Articles

Unlocking Hidden Value

By Dr Jeremy Osborn
Ernst & Young LLP

15 May 2017

Typically, around 50-80% of a company’s market value is not accounted for by financial data – it’s hidden. Leading companies such as British Land recognise the tremendous potential of non-financial data to give insights into where this value resides and where it’s been created or destroyed.

Although financial systems have become dominant in organisational data, we all intuitively know that it’s almost certainly people who are creating value, whether it’s a professional service like EY or physical assets like British Land.

If we only look at financial data, we miss all the other types of capital that generate value – the role of people, the ideas they come up with, the ability to convert those ideas into something of value to customers, the value of relationships with customers, the natural capital we rely on and so on.

Just as no man or woman is an island, there’s not a single piece of financial data that exists in isolation from other types of value creation. All these different datasets are connected, whether we call them financial, non-financial, extra-financial, pre-financial or sustainability. The better we understand this, the better we’ll manage our businesses.

Empowering decisions

Non-financial reporting gives insights that can drive better decision making both at a strategic and operational level – for the company’s leadership, for external stakeholders, for institutional investors and, in British Land’s case, for occupiers. 

The property sector is ahead of the curve in ‘operationalising’ non-financial data, for example using energy and water data to improve building performance. 

This is because understanding things like the energy efficiency of a building is a critical input into: 

  • Sustainability certification, such as BREEAM and LEED, which affect the reputation and desirability of the building.
  • Regulatory requirements, which mean that, from 2018, commercial property companies in the UK run the risk of having stranded assets if they don’t meet certain energy efficiency thresholds.
  • Occupancy costs, as buildings that are more energy efficient have lower utility bills.

An area where British Land’s non-financial reporting is particularly interesting is wellbeing. British Land has a strong reputation for creating Places People Prefer, buildings that people want to work in, shopping centres they want to go to and public spaces that everybody can enjoy. 

British Land is asking people at its London campuses and shopping centres about their experiences, systematically collecting data to understand the features of a building that affect people’s overall sense of wellbeing and happiness. This will give critical insights into what makes people prefer a particular place, providing leading measures of the attractiveness of an asset. Other lagging measures, which provide insights into the attractiveness of a particular asset, include increases in customer footfall, lower void rates and, ultimately, higher rental income.  

Data quality and quantity

There’s growing recognition amongst the world’s leading companies that non-financial data is most useful in decision making when it approaches the quality and reliability of financial data. Non-financial reporting is unlikely to achieve this standard overnight, as it’s a less mature area of business data. However, it can work towards the same core principles – reliable, consistently prepared, comparable and, in the case of external reporting, communicated against an internationally-recognised framework.

There are three main litmus tests of reliability:

  1. Is the methodology transparent? The methodology, scope of data coverage and timeframes should all be clearly set out.
  2. Has an external agency assured the data? Or at least the most material data as, typically, only selected non-financial data is assured.
  3. Who has signed off the data? If it’s signed off by the Chief Financial Officer, the data is likely to be reliable because the same discipline will have been applied as for financial data, with systems and controls in place to minimise the risk of data errors.

British Land’s non-financial reporting is amongst the most comprehensive and thorough of any of the organisations with whom I have worked. What’s also impressive is the transparency of the underlying methodologies for measuring this data. Nothing appears to be hidden. The methodologies that have created that data are there for everybody to see in the Sustainability Accounts. Selected metrics are also assured and the reporting aligns with international standards like the International Integrated Reporting Framework.

The flip side to comprehensive reporting is that it can be difficult to discern a sense of what’s most important. I believe that less is more. It takes more discipline to identify the most important datasets for internal and external decision making than to report everything that is available. This is an area that British Land is focusing on, identifying the most important metrics in terms of creating Places People Prefer.

Looking forward

Once non-financial data is on a par with financial data in terms of reliability, the future I’d like to see is one where value is understood and accounted for in a much more balanced way. 

EY is putting a lot of resource and energy into an area that we call ‘Long-term Value’, essentially an explanation of where a company is creating value that’s not adequately accounted for by financial accounting rules. We believe the nature of financial accounting and audits is likely to change quite fundamentally, so we’re investing to understand what future reports (especially external ones such as the Annual Report) might look like. 

I would be delighted if, in ten years’ time, I picked up the typical UK Annual Report and saw a balanced, thorough and reliable account of value creation across different types of capital – financial, manufactured, human, intellectual, social and relationship, and natural. I would hope to see an honest assessment of how a company has created, destroyed or maintained all these different types of value and how they all interrelate with each other.

There are several signs that this change is coming. The London Stock Exchange recently published guidance on Environmental, Social and Governance (ESG) data, an indication that stock markets and investors are recognising the value of this type of data when it’s produced to a high standard. 

I am excited to see how future reporting evolves and the significant contribution this will make towards the sustainability of businesses.

www.britishland.com/sustainabilityreport

The thoughts and opinions expressed above are those of the individual author, and do not necessarily represent the views of British Land or other employees of the company. For further details of relevant legal terms and conditions, including those relating to information you provide to us in the comments below, please refer to the Website Terms and Conditions.

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