Our Outside Voice series highlights the perspectives of stakeholders and leaders on important sustainability topics, such as sustainability reporting. On the particulars, we may not always agree. But we believe in hearing and learning from others who offer valuable insights and a different point of view on issues that are important to us all.
Mike Wallace, a partner at BrownFlynn, an ERM Group company, is an internationally recognized expert in sustainability with more than 20 years of experience advising corporations, nonprofits and government agencies on sustainability programs. He’s also interim executive director of the Social and Human Capital Coalition, a global collaboration that helps companies recognize, measure and value the importance of people and communities. Previously, he was a director at the Global Reporting Initiative (GRI).
In conjunction with the release of Domtar’s 2019 Sustainability Report, our Outside Voice team spoke with Wallace about the evolution of sustainability reporting, new areas of interest for stakeholders and the benefits of transparency to both publicly traded and privately owned companies.
Who is the audience for corporate sustainability reporting, and why does such reporting matter?
I’ve watched this field evolve over two decades, and we’ve entered a unique moment when all of the major players in the financial industry — stock exchanges, ratings agencies, investors, pension funds and managers, insurers and lenders — are showing significant interest in ESG [environmental, social, governance] and sustainability reporting. The audience also includes a company’s institutional customers, employees and — to some degree — consumers.
We can stop calling sustainability reporting a trend. It’s here to stay.
Financial stakeholders realize there are risks and opportunities associated with how and whether companies manage their ESG performance. For the financial markets to make informed decisions, they need ESG information, which can be packaged as discrete disclosures or a comprehensive sustainability report. Financial market players also seek to compare companies on ESG performance, so there is a need for consistency in how things are measured and disclosed. It’s this continual demand for comparable, standardized and consistent ESG information that has driven the evolution of sustainability reporting frameworks, guidelines and standards over the past 20-plus years.
The continuous improvement within the sustainability reporting field has brought us to this point. It may feel confusing and overwhelming for companies to look at the ESG reporting landscape, but at the end of the day, most of today’s disclosure guidelines build off GRI’s approach. It is the longest-running and most widely used sustainability reporting method in the world.
The Task Force on Climate-Related Financial Disclosures (TCFD) is one of the latest moves in the ESG disclosure space. It’s very specifically focused on climate, but we have never before seen such a diverse collection of companies come together to discuss and endorse the need to assess the climate risks to ALL business. A look through the supporters of the TCFD will reveal stock exchanges, insurers, lenders, investors, rating agencies and the companies that need all these financial services.
Given that sustainability reporting is voluntary in North America, how do companies benefit from reporting? Do you think it will become mandatory in the future?
To answer the second question first: Yes, it’s going to become mandatory.
From a business point of view, every company wants to maintain its license to operate. Companies at least need formal permission from society to do business. Most companies want more than just permission, however. They want to be recognized for greatness. They want to appear on Fortune’s World’s Most Admired Companies list. Companies are realizing that key stakeholders and society at large are increasingly asking about environmental, social and governance performance. Some, like large institutional customers, are even asking for proof of that performance.
If the adage “the customer is always right” holds true, then how can companies deny society’s growing interest in sustainability? Their customers include those who buy the goods and services, as well as those who buy the stock. Since all these customers are now asking about ESG performance, every company needs to be prepared to measure, manage and report.
What trends are you seeing in sustainability reporting, whether new topics or emphasis on particular areas?
Most companies generally think sustainability is only about environmental issues. The ESG movement has helped to change this thinking. Human capital is one of the fastest-growing and rapidly evolving concepts under the larger sustainability or ESG umbrella. The #MeToo movement, diversity and inclusion, living wage, wellness and well-being are all emerging areas that touch on the concept of human capital. Simply put, it is about how a company treats its people, from the top to the bottom. Where would you want your son or daughter to work? Your wife or your husband?
Human capital matters, especially as you look to attract talent. Your future employees care whether you’re a good citizen, as measured by how you treat climate change, human rights and philanthropy as well as how you take care of your people. They also want to see opportunities for future mobility and career growth, and inclusion and diversity often send a message about that.
What advice would you give companies on how to work with rating agencies and other analysts who evaluate ESG performance?
As humans, we’re always passing judgment. We must. It’s part of decision-making, part of survival. None of us likes to be judged negatively, including companies. The ESG ratings and rankings field is all about judging, or systematically assessing the ESG performance across multiple industries and thousands of companies. Most of these ESG rating and ranking firms are conducting extensive due diligence on companies, comparing and contrasting ESG issues across industries and producing useful analysis for their customers.
It is imperative for companies to understand the sustainability reporting universe: how it works and who is buying and using the information. If your largest investors are signatories to things like CDP, PRI [Principles for Responsible Investment] or TCFD, you can rest assured that they are conducting some level of ESG due diligence. In most cases, they are buying ESG research from third-party vendors. Companies need to realize that this ESG ecosystem has existed for 20 years, and it’s only going to grow. Also, understand that ESG research firms do make mistakes. It is important for companies to monitor these firms, ask for their reports and correct any errors.