Accounting for the intangibles: the business case for wider value creation.
According to a recent study, integrated report writing is on the rise. 66% of FTSE 100 companies now take a ‘wider value creation’ approach to their business model. This represents a substantial shift since 2014, with a 175% increase in companies engaging with this concept over the last four years.
The view once articulated by Albert Einstein, that “not everything that counts can be counted, and not everything that can be counted counts,” seems finally to be gaining traction. But how well positioned are companies to tell their ‘wider value creation’ story?
In the bad old days of corporate myopia, ‘value creation’ meant one thing and one thing only: creating value for customers in order to sell more products and services while generating financial returns for shareholders.
But with salutary lessons learned from those companies that have been too narrowly focused on short-term profit – BP, Volkswagen, Wells Fargo – this definition has broadened in recent years. Eighty-six per cent of senior executives now agree that longer time horizons for business decisions would improve performance, and companies are beginning to take a wider – and longer – view of how they create and sustain value.
It’s a view that’s been reinforced by the intellectual property merchant bank, Ocean Tomo, whose recent report, Intangible Market Asset Value, argues that much of a company’s true value never shows up in its financial statements. According to the report, this is largely because accounting systems are still set up to provide information on tangible assets, even though investment in intangible assets far outweighs investment in the more traditional asset class.
The Ocean Tomo report is often used to argue the case for wider value creation. And today, more and more companies are attempting to tell their ‘wider value creation story’. The problem is, this narrative requires new reporting tools, editorial techniques and alignment with broader sustainability agendas which many companies haven’t yet mastered.
A multifaceted narrative
The ‘wider value creation’ story is a multifaceted narrative which accounts not only for financial value but for those ‘intangibles’ which do not register on a company’s balance sheet, such as social and environmental performance or intellectual capital.
Through sustainability reporting, or integrated report writing as promoted by the International Integrated Reporting Council (IIRC), companies are able to account for those intangibles and communicate their non-financial performance. The IIRC’s Framework, for example, includes ‘six capitals’ against which companies can reposition their value creation process.
Described as “stocks of value that are affected or transformed by the activities and outputs of an organisation”, the ‘six capitals’ are: financial; manufactured; intellectual; human; social & relationship; and natural. Providing an opportunity for companies to combine both quantitative and qualitative information in their reports, they encompass topics such as resource conservation, biodiversity, sustainable communities and wider stakeholder engagement, among others.
Elsewhere, the United Nations Sustainable Development Goals (UN SDGs) provide an opportunity for companies to align themselves with the “17 building blocks of the global sustainability agenda up to 2030”. Launched in 2015, the UN SDGs are designed to shape the priorities of business, government and civil society for the next decade. And although awareness is growing among the business community, according to KPMG only four in ten (40%) of the world’s largest 250 companies currently discuss the SDGs in their corporate reporting. With 60% yet to engage with this wider sustainability programme, it’s clear there’s still plenty of work to be done.
Integrated report writers
With our specialist focus on sustainability reporting, integrated report writing and sustainability communications are core areas of expertise. We’re committed to helping companies tell their ‘wider value creation’ story. We’ve also helped a number of companies articulate their alignment with the UN SDGs, showcasing their commitments and activities in a range of non-financial areas.
If you’re looking to explain how your company creates value beyond the bottom line, we have the experience to help you build a compelling and credible narrative. One which you can articulate across your corporate reports, embed within your business model and strategy, and reposition across your wider communications channels.