Investor Demand for Environmental, Social, Governance (ESG) Disclosures


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Presentation by Vittorio Lusvarghi, chair of the Professional Accountants in Business Committee Sustainability Task Force, at the Institute of Cost Accountants of India's National Cost Convention, New Delhi, India, March 2012.

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Investor Demand for Environmental, Social, Governance (ESG) Disclosures

  1. 1. Investor Demand for Environmental,Social, Governance (ESG) DisclosuresImplications for ProfessionalAccountants in Business (PAIBs)New Delhi, India, March 15, 2012Vittorio Lusvarghi, Chair, PAIBCommittee Task Force Page 1 | Confidential and Proprietary Information
  2. 2. Understanding ESGWhat is ESG?• Environmental: Impact on climate change, risks and performance, e.g., GHG emissions, waste, etc.• Social: Health and safety, training and development, staff turnover, diversity, etc.• Governance: Conduct/litigation, board effectiveness, e.g., board composition, duration, remunerationESG factors play a large part in helping companiesachieve sustainable organizational success Page 2 | Confidential and Proprietary Information
  3. 3. The issuesWhat are our key findings? • ESG disclosures are increasingly used by investors to understand a company’s material ESG factors and how they impact overall performance • Investors are becoming more sophisticated in their investment approaches and gravitating to: – Greater ESG integration – Certain types of disclosures and key performance indicators – Assessing financial outcomes of ESG factors • Managerial accountants need to support their organizations in addressing the demand for ESG information Page 3 | Confidential and Proprietary Information
  4. 4. Short term versus long termWhy are ESG factors important? • ESG factors impact overall performance over a longer time horizon • ESG risk and performance will affect an organization and its ability to create sustainable value • Institutional investors theoretically have a long-term horizon • Many institutional investors are therefore considering their ownership rights from a broader perspective, although there are many challenges ahead. Page 4 | Confidential and Proprietary Information
  5. 5. InvestorsInvestor approaches • Negative ESG screening—excluding specific industries or sectors, such as alcohol • Positive ESG screening— or ―best-in-class‖ investing, whereby the scope of the investable universe is restricted to highly rated ESG companies • Engagement—involving a dialogue between a shareholder and a company with the aim of improving the company’s value through greater incorporation of ESG factors • ESG integration—involves integrating specific ESG criteria into valuations of a company Page 5 | Confidential and Proprietary Information
  6. 6. ChallengesChallenges to mainstreaming ESG • ESG issues are complex and multifaceted • Many investors/fund managers are overly focused on short-term financial results • ESG disclosures lacking from companies • Where disclosed ESG information can be of poor quality and reliability Page 6 | Confidential and Proprietary Information
  7. 7. Metrics 1What ESG KPIs and information do investors seek? 39 core ESG KPIs listed and available in report, including: • Environmental: – Total direct and indirect GHG emissions (scope 1, 2 and 3) – Total waste and type of waste (hazardous versus non-hazardous) produced by product and volume – Percent of waste reused in the manufacturing process – Total amount of energy used by the organization • Social: – Total workforce accidents and fatalities – Lost time from accidents – Total or average investment/expenses on training – Employee turnover rate Page 7 | Confidential and Proprietary Information
  8. 8. Metrics 2What ESG KPIs and information do investors seek? • Governance e.g., Board effectiveness – Board composition and diversity – Duration – Remuneration • Stakeholder engagement: – Frequency and main issues arising • Conduct/ethics: – Corruption – Total amount of remediation and fines – Payments to government(s) and total value of financial and in-kind contributions to political parties, politicians, and related institutions – Voting right parity Page 8 | Confidential and Proprietary Information
  9. 9. Focus on relevant issuesWhat ESG KPIs and information do investors seek? • A few relevant disclosures on risks, opportunities and KPIs • Both leading and lagging indicators are important • Financial implications of ESG factors, for example on – Cash flows/earnings – Revenue growth – Cost reduction How different are the needs of investors from those of wider stakeholders? Page 9 | Confidential and Proprietary Information
  10. 10. What can accountants do?The implications for PAIBs & their organizations • Engage investors to understand their ESG needs – Disclosure policies can affect the types of investors you attract • Incorporate ESG factors into governance and oversight – Leadership and governance structures reinforce importance of ESG • Link non-financial and financial performance – Link ESG factors to financial drivers of performance – Integrated reporting can help drive change • Relevance depends on materiality, timeliness and comparability • Break down internal silos – Functions, processes, systems and data need to be more connected Page 10 | Confidential and Proprietary Information
  11. 11. Where to go for more information?Practical guidance is available in the report Including: • Sustainability reporting: Global Reporting Initiative • Integrated reporting: International Integrated Reporting Council • CDP Project/Climate Disclosure Standards Board: Climate Change Reporting Framework • A framework for valuing non-financial performance • India: National Voluntary Guidelines on Social, Environmental, Economic Responsibilities of Business Page 11 | Confidential and Proprietary Information
  12. 12. Where to go for more information?Report and summary • Report available at • Executive summary also available and included in your conference papers Page 12 | Confidential and Proprietary Information