Purpose-led reporting. Sustainability. Corporate responsibility. Environmental, social, and governance risks and opportunities. ESG. Being responsive to stakeholders goes by many names. But one thing is clear - it’s becoming less and less optional.
Now more than ever, companies are creating value among a broad group of stakeholders, including investors, employees, customers, and suppliers, while managing their broader obligations to society. Stakeholder groups are calling on companies to not only do more on key sustainability topics, but also to be more transparent about their efforts.
In many instances, traditional financial metrics tell only part of a company’s story. A company’s ability to demonstrate how environmental, social, and other trends impact its strategy, operations, and long-term prospects is important to meeting the needs of its shareholders and other stakeholders. ESG initiatives go beyond just doing the right thing. They may improve society’s perceptions of the company, build competitive positioning, and increase market value. We’ve noted that a well-executed and well-communicated ESG strategy may create intrinsic value by appropriately managing key risks and cultivating opportunities. And, if a company is transparent about how it is addressing stakeholder ESG interests, market value may increase over time.1
It’s time. ESG is here to stay. We help you make sense of it.
Although there are an infinite number of metrics that demonstrate a company’s commitment to addressing ESG risks and opportunities, each company should consider which strategies are most important for its business and then determine the most effective way to measure progress and report them.
Prominent asset managers and institutional investors are considering all facets of ESG in their investment strategies to an increasing degree.
Asset managers and investors are backing up their actions with capital. In August, assets under management in funds that abide by ESG principles surpassed $1 trillion for the first time on record.6 And the results are promising. Morgan Stanley’s Institute for Sustainable Investing analyzed more than 1,800 US mutual funds and exchange-traded funds. It found that sustainable equity funds outperformed peers by a median of 3.9% in January through June 2020.7
Further, some prominent companies are demonstrating their commitment to ESG by linking their financing to their ESG activities. Sustainability linked bonds, such as green bonds or social bonds, are being used to provide support to innovate and scale ESG solutions. Alphabet issued $5.75 billion in sustainability bonds, the largest single issuance by any company.8
Sustainable investments have continued to perform well in volatile markets, reinforcing the value of sustainable investing and further dispelling the myth that investors who include sustainability considerations in their portfolios face a financial trade-off.
In recent years, a number of groups, such as the Sustainability Accounting Standards Board, the TCFD, the Global Reporting Initiative, and the World Economic Forum International Business Council, have issued ESG-related reporting disclosures. Others, including the IFRS Foundation, are considering how to incorporate sustainability information in corporate reporting.
Just as financial reporting is prepared in accordance with US GAAP, IFRS, or another accounting framework, ESG standards and frameworks allow companies to disclose standardized information. They provide consistency and comparability, and they benefit from due process, enabling investors to make more informed decisions.
The SEC considers ESG reporting as part of its “ongoing commitment to ensure that [the SEC’s] disclosure regime provides investors with a mix of information that facilitates well-informed capital allocation decisions.”
Balancing sometimes conflicting needs of different stakeholders requires management and the board to work together to determine a company’s purpose and how to measure success. With investors seeking ESG-savvy companies now more than ever, a company should start by setting a long-term vision and ambition level best suited to the organization.
Identify the ESG topics and metrics that are material to the company’s core strategy and long-term value creation to help prioritize and channel efforts. Leverage established frameworks and standards, and engage with stakeholders to get their input.
Once the responsibility of a single department, sustainability now touches every part of the business. These are the questions every member of the C-suite should be asking.
ESG information needs to be accurate, reliable, and consistent, which will support comparison across companies and over time. This can be achieved by instituting policies, controls, and governance, similar to those supporting other elective metrics (e.g., non-GAAP).
As companies look ahead, they should consider controls and processes to ensure the quality and reliability of ESG information disclosed. As a best practice, using the same process as for non-GAAP reporting can result in effective ESG disclosures, which provides transparency and may strengthen relationships with current and prospective investors.
Data visualization and transformation tools can further enhance the quality of ESG data and reporting as companies move towards integrated reporting. Digitization and technology help companies navigate multiple sources of data to create a central source of key ESG data and metrics, real time reporting, and analytics to inform internal decision-making and provide high-quality external disclosures.
Assurance can enhance reliability and confidence in the quality of the metrics and disclosures.
This is a journey. Monitor and measure against established goals and milestones. Make enhancements over time in response to company changes and evolving investor interest.
1 Could a focus on stakeholders increase your company's value?, PwC, February 6, 2020
2 CalPERS’ Investment Strategy on Climate Change: First Report in Response to the Taskforce on Climate-related Financial Disclosure (TCFD), June 15, 2020
3 Neuberger Berman Named To 2020 PRI Leaders Group, Maintains Top Score Of A+ In All Asset Classes, October 5, 2020
4 Comptroller Stringer and Three New York City Retirement Systems Call on 67 S&P 100 Companies Who Issued Supportive Statements on Racial Equality to Publicly Disclose the Composition of their Workforce by Race, Ethnicity and Gender, July 1, 2020
5 Goldman Sachs: COVID-19 and the Rising Importance of the ‘S’ in ESG, April 22, 2020
6 Sustainable investment funds just surpassed $1 trillion for the first time on record, CNBC, August 11,2020
7 Sustainable Funds Outperform Peers During Coronavirus, Morgan Stanley, September 17, 2020
8 Alphabet issues sustainability bonds to support environmental and social initiatives, August 3, 2020
9 New human capital disclosure rules: Getting your company ready, PwC, October 8, 2020