By Bridge Taylor, CPA, FSA
An ESG program, much like traditional financial reporting, requires transparency and assurance to be decision-useful for stakeholders. I want to explore the value and necessity of transparency and how the rigor that comes with assurance will make your ESG program more useful and easier to implement for my last blog post. Metrics, data, and context are only as useful as they are reasonably accurate and trustworthy. I worry that ESG disclosure, as an immature discipline, is lacking the rigor and transparency required in many practices.
Stakeholders, specifically external stakeholders, must be presented with information that can quickly and accurately benefit their decision-making process. Their number one priority is the speed and veracity of decision-useful ESG information. Thusly, the burden of assurance and transparency falls on you, the ESG team, to provide honest information to the market and your stakeholders.
This need for comparability and relevance for ESG metrics to be trusted leads us to the benefits of the Value Reporting Foundation’s SASB framework. This framework provides accounting and activity metrics that can be the foundation for efficient transparency. By using an existing framework, you decrease the time and effort needed by internal auditors, external auditors, and other stakeholders that help confirm the veracity of ESG disclosures. Custom metrics are still extremely useful, but it helps to start with what others are familiar with.
What else can we do to ensure transparency? My recommendation is to keep it simple and take advantage of existing frameworks like SASB and GRI. Don’t allow bad actors to co-opt your ESG program and lead you down a path of greenwashing, non-comparability, and results that are not decision-useful. Take non-financial accounting seriously, with a rigorous approach that has the same auditability as financial accounting, and the same ethical standards as compliance processes. This rigorous approach will be a benefit when you will need to raise money in the capital markets. I see too frequently ESG programs that are set up as marketing lip service and do not stand up to scrutiny.
I hope the take away from this blog is both a clarification of what goes into an effective ESG program but also a reassurance that it is realistic to add an ESG program to any organization. Because the industry is relatively new l and most professionals did not learn about ESG or non-financial accounting in school, it can feel like an enigma or something that must be built out of thin air. I’m dedicating my life to helping organizations build transparent non-financial disclosures that work. Thank you all for following this series of blogs and I hope we’ve helped you better understand how to take the first steps into non-financial disclosure!
One extra anecdote before I leave. Last week, my manager’s financial planner sent out an end of year survey. 5 out of 10 of his questions were about ESG and impact investing. Impact investing is not just a fad, it is permanent change to how investors view companies. Thankfully, the work that great non-profits like VRF and GRI are doing allows companies to disclose ESG metrics and help investors allocate their money with more complete information about a company. ESG is one of the newest smart beta strategies that is worth looking into. If the ethical concerns are not enough to get you invested in an impact fund, hopefully the data around ESG smart beta will. There is tons of information out there, but ESG metrics are one of the best ways to avoid disastrous companies that are not sustainable investments.