2018/12/11 Dresden, Germany
The essence of nexus-oriented research lies in looking at how two or more variables interrelate and connect. By making sense of the interdependencies, the hope is that we are better able to understand the whole or the big picture. The question beckons: how can we measure connectivity or the nexus? Is it at all possible?
In his Nexus Seminar on 19 November 2018, Prof. Thomas Guenther, Chair for Managerial Accounting and Control, and founding member of PRISMA – Centre for Sustainability Assessment and Policy, Technische Universität Dresden, offered a standpoint from the corporate reporting perspective. The lecture entitled “How to Measure the Nexus: What We Can Learn from Connectivity on Natural, Social, and Financial Capital in Corporate Reporting” attempted to present nexus researchers with a possible solution for measuring connectivity based on the insights gained from the assessment of capital flows in what are called “integrated reports” in the corporate world.
Prof. Guenther started by inviting the audience to get to the bottom of the nexus problem and unbox the motivation behind solving it. Often nexus research is motivated by our desire to learn about the impact of one variable on another, i.e. What is the “impact” of A on B?
In the business case of sustainability, for example, we may be looking at the impact of environmental management on financial performance. We may be asking, what is the relationship of natural capital with the future development of one’s firm? Should a company invest in environmental protection, and if so, why?
In his talk, Prof. Guenther looked at the interface between two variables: management control systems and corporate environmental performance. Presenting it in a predictive validity framework known as the “Libby Box” (see diagram below), he illustrated how the underlying constructs are distinguished and operationalised empirically.
Such a framework allows us to measure and analyse how the execution of one objective (i.e. a good management control system) affects our desired performance (i.e. high environmental performance). The two variables are operationalised through proxy measures respectively. By looking, on the one hand, at the extent to which an organisation adopts controlling instruments or their design and type of use and their corresponding levels of carbon emission and, on the other hand, level of the environmental management system, we are expected to derive the correlations between the two constructs better. Prof. Guenther also identified control variables, such as the type of industry and the legal system the organisation finds itself in.
Having laid down the nexus problem, Prof. Guenther went on to explore potential ways to solve it. The methods commonly employed in nexus research may take the form of quantitative or textual methods. The latter, in particular, content analysis, became the focus in the latter half of the lecture. In content analysis, the researcher studies causality or associations by looking at the proximity of “codings” of paragraphs, sentences, and words.
Before going into detail about the methodology, Prof. Guenther first introduced the idea of integrated reports that are the subject of the study. Integrated Reporting (IR) is an initiative that emerged amidst the realisation that the value of an organisation is not limited to tangible financial factors as conventional corporate reporting has so far covered. Integrated reports, therefore, hinge on integrated thinking – it concerns the connectivity of non-financial and financial value creation aspects (Coulson et al. 2015). Integrated reports connect information across previously siloed reports.
In his study, which is joint work with Dr Stephan Fuhrmann and Michael Grassmann, Prof. Guenther looked at the flow of six capitals – financial, manufactured, intellectual, human, social, and natural – (as defined by IIRC) in the integrated reports of Forbes Global 2000 companies between 2013 and 2014. Through a manual coding of a total of 169 reports, he found that the share of the various capitals was instead distributed contrary to the expectation that financial capital would take the bulk of it. In fact, the manufacturing capital had the largest share of 26.8% of the reports. Two-thirds deal with the status quo rather than project into the future. Interestingly, there is also a significant tendency (65.6%) to deal with qualitative information than monetary (10.9%). The coding is scored to construct a measure of connectivity.
The study found that the size of the company and volatility do not matter in how much connectivity a company discloses. We can infer that the degree of connectivity disclosed is a discretionary choice that is primarily determined by economic considerations. Signalling high performance to the capital market by more reporting and the critical role of providers of financial capital are vital determinants. Direct and proprietary costs are found to hamper the degree of disclosed capital connectivity. The study has also shown that connectivity in texts can be measured.
Finally, Prof. Guenther broadened the horizon and presented further challenges to nexus problems. Among them is the challenge of distinguishing between causality and association. He concluded that we cannot quite prove causality; at best, we can only measure association as we do not know what comes first.
During the closing Q&A session, various questions and concerns were raised. Several queries centred around the relevance of the study to nexus research in the natural sciences. From the methodology point of view, according to Prof. Guenther, one could apply the approach to the study of the Water-Soil-Waste Nexus, depending on the kind of data at hand. Similarly, the method employed could also be applied to measure policy impact vis-à-vis the Nexus Approach in various sectors.
This Nexus Seminar is part of the joint seminar series of UNU-FLORES and TU Dresden, delivering thought-provoking lectures and stimulating discussions on the Nexus Approach to environmental resources management. The next seminar will take place on 17 December 2018.
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