My colleague and co-author, Mike Krzus, and I have just published a paper titled “Constructing ExxonMobil’s First Integrated Report: An Experiment.” In it we describe how we constructed a 2016 integrated report for ExxonMobil based on documents the company has put in the public domain. This was an experiment. When we started it, we had no idea whether we’d be successful. Would there be enough information? There was. Could we do it in a reasonable period of time? It took Mike about 40 hours to do this. Below I’ll describe the construction process in more detail, the structure of the report, and the lessons learned. The reason we did this was to address concerns in the corporate community about the perceived complexity, cost, and litigation risk from integrated reporting. According to the International Integrated Reporting Council (IIRC), an integrated report is “a concise communication about how an organization’s strategy, governance, performance and prospects lead to the creation of value over the short, medium and long term.”
I am a big supporter of the IIRC and of other organizations whose work is helping to advance the integrated reporting movement including CDP, the Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), and the Sustainability Accounting Standards Board (SASB).
Despite the efforts of these organizations and growing interest in the investment community for integrated reporting, the corporate community has been slow to adopt this practice even though it is in its self-interest to do so. Through an integrated report a company will be better able to capture the value of positive performance on the material environmental, social, and governance (ESG) issues for its industry. Evidence of this can be found in a recent study by the Boston Consulting Group “Total Societal Impact: A New Lens for Strategy.” Companies often complain they aren’t getting credit for investors for good ESG performance, but they aren’t providing the information necessary for investors to assess this performance in the context of financial performance.
Integrated reporting also fosters “integrated thinking” in a company, a more holistic approach to managing the IIRC’s six capitals: financial, manufactured, natural, human, intellectual, and social and relationship. Through integrated thinking a company will do a better job of identifying and managing the material ESG issues that contribute to financial performance.
In order to assess the magnitude of the corporate community’s concerns about the complexity, cost, and litigation risk of integrated reporting, we decided to see how hard it would be to construct an integrated report for a well-known company. We chose ExxonMobil since we were already familiar with the company’s reporting practices in a study “Why Companies Should Report Financial Risks From Climate Change” we did of 15 large oil & gas companies through the lens of the Task Force on Climate-related Financial Disclosures (TCFD). To create the “ExxonMobil 2016 Mock Integrated Report” we used the following documents:
- ExxonMobil 2016 Corporate Citizenship Report
- ExxonMobil 2016 Financial and Operating Review
- ExxonMobil 2016 Form 10-K
- ExxonMobil 2016 Summary Annual Report
- ExxonMobil Notice of 2017 Annual Meeting and Proxy Statement
- ExxonMobil 2017 Executive Compensation Overview
- ExxonMobil 2018 Energy and Carbon Summary
The (only) 40-page “ExxonMobil 2016 Mock Integrated Report” was organized according to the TCFD’s recommendations of reporting on Governance, Strategy, Risk Management, and Metrics and Targets. We also used the work of FCLTGlobal on the 10 elements of a long-term strategy which Krzus mapped to the content elements of “The International <IR> Framework.” Put simply, we extracted from ExxonMobil company documents relevant information in a structured and integrated way for reporting on them. Included in the report is a mock “Statement of Significant Audiences and Materiality” where we’ve simply attributed to the board of directors statements made by the company. Our mock integrated report compares favorably to the 68-page “GE 2016 Integrated Summary Report” in terms of content. One reason ours is shorter is that we simply have less pictures.
We do not want to discount the complexity and cost to ExxonMobil of preparing the documents we reviewed. We clearly want to challenge the argument that an integrated report represents additional and overly onerous cost and complexity. Just to repeat, it took Mike about 40 hours to do this by hand. Furthermore, every single figure, word, and diagram in our mock integrated report comes from a company document which obviously puts to rest the litigation risk argument.
Of course, an integrated report prepared by ExxonMobil itself would be better than the one we put together by simply extracting relevant information from their published documents and organizing it the way we did. For example, the company would be able to provide a materiality assessment, such as based on the work of SASB, identifying those ESG issues it believes are related to financial performance and explaining why, such as SAP does on the connectivity page in its 2017 integrated report. It would also be able to report on how its management of these material issues is supporting the 17 Sustainable Development Goals. As explained in “Supporting Sustainable Development Goals Is Easier Than You Might Think,” Professor Costanza Consolandi of the University of Siena and I have developed a mapping of the material SASB issues for all 79 industries (grouped into 10 sectors) to the SDGs. The material ESG issues for ExxonMobil touch every one of the SDGs except for SDG#4 on quality education. Supply chain management affects 14 of the SDGs and water and waste management and accident and safety management each affect seven (albeit different ones).
The fact that the company could prepare a better integrated report for itself than we did is no big surprise. Of greater significance is that, done properly, integrated reporting would be a way of fostering integrated thinking in the company, with all of the benefits this entails. By “done properly,” I meant that the report is a reflection of how the company is being managed, rather than a bolt-on exercise at the end of the year which is still too common with most companies’ integrated reports.
I want to be careful about drawing any generalizations from this sample of one. Thanks to the existing level of transparency in ExxonMobil’s reporting, albeit spread out across a number of documents, we were able to put together a decent mock integrated report. The quality of such a mock integrated report is obviously a function of the degree of transparency in a company’s reporting practices.
Through this little experiment Mike and I are hoping that this will encourage ExxonMobil to produce an integrated report of its own. It has the resources and capabilities to do one for its 2018 fiscal year. This would be great reporting leadership by ExxonMobil and could help add momentum to the barely existing integrated reporting movement in the oil & gas industry (although the Italian oil & gas company Eni has been doing integrated reporting for several years) and the United States (where just a handful of companies are producing integrated reports).
One way of encouraging more companies to produce their own integrated reports would be for Mike and me to construct more mock integrated reports. We obviously don’t have the time to do this. We do wonder if a technology solution is possible. Could natural language processing and artificial intelligence be used to comb through a company’s documents and website to construct a decent first approximation of an integrated report? Were that to be the case, we would have an interim technological solution to meeting the demand of investors and other stakeholders for company performance information reported in an integrated way. It could also spur companies to produce integrated reports of their own. Their choice would be to do it themselves or to let some software program do it for them.
Companies like Ant Financial, BlackRock, IBM, Microsoft, SAP, and TruValue Labs probably have the capabilities to do this, although it may not be an application that fits their business strategies. But if there is sufficient market demand for an “Integrated Report Generator Tool” someone will figure out how to create one.
