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ACCOUNTABILITY and MANAGEMENT
The Business Impact of Environmental and Social Issues
On the Radar ... Chartered Professional Accountants of Canada
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TPB Comment
This paper from the Chartered Professional Accountants of Canada in 2018 highlights some of the progress that has been made in broadening the focus of analysis, reporting and investment to include issues beyond merely the profit performance of companies. What the paper does not reference is the appalling lack of rigor in the way in which companies address these important issues, something we are trying to address at TrueValueMetrics.
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The Business Impact of Environmental and Social Issues
On the Radar ... Chartered Professional Accountants of Canada
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Conventional Metrics
Societal, technological and geopolitical change, the impacts of climate change and the
interconnectedness of these issues present risks and opportunities that must be understood
and managed.
This piece pinpoints three key trends with environmental and social implications that are already impacting businesses and capital markets.
1. Evolving View of the Responsibility of Business in Society
Institutional investors, employees, customers, communities and governments increasingly look to corporations to:
- integrate societal issues into corporate thinking
- take responsibility for the impacts of their operations on society1
Corporations must ask relevant questions they may not have previously considered. For example:
- How do urbanization and demographics, energy costs, and availability of agricultural land, create business risks and/or opportunities?
- How do disease, poverty and/or illiteracy impact a company’s workforce and productivity in supply chains?
- What are the business risks and opportunities associated with: —— how a company’s products affect people’s lives
- —— how a large infrastructure project impacts communities
- —— how extractive companies work with local indigenous communities
- —— how resource limits influence decisions?
The interdependence of society, economy, the natural environment and related inherent resource limits is becoming clearer, along with the implications of this for business.
“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.”2 — Larry Fink, CEO of BlackRock
It takes time to appreciate the environmental and social risks and opportunities related
to megatrends. So, too, the social and environmental impacts of some business decisions
and operations can take time to develop and become apparent. That is why a longer-term
mindset in C-suites and boardrooms is required. A focus on short-term results can both
create and exacerbate negative environmental and societal outcomes.
The landscape of environmental and social risks important to business is depicted in the World Economic Forum’s annual Global Risks Report.3
Some of these issues may be important to all companies and some may be more or
less important to particular industries. What is key is that companies navigate both the
environmental and social mega-trends, and the industry and company specific issues
to the benefit of their investors and other stakeholders.4
Costco: “Do the right thing. It is a philosophy embedded in our culture… members
of our leadership team and beyond realize the key to long-term success
is not high margins; rather it is how you treat, engage, and include people: our
members, our employees and our suppliers alike.”5
Costco’s first sustainability principle is: “For Costco to thrive, the world needs
to thrive. We are committed to doing our part to help.”6
2. Increasing Investor Interest in Responsible Investing
Institutional investors are becoming more sophisticated in the integration of environmental, social and governance (ESG) issues into their investment decision-making (also referred to as responsible investing). This movement is growing globally.
Responsible investing in the United States grew to $12 trillion in assets under management in 2018, an increase of 38% in the past two years.7
In Canada, there were over $2 trillion in responsible investment assets under management, an increase of 41.6% in two years. This represents over half of Canada’s investment industry.8
As well, impact investing (a subset of responsible investing that seeks a social and/or environmental benefit in addition to financial gain), while still in its infancy in Canada,9 marks a growing trend. Importantly, investors are committed to measuring and managing impact10 — a trend that may affect corporate reporting.
“Risks can come from financial as well as non-financial factors, and that’s why analysis of ESG [environmental, social and governance] factors is integrated in our processes.”11 — Ontario Teachers’ Pension Plan
Institutional investors are looking for reliable, comparable ESG information that will enhance their investment analysis, engagement and voting decisions. Currently, institutional investors purchase selected ESG data from third parties because corporate disclosures are not always providing the evolving ESG metrics and information capital markets are seeking.
“Risks and opportunities for long-term capital differ fundamentally from those for short-term capital. Metrics also differ: short-term metrics tend to be more accessible and reliable, but they often do not capture disruptive changes in economies or markets. These long-term disruptive changes include climate change, cybersecurity, demographics, and many other factors.”12
— Excerpt 2018 Summit on Focusing Capital on the Long Term
Three noteworthy developments in reporting about ESG issues include:
- Asset owners, asset managers and companies have begun to report on climaterelated matters as recommended by the Task Force on Climate-related Financial Disclosures (TCFD).13
- Increasingly, corporations are presenting their responses to the UN Sustainable Development Goals (SDGs) in their sustainability reports.14
- Companies (and investors) are using the standards for identifying financially material environmental and social issues by industry sector provided by the Sustainability Accounting Standards Board (SASB).15
3. The Contribution of Stakeholder Engagement to Long Term Value
Knowing how environmental and social issues impact stakeholders16 and understanding stakeholders’ expectations17 of companies can contribute valuable insights for identifying strategic opportunities and risks and creating long-term value. It can also help to build trust, brand reputation and resilience.
“Effective engagement with non-shareholder stakeholders is equally vital to sustain the long-term interests of an organization and to ensure that a board discharges its management oversight responsibilities.”18 — CPA Canada Stakeholder Engagement Briefing
Transparency and engagement are key to developing and retaining trust with stakeholders.
In today’s market, attention to social media is particularly important. Information
posted on social media can be misleading or even deceptive with often little time to
fact-check and respond. More engaged stakeholders are more likely to support and trust
company responses.
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DISCLAIMER
This publication was prepared by the Chartered Professional Accountants of Canada (CPA Canada) as
non-authoritative guidance. CPA Canada and the authors do not accept any responsibility or liability that
might occur directly or indirectly as a consequence of the use, application or reliance on this material.
Copyright © 2018 Chartered Professional Accountants of Canada
All rights reserved. This publication is protected by copyright and written permission is required to reproduce,
store in a retrieval system or transmit in any form or by any means (electronic, mechanical, photocopying,
recording, or otherwise).
For information regarding permission, please contact permissions@cpacanada.ca.
“The real difference between shareholder activists and non-financial stakeholders
can be seen in the power of social media to shape the discussion. Non-financial
stakeholders concerned with environment, social and local issues can often
gather more online support for their concerns than activist shareholder can
gather for theirs.”19
— CPA Canada Stakeholder Engagement Briefing
Responding Strategically
Successful companies and boards are adept at handling the interconnectedness and complexity of the business issues related to environmental and social matters. They challenge their existing models. They bring together diverse stakeholders with different points of view. They take the time to develop, adapt and test innovative approaches and behaviours. And they dialogue and report strategically with investors and other stakeholders. Boards and executives that recognize and monitor trends such as those outlined in this publication will be better equipped to provide effective oversight of how their companies are dealing with environmental and social issues. And importantly, their companies will be better positioned to create long-term, sustainable value.
References:
- Based on a global survey of 11,000 business and human resource leaders, as well as interviews with executives from some leading organizations, a 2018 Deloitte study noted that organizations are increasingly judged on their impact on society. Deloitte Insights. 2018 Deloitte Global Human Capital Trends. The rise of the social enterprise.
- Larry Fink. A sense of purpose. Blackrock. January 2018.
- www.weforum.org/reports/the-global-risks-report-2018
- Some companies are beginning to prepare scenario plans to understand better the potential impact of megatrends and issues on future business strategies, operations and results.
- Annual Report 2017. Costco Wholesale Corporation. CEO Letter to Shareholders.
- www.costco.com/sustainability-introduction.html
- Report on US Sustainable, Responsible and Impact Investing Trends 2018. US SIF. October 2018. Page 1.
- 2018 Canadian Responsible Investment Trends Report. Responsible Investment Association. October 2018. Page 6.
- According to the 2018 Annual Impact Investor Survey, capital invested in 2017 exceeded U.S.$35.5 billion with growth of 8% expected in 2018.
- Global Impact Investing Network. Annual Impact Investor Survey 2018. Page XIII.
- www.otpp.com/investments/responsible-investing/our-principled-approach
- Summit 2018 Focusing Capital on the Long Term. FCLTGlobal. New York. 28 February 2018. Page 20.
- www.cpacanada.ca/en/business-and-accounting-resources/financial-and-non-financial-reporting/mdanda-and-other-financial-reporting/publications/tcfd-overview
- www.undp.org/content/undp/en/home/sustainable-development-goals.html
- https://materiality.sasb.org
- Stakeholder categories include capital providers, customers, employees, suppliers, communities, Indigenous Peoples, and governments. Non-governmental organizations can also impact companies and stakeholders.
- For example, millennial or Generation Z talent want to work for companies that make a positive impact in society. 2018 Deloitte Millennial Survey. Page 2.
- CPA Canada. Director Briefing — Stakeholder Engagement. Andrew J. MacDougall, LLB and Josh Pekarshky. 2018. Page 1.
- IBID. page 4.
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