FINANCIAL REPORTING & IR

At the beginning of 2020, the Australian wildfires fixed the world’s attention on the impact of climate change. However, within a few months, the evolving COVID-19 pandemic took over the world’s attention, followed by George Floyd’s tragic death and the global protests focused on the glaring reality of systemic racism.

Environmental, social and governance (ESG) risks are not only dominating societal agendas, they are becoming increasingly central to corporate agendas and business sustainability. Climate change and environmental issues are certainly not new to the corporate agenda, but broader issues of social purpose and impact, and related disclosures, are now also becoming central. ESG issues that were until recently championed primarily by NGOs, are now being championed by major institutional investors as well.

Leadership by some of the world’s largest asset managers – BlackRock, Vanguard, and State Street, among others – continues to place ESG issues front and centre. BlackRock’s CEO Larry Fink captured corporate and media attention in his 2018 letter to CEOs, when he told his investees’ CEOs that in his view a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. “Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth.”[1] That significant evolution in focus is echoed also by other major institutional investors, and has since been reaffirmed in Fink’s 2019 and 2020 letters.

The message from this shareholder community is clear, and has been taken up by the corporate leadership community. In August 2019, the U.S. Business Roundtable (BRT), a non-profit association comprising the CEOs of the largest U.S. companies, issued a statement[2] redefining its view of the purpose of a corporation. In an important shift from the long-held view of shareholder primacy, the BRT has defined a corporation’s purpose as “working for the benefit of all stakeholders, including customers, employees, suppliers, communities where the company operates, in addition to shareholders.” Drafted following months of consultation with CEOs and members of the political, academic and NGO sectors, the statement was signed by 181 CEOs, or 95% of BRT members.

While the BRT statement was well-received by many observers, there is understandably still some uncertainty – in some cases skepticism – regarding how these commitments will be implemented and communicated. In order to meet investors’ and stakeholders’ evolving expectations, companies are well-advised to proactively rethink their stakeholder communications strategy to consider ESG reporting in a context relevant to their sector, their priorities and their stated social purpose. Each company will have its own mix of ESG issues. Management will need to clearly explain why each issue matters and how it is incorporated in the company’s strategy and long-term value creation. Different groups of stakeholders will seek information that is relevant to their priorities. A key step in crafting ESG messages that resonate is understanding stakeholders’ varying needs and being sensitive to how their priorities evolve. Today, for example, most companies will likely prioritize communicating how diversity and inclusion are fostered in their workforce, and how their employees’ and customers’ health and safety are ensured in the face of the significant health and business risks the pandemic creates.

Expect additional scrutiny and questions from your Board of Directors, as well. Not only are its members the stewards of the organization, but given the large number of institutional investors who view strong ESG performance as an indicator of a well-managed company, expect Boards to increasingly ‘lean in’ on how a company’s disclosures tell its ESG story.

Given the evolving importance and complexity of ESG reporting, many companies have been looking for a reporting framework to guide their assessments of what is material to stakeholders, and their disclosures. Some help is available:

Sustainability Accounting Standards Board (SASB) is an independent non-profit organization that maintains sustainability accounting standards for 77 industries. The standards focus on the industry-specific sustainability factors reasonably likely to have material impacts. 

The Global Reporting Initiative (GRI) is an independent international organization that seeks to help business, government, and other organizations understand and communicate the impact of business on ESG issues such as climate change, human rights and corruption.

The Financial Stability Board’s Task Force on Climate-Related Financial Disclosure (TCFD) employs a disclosure regime, based on other existing climate disclosure frameworks, that is intended to support the reporting of consistent, forward-looking climate-related risks and opportunities to investors and other stakeholders.

In July 2020, SASB and GRI announced a collaborative workplan aimed at providing clarity on the application of their reporting standards, and help others understand how to use the sustainability performance data they provide, which is critical to meeting the needs of all stakeholders.

Investor relations professionals have an important role to play in helping companies rethink their disclosure strategies and embrace the significant changes that are being called for in ESG disclosures. ESG disclosures are no longer a ‘nice to have’, or adjunct to the core business financial reports. Shareholders, regulators, customers, employees and the media are watching and all have a ‘say’ in maintaining the corporate social license to operate.

Terry Liu, CPA, CA is a Senior Manager, and Rob Brouwer, FCPA, CPA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.