undermining assurance in the media on the way by way of.
Andrew Parsons, the founder and chief investment officer of real estate securities manager Resolution Capital, said any notion or clarity would be appreciated “but I’m not holding out too much hope”.
“Obviously there’s some exceptions, such as most logistics-related real estate, but investors will be trying to ascertain the extent to which rent cashflows are lost, deferred and permanently reset lower,” Mr Parsons said.
Due to COVID-19, the majority of A-REITs have already withdrawn their 2020 financial year guidance, cut distributions and several raised equity. Many in the retail sector have slashed asset values by as much as 11 per cent.
While the macro environment is supportive, fundamentals vary by asset class with retail and office he harder hit.
Sholto Maconochie, the head of real estate research at Jefferies, says he expects a “big divergence” in underlying earnings on a funds-from-operations basis versus cash-flow.
He said investors will be paying “close attention” to the treatment of rent abatement and deferral.
“We also expect many A-REITs may provide only limited or no 2021 financial year guidance,” Mr Maconochie said.
He said while the virus will make it difficult for A-REITs to provide meaningful guidance, he will be seeking updates on rent collection rates; the level of rent abatement/waivers agreed; and the direct and indirect impacts on the results in the year ahead.
SG Hiscock & Co. portfolio manager of Australian real estate investment trusts Grant Berry said for the retail-focused trusts, while it has been in the front line of the lockdown and there has been income implications, “there may be encouraging signs of foot traffic improving from the low levels in March/April”.
“As investors we will be looking for progress and information on Small Medium Enterprise [SMEs] lease negotiations under the National Code of Conduct and any lease negotiations with tenants that reside outside the Code and how these have been structured,” Mr Berry said.
The office sector has also been hard hit with staff working from home and recent surveys indicating that the trend will continue, leaving towers half empty.
Mr Maconochie believes the “death” of the office is overdone, and he remains contrarian on his buy recommendations for landlords Dexus and Centuria Office REIT.
“But I concede negative office sentiment on work from home and structural shifts may see Dexus underperform in the near term,” he said.
For Mr Berry, rent collection has been better in the office subsector, with a smaller proportion of SMEs and companies less impacted by the shutdown measures, as they have been able to predominantly work remotely.
“Our interest will be in the office sublease environment and changes in tenant preferences and requirements for space,” he said.
“The longer-term implications of [working from home] and how the landlords will adapt to work with this in order to enhance the appeal of the office environment will be another area of interest in the reporting season.”
Carolyn Cummins is Commercial Property Editor for The Sydney Morning Herald.