Sustainability reporting is becoming increasingly more important to investors. I recently had the privilege to talk with Kristen Sullivan, Partner, Deloitte Risk and Financial Advisory serving as the Sustainability Risk Advisory and Assurance services leader, at a recent conference.
What specific sustainability issues are most relevant for investors?
It’s a great question. Investors are not a monolith, there's a spectrum and they're interest in ESG (environmental, social and governance) spans that spectrum in terms of strategies and approaches and therefore information that they need. So if you ask an investor what ESG information would be valuable, they'll say “yes”. Investors are looking to gain greater insight into how a company is thinking about the various ESG topics that impact their business and drive value for their business and then how they are measuring and communicating their performance in those areas. I think in terms of topics that are heightened interest for investors, you've seen the leading institutional investors become very vocal around the topic of climate change. It's pretty much a proxy sustainability issue and investors are acting on their priorities and commitments. They're voting their proxies, they are engaging with companies and I think it's this engagement activity that can help companies better understand what ESG topics investors are interested in. Investors want companies to provide more insight into how they are thinking about these issues? How they are integrating ESG risks and opportunities into their business strategy, and then how they are measuring performance to inform decision making and disclosure?
What kind of guidance could best be provided to ensure appropriate disclosure of that information?
There's a lot happening on the standards landscape. There's a number of standard setting and framework initiatives that really help or are intended to help companies translate those issues into meaningful, comparable, reliable information. These standard setting organizations issue guidance, application and implementation guides. In many cases, these organizations work with industry partners to develop tools and resources because the materiality of ESG issues vary by industry. If you're a public utility, carbon emissions and safety practices are important versus an insurance company where ESG risks need to be factored in the underwriting and investment practices.
What role do you think investors play in enhancing disclosure effectiveness by expecting companies to disclose performance on material ESG factors?
A big role and I think disclosure is the first step. There is this increased appetite by investors to gain access to ESG information. The biggest complaint by investors is that they can’t easily access comparable and consistent ESG information. We've seen this trend where the universe of ESG data providers and raters has continued to expand and so when investors can't get ESG information easily from companies or through direct engagement with companies, they look to ESG data providers. I think the biggest call to action for companies is the fact that with the absence of ESG disclosure, these data providers will try to fill in the gaps on their own. As companies increasingly understand that these ESG providers are supplying ESG data to investors, and they're in a sense filling in the gaps where companies aren’t reporting, that's even a further motivation to companies to say, Hey, I've got to tell my story and communicate so someone else is not telling the story for me.
What is driving the growing interest from investors in sustainability information?
Well, I think it's becoming much more here and now. Companies are experiencing the physical, regulatory, and reputational impacts of sustainability issues, right now. Investors continue to reinforce their belief that ESG issues are critical to driving value for business and in the absence of effective disclosure, investors aren't able to effectively price in that risk. We know it's happening, but companies aren’t disclosing it in a transparent, consistent way and so investors are saying, I'm not able to effectively execute on my strategies. And so I think that's really motivating and has really intensified the push by investors to really engage with companies and try to use any lever to encourage disclosure.
What is the biggest challenge facing the Sustainability Accounting Standards Board in 2018?
I think there are a number of opportunities, as well as challenges. I think we're at a really important inflection point where again, investors are going to drive this acceleration in more effective ESG disclosure. We’re likely not going to see any regulation in the US in the near term – we don't anticipate the SEC to take any action in this area. We see investors really making their case that we need a broader universe of information to inform sound investment decisions. So I think the SASB, the GRI, the IIRC, the CDP, among others, are now called to action to really drive a clarity of message to the market around what is your purpose, what is your objective and how should your standards be used. The real objective is to enable companies to more effectively communicate ESG performance to the market. So that's a challenge and an opportunity. I think the challenge to combat is the perception of a lot of confusion and noise because there's so many players in the space, but that presents the opportunity to drive that clarity of message around how standards can better enable companies to effectively communicate ESG performance in a manner that meets the needs of my stakeholders.
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