I was listening to the EY Thought Centre webcast titled The Evolving ESG strategic imperative where the panellists agreed that corporate board members need to see environmental, social and governance (ESG) issues as a mainstream investment strategy.
Here are 4 reasons why:
1. Fiduciary Duty-Conventional accounting does not treat nonfinancial resources (human, social, natural) as assets, even though they represent sources of future value. A 2015 report titled Fiduciary Duty in the 21st Century, makes the bold statement, “Failing to consider long-term investment value drivers, which include environmental, social and governance issues, in investment practice is a failure of fiduciary duty”.
2. Risk Mitigation-A 2001 report by the FASB acknowledged that the value of assets is becoming less tangible and financial statements tell an increasingly smaller part of the story. Therefore, it is imperative for boards to identify and manage these intangible risks.
3. Client Demand-The increasing focus from institutional investors on ESG information is demonstrated by the signatories to the Principles of Responsible Investment (PRI) which account for about $60 trillion as of 2017.
4. Regulatory changes-In Canada the current regulatory disclosures pertain to environmental issues. However, the World Federation of Exchanges and its 60 member exchanges (including NYSE, NASDAQ and TMX Group) are pushing for standards to create transparency and fairness in the capital markets. In 2017, the London Stock Exchange Group released “Your Guide to ESG reporting”.
As business leaders navigate a changing marketplace where they face a laundry list of risks and opportunities, many of which are not captured by traditional financial statements using ESG as a strategic tool may ensure the long-term success of the business.