Sustainability reporting is becoming increasingly more important to investors. I recently had the privilege to talk with Eric Hespenheide, the incoming Chairman of the GRI Board of Directors at the AICPA’s conference on SEC and PCAOB developments in Washington, DC.
What specific sustainability issues are most relevant for investors?
I think what is most important to investors are those issues that would have a financially material impact on them. So depending on the sector and depending on the particular makeup of the investor class that owns a particular company stock will dictate what their interests are. From a GRI standpoint, we're keenly interested in financially material issues of an ESG nature or environmental, governance, and social issues, but we're also keenly interested in what impact the companies are having on the world.
Most investors are interested in what the impacts are going to be on the company. From a GRI perspective, it's slightly different than what FASB or others are looking at. We're looking at what is the impact that organizations are having on the world as opposed to what the world is having an impact on the company. So when you get to the question of what's important to investors, it ought to be both. Certainly those material issues in climate change, the impacts on food supply, energy sources, and energy costs can be financially material to some sectors. But also, what's coming at companies, which is, what the impact they're having on the world. What GRI focuses on are the future risk factors and opportunities that investors ought to be interested in.
What kind of guidance could best be provided to ensure an appropriate disclosure of that information?
We believe that there is significant value to investors and to the companies themselves in terms of improvements in their performance, but also other stakeholders by having a comprehensive understanding of what those impacts the company is having on the world, whether it be about social, environmental, or even if they have a governance nature. Companies should be disclosing all of those impacts, not just those that have financial materiality in the short run or even the midterm, but to provide stakeholders and investors a comprehensive view as to what the impact that the organization is having or the company is having on the world.
What role do you think investors play in enhancing disclosure effectiveness by expecting companies to disclose performance on material ESG factors?
The investors play a critically important role in that they should be asking for the disclosure of those performance factors that are impacting the risks and opportunities of a company. There is growing evidence that there is interest by investors in asking of those questions. I think investors have a ways to go in terms of really understanding how to incorporate into their analysis of future prospects of company ESG factors, but they are important to it. Certainly, the idea of what assurance is provided on this non-financial information, if you will, ESG performance data will play an important role.
What is driving the growing interest from investors in sustainability information?
I would put it into two, perhaps three, categories. One is investors have historically looked for what information can differentiate a particular company in a sector from another company in that sector. What sorts of differentiation can be made using ESG information as a screen or a factor in that analysis of what differentiates companies. What the future risks and opportunities might be, can be, in the normal course of how do we get better information and how do we better predict future outcomes. Using ESG information as one of those additional screens, in addition to what cash flows might be and what investments might be in property, plant, and equipment, is yet another factor.
The other category that I think is driving it is a recognition by investors, but certainly other stakeholders and other actors on a regulatory or policy level, that the future prospects for a company are going to be greatly influenced by how they respond to environmental and social challenge whether it be by individual stakeholders or by government regulators that want to see companies behave more responsibly going forward.
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