SUSTAINABLE ACCOUNTING REVIEW
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Integrated thinking and reporting at Italy's Eni Corporation
by Cristiano Busco
May 29, 2014
Cristiano Busco PhD is Professor of Accounting, J.E. Cairnes Schools of Business & Economics, National University of Ireland, Galway. The full case study of Eni can be found in “Integrated Reporting – Concepts and Case that Redefine Corporate Accountability,” Busco, Frigo, Riccaboni, Quattrone editors, Springer International Publishing, Switzerland, 2013.
Eni is the 6th largest integrated energy company by market value, active in 90 countries in the world, with a staff of approximately 78,000 employees. It has net sales from operations of €127 billion. The company boasts a strong position in the oil and gas value chain, from the hydrocarbon exploration phase to product marketing. Eni also explores and produces hydrocarbons in Italy, Africa, the North Sea, the United States, Latin America, Australia and in a number of other areas of high potential, such as the Caspian Sea, the Middle and Far East, India and Russia. In Italy, Eni is the first operator in the refining business, with five refineries, and is a leader in the distribution of petroleum products. Eni is also one of the largest international engineering and construction companies, serving the onshore and offshore oil and gas markets.
In Eni, sustainability is not a specific area of activity but represents a business approach in itself and is a lever to support long term value creation while managing political, operational and financial risks. This approach has been embedded in the Company’s culture since its foundation, when Eni’s first chairman, Enrico Mattei, pioneered a way to become more competitive by managing relations between international oil companies and producing countries based on long term cooperation, on the transfer of knowledge and skills, and on mutual development.
In 2010 Eni began the process of integration in corporate reporting when the publication of its stand-alone sustainability reports were discontinued. The Annual Report was considered the main document to be integrated.
Sabina Ratti, Sustainability Senior Vice President at Eni explains why. “After having issued a series of Environmental and then Sustainability Reports we realized that, although the numbers were allowing a true and fair review of the company’s performance, operations and management, they were not necessarily relevant to the stakeholders or able to hint the sustainability of the business. Neither was the simple act of reporting data relevant per se.” What was missing, she explains, was a broader process of analysis and communication able to put performance in context, able to represent the strategic leverages the company was using to build and maintain its ability to produce value in the long term.
Eni adopts integrated thinking that starts from planning and integrated risk management. Projects are defined taking into account all the capitals that could be affected by the organisation and different kind of risks are evaluated considering all the impact generated. “Stakeholders’ demands for greater transparency have, in time, been coupled with an internal reflection on what the company considered its strategic drivers: nowadays, our integrated reporting aims to respond to this challenge,” she says.
A cultural shift, though, was required to support such a process. In this respect, Sabina comments, “joining the Pilot Programme of the International Integrated Reporting Council back in 2011 was very useful to us. Integrated Reporting offers an opportunity to combine Sustainability and profitability in a single process, in a single document and, ultimately, in a single story.”
To achieve the Integrated Report (IR), Eni adhered to the Pilot Program launched by the IIRC and, in accordance to the IIRC framework, restructured its Annual Report. The new Annual Report discloses not only on past performance, on financial and non financial results, as well as on the connection existing between the company’s business model, the competitive environment and strategy, the integrated risk management model, and the corporate governance system. Significantly, the 2013 integrated report offers an innovative and quite unique view on the different capitals used and affected by Eni’s value creation processes. See Eni reports online here and here.
In order to have a full picture of the company and to prove that sustainability results play an important role, Eni has also introduced Consolidated Sustainability Statements that include tables and notes on sustainability performance, in accordance with the “Sustainability Reporting Guidelines, version 3.1” issued by the GRI (Global Reporting Initiative) and the related “Oil and Gas Sector Supplement”, with particular reference to the principles of materiality, completeness, stakeholder inclusiveness and sustainability contexts. This is not a specific requirement of the IIRC framework, but rather it is the company’s decision to give an enhanced view of all the different forms of capital that could be affected or managed by corporate activities.
The Consolidated Sustainability Statements collect the sustainability performances for the last 3 years at group level that are representative of the effective integrated business model in action. For instance, there are environmental results that are compared to operational results, or the link is reported between financial and non-financial performance. The reduction in energy consumption, for example, is quantified in terms of cost or CO2 emission reductions. There is the effort to show how a sustainable business can lead to the reduction of impacts on different forms of capitals. It is also illustrated how a sustainable business is the prerequisite for seizing new opportunities. Finally, it is worthwhile to highlight how Eni calculates and reports value creation for stakeholders.
The configuration chosen in Eni’s integrated report is that of “overall added value net of amortization and depreciation.” Net overall added value is divided among employees (direct remuneration consisting of wages, salaries, and provisions for termination benefits and indirect remuneration consisting of social welfare contributions); the public administration (income taxes); financial backers (medium/long-term interest paid for availability of borrowed capital); shareholders (dividends distributed); and the company (quota of reinvested earnings). The net added value distributed in 2012 was €22,475 million and was divided as follows: 52% to the state and public administrations through taxes on the income of Italian and overseas businesses, 22% to human resources, 18% to shareholders, 4% to the company system, and 4% to financial backers (see p. 236 of the 2012 Eni Integrated Annual Report). All the information included in this section has been certified by an independent auditing entity in order to report on the quality and level of performance.
Connectivity of Information
In line with the contents, elements and principles included in the IIRC Framework, in each of the sections included in the 2012 IR Eni has attempted to operationalize the principle of connectivity of information. In particular, the attention towards connectivity of information has gone beyond the need for showing how sustainability is embedded within the individual organizational processes, to include the integration mechanisms across the entire Eni management system. Eni has interpreted the principle of connectivity by focusing on the broad picture of the company’s value creation story.
To achieve this goal, Eni’s 2012 IR includes a detailed description of how the company strategy, governance, performance and prospects concur to create value over time. As Sabina Ratti explains, the objective was to make the users appreciate how the elements of a complex organization in a complex environment contribute to Sustainable Value creation over the short, medium and long term. “In doing so,” she says, “the numbers and information provided in the Integrated Report aim at representing the way in which Sustainability’s objectives and multiple perspectives are fully embedded within the Company’s business model and decision-making processes.”
The interdependencies between the industrial challenges in the external environment, the actions in place, the performance of the year, and future targets are illustrated and analysed in the IR. The fundamental purpose is to break down the established silos in accessing, measuring, managing and disclosing data and information. Ultimately, overcoming information silos has allowed Eni to increase awareness and knowledge of the dynamic of value creation. This is useful for both the internal top management, in order to refine the decision-making process, and for the external stakeholders, including capital providers, in order to make better investment decisions.