ESG As A Value Play

ESG As A Value Play.

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 companies evolving sustainability disclosure to draw greater linkage to business value drivers?

Kristen Sullivan: The business context for environmental, social and governance (ESG) impacts is evolving rapidly and challenging corporate executives to translate global megatrends like climate change, resource scarcity and population growth into tangible risks to and opportunities for their business. ESG impacts are generally longer term in nature and, in many cases, out of the direct control of the company, which makes the linkage of ESG impacts to business value even more challenging.

Attention around the way a company identifies, evaluates and invests in ESG areas is growing from multiple directions; investors, policy makers, regulators, customers, business partners, employees, among others. Companies increasingly need to expand the lens through which they define their key stakeholders and capitals on which they depend, beyond financial capital, to drive long term value. Increasing the level of transparency around a company’s ESG performance is no longer a nice to have, but rather an essential means to effectively communicating with the marketplace.

Multiple sustainability standards and frameworks (the Global Reporting Initiative Global Sustainability Standards Setting Board Standards, Sustainability Accounting Standards Board to name a few) are advancing measurement and disclosure practices to better enable companies to understand and draw linkages between ESG impacts and financial and economic value. Critical to the linkage of ESG and financial performance is a focus on material ESG impacts to the business and its stakeholders, and the concept of materiality and communicating business value is central to evolving standards and frameworks seeking to advance greater standardization and relevance of sustainability reporting.

 

Skroupa: How are marketplace developments helping to accelerate attention around material ESG issues and drive greater definitional clarity around the business context for sustainability?

Sullivan: The foundation of any market is a common language for communication. As the attention around the role and necessity of business in driving solutions to pressing global social and environmental challenges increases, so does the need for greater conformance around the manner through which companies communicate ESG performance. In the absence of an established regulatory regime as with historical financial reporting requirements that guide the discipline and enforcement of standardized disclosure, companies continue to struggle to rationalize the multiple ESG disclosure initiatives, many of which remain largely voluntary in nature, and how to draw on such initiatives to guide a balanced, complete picture of ESG performance that is relevant to its key stakeholders.

The definition of sustainability and ESG varies by company and market participant. There is no one-size-fits-all approach to sustainability impacts across industries, as recognized by leading sustainability standards and frameworks, yet investors and the marketplace continue to demand ESG information that is consistent, comparable and complete.

A large part of the challenge is the lack of consensus around what sustainability really means in its broadest sense. I talk to companies every day with a focus on ESG topics relevant to their specific industry, and in more cases than not, corporate executives respond that certain issues are certainly areas of focus, but they aren’t “sustainability issues.”

Take cyber security for one: In SASB’s industry research, data security and customer privacy represent material sustainability topics with specific metrics in over half of the 79 industries within SASB’s standard setting framework, yet very few companies manage cyber security under a sustainability umbrella. The SASB relevance focuses on the social and human rights element of privacy and security and highlights the breadth of an organization’s social and environmental impact.

Companies need to stay informed around how market initiatives are advancing conformance around the definition of sustainability and ESG performance areas and balance such market standards and expectations with how the company organizes around and manages the full range of environmental and social impacts.

 

Skroupa: What’s next? Why is now the time for CEOs, CFOs and Boards to engage?

Sullivan: Only once an organization has determined its material sustainability impacts (through extensive stakeholder consideration) and mapped those impacts to business value drivers, can it look to the multiple sustainability standards and frameworks to guide credible, reliable disclosure. Many companies are looking to take back control of their sustainability disclosure and communication by focusing more on the critical, relevant, material ESG issues to the business and its stakeholders and less driven and shaped by the multiple and varied requests for information that promote survey fatigue and can dilute the relevance and value of ESG disclosure to the marketplace.

However, many companies are challenged with how to prioritize investment in the necessary processes, controls and technologies to enable ESG measurement and disclosure with the level of discipline, accuracy and confidence as financial reporting. In the absence of a broad regulatory mandate for ESG disclosure and external assurance, the prioritization of these efforts in many cases is not always clear and compelling.

My message to companies is this: The stakes are rising, and so is the urgency with which companies need to be focusing on the sufficiency and accuracy of sustainability reporting. From policy and international accords to legal and heightened regulatory attention, to stock exchanges and proactive business response, indications continue to point to the importance of sustainability disclosure driving business value and financial performance.

Leading practices include translating ESG impacts and drivers into traditional business language of: revenue enhancement, productivity and risk mitigation—this is where the role of the Board, CEOs and CFOs comes in.

As companies gain more experience with ESG reporting and gain analytical capabilities around sustainability performance and trends, the case will become more clear as to the critical importance of high quality ESG measurement and reporting systems, reinforced with external assurance to enhance the confidence placed in the reported information by both internal and external stakeholders. As the quality of sustainability information grows, so will the demand and market moving potential for this form of enhanced corporate reporting.

 

This article contains general information only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

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Christopher P. Skroupa is the founder and CEO of Skytop Strategies, a global organizer of conferences.