The rising demand for companies to disclose their environmental impact is driving change in corporate behaviour, and finance teams are at the leading edge of this evolution
This article was first published in the October 2019 International edition of Accounting and Business magazine.
We are living through a time of social and environmental jeopardy. Every week brings new headlines of melting glaciers, burning rainforests, social inequality and poverty. But what responsibility does – and should – business have for remedying the ills of humankind?
If the ultimate aim is for everyone to have the means to live well on an ecologically flourishing planet, to say there is much work ahead is quite an understatement. But it may nevertheless be an achievable goal if the way in which modern economies function can be reset. A framework for the future has already been set out in the UN’s Sustainable Development Goals, which describe 17 interconnected social, environmental, economic and governance issues for countries to achieve by 2030. But as a major report from ACCA, in collaboration with the CFA Institute, points out, achieving that aim will require the active involvement of finance and business.
The report, Social and environmental value creation, uses emerging risk and reporting data analysis from Datamaran, and draws on roundtable discussions with ACCA members and interviews with key stakeholders, to assess the challenges of social and environmental value creation within companies and the role the financial sector plays in evaluating risks and opportunities.
More precise environmental reporting is just one strand of a growing trend for companies, particularly large multinationals, to consider and discuss their contribution to an expanding range of societal issues. The pressure from the public, governments and other stakeholders on organisations to play a greater role in meeting environmental and social challenges is growing. The report looks in detail at the ways in which companies manage their social and environmental risks and how they can contribute value to society and to the environment, as well as the growing importance of environmental, social and governance (ESG) issues in finance.
The report tracks how market-based capitalism encouraged a focus on shareholder value, which has over time morphed into the concept of ‘shared value’, where societal returns are expected to be given equal weight to financial returns. ‘There is a growing understanding that better social and environmental performance by companies leads to better-managed business, one that is more engaged with the society in which it operates,’ says the report.
This evolution has resulted in a shift in corporate reporting, notably the emergence of sustainability reporting. ‘Questions about whether, to what extent and how business should take responsibility for environmental and social mega-trends manifest themselves in the development of new criteria and indicators for assessing corporate performance, which increasingly associate performance with responsible business conduct and sustainable outcomes,’ declares the report. Demand for information about how corporate activity jeopardises or contributes to long-term sustainability is rising. Existing requirements are being expanded – for example, to explain how governance and remuneration encourage particular behaviour, and new measures of performance, such as social impact measurement, are being developed.
The report points out that finance teams are on the front line of this evolving battle. Professional accountants have a uniquely privileged view, as they are involved across all elements of the business model – from proposals to create value to the creation of value itself, and capturing and reporting on the value that is being created.
But while many tools exist to help organisations monitor and report on social and environmental risks and value creation, the report argues that finance teams ‘lack the capabilities and mandate to make the case’ and to put the necessary processes in place. An added challenge is that not all activities fall under finance’s remit. One of the consequences of a greater focus on social responsibility, for example, has been an increase in the involvement of companies in community engagement activities. Typically, this comes under the responsibility of marketing or external communications, and is far removed from strategy, finance and internal audit teams.
The report explores in detail the growing demand for more ESG disclosures from investors. It notes that ethical investing is on the rise – ESG funds have seen ‘tremendous growth’ in recent years, with assets under management rising by 60% between 2012 and 2019 from US$655bn to just over US$1 trillion. Given the interest of the millennial generation in ethical investing, the trend is likely to continue.
The report also points out that investment managers are feeling the effects of a series of push-pull factors that encourage advances in ethical investment. The factors include increases in regulation, and enhanced disclosure and reporting requirements, as well as the availability of better-quality ESG data, metrics and analysis, and ‘an emerging and broadly supportive body of academic literature on ESG issues in investment management’.
That said, there are still a number of obstacles in the way of more widespread adoption of ESG investment approaches. The barriers include a lack of comparability of ESG data and disclosures across organisations – which probably reflects the multitude of corporate reporting practices and standards governing non-financial information across the world. Until both ESG data and reporting requirements are complete and standardised, a true appraisal of ESG risks and opportunities will remain beyond our reach.
The report concludes that the challenges are ‘immense, complex and urgent’, but that opportunities can be realised with the use of existing tools and processes. All that is needed – and it is no small thing – is a shift in values and mindsets by business. The world is watching.
Liz Fisher, journalist
"Professional accountants have a uniquely privileged view, as they are involved across all elements of value creation in the business"