It might not always be easy to quantify but investors still want the information
It’s a quotation that is often misattributed to Albert Einstein: ‘Just because you can count it doesn’t mean it counts, and just because you can’t count it doesn’t mean it doesn’t count.’ The concept of integrated reporting, reporting on all material factors in the same place, whether they are included in traditional accounting data or are part of ESG risk factors, has caught on faster in Europe than in the US – but its time has come.
‘Companies have to get much better at presenting material ESG factors,’ says Matt Patsky, CEO of Trillium Asset Management. ‘There is a movement toward standardization of these factors, what the Sustainability Accounting Standards Board (SASB) is looking at as material, even without regulatory guidance, because we are not going to get any regulatory guidance from Washington for at least a couple of years.
‘But companies have to realize that this is the direction it’s moving in, and get ahead of it. They should be looking at what SASB has decided is material and look to include it in their annual books and records because this is all going to be a requirement sooner or later. The rest of the world is moving; the US will catch up.’
Trillium has been one of many investors pushing companies to make ESG disclosures, and many have acquiesced, producing hundreds of CSR or sustainability reports. Sometimes these are glossy productions that are more about PR than about communicating real risks and successes upon which a value can be placed. But if you are going to put it in your annual report, not your CSR brochure, it has to be measurable.
‘We recognize that SASB has limitations; what we try to do is get to the point where we identify only those issues where we can demonstrate materiality to performance. Then we can discriminate between what is material and what might not be,’ Patsky says. ‘There’s plenty of ESG that we can’t put a firm, hard number on but we know it matters. So we look at, for example, the overall impact of a product or service on society as a factor, but how do you quantify that? With other factors, such as greenhouse gas emissions, there’s a simple way of quantifying them.’
Patsky singles out Intel as having a different approach to the issue of reporting on ESG: ‘It takes the time to call out to our [ESG] community and have annual meetings with us to ask, What issue areas should we be thinking about in the future?, as well as updating us on its progress on all the issues already disclosed. Intel’s attitude seems to be, We have a very proactive approach on responding to concerns about ESG issues: this is what we do and here’s where you find it on our website and here’s where you find it in our annual report.’ Indeed, Intel’s sustainability report is comprehensive and the risk factors that are identified in it are included in Item 1A: Risk Factors in the company’s annual report.
Coca-Cola has adopted the same approach. A spokesperson explains that ‘as you can find on our website, in addition to our annual report on 10K we also publish a sustainability update. We are always considering our reporting framework.’ As well as the normal currency fluctuation risks you see in all annual reports, other material ESG factors Coca-Cola lists include:
• Water scarcity and poor quality
• Product safety and quality concerns
• Public debate and concern about perceived negative health consequences of certain ingredients, such as non-nutritive sweeteners and biotechnology-derived substances, and of other substances present in its beverage products or packaging material
• Increased demand for food products and decreased agricultural productivity
• Climate change
• Negative publicity, even if unwarranted, related to product safety or quality, human and workplace rights, obesity or other issues damaging Coca-Cola’s brand image and corporate reputation
• Global or regional catastrophic events, including terrorist acts, cyber-strikes and radiological attacks.
There are easily as many ESG risk factors discussed as more traditional ones. No one could argue that these are not material factors. Though many are difficult to quantify, they clearly warrant inclusion and discussion.