by Michael Hines
Minimizing a company’s impact to society has long been considered to be at odds with maximizing stakeholder returns. Better informed customers, as well as liability averse investors are now requiring companies to do better. Companies are responding, and a bottom line benefit is emerging.
In the last 50 years sustainability has primarily been seen in Socially Responsible Investing (SRI), which avoids investment in companies with unethical or risky practices. While a positive development for society, this exclusionary practice has generally been associated with at best average investor returns.
Today corporate sustainability has evolved to where it is possible, even advantageous, to operate in a manner that is a win win for an organization, its partners and society. There is strong evidence that companies with their “Triple Bottom Line” – Environmental, Social and Governance (ESG) – ducks in a row are rewarded with a lower cost of capital and frequently outperform. These “best in class” companies are not only reducing their impact on others, but cutting waste and mitigating liabilities in their operations.
While a new concept for many, ESG is coming on strong. After nearly zero a decade ago, ESG related assets under management at the end of 2015 were over $21 trillion. Morningstar now has ESG sustainability ratings for funds. It’s both carrot and stick – recent financial crises have convinced regulators and investors that more information is needed from companies. And companies have recognized that being a good citizen is a point of positive product differentiation.
Much of the impact of ESG falls on the CFO’s desk. For the Social component – the S in ESG, companies that treat employees and suppliers fairly reap rewards of increased productivity plus less turnover and litigation.
Recent data breaches at companies like Target and Home Depot have shown that companies need to manage supply chain vulnerabilities that can threaten their sustainability. Companies like ThirdPartyTrust have emerged to address the issue as companies scramble to identify and manage this risk. For suppliers, demonstrating data security has become a necessary requirement to win contracts as well as a potential competitive advantage.
Strong corporate governance (the G in ESG) creates transparency and stability, encouraging investment.
Most early adopters are large multinationals, particular those in Europe with regulatory requirements from public exchanges. Companies such as Mitsubishi, Apple, and Cummins are providing ESG disclosure in an annual report like format. Goldman Sachs is a solid example of ESG reporting.
Standards for ESG measurement and reporting are evolving. Unlike standard GAAP financial principles with a well defined one way dissemination of information, ESG measurement is still both an art and a science. Communicating this sometimes hard to measure information is ideally a two way conversation with stakeholders. Just as GAAP represents a standardization of best practices over time, initiatives such as GRI and SASB aim for the same consistency and eventual auditability.
Driving change at an organization begins with measurement and communication of the relevant drivers. Sustainability Academy’s Certificate in ESG Performance for Investors and Sustainability Professionals provides useful knowledge about ESG reporting and the opportunities and challenges of this changing field.
What gets measured, gets managed. Markets and companies becoming more transparent will benefit both the environment and the economy.
Michael Hines is an executive, consultant and entrepreneur. He is experienced in financial management, operational improvement, sustainability, and strategy. His work includes large and small companies, restructurings, startups and acquisitions.