By Bridge Taylor
First of all, thank you all for the great feedback and outpouring of support we’ve gotten from our first blog in the Bridge to ESG series. If you haven’t read last month’s blog, don’t forget to do so right after this one: Why is ESG Different? I think it’s a great primer on why sustainability accounting and ESG programs are not as complex or scary as you might think.
This week I wanted to talk about the “why” of ESG. I’m nervous when ESG programs start at the behest of external stakeholders (investors, regulators, boards, etc.) demanding non-financial information but are not used to tell decision-useful stories. ESG can seem overwhelming, but this great new data should be used for analysis, not just box-ticking. As we look at these ESG metrics to better understand risks and opportunities in our organization that traditional accounting and risk management miss, we will fall flat on our face if we stop at data collection and never find our stories.
As an accountant, I see ESG as a logical extension of traditional financial accounting. So, when I work on an ESG program or read an impact report, I approach it as if I were reading a 10-K. Like financials, ESG disclosures require a lot of context to become decision-useful. What this context looks like is also different for different stakeholders. My clients (internal stakeholders) often compare metrics to prior years, forecasts, industry standards, and best practices to understand the strengths or weaknesses of their ESG program. External stakeholders will use different factors to contextualize and can be guided through a story with a good narrative impact report.
When thinking of the storytelling that ESG data can do, start by thinking about who will be telling the stories. I use this exercise when I do Stakeholder Assessments before launching an ESG program. When you think about this from the beginning, disclosure is easy and has all the ingredients that your stakeholders will need. Internally, I encourage managers to engage their employees who do ESG data collection on the context and the story that the metrics are telling. This includes the drivers, the roadblocks to improvement, and where we are in relation to the rest of the industry. This dialog encourages analysis, understanding, and innovation before it goes up the corporate ladder.
The traditional, almost cliché, example of a decision useful story told by ESG disclosure are the willful Violations & Fines that BP paid in the years leading up to the disastrous 2010 Gulf of Mexico oil spill. In the years before the spill, BP had 760 willful violations of OSHA health and safety regulations. Without context, this means nothing, but adding in that their competitors Sunoco & Conoco-Philips had eight each, while Exxon-Mobile & CITGO only had one each paints a stark picture. These incidents only appeared on their income statement as $75K per infraction. For a multibillion-dollar operation, these small expenses were a harbinger of a much larger liability that ultimately cost BP more than $60B. Traditional accounting and risk management allowed this to go unnoticed.
Of course, BP’s situation was extreme but is exactly how investors and analysts are using ESG data to tell their stories.
I recently came across another SASB topic that tells a compelling story, nursing turnover in hospitals. This rather innocent metric negatively correlates to patient care and tells a complex story about public health that compliance and accounting miss. In a hospital, patient care can mean the difference between lives saved or lost. Think back to the last time you went to the doctor; didn’t it feel a lot better to know that the nurses there knew the place like the back of their hand?
Though it has obvious importance to public health, different stakeholders will use this metric to tell different stories. For patients, it tells a story of public health, to employees one of culture and satisfaction. For management, it could be a leading indicator that a hospital’s reputation is going the wrong direction. The importance of stakeholders in storytelling is exactly why doing stakeholder assessments before establishing your ESG program is so important.
ESG disclosures will be just as diverse and contextualized as financials are today. Which is said, not to scare you but to remind you that there are decision-useful stories in this data and it is our responsibility to analyze them once the data is collected. Every organization and industry has metrics like nurse turnover and willful violations that will catch your eye and help you solve a problem or seize an opportunity you might not have known was there! Sometimes these data points are seemingly innocuous, maybe even already collected, but not presented and synthesized with the importance that your financials are. What stories are you missing by not having an ESG program?