The sustainability space — Environmental, Social and Governance (ESG)
The UN World Commission on Environment and Development defined sustainability as development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
Sustainability is often thought of as having three pillars or components: economic, environmental and social — or, more commonly, profits, planet and people. In this context, its scope is about promoting prosperity and economic growth (profit) while protecting the planet and people across three interconnected core elements:
Environmental — Considers how an organisation performs as a steward of nature. This factor includes the nature and extent of non-renewable resources used in production, as well as the release of potentially harmful elements to the air, land or water.
Social — Examines how an organisation manages relationships with employees, suppliers, customers and the communities where it operates. Social issues range from human rights and health and safety to other responsible business practices, such as product marketing and privacy. Expectations around these issues, as well as environmental issues, define what is often referred to as the social license to operate.
Governance — Deals with an organisation’s leadership and effective management of the business. In addition to overseeing strategy execution, performance and management of risks, effective governance ensures maintenance of the social license to operate. Specific governance considerations include executive pay, regulatory compliance and shareholder rights, as well as internal controls and internal and external audits.
In 2015, as outlined in the CGMA® guide The role of the accountant in implementing the Sustainable Development Goals, the United Nations established its 17 Sustainable Development Goals (SDGs).1 The goals recognise ‘that ending poverty must go hand-in-hand with strategies that build economic growth and address a range of social needs, including education, health, equality and job opportunities, while tackling climate change and working to preserve our ocean and forests.’2
The private sector was actively involved in multiple ways to establish the goals, and while the scope of SDGs is vast and applies at high levels to all countries, it’s also the responsibility of organisations of all kinds, all sizes and all purposes. Businesses have a particularly critical role to play, having the global influence and economic power needed to make the difference where it matters most — in the communities where people live and work.
The business community also embraces this expanded role of the organisation and are raising sustainability elements as global mainstream issues that require discussion and consensus. In August 2019, the Business Roundtable, an association of the chief executive officers (CEOs) of leading U.S. companies, redefined the purpose of a corporation. The statement, which 181 CEOs signed, committed the executives to lead their companies for the benefit of all stakeholders. This includes customers, employees, suppliers and communities (environment), as well as shareholders.3
The COVID-19 crisis shows the importance of early action and that organisations and governments should, and can, take huge steps to protect their populations. Climate change, another massive but foreseeable global risk, has exposed global fragilities but shown what is possible when communities and societies work together. As societies emerge from lockdowns, there are demands for national COVID-19 stimulus measures that go toward building more resilient and sustainable economies focused on long-term benefits. These appeals, such as ‘Build Back Better’ and the World Economic Forum’s ‘The Great Reset’ initiative, play to SDG 8, ‘Promote sustained, inclusive and sustainable growth’.4
AICPA and CIMA support a letter calling on the United Kingdom’s Prime Minister to use the United Nations Sustainable Development Goals to create a socially just and green recovery from COVID-19.5 The letter, from 150 businesses, civil society and organisations, recommends the use of the goals to:
Unite all sectors behind a plan to build a stronger and more resilient economy
Prioritise the most vulnerable in our society and level up regional and societal inequalities
Build coherent policies for a healthy planet and to aid transition to net-zero6
Interestingly, Linda Eling-Lee, the global head of ESG research at MSCI, notes that, ‘companies with high ESG rankings have outperformed rivals during the crisis’.7 A possible reason for this is the greater corporate adaptability that ESG reporting and scrutiny provides organisations to rethink their business models in times of stress.
What the pandemic and the build-back-better recovery phase amplify is how important all three core sustainability elements are for resilient businesses. Debates continue around the ethical implications of organisations that furloughed their employees onto government schemes at the same time as paying dividends to their shareholders. Profit, social inclusion or both?
The pandemic also caused us to stop and reflect on the interconnectedness of the health of humans, wildlife and the planet’s ecosystem. It has exposed the precarious nature of global supply chains and how reliant all countries and people are on each other as a result. As we reflect on the nature of fragility and the systematic threats human society faces, how do we embed sustainability risks and opportunities into resilient organisations of the future?
In his January 2020 annual letter to corporate executives, Larry Fink, the chief executive officer of BlackRock, placed sustainability and the issue of climate change at the centre of its investment process. Fink set out that, ‘climate change has become a defining factor in companies’ long-term prospects’ and ‘we are on the edge of a fundamental reshaping of finance’.8
This is an important sustainability milestone as BlackRock is one of the biggest holders of shares among U.S. publicly traded companies. It is also important because, in their investment stewardship approach, Fink calls out the Sustainability Accounting Standards Board (SASB) for providing ‘a clear set of standards for reporting sustainability information’ and the Task Force on Climate-related Financial Disclosures (TCFD) that provides a valuable framework for evaluating and reporting climate-related risks.
The Larry Fink letter is one example of a call from the investor community for financial market transparency and the importance of sustainable data to achieve clarity. Only through improved accurate and timely disclosure can stakeholders understand how organisations manage sustainability-related risks.
In May 2020, the Canadian federal government announced that large businesses affected by the COVID-19 pandemic and applying for emergency loans must publish annual climate disclosure reports. This applies to businesses with revenues above $300 million CAD. The loan requirements explicitly refer to the Financial Stability Board’s Task Force on Climate-related Financial Disclosures, and require applicants to link their corporate reporting to other environmental sustainability goals. The Canadian government clearly is linking COVID-19 stimulus packages with the building of sustainable and resilient businesses.9
Greater climate-related financial disclosure is also a goal of the United Kingdom’s Government’s Green Finance Strategy paper, issued in July 2019. By 2022, the expectation is for all listed UK companies and large asset owners are disclosing in line with the TCFD recommendations.10
In the United States, a committee within the market regulator, the Securities and Exchange Commission (SEC), urged the SEC to develop standardised principles-based ESG disclosure rules. The SEC’s Investor Advisory Committee, in May 2020, voted to make recommendations to the SEC on ESG disclosure. It contends that using ESG-related disclosures, ‘has gone from a fringe concept to a mainstream, global investment and geopolitical priority’ and based their recommendations upon the following:
Investors require reliable, material ESG information upon which to base investment and voting decisions.
Issuers should directly provide material information to the market relating to ESG issues used by investors to make investment and voting decisions.
Requiring material ESG disclosure will level the playing field between issuers
Ensure the flow of capital to U.S. markets and to U.S. issuers of all sizes.
The U.S. should take the lead on disclosure of material ESG disclosure.11
This move in the U.S. acknowledges sustainability as a significant business factor and that its disclosure needs to be consistent and transparent.
The increasing demand for organisational sustainable thinking, sustainability metrics and non-financial reporting is coming from all sides. Investors, regulators and businesses all demand organisations focus on long-term value and resilience that meet present needs without compromising future generations’ ability to meet their needs.
