Making sense of ESG

In the loop , PwC US Oct 29, 2020

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.

Examples of ESG metrics

Examples of ESG metrics: Environmental • Carbon emissions • Number of water-intensive operations in locations of high baseline water stress • Percent of reduction in energy used in our facilities • Percent of products sustainably sourced/manufactured • Amount of management pay tied to climate response targets • Sensitivity of earnings to price on carbon aligned to the Paris Accord • Tons of toxic waste Social • Types of employee wellness initiatives • Percent of employees digitally upskilled • Median hourly gender pay gap • Percent of employee retention • Percent of employees retrained after automation impact on their positions • Percent of gender and racial/ethnic group representation for management and all other employees • Number of suppliers identified with high-risk labor conditions and actions taken Governance • Number of female directors • Board oversight of climate issues • Number of minority directors • Executive compensation

What you need to know

  • Stakeholders are using more information about a company’s risks and strategies related to environmental, social, and governance considerations.
  • Being responsive to stakeholders and transparent about those efforts can help companies in a number of ways. 
  • Companies should design and maintain processes and controls for ESG reporting.

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.

Why do investors care so much about ESG?

Prominent asset managers and institutional investors are considering all facets of ESG in their investment strategies to an increasing degree. 

  • CalPERS released a report on how its investment strategy addresses climate change. The goal is a portfolio that is resilient to risk and positioned for the investment opportunities that the energy transition brings, in line with the target rate of return.2
  • BlackRock continued to push for strong climate-related and other ESG initiatives during the 2020 proxy voting season. It issued a report that discusses its actions with regard to companies that are lagging in progress and disclosure on climate-related issues.
  • Neuberger Berman portfolios implemented a climate-related strategy in line with the Task Force on Climate-related Financial Disclosures (TCFD), assigning responsibilities and oversight of climate-related risks to the Neuberger Berman Board of Directors.3
  •  New York City Comptroller Scott Stringer, on behalf of three pension plans he oversees, called on companies to match their statements supporting racial justice with enhanced diversity and inclusion disclosures. Stringer’s office sent letters to the CEOs of 67 S&P 100 companies urging them to publicly disclose race, ethnicity, and gender data by job category.4
  • Goldman Sachs Asset Management expects a heightened focus on social factors that require investors to understand how companies approach social considerations in their core business model in the long-term, not just how they respond in the moment.5
  • The SEC’s Investor Advisory Committee recommends that the SEC update reporting requirements for issuers to include “material, decision-useful ESG factors” in their reporting.
  • Shareholders have filed lawsuits against companies and their boards for not having a commitment to diversity. This is a new approach as shareholders may have previously filed shareholder proposals, which are typically non-binding, to address diversity at a company.

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.

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.

Audrey Choi, Chief Sustainability Officer at Morgan Stanley and CEO of the Institute for Sustainable Investing

ESG standards and frameworks

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.

How does ESG fit in with other reporting?

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.”

Here is a timeline of recent events

9 SEC statement encouragingaudit committees to be“actively engaged” in thereview of non-GAAP metrics,including ESG SEC Chairman Jay Clayton’spublic comments on theSEC’s work with regulatorsin other countries wherecertain ESG disclosures maybe requiredSEC staff interpretiveguidance for companiesrelated to key performanceindicators and metrics inMD&A that is applicable to ESG metrics SEC statement on theimportance of transparencyand forward-lookingdisclosures in light of thepandemic New SEC disclosurerequirements designedto provide stakeholdersinsight into human capital Dec 2019 Jan 2020 Apr 2020 Aug 2020

How can companies achieve “investment-grade” ESG reporting?

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. 

Establish the ESG topics material to the company’s strategy 

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. 

Ensure ESG is a team effort

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.

CMO: How can social and environmental trends help us differentiate our products and increase our market share? CRO: How do we  build resilience to business disruptions caused by climate change and resource scarcity? COO: How can we operate our business more efficiently, realizing efficiencies across all the inputs to our operation from electricity use to travel? CEO: How can we evolve our business  and institute an operating model to drive action and deliver positive environmental and social change? BOARD: How does the Board drive commitment to long-term vision and purpose and take faster strides in areas that matter the most to our stakeholders?

Expand current disclosure processes, systems, and controls to include ESG

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.

Todd Bialick, US Deputy Risk Assurance Leader, PwC US

Determine the right format for the information

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.

Consider independent assurance

Assurance can enhance reliability and confidence in the quality of the metrics and disclosures. 

Enhance initiatives and reporting over time

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

To have a deeper discussion, please contact:

Wes Bricker

Vice Chair - Assurance Leader, PwC US

Email

Todd Bialick

Deputy Risk Assurance Leader, PwC US

Email

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Heather Horn

Heather Horn

US Strategic Thought Leader, National Professional Services Group, PwC US

David Schmid

David Schmid

International Accounting Leader, National Professional Services Group, PwC US

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