The Power of (ESG) Capitalism: The Financial Imperative Driving the Evolution of ESG Reporting
At the start of the year, Larry Fink, Chairman and Chief Executive Officer of BlackRock, shared a call to arms to fellow CEOs. At the heart of the letter was the conviction that all businesses need to understand and respond to the financial imperative underpinning sustainability reporting.
He wrote, “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients…The next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators—startups that help the world decarbonise and make the energy transition affordable for all consumers."
"Stakeholder capitalism is all about delivering long-term, durable returns for shareholders. And transparency around your company’s planning for a net zero world is an important element of that. But it’s just one of many disclosures we and other investors ask companies to make. As stewards of our clients’ capital, we ask businesses to demonstrate how they’re going to deliver on their responsibility to shareholders, including through sound environmental, social, and governance practices and policies.”
This sentiment is well supported by many, if not all, of the large consulting firms. McKinsey lays out how a strong ESG proposition creates value in five essential ways: top-line growth, cost reductions, avoiding regulatory and legal interventions, delivering productivity uplift and optimising assets and investments. It’s also echoed by ordinary investors. According to a 2021 Workiva survey, 61% of US respondents feel that their moral beliefs must align with a company before investing—something that is best achieved through transparent and easily accessible ESG metrics.
As we head deeper into 2022, we’re working with a clear mindset. ESG isn’t just about doing something good for the environment, being accountable for good governance and having a positive impact on the wider community. It’s about driving growth within your business—so it’s of critical importance to get it right.
Why ESG and finance aren’t worlds apart
Financial value has always been intrinsically linked to ESG reporting. We lay out exactly how in The ESG Leader’s Playbook, detailing KPIs that both sustainability and finance teams should measure to achieve overarching business goals.
You can also look across to the relatively ESG-mature Europe to understand how the market has grown to embrace that sustainability data has financial value. The Non-Financial Reporting Directive (NFRD) is being retired in part because there is no such thing as “non-financial” sustainability data. The realisation that these data have financial value is one of the drivers behind the EU Taxonomy, the Corporate Sustainability Reporting Directive (CSRD) and the Task Force on Climate-Related Disclosures (TCFD)—the last of which is informing the development of global standards by the newly minted International Sustainability Standards Board (ISSB).
And there are clear financial implications for companies that fail to acknowledge or address the social factors that are adding fuel to the fire of the Great Resignation. In his letter, Fink asserts that, “No relationship has been changed more by the pandemic than the one between employers and employees...Workers demanding more from their employers is an essential feature of effective capitalism. It drives prosperity and creates a more competitive landscape for talent...Companies not adjusting to this new reality and responding to their workers do so at their own peril.” People want to work for companies that demonstrably deliver value. They rightly want higher pay, a fair shot at promotions and work-from-home flexibility. They want to know that they work for a company that is doing good and is being held accountable by clear ESG metrics. Getting this right will lead to stronger relationships between employers and employees and, ultimately, is good business.
"The next 1,000 unicorns won’t be search engines or social media companies, they’ll be sustainable, scalable innovators"
Chairman and Chief Executive Officer, BlackRock, writing in a letter titled "The Power of Capitalism"
There isn’t a massive gulf between ESG and financial data. Finance is the bridge that traverses both of these worlds. When organsations apply the same rigor to sustainability data as they do to financial data, they’ll demonstrate trust that will help establish stronger relationships with investors. And, importantly, they’ll add value to their business and play an instrumental role in its growth.
How to meet investor expectations
Larry Fink’s voice is prominent. And it’s not alone. Across the board, investors are being increasingly vocal about the need for comparable, transparent and trustworthy ESG metrics and reports. Earlier in 2022, Workiva’s CFO Jill Klindt, in her role as a member of the United Nations Global Compact CFO Taskforce, joined a CFO Media Roundtable event where Scott Mather, Chief Investment Officer U.S. Core Strategies of PIMCO and UN Global Compact CFO Taskforce Co-Chair, asserted: “The demand for sustainable investments is growing exponentially. The role of corporate finance and chief financial officers hasn't necessarily been center stage. And I think that's about ready to change.”
And, late last year, on a panel with Workiva at Reuters’ Sustainable Finance and Reporting Europe 2021, another major investor shared how his firm will require every company in its portfolio—including small and unlisted companies otherwise unaffected by some ESG mandates—to report on their scope 1, 2 and 3 carbon emissions.
Other investors will either echo this sentiment or have their own set of requirements. Understanding what these expectations are is just the beginning of the battle. The real fight lies in knowing how to meet them.
The answer can sound deceptively simple: treat ESG data as you would financial data. Don’t think of ESG as separate from finance. They’re one and the same. You need end-to-end visibility of all this data to develop clear, consistent and trusted integrated reports. Get that right and you’ll be well-placed to create long-term value both for your business and its shareholders.