SUSTAINABILITY MATTERS: FOCUSING ON YOUR
FUTURE TODAY
Prepared for delivery by Elisse B. Walter
CPA Canada, March 30, 2017
Good evening and thank you, Joy [Thomas], for that kind introduction.
It is an honor to be here with all of you in Toronto, and particularly an
honor to have been invited by CPA Canada, an organization that has
demonstrated an unwavering commitment to the public interest in its
efforts to facilitate economic and social development. As the daughter
of a CPA, I always feel right at home when I am surrounded by
accountants, so thank you for making me feel welcome.
We are here today to have a conversation about the evolving
expectations for board and management oversight of sustainability
issues. One shorthand for this topic is ESG, which stands for
“environmental, social, and governance.”
Personally, I believe that that catch phrase doesn’t really capture the
essence of the subject. What we're talking about is information that is
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critical to a company's success or failure but isn't reflected in its
financial statements. We read about these issues in front-page news
every day—when oil prices plunge five percent in a single day; when
motorists and passengers suffer injuries (or worse) while waiting for
their defective airbags to be replaced; when food safety issues at a
popular restaurant chain lead to hundreds of customers getting sick
and dozens being hospitalized; and when a large commercial bank is
fined for deceptive sales practices affecting millions of customers.
Today, I will discuss two reasons driving companies to pay attention to
sustainability factors. One takes a macroeconomic perspective, and
the other takes a microeconomic perspective, but they both point to a
similar path forward.
From the 30,000-foot macroeconomic perspective, sustainability is
about trust, which, in many ways, is the essence of corporate
governance. In fulfilling their core functions, boards of directors aim to
establish confidence and credibility among a variety of stakeholders—
first and foremost the shareholders for whom they serve as fiduciary
2
stewards, but also others, from employees to the communities in
which they operate.
Meanwhile, from the narrower microeconomic perspective,
sustainability is about risk and, significantly, its flip side—opportunity.
By more effectively measuring, managing, and communicating about
their performance on key sustainability issues, companies can not
only avoid problems, but also open doors to new markets, new capital,
and new pathways to competitive advantage.
So, let’s start with the big picture.
When you deal with financial markets—as many of us do—uncertainty
comes with the territory. So much of our economic future depends on
things we do not, or cannot, know. None of us would claim we have a
great deal of certainty about where things are headed in today's global
marketplace, even in the short term. In fact, considering the
sociopolitical sea change that we are seeing in many parts of the
3
world, we may have less certainty today than we have had in quite
some time.
So-called populist movements in the U.S., the UK, France, and
elsewhere have reminded us of the old saying, “Everything you know
is wrong.” For anyone willing to listen, this evolving—and, some might
say, tumultuous—political landscape has sounded an alarm. Public
trust in entrenched leaders and institutions has eroded, and the
consequences can be highly unpredictable. Although much of the antiestablishment sentiment thus far has been aimed primarily at
governments and political figures, business leaders who ignore it may
do so at their own peril.
After all, in business, trust may be our most valuable asset. It
underlies all our relationships—with investors, customers, suppliers,
employees, regulators, trade partners, and so on. Even so, we have
sometimes taken it for granted, and mismanagement has chipped
away at its foundation. A fundamental premise underpinning the
provision of a “license to operate” is that business exists to create
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value. However, in recent years, oil spills, bailouts, emissions
scandals, data breaches, and climate change issues—to name just a
few of the culprits—have undermined public faith in the ability of
corporations to create value without undue cost. In fact, in a recent
poll, fewer than one in five Americans reported high levels of
confidence in big business.1 Meanwhile, in Canada, trust in institutions
has fallen to its lowest level in 17 years, including a drop of six
percentage points for business institutions.2 Through our own
actions—as managers, executives, directors, and advisors—we have
contributed to the erosion of public trust, and we must also be the
ones to rebuild it.
As the media unleashes its army of fact-checkers to review and verify
politicians’ statements, I would like to point out that this same basic
function has been built into the business infrastructure for generations.
For roughly a century, in both the U.S. and Canada, mandatory
financial reporting and increasingly rigorous auditing practices have
1
2
Gallup, Confidence in Institutions poll, June 1-5, 2016.
Edelman, “Trust in Canada,” Edelman Trust Barometer 2017 (January 15, 2017).
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worked toward providing investors and the public with reliable,
trustworthy information on corporate performance. This noble goal—to
provide a true and fair view of a company’s financial condition—
occupies many of you every day.
Financial information, of course, remains immensely valuable.
However, it is also true that it increasingly tells an incomplete story.
Naturally, the world of business has changed since disclosure
requirements were established in the early 20th century. Indeed,
seismic shifts have occurred even since the 1970s, when muchneeded standardization introduced new levels of comparability and
decision-usefulness to financial reporting in both the U.S. and
Canada. If conventional financial metrics no longer provide a full
picture, then disclosure must continue to evolve along with the world
around it. After all, transparency engenders trust, but only insofar as it
extends to the most important considerations.
In today’s knowledge-driven economy, market value is a multiple of
book value because a company’s ability to succeed relies increasingly
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on intangible assets—things like patents, processes, brand value,
intellectual capital, and customer or supplier relationships. Among the
S&P 500, for example, intangibles now account for more than 80
percent of market capitalization.3 However, these crucial assets are
not sufficiently captured by traditional accounting methods and, in the
absence of suitable metrics to aid efficient pricing, their value is
especially vulnerable to impairment from mismanagement. If
companies’ financial statements and financial realities diverge, they
expose themselves to increasing scrutiny from a skeptical public, now
primed to conclude that self-serving managers focused on short-term
gains are quote-unquote “cooking the books.”
Against this backdrop, the U.S. Securities and Exchange
Commission—the SEC, where I spent more than 20 years as a staffer,
Commissioner and Chairman—has prioritized efforts to improve
disclosure effectiveness. In a 2016 request for comments, the
Commission sought public input on a variety of possible updates to
Regulation S-K, including the disclosure of information on
3
Ocean Tomo, Intangible Asset Market Value Study (March 5, 2015).
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“sustainability matters.”4 These include the environmental and social
impacts of business, as well as their governance—which are the same
aspects of corporate behavior that have increasingly tended to either
build, or destroy, public trust and thereby influence a company’s social
license to operate. The Commission received 276 non-form letters in
response to this outreach, two-thirds of which addressed sustainability
matters, 80 percent of those calling for improved disclosure of this
type of information.5
This should not surprise us. Investors have made their position on
sustainability very clear: When it is material to a company’s business,
they believe it is important. (If that sounds like a tautology, I believe it
is.) Today, approximately half of global institutional assets—about $60
trillion—are managed by signatories to the Principles for Responsible
Investment (PRI), which promotes the incorporation of ESG factors
into investment decisions. (And that figure is growing steadily every
4
U.S. Securities and Exchange Commission, Business and Financial Disclosure Required by Regulation S-K (April 15,
2016).
5
Sustainability Accounting Standards Board, “Business and Financial Disclosure Required by Regulation S-K–the
SEC’s Concept Release and Its Implications” (September 13, 2016).
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year, by the way.)6 In the U.S. alone, sustainable, responsible, and
impact investing assets have expanded to $8.72 trillion, up 33 percent
from just two years ago, and now represent one out of every five
dollars invested in the U.S.7 Indeed surveys show that 73 percent of
institutional investors take ESG issues into account in their investment
analysis and decisions to help manage investment risks.8 Increasingly,
investors—and we are talking about mainstream investors here—are
using this information to facilitate more effective risk management at a
portfolio level, more accurate relative valuations at a fundamental
level, and more useful benchmarking at an industry or index level.
For example, UBS Asset Management, which handles $670 billion in
assets, uses sustainability information to augment more traditional,
fundamental analysis—such as a discounted cash flow model—which
allows it to identify equities that are both priced attractively today and
poised to deliver returns over the long-term. Breckenridge Capital
6
Principles for Responsible Investment, About the PRI, accessed March 2, 2017, at https://www.unpri.org/about.
Forum for Sustainable and Responsible Investment, 2016 Report on Sustainable and Responsible Investing Trends
(November 14, 2016).
8
CFA Institute, Environmental, Social and Governance (ESG) Survey (June 5, 2015).
7
9
Advisors, managing $25 billion in assets, takes a similar approach,
adding an extra layer of rigor to its fundamental analysis of fixedincome securities, where investments have longer time horizons and
investors have less appetite for risk.9 These are just a couple of
examples from asset managers. We also see asset owners
incorporating sustainability considerations into the evaluation and
monitoring of their external managers, and private equity firms
performing ESG analysis as part of their due diligence. The list goes
on.
As many of you know, I serve on the Board of Directors at the
Sustainability Accounting Standards Board (or “SASB”), a nonprofit
organization that aims to facilitate more useful corporate disclosure
with respect to the handful of sustainability factors that investors care
about in each particular industry. I’ll talk more about the SASB in a
moment, but right now I want to mention our work with investors. Last
year, we formed an Investor Advisory Group, which is now working to
articulate the importance of sustainability factors to their portfolio
9
Sustainability Accounting Standards Board, ESG Integration Insights (Q4 2016).
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companies, and to stress the need for a market standard to improve
the quality and comparability of this information.10 Among the founding
members of the group are two influential Canadian organizations, the
Ontario Teachers’ Pension Plan and the British Columbia Investment
Management Corporation (bcIMC). These investors, like many in
Canada, are leaders in actively shaping the future of our financial
markets. In fact, the Pension Investment Association of Canada,
which represents more than $1.5 trillion in assets under management
on behalf of millions of Canadians, was among those responding to
the SEC’s call for feedback last year. In its letter, the association
strongly advocated for “improvements in the reporting of material risk
factors, including environmental, social and governance factors, so
that [its members] can make better investment decisions.”11
As these and other institutional investors continue their rise to
prominence and fiduciary capitalism grows in influence, there is an
10
Sustainability Accounting Standards Board, Investor Advisory Group, accessed March 2, 2017, at
http://using.sasb.org/investor-advisory-group/.
11
Pension Investment Association of Canada, Re: Concept Release: Business and Financial Disclosure Required by
Regulation S-K - File Number S7-06-16 (letter to SEC dated July 17, 2016).
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increasingly close relationship between public trust and investor
confidence. Investor confidence in the quality of financial disclosures
is what makes our markets work. Although this confidence is higher
than it was five years ago, a growing number of investors are deeply
dissatisfied with the quality of the sustainability information being
provided to them. In a recent survey of U.S. institutional investors, for
example, 71 percent expressed dissatisfaction with the quality of
sustainability data.12 In another survey of Canadian institutional
investors, 70 percent said the ESG information companies provide is
not good enough to help them assess materiality to the company’s
business.13
Interestingly, many of the questions that arise today around the
reliability of sustainability disclosures are the very same ones that
made financial auditing an obligatory practice in the wake of the stock
market crash of 1929 that helped usher in the Great Depression. They
12
PwC, Investors, corporates, and ESG: bridging the gap (October 2016).
RR Donnelley and Simple Logic, 2016 Canadian Investor Survey: New insights into what investors want from
disclosure (June 23, 2016).
13
12
include questions about the completeness and accuracy of data and
the existence and effectiveness of controls.
This comparison is instructive for at least a couple of key reasons.
First, and most obviously, it recalls another period in history during
which reform and regulation of financial markets served as an
effective rallying cry. Equally important, at that time in history,
independent audits became commonplace several years before they
were mandated, because investors demanded it.
This bit of history—a voluntary reform of corporate disclosure
practices in response to market forces—is almost perfectly analogous
to what is happening now with the emergence and evolution of
sustainability disclosure. The core principles that guided that reform—
such as transparency, investor protection, and the use of materiality
as a moderator—are still relevant today and continue to guide market
regulation.
13
I have mentioned materiality several times, so let me explain why it is
so important in this context. As everyone here likely knows, materiality
is a legal concept in both the U.S. and Canada which recognizes that
some information is important to investors in making investment
decisions, while other information is not. By viewing sustainability
through the lens of materiality and focusing on the narrow subset of
sustainability issues that really matter to a company’s business,
improved disclosure on these topics no longer needs to be viewed as
corporate largesse. Rather, it is, as it should be, a way to align the
long-term interests of companies, their investors, and society at
large—a win-win-win of value creation. Materiality defines the line
where sustainability issues become business issues.
After all, asking banks or professional services firms to measure,
manage, and report data on their greenhouse gas emissions will
contribute little to the alleviation of a global temperature increase.
Rather, companies in each industry should zero in on the handful of
issues on which they are uniquely positioned to gain the most traction
and make the biggest difference. For software companies, addressing
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climate change involves the energy-intensity of data centers. For
automakers, it is more about use-phase emissions than about
manufacturing. For agricultural firms, it means managing withdrawals
in water-stressed regions. In other words, different sustainability
issues affect different industries in unique ways. Materiality helps
make that distinction, focusing firms on the issues where they can
affect performance in a significant way.
This brings us to our second answer to the question of why
sustainability matters to companies. It matters because, when it is
deployed effectively, it can reduce risk or beckon opportunity. As 21st
century markets are reshaped by resource constraints, climate
change, population growth, technological innovation, and
globalization, sustainability is poised to be the next competitive
frontier. In fact, research has already shown that companies can
achieve superior results—including return on sales, sales growth,
return on assets, and return on equity, in addition to improved riskadjusted shareholder returns—by focusing on the limited number of
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materiality-based, industry-specific sustainability topics identified by
SASB.14
This recognition—that sustainability performance and financial
performance are intertwined—is why hundreds of industry-leading
companies, representing trillions of dollars in combined market
capitalization, have signed the Business Backs Low Carbon statement
urging global leaders to implement the Paris agreement on global
climate action.15 It is why food companies are pouring resources into
the organic market, where growth is outpacing conventional foods by
almost 400 percent.16 And it is why, according to an Accenture survey,
80 percent of CEOs think their companies are approaching
sustainability as a route to competitive advantage:17 They are cutting
costs, they are changing markets with innovative inputs, processes,
and products, they are attracting top talent, and they are strengthening
their brands.
14
Mozaffar Khan, George Serafeim, and Aaron Yoon, Corporate Sustainability: First Evidence on Materiality,
Harvard Business School (March 24, 2015).
15
Business Backs Low-Carbon USA, accessed March 3, 2017, at http://www.lowcarbonusa.org/.
16
Organic Trade Association, 2016 Organic Industry Survey (May 2016).
17
Accenture, UN Global Compact-Accenture CEO Study on Sustainability (2013).
16
There is another key development that demonstrates the link between
sustainability performance and financial performance: Companies are
addressing key sustainability issues alongside their financial
statements in public filings. SASB recently published an analysis of
SEC filings that shows nearly 70 percent of industry-leading
companies are already addressing at least three-quarters of the
sustainability topics included in their industry’s SASB standards, and
more than a third are already providing disclosure on every SASB
topic. Undeniably, companies have acknowledged the existence of, or
the potential for, material impacts related to these issues.
But, there is a catch. The same analysis shows that less than 24
percent of reported sustainability topics are being disclosed using
metrics, while more than half use boilerplate language, which is nearly
useless to investors. In fact, even in those cases where metrics are
being used, they are non-standardized, and therefore lack
comparability across industry peers.
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The question, then, is no longer whether companies should disclose
information on material sustainability risks and opportunities; it is how
they can improve the effectiveness of the disclosures they are already
making. In short, it is not about more disclosure; it is about better
disclosure.
Considering the strength of investor demand for useful sustainability
information, and the lackluster quality of sustainability disclosure in
SEC filings, I would say what we have here is a failure to
communicate. To me, this is a missed opportunity. I believe issuers
should not view sustainability disclosure as an obligation, but rather as
an opportunity to tell their full value-creation story.
In the U.S. and Canada, companies’ public filings include a section
called Management’s Discussion and Analysis of Financial Condition
and Results of Operations, or MD&A. Its purpose is quite simple: to
“give the investor an opportunity to look at the company through the
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eyes of management.”18 This makes MD&A an incredibly powerful
communication tool, one that is invaluable to an investor's assessment
of his or her investment. For 35-plus years, companies have been
using this section of their statutory filings to explain financial
statements from an insider’s perspective, to enhance financial
disclosure and provide context for its analysis, and to describe not just
the “what?” and “how much?” but the “why?” so that investors can
better understand whether past performance is indicative of future
results. This is the core of what mandatory disclosure is all about.
So why, then, do we have investors getting their sustainability
information from ad hoc reports that are neither comparable nor, in
many cases, focused on the issues that really matter to that
company? Or from questionnaires that are costly and time-consuming
to prepare and respond to? Or from direct engagement, where the
potential for “selective disclosure” might raise red flags with
regulators? These are not the hallmarks of an efficient market.
18
Securities Act Release No. 6711 (April 17, 1987), Concept Release on Management's Discussion and Analysis of
Financial Condition and Results of Operations, 52 FR 13715 quoting Securities Act Release No. 6711, Securities Act
Release No. 6711 (April 24, 1987) [ 52 FR 13715]., at 13717.
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There is a solution, and it does not require legislation or regulatory
action. It requires only that all of us—investors, corporations, auditors,
securities lawyers, regulators, and so on—work together to establish
and maintain a market standard for the disclosure of this important
information within mandatory filings.
Guided by existing, time-tested disclosure requirements, in 2012
SASB began developing that solution—sustainability accounting
standards on an industry-by-industry basis. In my view, this approach
is quite elegant. It takes cues from existing securities law. Thus, it
requires no new regulation. It leaves the materiality determination in
the hands of those most knowledgeable about each company, its
management.
By using the materiality threshold for disclosure as a lens through
which to view sustainability, the standards identify the small subset of
industry-specific sustainability factors that are reasonably likely to
have a material impact on a company’s financial condition or operating
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performance. This ends up being, on average, just five topics per
industry. (For the sake of comparison, a typical sustainability report
includes dozens—or, in some cases, even hundreds—of issues.) It is
then up to each company to decide whether those issues are, in fact,
material to its business. Furthermore, SASB selects or develops
metrics to capture performance on those topics. Moreover, and this
part may be most interesting to the auditors in the audience, these
performance metrics are supported by rigorous technical protocols
that can serve as the basis for suitable criteria in an independent,
third-party assurance engagement. Finally, whenever possible, they
are metrics that are already used in the marketplace, thus decreasing
the cost of implementation. Thus, the SASB standards provide
investors with a set of sustainability information that is more focused,
more comparable, and more reliable than what they get today—and
that can be reported by the issuer without undue burden.
The disclosure requirements are clear. And, now, the standards are
out there. SASB standards are available in provisional form for 79
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industries. We are working to codify the standards by the beginning of
next year.
Of course, SASB is not the only organization working to improve
sustainability disclosure. Just as SASB standards align with existing
securities law, they also strive to harmonize with other disclosure
frameworks. I won’t go into detail this evening. But, I would like to
take a minute to highlight some of the key similarities and distinctions
between the SASB standards and the work of the TCFD. The
Financial Stability Board’s Task Force on Climate-Related Financial
Disclosures was established in late 2015 to develop recommendations
with respect to climate-related disclosures. Climate is the Task Force’s
singular focus, while the SASB covers the full range of industryspecific sustainability issues.
(A quick aside: Climate change is perhaps the most prominent
sustainability issue for good reason: It is one of the few that qualifies
not only as a systematic risk—in other words, something that investors
cannot diversify away from—but also as a systemic risk—that is,
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something that could be a source of contagion that extends across
markets. This is because it not only impacts most of the economy—72
of 79 industries, according to SASB research19—but it also involves
long-lived, capital-intensive assets like carbon reserves that are
subject to sudden and volatile price changes.)
When you consider these unique characteristics of climate risk, you
begin to understand why it is being addressed by multiple
organizations at different levels. First, let’s briefly consider how the
SASB and the TCFD differ in their approaches to climate risk. The
SASB is focused on disclosure to investors, while the TCFD is
directed toward a broader range of stakeholders. The TCFD has a
global remit, while the SASB has chosen to focus on companies that
are traded on U.S. exchanges. The TCFD recommendations reach
beyond current disclosure requirements and emphasize forwardlooking scenario analysis—for example describing the potential impact
of a 2-degree scenario. I could continue but I’ll stop here for now.
19
Sustainability Accounting Standards Board, Climate Risk Technical Bulletin (October 2016).
23
Because, despite these differences, what is most significant is that the
work of the SASB complements that of the TCFD. In fact, the SASB
has committed to harmonize its standards with the Task Force’s
recommendations, including updating standards to align with those
recommendations. With that alignment, investors will not only be able
to understand what a company’s past and current sustainability
performance indicates about its future performance (via the SASB
standards), they will also be able to gain a clearer picture of how
systemic changes in the broader economic environment are likely to
impact expectations for that future performance (via TCFDrecommended scenario analyses). For the long-term investor—and,
indeed, for the corporate director or executive focused on sustained
and sustainable value creation–this represents a powerful combination
of set and setting.
TCFD and SASB aren’t the only ones working on improving the
disclosure of risks related to climate change. Just last week, the
Canadian Securities Administrators (CSA) announced plans to review
how large, public companies listed on the Toronto Stock Exchange
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are disclosing the risks and financial impacts of climate change.
According to the CSA, the goal of the review is to help ensure issuers
provide high quality disclosure of material information to investors, and
will include a review of other efforts including those of the TCFD and
SASB.
So now I’ve spent a lot of your time discussing sustainability, moving
from the big picture of restoring confidence in the future of free
enterprise, to a sharper focus on the opportunities for competitive
advantage that can come from taking a materiality-based approach to
sustainability, and finally back to the strength of the broader financial
system in the face of systemic risks. As I mentioned earlier,
uncertainty is part and parcel of financial markets, but it does not
prevent us from taking action to move those markets forward,
ushering in a new era of accounting, reporting, and financial analysis
that presents a more complete picture of how companies create value
over the long term. This would avoid unnecessary uncertainty by filling
in informational gaps. To quote business guru Peter Drucker, “All
economic activity is by definition ‘high-risk.’ And defending
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yesterday—that is, not innovating—is far more risky than making
tomorrow.”20
So what does this mean for a company’s directors and executives?
One of the most important roles the board plays is safeguarding the
assets of the company—and that includes its social license to operate.
Directors should therefore work with their executive team to do a few
things. They should incorporate material sustainability factors into the
firm’s core strategy. They should align on the story they want to tell—
both publicly and internally—about how the company sustainably
creates value. And they should clarify roles and responsibilities for all
sustainability initiatives, including reporting. That may include
performing a materiality assessment to determine the most critical
sustainability factors, shifting oversight of sustainability reporting,
perhaps to the audit committee, and expanding board oversight to the
development and maintenance of internal control over sustainabilityrelated objectives for operations, compliance, and reporting.21
20
Peter F. Drucker, “Principles of Innovation,” The Essential Drucker, p. 279, HarperCollins (2001).
Elisse Walter and Aulana Peters, “Directors Can Add Valuable Perspective to SEC’s View of Sustainability,” NACD
(July 14, 2016).
21
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After all, last year, two-thirds of shareholder resolutions were related
to sustainability matters, up from 40 percent just four years earlier.22 If
it matters to shareholders, it should matter to us.
As I conclude, I would like to point out that Ontario has a proud
tradition of thought leadership in the field of accounting. More than a
century ago, the Companies Act of 1907 became one of the earliest
pieces of legislation in the English-speaking world to mandate
disclosure of income statement and balance sheet information by
commercial enterprises to their shareholders.23 I would say that spirit
of transparency and investor protection is alive and well here today.
Interestingly, that 1907 Act is also one of the earliest examples of an
accounting organization demonstrating its influence on disclosure
legislation, with the Institute of Chartered Accountants of Ontario
providing the professional judgment and intellectual authority that
22
Sustainability Accounting Standards Board, Re: Concept Release on Business and Financial Disclosure Required
by Regulation S-K (letter to SEC dated July 1, 2016).
23
George J. Murphy, University of Saskatchewan, “Early Canadian Financial Statement Disclosure Legislation,”
Accounting Historians Journal, Vol. 11, No. 2 (Fall 1984).
27
guided its development. Looking at today’s corollary, sustainability
reporting does not require new legislation, but it can definitely use the
intellect and judgment of CPA Canada and of all of you who have
been kind enough to join us here today.
I look forward to hearing your thoughts and answering your questions.
Thank you.
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