Connectivity: Why Financial Statements and Sustainability Go Hand in Hand

There is still a need for a thorough cultural change in the way companies approach corporate disclosures. This is one of the conclusions outlined by Annalisa Prencipe, KPMG Chair in Accounting, and Ariela Caglio of the Department of Accounting, in a series of studies presented last October 3 at an event organized by Bocconi and KPMG.

Companies are faced with increasing demands for information about their operations well beyond purely financial results. Stakeholders, in this respect supported by European legislation, are also paying increasing attention to sustainability reporting concerning the environmental, social and governance (ESG) dimensions.

The new European Corporate Sustainability Reporting Directive (CSRD) - soon to be implemented - imposes stricter disclosure requirements on listed and unlisted companies. To find out what the state of the art is and how distant Italian companies are from full and proper implementation of the new legislation, a study was conducted on the financial and non-financial documentation issued by 199 companies listed on Borsa Italiana. But, as Annalisa Prencipe points out, "The expression 'non-financial information' is inaccurate, because it implies that information of this nature is not relevant on a financial level." As suggested by the directive itself, it is better to use the expression 'sustainability information'.

In general, reported data is still limited and is too often expressed only in a qualitative way. Only 48 percent of companies, moreover, have at least one board member or other governance role dedicated to sustainability. A vision that truly considers sustainability as an integral part of business strategy and processes is still lacking. According to Annalisa Prencipe, "it is essential to start considering sustainability as an opportunity, not merely a regulatory obligation to fulfil in order to avoid penalties."

One of the main challenges businesses face is played out around the concept of connectivity. Connectivity refers to both the ability of an organization to provide integrated reporting of financial and sustainability information within the same report and the ability to make connections between different reports.

Ariela Caglio presented another part of the same study in which each company in the same sample was assigned a connectivity score on five parameters, with a minimum score of 0 and a maximum score of 5. The resulting average was 1.6, and this figure alone is evidence of how much room there still is for progress. This connectivity value was found to be positively correlated with company size and business performance, and negatively correlated with the length of sustainability reports. Ariela Caglio explains it this way, "It is not surprising that larger companies, having more resources, are also those that are more readily able to respond to corporate reporting challenges. Interestingly, on the other hand, the most connectivity virtuous companies also produce shorter, more focused reports, which we know from previous research to be preferred by investors and stakeholders."

Another study, conducted by Ariela Caglio together with Francesco Grossetti (also of Bocconi Department of Accounting), Arianna Pisciella and Gaia Melloni of HEC Lausanne, looked at data from 2011 to 2019 for 138 companies listed on the Johannesburg Stock Exchange. From 2010 onward, they have been required to publish an integrated report, a concise communication that illustrates both financial and sustainability aspects. Using text analysis techniques, the research team proposes a new measure of connectivity, which is based on the number of times within the integrated report the text shifts from financial to ESG aspects, and vice versa. Preliminary results of the study indicate that a more connected report does not get better ESG ratings, which are rather more associated with the amount of ESG information disclosed rather than with its integrated presentation. Conversely, as business complexity increases, text connectivity increases. As Ariela Caglio explains, "in a more complex business, there are often more diverse and interconnected operations and more risks: connectivity becomes necessary to effectively communicate operational complexity and to reassure stakeholders about the ability to manage risks."