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The State of Sustainability


Demand for ESG reporting is coming from an ever-diversifying group of stakeholders. The preparer community has the opportunity to help shape future ESG reporting.

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Growing concerns about climate change and workers’ rights – among other issues, are quickly eroding the primacy of shareholder value (first advocated in 1930 and popularized by Milton Friedman in 1970) in favor of stakeholder value (Business Roundtable August 2019).  Accordingly, the movement for increased ESG reporting has reached its tipping point, which was a key theme among presenters at this year’s SASB Symposium: Moving the Market.

The ESG Paradox

ESG reporting is currently beleaguered by an interesting paradox: studies repeatedly demonstrate that companies providing ESG measures are perceived as higher performing – yet relative few companies have embraced ESG reporting.

  • Dr. Rachelle Sampson (Robert H. Smith School at the University of Maryland) explained that management teams reporting on ESG topics are perceived as more conscientious and competent, and that firms that report on ESG have reduced downside risk – and a commensurately lower cost of capital.
  • At the same time, Dr. Caroline Flammer (Questrom School of Business at Boston University) added that companies with increased CSR activity demonstrate increased levels of innovation, better governance, and greater competitiveness during downturns.

In explaining this odd phenomenon, Sampson postulated that the dearth of ESG reporting and investments is explainable by two factors:

  1. Short-termism: Currently, there is a misalignment between timelines at which ESG investments (and ESG reporting) payoff and investors hyper short-term focused expectations. (coincidentally, companies perceived as overly focused on short-term results tend to score poorly with regard to ESG)
  2. Lacking KPIs: As ESG reporting and investing is in its infancy there are relatively few established KPIs against which to benchmark. Until one or two standard setters emerge, the diversity of practice will continue, which will further hamper the development of KPIs.

The Investor Perspective

Given the choice between more or less information, investors will always choose the former. Thus, that investors want increased ESG reporting is not what is interesting – rather it is the way in which investors hope to use the new information. Jessica Ground, Global Head of Stewardship at Schroders remarked, “With the rise of quantitative investing, we are living in an environment where the headwinds of ESG are increasing for the companies we are investing in. For us, ESG is a sourced of untapped data that helps evaluate how a company is managing risk. This is how we [active fund managers] will create value over the next decade - having the data, mining it, and communicating it with regard to business models.”

In combating the existing perception that ESG reporting is not as important for private companies, Elizabeth Seeger, Director of Sustainable Investing at KKR, noted that private investors are interested in ESG issues, especially private equity firms that invest across considerably longer time horizons. They view ESG reporting as offering valuable insights into a company’s prospects over a 3-, 10-, or even 40-year horizon.    

From Investors to Directors

Beholden to shareholders, directors have become increasingly interested in ESG reporting, as evidenced by a recent survey of NACD members – where 80 percent of directors named ESG as a top priority. Mindy Lubber, CEO and President at Ceres, looks to ESG issues from the board’s role in risk mitigation. She noted, “if they’re [in reference to ESG] a risk, they’re a risk. The risks are coming fast and furious and more persistent. [sic] We overcomplicate things by trying to figure out if we need to measure it differently. If it’s a risk, it is something to solve. If ESG risks are substantial, then they need substantial mitigation strategies.”  

The Preparer Perspective

The rising demand for ESG reporting will eventually fall on preparers. In a panel featuring preparers from Waste Management, The Travelers Companies, Inc., Kinder Morgan, and MOL Group the discussion focused primarily on how they had used ESG reporting as an opportunity to reconsider their existing reporting procedures.

Still in its early development, some questioned whether regulators should take a more active role in shaping ESG reporting. Yafit Cohn, Chief Sustainability Officer and Group General Counsel at The Travelers Insurance Companies indicated, “Everything that’s material [whether it is categorized as ESG], is already in our public filings. So, I don’t see a role for the SEC to play here. I don’t think we need specific SEC standards. I think that we need to let our voluntary reporting play out a little bit more.”

What ESG reporting will look like in the future remains to be determined. After all, preparers lack a viable framework from which to draw guidance – not to mention a standard setter. Thus, there is opportunity for the preparer community to help shape ESG reporting.

This leads me to reflect on a gentleman I met at the symposium. He explained that he had worked in investing for years but had recently seen his portfolio diminish year by year. Realizing that he could either adapt or slowly fade away, he opted for the former; he pitched his partners on the idea of moving into ESG investing. They readily supported his move, and he experience a mid-career resurgence.

His story reminds me of some advice from Bob Dylan’s existential ballad “It’s Alright, Ma (I’m Only Bleeding)” he not busy being born is busy dying.