Assistant Professor George Serafeim, as part of an ongoing collaboration with Robert G. Eccles (see profile), explores how integrated reporting of financial and sustainability performance can embed material sustainability issues within both the capital allocation decisions of investors and the strategic decisions of managers.
“Being able to collect, analyze, and integrate environmental and social data in investment analysis is an emerging field which can give opportunities for constructing portfolios with better risk/return profiles”
Serafeim emphasizes the financial benefits of integrated reporting. By providing information on those aspects of sustainability that are most relevant within each industry, it helps investors take longer-term risks and opportunities into account when making capital allocation decisions.
“Being able to collect, analyze, and integrate environmental and social data in investment analysis is an emerging field which can give opportunities for constructing portfolios with better risk/return profiles.”
Integrated reporting not only creates transparency for investors, it also guides managers toward better performance. Serafeim sees this as a valuable managerial tool that can help in the transformation of an organization to a sustainable one. “Managers can and are using integrated reporting as a disciplining mechanism to improve internal processes, motivate people, change incentives inside the organization, and gathering institutional support to redesign the organizations and align sustainability with corporate performance,” he says.
Changing the practices of a relatively small number of global companies, contends Serafeim, can have an enormous impact on society and on the planet. At the end of 2012, just one thousand corporations were responsible for half of the world’s total market value — with a total market capitalization of $28 trillion. These companies consume vast amounts of natural resources, are responsible for a large share of pollution, and exercise enormous influence over the quality of employee lives. “The vast concentration of economic activity in few corporations allows for an institutional change strategy to concentrate on just 1,000 companies instead of millions.”
To explore this idea further, Serafeim teaches an MBA course called Leading the Global 1000. “For students that are interested in senior executive positions in large companies, understanding megatrends… is extremely important. Climate change and the stranding of assets fundamentally affect a firm’s ability to generate earnings in the future.”