RISK MANAGEMENT

Deloitte CFO Insights: As Sustainability Takes Root, Finance Takes Notice

It’s an issue that has gone by many names: corporate social responsibility (CSR), sustainable development, the “triple bottom line,” ESG (environmental, social, governance), and the green movement, to name just a few. Odds are good that you know it by its shortest and most common name – sustainability.

And while it has been around in many forms, sustainability has been, admittedly, a squishy topic that’s more likely to be “owned” by the marketing department or viewed as a risk management issue, rather than as a strategic priority for finance.

The focus of early efforts at sustainability reporting was often on what impact companies were having on the environment. Today, investors ask what impact climate change, resource scarcity, labor sourcing, and a host of other ESG issues may have on companies’ financial performance

However, that appears to be changing quickly. Proponents of sustainability – which include investors, consumers, regulators, NGOs (nongovernmental organizations), and others – are demanding that companies think more broadly about how they make money, and about the impacts their operations and decisions have on the environment and society.

They insist that by addressing a range of non-financial factors, from climate change to demographic trends to product labeling, businesses can create long-term shareholder value while preserving natural resources, enhancing social stability, and achieving other quantifiable benefits.

Proponents, in fact, aren’t just advocating for sustainability at a conceptual level; they want hard numbers.

Enter the CFO, who may feel that in the wake of a decade-long push for “transparency,” there is little corporate information left to disclose. That is not necessarily the case here, however, because companies have not tended to collect the kinds of data that sustainability reporting calls for.

In this article, we’ll take a look at the rapidly emerging standards that are not only intended to simplify sustainability reporting, but also provide companies with insights that can improve performance – as well as additional steps CFOs can take to improve that reporting and drive value.

Meet the SASB

Multiple efforts exist to create standards for sustainability reporting – the Global Reporting Initiative (GRI), for example, can trace its history back 20 years to its 1997 founding in Boston. Various investment groups have also done useful work in this area.

More recently, the Sustainability Accounting Standards Board (SASB), created in 2011, is focused on integrating sustainability metrics into current financial reporting requirements.

Toward that end, SASB has developed provisional sustainability standards specific to 79 different industries (using a definition of materiality that is consistent with the one that guides financial reporting) and therefore suggests that these SASB indicators should be disclosed through the Management Discussion & Analysis (MD&A) section of Form 10-K or 20-F.

According to SASB co-vice chair Mary Schapiro, former chair of the Securities and Exchange Commission (SEC), the benefits to reporting organizations are also clear: “These standards can help companies identify, measure, and manage a subset of sustainability issues that are the ones most likely to impact the value of the company.”

A 2015 Harvard Business School study agreed, finding that companies that performed well on the material sustainability factors SASB identified enjoy enhanced market returns compared with organizations that performed poorly on those factors. In addition, the study found that companies enjoy significantly higher accounting and market returns when they addressed material sustainability factors.

That focus on materiality should attract a CFO’s attention. Early efforts at sustainability reporting varied widely and were sometimes dismissed as feel-good public relations exercises. Moreover, the focus was often on what impact companies were having on the environment (think greenhouse gas emissions, for example) only. 

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