Where do we find common ground in nonfinancial reporting?

Sustainability investing — which embraces the idea that businesses need to create long-term value for all of their stakeholders — has entered the mainstream. BlackRock CEO, Larry Fink, recently told his firm’s clients that sustainability goes beyond climate issues and that “all investors … need a clearer picture of how companies are managing sustainability-related questions.”

But without a standard framework or established metrics for nonfinancial reporting, drawing that picture is harder than it should be. In fact, some 600 environmental, social and governance (ESG) frameworks are in use today, creating an “alphabet soup” of different approaches that generate confusion, along with a groundswell of demands for a common set of global sustainability standards. Just what that would look like is not yet clear, but we are seeing tremendous effort and progress toward that goal.

Concurrently, many global businesses are moving to adopt the philosophy of “stakeholder capitalism,” which underlies the statement issued by the  Business Roundtable in 2019 that corporations should expand their purpose to focus on more than generating profits. Signed by Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase & Co., and all 180 CEOs on the roundtable, the letter served as notice that major companies are taking social issues seriously.

As EY Global Vice Chair of Public Policy, I have witnessed firsthand the heightened focus on both sustainability and stakeholder capitalism. After decades of what seemed like glacial movement on corporate reporting, it now seems that every week someone on my team answers a new query from investor groups seeking our opinion about another nonfinancial reporting metric or framework. As a purpose-led organization, we welcome this trend. We achieve our purpose of building a better working world when we focus on sustainable growth that helps EY people, EY clients, our communities and society at large.

Along with other members of the Big Four, the EY organization is working with the World Economic Forum’s International Business Council (WEF IBC) to develop a framework for nonfinancial reporting that aligns existing metrics around four pillars — governance, planet, people and prosperity. As outlined in the WEF IBC’s report titled, Measuring Stakeholder Capitalism, the pillars apply across all industry sectors and relate directly to the principal categories in the UN’s Sustainable Development Goals (pdf). The pillars offer a useful starting point for understanding the “why” of both sustainability investing and stakeholder capitalism.

Governance

The definition of governance has evolved as organizations embed a sense of purpose at the core of their business. At the same time, the principles of agency, accountability and stewardship continue to stand as key components of truly “good governance.” Governance represents a key foundation for achieving long-term value by aligning financial and societal performance with an overarching purpose of businesses to solve problems for the people and planet — profitably, in other words, not to seek profit by causing problems.

Planet

With the world facing the increasing risk of climate change and other pressing ecological issues, more shareholder activist groups are pushing companies to embrace sustainable business practices. As such, this pillar represents a critical element of any plan to measure corporate responsibility. In particular, this requires businesses to focus on long-term value creation and take steps to address the environmental impact of all upstream or downstream activities.

People

People are a crucial part of any organization, representing employees, customers, suppliers and neighbors in surrounding communities. In that light, the third pillar centers on a broader ambition to require organizations to respect health and safety, human rights and provide decent working standards. This includes providing equal pay for work of equal value and pursuing goals that help end poverty and hunger. While this is a relatively new dimension to socially responsible investing, addressing poverty and income inequality has become a major imperative for corporations, and reflects growing public sentiment.

Prosperity

For years, achieving prosperous growth was viewed as the primary objective of every corporation, embodied by economist Milton Friedman’s famous comment that the sole purpose of a business was to generate profits for shareholders. Now, more companies recognize that they need to embrace goals that also include creating a strong, inclusive and transformative economy. These views are also gaining more acceptance in the mainstream, and not just by shareholder activists. According to Pew Research, some 61% of Americans believe there is too much economic inequality in the US today.

Importantly, we are not proposing these four pillars as the final answer to sustainability investing, but rather as a critical accelerator in this ongoing journey. While companies may take short-term actions that seem to run counter to these goals, especially when they respond to emerging business conditions such as the global COVID-19 pandemic, ultimately, they should never lose sight of the fact that the return on investment should be measured by more than just financial results.

We all need to do our part — both as employees and stakeholders — to hold all companies, including our own, accountable to achieving these goals.