In 2013 Park and Ravenel argued that as long as ESG (environmental, social and governance) externalities were unpriced, they are effectively invisible to financial markets and so cannot inform investment decisions. They wrote:
"To the extent that this failure prevents mainstream financial analysts from effectively assessing such social costs and benefits- and their potential effects on future corporate performance and value - the result may well be inefficient allocation of capital. ESG data thus has the potential to provide crucial market transparency and a unique lens through which to assess future company and investment performance" (Park A and Ravenel C (2013) Integrating Sustainability into Capital Markets: Bloomberg LP and ESG's Quantitative Legitimacy, Journal of Applied Corporate Finance, 25:3)
"In a philosophical shift in thinking about corporate accountability, integrated reporting not only changes the form of reporting, but also its purpose. The underlying agenda is to make corporations more sustainable. Sustainability proponents argue that, in addition to providing information to a broad range of stakeholders, integrated reporting will change the way that corporations operate, helping them to make more sustainable decisions (IIRC 2011). This is very different from the traditional role of financial reporting, centred on providing financial information to external investors." (Soderstrom N (2013), Sustainability Reporting: Past, Present and Trends for the Future, Insight 13: p.31).
Required
Discuss the issues raised in the above extracts. Your response should include: a clear definition of integrated (sustainability) reporting, what this may mean for traditional financial reporting, and how it may change the way that investment decisions are made. What problems do you consider a change to sustainability reporting may raise for corporations, investors and the accounting profession?
Essay length: 1800 words.