8 minute read 26 Oct 2021
Agronomist using digital tablet for analysis of plantation

Why nonfinancial reporting is pivotal to a green recovery

By Randall Tavierne

Global EY Private Assurance Leader

Global leader helping entrepreneurs and private companies realize their ambitions. Frequent speaker on the high-growth market.

8 minute read 26 Oct 2021

Private companies should be able to demonstrate long-term value creation and resilience as they prepare for the economic rebound.

In brief

  • Private company finance leaders should look to a world where performance is defined by environmental and social factors, and financial outcomes.
  • Going beyond financial reporting can provide the long-term value insight that stakeholders want.
  • We spoke to finance leaders George Mbugua and Wesley Wilson to see how they are meeting the increasing demands for reporting.

As privately owned companies prepare for the economic rebound, their finance leaders have an opportunity to provide more of the insight into long-term value creation that stakeholders want. By rethinking the relevance of corporate reporting, they can go beyond financial measurements toward more environmental and social reporting, demonstrating that they are part of the much talked about green recovery.

Forward-thinking private company finance leaders are already becoming much more involved in nonfinancial reporting. According to the 2020 EY Corporate Reporting Survey, 34% of respondents collect, analyze, assure and report on nonfinancial and environmental, social and governance (ESG) information – compared with only 27% of their peers in public companies. Moreover, 86% think their finance teams will be deeply involved in such activities over the next three years, compared with 81% of public company finance teams. The CFO Imperative series examines these evolving responsibilities, identifying critical answers and actions to help leaders reframe the future of their organizations. Finance leaders should not only think of what’s next — they should also imagine what’s after “what’s next.”

George Mbugua, Finance Director of Kenya-based water and energy engineering firm Davis & Shirtliff, believes this is because public firms tend to focus more on financial returns while doing the minimum required for regulatory compliance on ESG. 

“Private companies often get into ESG for more personal reasons compared to public companies, where it could be more of a box-ticking exercise,” he says. “We don’t have the same external pressures and requirements to produce a financial statement for shareholders. We are not doing it to please others or to attract external investment. Private companies are doing it from the heart and because we believe it is a good strategy, and so there is more commitment. We aim to put purpose before profit and we are happy to be involved in an organization that is changing people’s lives.”

Private companies often get into ESG for more personal reasons compared to public companies, where it could be more of a box-ticking exercise.
George Mbugua
Finance Director of Davis & Shirtliff

Wesley Wilson, CFO of US real estate asset manager Avanath Capital Management, adds: “Public markets don’t look at the metrics we look at around how ESG factors benefit our communities. That gives us a significant advantage. It opens our pool of investors to those concerned about social impacts and the links to extremely competitive returns and long-term value. 

“For example, there are still many myths about investing in affordable housing in the US (i.e., undesirable areas plagued with criminal activity). We work hard to break those misconceptions and show why this is an attractive, differentiated strategy.”

(Chapter breaker)
1

Chapter 1

Driving the green recovery

Avanath Capital Management and Davis & Shirtliff are making a difference.

As part of the green recovery, says Wilson, corporate reporting should transform to produce nonfinancial information on long-term value that is just as credible as financial data. In Avanath’s case, that includes social metrics such as data on tenant turnover and resident engagement.

An important aspect of the COVID-19 pandemic, which has affected both Avanath and Davis & Shirtliff, is the increase in the number of people working from home. For Avanath, it has meant more water and electricity usage in its properties, so it has been looking at using more solar and other clean electricity solutions.

In East Africa, many people retreated to rural areas during the COVID-19 pandemic, which highlighted the poor availability of energy and water there. This gave Davis & Shirtliff an opportunity to help fix these issues, through normal business, and also through its “Improving Lives” initiative, which supports a wide range of social projects in marginalized communities.

“Two of the United Nations’ sustainable development goals are clean sanitation and water; and affordable and clean energy,” says Mbugua. “So we see ourselves at the heart of the green recovery, as we are driving use of cleaner water; green energy such as solar heating; and sustainable innovations such as solar water pumps.”

“Furthermore, as part of our “Improving Lives” initiative, every department and subsidiary of the company is challenged to develop a community project to improve lives. Most importantly, we need to know the costs and how many people each part of the program impacts. The finance team collects that information and the beneficiaries' testimonies with lots of colorful photos – for example, of the schools we are helping to supply with water and solar energy – for the Improving Lives report.”

“So, some of our reporting is more thematic than quantitative. But the key metric is how many people benefit from each project. In the last half-year, we positively impacted 124,000 people across nine countries.”

(Chapter breaker)
2

Chapter 2

Creating social value

Social impact investments can drive long-term value and a sense of community.

Wilson says the greatest post-pandemic challenge is supporting social recovery.

According to the 2020 EY Corporate Reporting Survey, social value is one of the biggest areas in which private company finance teams have been making progress in measuring and communicating intangible value; 92% of respondents made such progress, compared with a figure of 89% for public companies.

“When the pandemic hit, we implemented several projects to help all our tenants, including rent discounts, wellness apps and initiatives to boost vaccination rates,” says Wilson. “This kind of social impact investment drives long-term value. For example, we’ve implemented after-school care and summer camps at most of our properties, which provides structure and stability for kids while their parents are working. We’ve converted unused spaces into basketball courts and soccer fields. We also have programs where residents can escrow a small portion of their rent toward a down payment on a home, which produces long-tenured residents who place value on being stewards of their community.” 

We found that the better we treat our communities and the more services we offer, the longer tenants stay.
Wesley Wilson
CFO of Avanath Capital Management

Avanath also has housing for senior residents, and projects there include bringing in on-site care to support longevity and happiness.

“We found that the better we treat our communities and the more services we offer, the longer tenants stay – our average resident tenure is six to seven years, versus a multifamily industry standard of 12 to 14 months – plus we’ve instilled a greater sense of community amongst the residents,” says Wilson. “These factors reduce our turnover costs and pay dividends in other financial benefits.”

Wilson’s team tracks resident engagement in its programs and analyzes how that correlates with the length of stay, occupancy and collection rates.

“You aren’t likely to see these metrics on other companies’ balance sheets or in their corporate reports, but they should be there because they are important to sustainable investing and are easy to track,” he says. “They help us analyze how each investment translates to more durable cash flow for investors. It can sometimes be difficult to show these correlations, but the fun and creativity come in finding ways to do it.”

Perceived value of nonfinancial reporting

68%

of private company finance teams believe there is a significant value for their organization in nonfinancial measures.

This ties in with the 2020 EY Corporate Reporting Survey data showing that 68% of finance teams in private companies believe there is significant value for their organization in nonfinancial measures, compared with 62% in public companies.

(Chapter breaker)
3

Chapter 3

Using appropriate ESG reporting and frameworks

Sound nonfinancial reporting processes and controls can build confidence.

Of the private company CFOs interviewed for the EY survey, 30% said the biggest challenge in measuring and communicating long-term value is identifying which environmental, social and economic factors are material, while 23% said it is instilling more disciplined nonfinancial reporting processes and controls to build confidence.

Mbugua recognizes these challenges and says his company aims to continuously evolve more formal ESG reporting and frameworks. “ESG covers governance and risk management issues and those involve finance through the internal audit,” he says. “We report into the board audit, risk and compliance committee, we blow the whistle if something is going wrong, and we drive the risk management framework, which is a key part of our strategy.”

“You cannot compete in the global arena without considering ESG. We aspire to be a world-class company and to adopt the same frameworks. For example, we plan to use the Task Force on Climate-related Financial Disclosures (TCFD) framework to benchmark and promote our strategy. We also adhere to frameworks in areas such as anti-bribery and data governance. However, hearing it from the mouth of an individual beneficiary is often more convincing than reading some of these statistics, so we will keep gathering more testimonies as well.”

You cannot compete in the global arena without considering ESG.

Avanath has developed its own ESG metrics and started using the Global Real Estate Sustainability Benchmark (GRESB). “It was an effort to get the data we needed for GRESB,” Wilson admits. “We are bridging the gap between what we do and the regulatory frameworks. For example, our latest fund launch had about 50% international investors, some of whom required GRESB reporting. The benchmark focuses heavily on environmental factors, which are easiest to track and measure. But we are advocating for social measurements to have more weighting, too.”

“Social has always trailed environmental and governance when it comes to tools and frameworks data. Despite social impact data is advancing slightly in this area, it still has no easily applicable frameworks. Some of our investors have even looked to us to help them develop a due diligence questionnaire for real estate managers. The industry needs more leadership, guidance and accountability on this.”

(Chapter breaker)
4

Chapter 4

Investing in technology

Technology has helped Avanath Capital Management to improve their nonfinancial reporting.

Wilson adds that investment in technology is also essential to support accurate tracking of social measures. “We’ve been adding more metrics to our accounting database from outside the usual finance process, from water usage to crime rates, so we can report on them easily,” he explains. “It also allows others to participate in data collection and provide useful outputs.”

“Furthermore, we adapted our property management and accounting software to enable more central data management, and overlaid that with data visualization software and our cloud platform to allow real-time visualization.”

Many challenges remain in nonfinancial reporting. But as more private companies adopt practices such as these, it looks set to be a dynamic area of transformation in the post-COVID-19 pandemic era.

Profile

George Mbugua is Finance Director of water and energy engineering company Davis & Shirtliff. The privately held firm, which was founded in Kenya in 1946, has 800 staff and provides water pumps and treatment, solar power and irrigation solutions to nine countries in East and Southern Africa. Mbugua joined in 1996 and leads the finance and information and communications technology functions.

Wesley Wilson is CFO of California-based privately held real estate asset manager Avanath Capital Management. He has seven years’ experience in senior financial positions and plays a pivotal role in Avanath’s pioneering social approaches to real estate investment.

Summary

There is an increased interest in nonfinancial reporting, with environmental, social and governance (ESG) disclosures contributing more to decision-making. ESG analysis provides an additional lens for reviewing and evaluating companies and assets — not only for listed companies, but also for their private counterparts. 

We spoke to George Mbugua, Finance Director of water and energy engineering company Davis & Shirtliff, and Wesley Wilson, CFO of California-based privately held real estate asset manager Avanath Capital Management, to see how they are meeting the increasing demands for reporting.

About this article

By Randall Tavierne

Global EY Private Assurance Leader

Global leader helping entrepreneurs and private companies realize their ambitions. Frequent speaker on the high-growth market.