Kristen Sullivan leads Deloitte & Touche LLP and Deloitte, Touche Tohmatsu Limited’s (DTTL) Sustainability Reporting, Assurance and Compliance services, and serves as the DTTL Americas Region Sustainability Services Leader. Sullivan has extensive experience in sustainability risk assessment, reporting and assurance, and she leads Deloitte’s efforts in social impact investing and Conflict Minerals Advisory and Assurance services. Sullivan also serves as a member of the Global Reporting Initiative (GRI) North America Advisory Council, the Sustainability Accounting Standards Board (SASB) Assurance Task Force, the Global Initiative for Sustainability Ratings (GISR) Technical Review Committee, the Sustainable Stock Exchange (SSE) Initiative Corporate Working Group, and serves as a member of the AICPA Conflict Minerals and Sustainability Task Forces.
Christopher P. Skroupa: How do you see the evolving sustainability disclosure landscape driving behavior change within reporting organizations, in particular the role of the CFO?
Kristen Sullivan: As demand for sustainability reporting continues to grow and gain traction, so does the expectation that such reporting is accurate and reliable. CFOs, already responsible for corporate transparency in the form of orderly and accurate financial reporting, have the tools and resources to capture the potential influence of environmental, social and governance (ESG) issues on enterprise performance and valuation. Assurance is a critical step in establishing a disciplined, credible sustainability reporting and disclosure program in response to those marketplace expectations, with the goal of enhancing confidence in the reported information for the benefit of the intended users of the information.
Scrutiny around how companies conduct business is intensifying as investors, regulators, and consumers seek more details on, and deeper insight into, the effect of business operations on the environment, society, and regulatory compliance. More rigorous analysis and disclosure of ESG performance will be essential for companies to improve credibility and trust among an expanding set of stakeholders—at the same time, drive performance in a manner that can be transparently evaluated by internal and external stakeholders.
Skroupa: With investors and other stakeholders increasing their scrutiny around the quality of sustainability disclosure, is ESG reporting “investor grade” at this time? If not, what will it take to make ESG disclosure “investor grade”?
Sullivan: Corporate directors and executives may feel they are receiving mixed signals regarding the importance of ESG topics to investors. They can be swamped with questionnaires and surveys from investors, ratings agencies, media outlets, and others regarding their company’s ESG performance, yet the topic is seldom raised on quarterly earnings calls.
A recent CFA Institute Survey found that 69% of CFA Institute members globally believe it is important that ESG disclosures be subject to independent verification. Respondents, however, are split on what level of verification is necessary – 44% prefer a high level of assurance and 46% support limited verification. But it is clear that the movement toward “investor-grade” ESG disclosure is still evolving with only 63% of the responding Global 250 companies obtaining some form of assurance on sustainability reporting.
In many cases, investors look to third-party ratings and data providers to gain access to ESG data sets, generated primarily through company survey responses (or lack thereof), external research, and other inputs. Tedious as they may be to complete, those investor and ratings agency surveys have become an increasingly important step in the ESG information value chain and the ability of investors to consider ESG factors in the absence of standardized, accessible, and comparable ESG reporting and disclosure by companies.
Sustainability reporting and disclosure, in many cases, currently lacks the discipline of established management systems, processes, and controls exhibited by financial reporting within organizations. As marketplace pressures continue to mount around quality and relevance of ESG disclosure, reporting companies need to take measures to establish effective governance practices and accountability to drive high-quality, “investor grade” reporting. The absence of accurate, relevant, and meaningful ESG data that can be used to inform management decision making and measure performance makes it harder for companies to create value based on the information, and leaves investors struggling to interpret and incorporate ESG information into their decision making in a meaningful way.
Skroupa: Where do you see the future of corporate reporting in five years?
Sullivan: Improved corporate reporting is becoming a growing priority for many stakeholders. We expect to see some significant developments in terms of approaches to disclosure of more comprehensive and relevant business performance information in the next five years. We have already seen some new and innovative approaches to annual reporting by leading U.S. companies in response to disclosure effectiveness efforts seeking to shift annual reporting from a compliance document to a communication tool.
As standalone sustainability reporting continues to mature and evolve, not only can companies gain a better appreciation of how ESG impacts drive their business – “you can’t manage what you don’t measure” – but they can also build trust and credibility with a growing number of stakeholders that demand greater insights into how a company manages risks and opportunities related to ESG topics. From an operational perspective, businesses are increasingly applying an ESG lens as they consider the full costs and availability of required inputs—beyond direct material input costs—to the development and delivery of their products and services.
From a capital markets perspective, not only are investors seeking to understand how corporations manage risk and identify opportunities related to ESG topics, but also how such organizations embed those considerations into their business strategies. However, standalone sustainability and financial reporting have not sufficiently enabled a clear understanding of how sustainability performance affects business results. Each form of reporting is intended for different audiences; current sustainability reporting is generally framed in a language that is not familiar to mainstream investors. I think over the next five years, we can expect to see an increasing integration of ESG and historical financial reporting as reporting organizations gain greater insight into the linkage of various forms of capital – beyond financial and manufactured to natural, human, relationship, intellectual – and how their interdependencies drive value in the short, medium, and long term.
Skroupa: What is the role of the Board of Directors in a company’s sustainability disclosure program? What would be the optimal state of the Board of Directors role in a company’s sustainability disclosure in driving long term value creation?
Sullivan: According to a 2014 study by Ceres, only 32% of the largest publicly traded U.S. companies have board-level oversight of sustainability performance. Sustainability impacts can be both risks and opportunities, and they have the potential to create significant value for companies across all industry sectors. The board of directors is uniquely positioned to provide an independent perspective to management around balancing stakeholder interests as well as risks and opportunities in the context of the environment within which a company operates.
Boards and senior-level management need to work together to develop an effective approach to engage on sustainability topics and drive the importance and prioritization of commitments to sustainability efforts throughout an organization. Transparency around board involvement in sustainability is key for investors and other stakeholders to understand effectiveness and how sustainability drives long-term value for an organization. Disclosure that communicates sustainability performance in a manner that aligns to business value drivers – risk mitigation, cost reduction, revenue enhancement – is typically more effective in reducing the information gap between companies and investors around critical ESG issues.
There has been a lot of attention recently focused on the role of the board of directors with respect to ESG issues. In the October 2015 publication View From the Top – How Corporate Boards can Engage on Sustainability Performance, Ceres, Ceres highlighted a few key considerations for board performance around sustainability topics. The report focused on how to integrate sustainability into board systems and actions:
- Integrate sustainability into board systems:
- Formalize as a board priority
- Incorporate into relevant board charters
- Develop informed oversight
- Align priorities with management approach and business performance
- Integrate sustainability into board actions:
- Include in risk oversight
- Incorporate into strategic planning
- Incentivize management for performance
Christopher P. Skroupa is the founder and CEO of Skytop Strategies, a global organizer of conferences.