Bridging the gap between sustainability and fiduciary duty

By Daniele Coronacion, ASEAN Regional Program Manager, Global Reporting InitiativeWe are now at a tipping point of corporate sustainability. Over the past decade there has been an exponential increase in attention on all things ESG related – across jurisdictions, institutions, sectors and industries. The COVID-19 pandemic, in particular, has been an accelerant, not just in terms of growing awareness of sustainability issues but also increasing action.Consumer interest is also on an upward trajectory, with concern about responsible business and the state of the environment growing during the pandemic, according to WEF analysis, while Google searches relating to sustainable purchasing rocketed 71% between 2016 and 2021.Research from McKinsey, meanwhile, revealed four-in-five C-Suite executives recognize the growing significance of ESG programs in achieving shareholder value. This is backed up by the growth of so-called sustainable investing, which last year reached an all-time high, according to a Standard Chartered survey. Indeed, estimates from Bloomberg Intelligence for 2021 put the value of ESG and sustainability-related assets at US$41 trillion.Yet concerns remain over ‘greenwashing’. As the Financial Times highlighted in July, some 42% of global private capital — or $4.73tn — is managed in funds that claim to be run according to sustainable investment principles. Yet major financial institutions – including Deutsche Bank, Blackrock, BNY Mellon and Goldman Sachs, to name a few – have faced accusations over the sustainability credentials of their ESG investing.It is no surprise, therefore, that there are growing demands for companies to provide robust and verifiable information on their sustainability performance, with investor relations (IR) professionals fulfilling a crucial role in delivering feedback to management and taking action to address communication gaps. The final instalment of the GRI Expert Series on Sustainable Business Leadership offered insights from corporate leaders on how IR is moving to the forefront of sustainability communications, with financial markets and stakeholders, as well as ESG investment stewardship.The evolving role of investor relationsTraditionally, IR was responsible for consistent messaging to the investment community, alongside monitoring and responding to the opinions of stakeholders regarding the company’s performance. As more and more investors are showing interest in how a business accounts for its impacts, the IR role has expanded to encapsulate communications about ESG as well as financial performance.As SM Investment Corporation’s IR Consultant Timothy Daniels explained: “For us, integrating sustainability disclosures with IR communications was largely driven by investor expectations. Investor relations is a dialogue, and finding the people whose investment criteria and philosophies are aligned with that of the company means we can build secure, long-term partnerships.” Belinda Lee, IR Head with City Development Limited (CDL), identified where IR plays a pivotal role in aligning the company’s ESG strategies, performance and reporting: “IR needs to be proactive in providing the necessary disclosures and data, aligning with internationally recognized reporting frameworks, such as the GRI Standards, to demonstrate how they identify risks and opportunities. IR serves as the conduit between investors and the company. IR is the best fit to distil the work of the sustainability reporting team and focus on the main concern for investors.”From enterprise value to double materialityThe business community has recognized that integrating sustainability in their strategy can be a competitive advantage. As Jerry Goh, Investment Manager at Aberdeen Asset Management, put it: “investors increasingly see ESG performance as having a material impact on corporate performance, which in turn affects financial performance and the company’s market valuation.”But how should companies determine their material topics? At GRI, we are clear that a ‘double materiality’ approach is central to how an organization is able to demonstrate accountability for their impacts to a multi-stakeholder audience. This recognizes that reporting on outward socio-environmental factors (impact materiality) need to be given equal position with enterprise value (financial materiality) considerations.Prevailing assumptions that investor interest sits only with the financial are not being borne out by reality. As Mr Goh shared: “Take the example of a consulting organization whose biggest asset is its employee base. That means talent attraction and retention is a material ESG topic. So, they need to demonstrate that they have effective employee engagement and retention policies, as well as an inclusive corporate culture.”Improving transparency and credibilityThrough the GRI Sector Standards, companies can better address investor expectations by reporting on material ESG topics that may, in time, pose as financial risk to the company. According to Juferson Mangempis, IR VP with Indonesian energy provider Pertamina: “ “The GRI Standards helped Pertamina realize that sustainability performance has to be measured based on the nature of our operations and our impacts. In the oil and gas sector, disclosures on emissions targets, and progress towards net zero, are always priority areas for investors. How we apply materiality assessment, discussions with stakeholders and assurance are the crucial steps to justify the legitimacy of selecting material disclosures in our report.”Paul Murphy, Investment Stewardship Director for Vanguard, recommends that companies disclose on the topics that pose a sustainability risk to their business operations. He said: “Sustainability risks, if not addressed, can create substantial financial risks to the company. For example, if a company has material exposure to climate risk, then a plausible and well-articulated story on how it is navigating government and regulatory net-zero targets, including energy transitions and tariffs, should be the focus of their ESG disclosures.”

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