Investors are asking the wrong questions about sustainability

by Carol A Adams

When it comes to hitting the 2030 targets underpinning the UN’s 17 Sustainable Development Goals, considering risk alone will not cut it. Larry Fink’s recent emphasis on climate change risks and divesting in coal is significant, albeit a few decades late, but what about opportunities? And what about other sustainable development issues that threaten to bring businesses down?

Unless businesses change what they do and how they do it, the goals will not be achieved. To safeguard long-term returns, businesses can’t ignore sustainable development issues such as soil erosion, water security and poverty. 

Investors aren’t asking the right questions to protect long-term returns.

While important, financial and quantitative disclosures deserve no more attention than qualitative disclosures on governance oversight, strategy and management approach. These narrative disclosures tell investors whether an organisation has adequate processes in place to identify sustainable development risks and opportunities and reflect them in their strategy. 

Without internal controls, internal audit and board oversight, disclosures — whatever the standard or framework used — are not worth much. Not so long ago, Volkswagen’s reports promoted its green credentials and ambitions. We now know the data was wrong, the cost to investors significant, and earlier this month six Volkswagen managers were charged with fraud. 

Not all information that influences the long-term future of a business can be reduced to numbers. An investor would be wise not to ignore a narrative disclosure that farmers in a drought-stricken area are complaining to politicians that they need the water used by a bottling plant more. That sort of information might only be gleaned through a company’s process of engaging with stakeholders — a process that the Global Reporting Initiative Standards are unique in requiring them to disclose. 

The focus on the ‘alphabet soup’ of sustainability standard setters is perhaps a distraction from the need for companies and investors to do more on sustainable development issues.

Carol Adams

Sustainability reports are dominated by information on historic reporting, but investors should be asking about strategy and how the company knows its strategy addresses risks and opportunities.

The International Integrated Reporting Council has championed a focus on forward looking information in corporate reporting and influenced stock exchanges and regulators to ask for more of it. The Task Force on Climate-related Financial Disclosures (TCFD) has followed this lead with a focus on climate change reporting. In requiring board sign off, these disclosure frameworks really can change what a business focuses on. 

The Sustainable Development Goals Disclosure (SDGD) Recommendations— a report I authored with Paul Druckman and Russell Picot with broad stakeholder input — pulls together the essential elements of these frameworks that are relevant to achieving the sustainable development goals. The SDGD Recommendations call for reporting on value destruction (important to investors) and negative impact on the SDGs — so that they can be addressed through the business approach.

The focus on the “alphabet soup” of sustainability standard setters is perhaps a distraction from the need for companies and investors to do more on sustainable development issues. For too long companies have got away with incomplete and dishonest reporting of sustainability issues that would not be tolerated in financial reporting. And investors need to step up their due diligence and engagement across a range of sustainability issues. Yes, it’s complicated — so put more resources to it.

Like financial reporting standards each framework/standard offers something different, all are important in different ways. Mr Fink’s selection of two — the US-based Sustainability Accounting Standards Board (SASB) and TCFD — misses the all-important elements of others. 

It is also time the global accounting community got to grips with the assurance of qualitative sustainability information. We list the type of evidence reporters can collect to support their disclosures in the SDGD Recommendations. 

The Big Four need to be innovative and provide corporate stakeholders with more information on their approach, the evidence they’ve relied upon and their recommendations for improvement. There is no time for conservatism and risk aversion to get in the way of developing assurance practices that improve reporting, investor confidence and sustainability outcomes.

We are nowhere near achieving the SDGs by 2030. And we won’t without corporate investment in better reporting and board oversight. Asset owners and managers could drive this through engagement and due diligence. This would make businesses accelerate their initiatives around the SDGs and transform the world by 2030. 

This article was first published in the Financial Times and is republished with permission.

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