In 2010, when Ceres released The Ceres Roadmap for Sustainability (https://www.ceres.org/roadmap), sustainable business leaders were easily identified and few in number. Now it is commonplace to find a “sustainability” or “corporate responsibility” section on company websites. Increased public awareness, regulation, and investor interest have made acknowledging environmental and social impacts and making an organizational commitment to be “sustainable” mainstream business practices.
Nearly half of the 600 largest publicly traded companies in the United States now formally communicate with investors on sustainability in some way, whether via annual meetings, quarterly earnings calls, investors days, or other interactions. But how those companies engage, and the depth and value of those engagements, varies widely. Most companies still share information in ways that reinforce the misconception that sustainability issues are extrafinancial and immaterial. Most also fail to provide investors with the information they need to understand and value the positive impacts of sustainable business strategies on corporate health and financial performance.
CFOs, CPAs, and other financial professionals must play leading roles in overcoming these challenges. Quantifying the impact of environmental, social, and governance (ESG) risks and building a balance sheet and a capital investment program that can thrive in the face of those risks cannot be done without the help and expertise of these professionals. In addition, complete and accurate financial disclosures are critical to ensuring a company’s long-term success and building a robust investment case.
As an experienced leader of corporate and investor dialogues, Ceres understands that for many companies, engagement with investors on ESG issues is fraught with trepidation and resistance. Too often, this resistance can come from the finance function; if the risks are perceived as nonfinancial, they are deprioritized or seen as extraneous.
Without deeper insight on what ESG information investors value, how investors want to see that information, and who they want to hear from, companies will continue to fall short in providing the decision-useful information investors need to fully understand the financial implications of critical sustainability risks and opportunities.
In a recent report (Change the Conversation: Redefining How Companies Engage Investors on Sustainability,http://bit.ly/2KHBR17), Ceres sought answers to the most common questions companies have, all of which are relevant to the day-to-day work of accounting and finance professionals:
- What does meaningful ESG disclosure look like to the investor community, and where and how do they want to see it?
- Which time frames are investors interested in, short- or long-term?
- How do investors define sustainable business leadership?
- How, in an increasingly crowded space of companies claiming to be sustainable, can companies stand out and be rewarded by investors for their leadership?
The Role of Finance in the Sustainable Investment Landscape
Integrating ESG factors into investment decision-making is fast becoming a mainstream practice among investors of all types and sizes. ESG investing represents about one quarter of all professionally managed assets around the world; in 2017, investments guided by ESG criteria rose to $12 trillion in the U.S. alone, nearly double the 2014 levels, and neared $23 trillion globally. Wealth transfers to a new generation of millennial investors will likely accelerate this trend.
Given these observations, Change the Conversation recommends that companies implement a proactive investor engagement strategy on sustainability. By describing these issues in the language of finance, companies can ensure that investors understand and value them. Leveraging the CFO and other senior leaders as key messengers can also help companies attract investors, as can making sure several different engagement strategies are used.
Rising interest in ESG investment is accompanied by increased investor activity focused on improving and accelerating companies’ ESG performance and commitments. To enable effective engagement and accurate assessment, investors are coupling increased activity with demands for improved access to more and better information. More than ever, what companies publicly disclose and proactively share with investors on ESG issues is critical in establishing leadership among sector peers.
Given the critical role of finance departments in producing investor-focused disclosures, sustainability should be a top priority for U.S. CPAs. Ceres works with its Company Network members to help implement the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and the standards promulgated by the Sustainable Accounting Standards Board (SASB), both of which focus on the disclosure of material sustainability risks in financial filings. Finance departments of major U.S. companies should engage more deeply in the preparation of these disclosures, rather than rely entirely or primarily on their sustainability teams to do this work.
When finance teams take on this responsibility, it often leads to increased recognition that so-called “nonfinancial risks” aren’t nonfinancial at all. Instead, risks associated with climate change, water scarcity, and inequity often turn out to have significant financial impact for companies and should be treated the same way as other risks. Thus, these issues should command the attention of the CFO and be considered in strategic planning and capital allocation decisions. Change the Conversation finds that formalizing the integration of sustainability into the business and clarifying accountability internally can help companies manage risk better than their peers.
Investors also want to see companies engage on sustainability as a path toward future opportunity. In 2018, Bill McNabb, the then CEO and Chairman of Vanguard, called on the companies in its corporate portfolio to proactively integrate sustainability into their business strategies: “For too long, companies have sacrificed long-term value creation to generate short-term results, which erodes the sustainability strategic investors seek.” Investors are pushing for sustainability measures because they recognize that they are core to business value creation. Studies from Oxford University, Harvard Business School, Morgan Stanley, and Bank of America Merrill Lynch all affirm that a focus on a sustainable business strategy can provide a competitive advantage in stock price, cost of capital, and operational performance, as well as unlock opportunities for decades to come. By helping clients identify these opportunities and quantify their impact, CPAs can be key players in moving business forward while helping to create a just and sustainable global economy.