How do you make sure you’re measuring the things that matter?

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EY Global

Multidisciplinary professional services organization

1 minute read 26 Apr 2018
Related topics Trust Risk

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As stakeholders demand transparency, sustainability is increasingly important in corporate reporting.

In February 2016, the CEO of BlackRock, Larry Fink, sent a memo to CEOs of the S&P 500 with this message: Focus more on long-term value creation rather than short-term dividend pay-outs; be open and transparent about growth plans; and focus on environmental, social and governance factors because they have “real and quantifiable financial impacts”.

It’s a powerful message, compelling companies to ask fundamental questions about how they define and measure value, and report to stakeholders. “Corporate reporting standards were designed to reflect a global economy based on manufacturing, where physical assets like buildings and machinery made up most of a company’s value,” says Brendan LeBlanc, a Partner in Ernst & Young LLP (EY US), Climate Change and Sustainability Services (CCaSS). “And while corporate reporting is maturing to include a deeper analysis of additional factors that constitute value and risk, there’s more work to be done.

Corporate reporting standards were designed to reflect a global economy based on manufacturing, where physical assets like buildings and machinery made up most of a company’s value. 
Brendan LeBlanc, Partner,
Ernst & Young LLP (EY US)

In each of the past three years, EY has surveyed over 200 institutional investors to get their perspective. According to the most recent survey, more than 80% of respondents agreed with four key statements, each of which relate to BlackRock’s points: that CEOs should lay out long-term board-reviewed strategies each year; that companies have not considered environmental and social issues as core to their business for far too long; that generating sustainable returns over time requires a sharper focus on Environmental, Social and Corporate Governance (ESG) factors; and that ESG issues have real and quantifiable impacts over the long term.

EY has long believed these messages to be true, and has worked to advance these themes in many ways, including its membership in the World Business Council for Sustainable Development (WBCSD), a global, CEO-led organization of over 200 leading businesses and partners working together to accelerate the transition to a sustainable world. As the Liaison Delegate to the WBCSD, Brendan leads EY’s work in the integration of ESG into enterprise risk management. Again, gaps exist. A January 2017 WBCSD report found there’s a significant difference between the risks that companies highlight in their sustainability reports, and the risks they disclose in their legal filings or to investors.

However, the increasing number and magnitude of sustainability risks are requiring companies to address the gaps and improve reporting. “Sustainability risks are broad, complex and interrelated,” explains Brendan. “They cover climate change and water scarcity; demographic shifts and resource availability; land use and labor rights. They can affect every part of a business, and should not be viewed as ‘standalone’ risks that can be tackled independently from other risks facing the enterprise. Identifying, quantifying, managing and reporting on sustainability risks also brings its own set of intrinsic challenges, such as overcoming unconscious bias, lack of in-house subject matter expertise and lack of data to support quantification.”

Identifying, quantifying, managing and reporting on sustainability risks also brings its own set of intrinsic challenges, such as overcoming unconscious bias, lack of in-house subject matter expertise and lack of data to support quantification.
Brendan LeBlanc, Partner,
Ernst & Young LLP (EY US)

Based on these initial findings, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) joined the WBCSD to produce guidance on how businesses can better incorporate sustainability risks into their overall enterprise risk management (ERM) activities.

The guidance will help companies meet growing demand from their stakeholders for more transparency about their environmental and social practices that BlackRock and others have helped draw attention to.

“What I’m really passionate about is working to help change how social and environmental issues are accounted for,” concludes Brendan. “I’m fortunate, through EY, to be able to work with a range of organizations – like the WBCSD, as well as the International Integrated Reporting Council, Sustainability Accounting Standards Board, the Global Reporting Initiative, SHIFT and more – to redefine value for companies, the environment and society.”

Summary

Social and environmental issues must be accounted for in corporate reporting. In order to redefine value, organizations need to address sustainability risks.

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EY Global

Multidisciplinary professional services organization

Related topics Trust Risk