ESG Reporting is Crucial for Your Business - Nick Whittle
On March 3, McKinsey.com published an interview between Kurt Kuehn, the former CFO of United Parcel Service, and consultants Tim Koller and Roberta Fusaro. Many of you may know Tim Koller for his work and publications on corporate finance and valuation, and this alone would normally be enough to grab my attention, but I was particularly drawn to this article, because Kurt Kuehn serves as a board member of the independent Sustainability Accounting Standards Board (SASB) and explains SASB’s evolving “industry-specific, market-informed” approach to sustainability reporting.
As Kuehn states, the understanding that non-financial ESG issues can significantly impact business opportunity and risk is now widespread, but the inconsistency in reporting them alongside more standard financial matters remains a cause of frustration for many managers and investors alike. I would add that this is even more of a problem in the emerging markets, and the attitude that ESG reporting is a form of greenwashing better relegated to the marketing department than the C-suite continues to be common.
A concerted global push toward a consistent foundation from which investors can begin their analysis of a company’s ESG performance, and the impact this has on financial returns, has been ongoing for some years. Maybe one of the benefits that we will see come out of the disruption of the past year and a half is the adoption by companies, investors and other stakeholders of these SASB standards, focused on ESG issues that can have material financial impacts. Certainly, in the emerging markets in which I am most active, I am sure that those companies that think carefully about the subset of ESG topics that most affect their ability to create sustainable value, and then communicate this in a consistent and transparent manner, will build considerable goodwill with their investors and enhance their access to capital.
Often the most emotive images of ESG failings or non-compliance come from the emerging markets. Think of the way orangutans have been co-opted by both sides in the arguments about deforestation by palm oil producers, and the results these have had on customer attitudes. As Kuehn goes on to say, a broad majority of investors care a great deal about ESG performance and impacts. The SASB found that investors examine four factors in their ESG analysis: Are companies aware of non-financial risks? Do they have a plan to mitigate such risks? Do they have performance targets and a way to measure performance against these risks? And, are they progressing according to plan? Enlightened leaders can show how ESG factors affect their companies’ financial performance and form an integral part of corporate strategy.
Great progress has been made toward a set of guidelines on ESG reporting that can satisfy the needs of corporates and investors, and I hope that within the next twelve months, the majority of US and European issuers will have made strides toward standardizing their approaches to this critical reporting function. It would certainly be a decisive step forward for emerging markets if the SASB standards were broadly and quickly adopted in major markets — when it becomes the norm for investors to expect this level of insight into the companies they follow, then investors will simply punish any failure to deliver to the required standards by withholding their capital. Companies that have been dragging their heels in this regard, wherever they may be, should take careful note.
You can read the full interview between Kurt Kuehn, Tim Koller and Roberta Fusaro by clicking here.
Executive Director of Fountain City Investments Ltd., supporting Indonesian debt financing via cross-border…