January 20, 2017
Building a trusted investor brand
If you do not include sustainability in your investor reporting, you may be missing out on a powerful opportunity to strengthen your investor brand. Investors are becoming more attuned to the value of a well-executed sustainability strategy and they are seeking evidence that companies are taking action.
That was the message driven home in December by institutional investors speaking at two landmark conferences – the inaugural Sustainability Accounting Standards Board (SASB) Summit in New York and the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) Report Launch in London.
Here’s why sustainability reporting matters and how you can use it to satisfy investor demands, prepare for regulatory compliance, and differentiate your brand.
Sustainability matters because it is a proxy for good management
A recent study by the American CFA Institute reveals that 73% of surveyed investors consider ESG integration – or how a company manages issues relating to the environment, company stakeholder groups and governance – when researching and analyzing potential investments.
Investors increasingly view companies that take a proactive approach to sustainability as well-managed. That’s because many sustainability-related issues are tied to future trends that can significantly impact markets, inputs, economics and business models.
Take climate change, for example. The global 2015 Paris Agreement and new Canadian federal and provincial legislation aimed at addressing our radically warming planet are altering the business landscape in far-reaching ways. All industries will be affected in some way: the need to manage energy cost risk, deal with carbon constraints, market new services or access innovation subsidies are just a few of the foreseeable impacts.
Of course, climate change is only one sustainability issue. Business ethics. Workplace safety. Child labour. Pollution. They’re all part of the emerging agenda. Failing to address these in company disclosures looks odd through the investor’s lens and can negatively impact the management’s reputation and brand – not only among investors, but also among employees, customers and other important stakeholders, all of whom see value in a sustainable enterprise.
Act now – ahead of investor regulations
Your disclosure strategy also positions you to comply with any future regulatory disclosure requirements. In a recent landmark report, the Financial Stability Board, chaired by Bank of England Governor Mark Carney, highlighted the need for better corporate climate change management information to support the financial services sector’s lending and insurance underwriting decisions. In fact, select sustainability reporting in financial disclosures is already mandatory in some jurisdictions, including the European Union, Norway, South Africa and parts of Asia.
It’s about disclosing pertinent information – not best performance
Investors are not expecting companies to be a star in all areas of sustainability. They are seeking affirmation that that the companies in their portfolios have started to elevate sustainability to C-Suite and board room discussions. They want assurance that management teams are addressing the broader environmental and societal issues affecting their businesses, and they want to know that companies are managing these as they would any other business issue. “Transparency trumps performance.”
Report on the most important issues
Disclosure should incorporate topics that are most material to the company and its industry, and it should tie into a general discussion about the company’s broad strategic challenges and opportunities, including the management of current and future risks.
At a minimum, reporters should provide a qualitative discussion about the company’s management approach and support the narrative with quantitative performance data. To prove that sustainability is managed as a business issue, it is valuable to discuss future objectives and progress to targets. It is also valuable to name those in senior management or at the board level who are responsible for strategy oversight and performance improvement.
Sustainability reporting should start with financial reporting
Historically, companies have published sustainability information separate from other core investor disclosures. In our opinion, this is unwise: it subjects the reporter to undue litigation risk as financial reporting guidelines clearly state that companies need to disclose factors that “would reasonably be expected to have a significant effect on the market price or value of a security” (Ontario Securities Commission).
Sustainability opportunities and risks can have material implications on company cash flow and asset valuation. For example, how is climate change affecting product demand, supply chain and physical infrastructure? What are the investment returns from water and energy efficiency programs? How is the company creating strategic opportunities through stakeholder partnerships?
The largest companies in the world include sustainability information in their annual financial reports. According to a 2016 KPMG study, three of five of the 250 largest companies in the world follow this practice, and this number is expected to grow. Most also independently assure the information.
Incorporate voluntary reporting to deepen brand building
Progressive companies recognize that voluntarily disclosing detailed sustainability information generates profound reputational benefits among their broader stakeholder groups. This can be done through supplementary channels, such as a stand-alone sustainability or corporate responsibility report and through your company website and social media.
Don’t be daunted – just get started
Formulating your company’s response to sustainability risks and opportunities takes commitment, time and effort. But do not wait until you have the best possible message because it will likely never happen. Start with a few key messages: What is at stake for your company? What is your overall plan? Which executives are in charge? Complement this with a simple scorecard and report on emerging performance indicators.
Whether you are incorporating sustainability information disclosures into financial disclosure or reporting voluntarily, help is at hand. Reporting standards such as the Global Reporting Initiative (GRI) and Carbon Disclosure Project (CDP) provide cross-industry guidance, while the Sustainability Accounting Standards Board and Task Force on Climate-related Financial Disclosures supply checklists tailored to specific industry sectors.
It is important to realize that even publishing sustainability “work in progress” information is beneficial to your reputation and your risk management strategy. It signals to the investor community that your company has a prudent and insightful approach to managing emerging, macro-type risks. And it puts you on a path to developing a robust sustainability disclosure strategy that will drive company action and clearly differentiate you amongst your capital market competitors.
To learn how Quinn & Partners can help you map out your sustainability reporting strategy please contact Francisca Quinn at 416-300-8068 or email@example.com.