INTERVIEW February 2016 For professional investors

Interview | 1

‘Integrated

reporting

needs to be a

reflection of

integrated

thinking’

Integrated reporting, which combines financial and sustainability

information, is starting to appear more on companies’ agendas.

Although this is a step in the right direction, integrated reporting

should not be the final objective, but rather a means of meaningful

reporting, say financial analyst Johan van der Lugt and engagement

specialist Daniëlle Essink.

The two separate streams of information companies currently provide, i.e. sustainability

data in a Corporate Social Report and financial information in an annual report, need to

be integrated into one comprehensive, meaningful report, say Daniëlle Essink,

engagement specialist at Robeco, and Johan van der Lugt, a financial analyst in the Global

Equity team. ‘In most cases, a Corporate Social Report does not speak the language of

financial analysts, whereas an annual report only provides financial data,’ says Essink. ‘At

Robeco, sustainability specialists and financial analysts increasingly work together when

analyzing the risks and opportunities of companies’ business models, as the two types of

information are not isolated but impact each other. We need companies to provide

Johan van der

Lugt, Global

Equity Analyst

Daniëlle Essink,

Engagement

Specialist

JOHAN VAN DER LUGT & DANIËLLE ESSINK

Integrated reporting: more than a box-ticking exercise

Interview | 2

information that integrates the two, showing their interlinkages.’

There are companies that sign the UN Global Compact, disclose a dataset on sustainability

metrics, appoint a Sustainability specialist in the Investor Relations department, and that’s

it. This is just the starting point, says Van der Lugt. ‘Companies need to make sustainability

information available to investors in a transparent, comparable and accessible manner. It

should reflect integrated thinking. With this, I mean linking traditional sustainability data

to the company’s strategy and its financial outcome.’

‘As investors and users of financial and sustainability reports we would welcome a higher

degree of standardization and integration of the various metrics,’ he continues. ‘Reports

need to contain quantitative information on material sustainability issues. If sustainability

issues are indeed material to a company – meaning that they have a significant impact on

their long-term competitiveness and profitability –there is no reason why this information

should not be disclosed in their annual report.’

‘Australian bank and RobecoSAM industry leader Westpac is an example of a company

that has embraced materiality. Their materiality matrix is a good illustration of integrated

thinking.’

Materiality matrix Westpac

Source: Westpac

In addition to including material sustainability information, the reports should also show

how the company has arrived at defining the factors that are material to them. ‘Thinking

and reporting about materiality should be a dynamic process,’ says Van der Lugt. ‘As

investors we want to understand the relative importance of material factors over time.’

Not just risks ‘When companies do look at material factors, they tend to focus only on risks,’ Essink adds.

‘As a result, they miss out on the opportunities sustainability integration can also provide.

Investors like companies to establish how they can seize opportunities to enhance long-

term returns. A good example is Hewlett-Packard, which differentiates itself by helping its

customers to get by with fewer and more energy-efficient printers. This is where

sustainability and business meet.’

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‘Determining the materiality of sustainability factors is just the first step,’ Van der Lugt

agrees. ‘Companies should have a view on how they can create value by investing in the

six different forms of capital as identified by the International Integrated Reporting

Council, i.e. intellectual capital, customer capital, human capital, environmental, social

and financial capital, and how this effects their financials such as growth (revenue),

profitability (costs), capital efficiency and their risk profile. If a company doesn't sufficiently

invest in its value creation capital, the sustainability of its profitability is at stake. For

investors it is important to understand to what extent a company is in control of these

issues. At Robeco we discuss these topics whenever we meet with companies and their

management. We like to be in a constant dialogue with them about this.’

Reporting trap ‘It is important for investors like us to determine whether a company has merely fallen into

an integrated reporting trap (when the publication of an integrated report itself becomes

the final objective, typically steered by the management team and corporate center) or

whether sustainability thinking truly cascades down into the organization,’ Van der Lugt

continues. ‘The latter means that sustainability becomes part of a balanced scorecard or

KPI setting and is linked to a company's ultimate financial targets (for example, a Return

on Equity in excess of 15%).’

‘Investors do not want polished stories, but prefer a balanced view and integration with

KPIs and value creation. We feel that more work needs to be done in terms of bridging the

materiality factors and their link to the different forms of capital on the one hand, and a

company’s key financial targets (embedded in the long-term incentive plan) on the other.

This is what we want to talk about with companies.’

‘In this respect, we do see a risk of overshooting in standardization,’ Essink adds. ‘One size

does not fit all. Although we do want to see some form of comparability between reports,

they have to remain relevant for the company concerned. Integrated reporting should

therefore not be the final objective, but a means of meaningful reporting.’

Progress Van der Lugt and Essink do see that sustainability is increasingly being integrated into

business operations. ‘Leading companies are moving from a model in which sustainability

is managed as a separate function towards embracing sustainability as a key factor in

running a successful business,’ Van der Lugt states. ‘Companies that are more advanced in

terms of reporting on the different forms of capital and their material impact are in our

opinion better placed to generate sustainable Returns on Equity than their less advanced

industry peers.’

‘South Africa is a pioneer, having adopted integrated reporting back in 2010 on a comply-

or-explain basis,’ Essink knows. ‘Furthermore, Europe is clearly in the lead, whereas US

companies typically lag far behind other regions, especially when it comes to including

material sustainability information in their annual reports. This might be attributed to

heavily standardized SEC-filing requirements. These offer little room for companies to

adapt their annual reports to accommodate sustainability data.’

Out of a job ‘In an ideal world I would be out of a job in a few years’ time,’ Essink concludes, ‘as

companies and financial analysts will cover sustainability topics naturally. The next step

now will be to have more strategic, integrated discussions between companies and

sustainability specialists. Companies can help advance this by integrating their

sustainability efforts into their strategy and business model and vice versa.’

Interview | 4

Appendix: Comparison of common business reporting standards

Source: International Integrated Reporting Council

Important information

This statement is intended for professional investors. Robeco Institutional Asset

Management B.V. has a license as manager of UCITS and AIFs from the Netherlands

Authority for the Financial Markets in Amsterdam. This document is intended to provide

general information on Robeco’s specific capabilities, but does not constitute a

recommendation or an advice to buy or sell certain securities or investment products. The

prospectus and the Key Investor Information Document for the Robeco Funds can all be

obtained free of charge at www.robeco.com.