Sustainability and Financial Management

This is the third issue of the JACF devoted to “sustainable financial management” in collaboration with Harvard Business School professor Bob Eccles and the Founding Chairman of the Sustainability Accounting Standards Board (SASB)—a position now filled by Michael Bloomberg and Vice Chair Mary Shapiro, formerly Chairwoman of the SEC.)

Why so much attention to this subject?

Because the globalization of business during the past 20 or 30 years, together with the growing evidence of climate change and the recent worldwide financial crisis, has intensified the popular demand for business to play a larger role in addressing environmental and social problems.

But this raises the question: how can companies make significant contributions to “sustainability” while maintaining enough profitability and value to keep attracting the investor capital that will enable them to sustain themselves?

Sustainable financial management involves significant investments of management’s time and, in many cases, investor capital. Although the returns from some ESG investments show up fairly quickly in corporate P&Ls, the main purpose of most other initiatives is to strengthen the commitment of non-investor corporate stakeholders with the ultimate aim of increasing a company’s long-run value.

For corporate managements, such investments often require difficult trade-offs between shareholders and stakeholders—and what appear to be sacrifices of value, at least in the near term. Having made investments that are likely to reduce their reported earnings for a while, CEOs and boards must work hard to explain those decisions to the markets.

These explanations depend now upon what has come to be called “integrated reporting” which combines the information many companies have long produced in the form of “sustainability reports” detailed accounts of just their “material” environmental and social risks—and of their plans and efforts to manage them—while demonstrating the expected effects of both on long-run profitability and value. In other words, the main focus of integrated reporting is the link between ESG investments and shareholder value.

A promising the version of integrated reporting is now being promoted by the International Integrated Reporting Council (IIRC), a global non profit coalition of financial institutions and investors in the form of an “ Framework.” In our lead article, Bob Eccles, Mike Krzus, and Sydney Ribot hold up the SASB as an excellent U.S. version of the IIRC approach.

And in an article called “Integrated Reporting and Investor Clientele,” HBS professor George Serafeim presents the findings of his recent study showing that companies filing sustainability reports during the past decade have indeed experienced significant increases in the proportion of “dedicated holders”—institutional investors with smaller numbers of (large) equity positions and long holding periods—in their share-holder base. To the extent that integrated reporting represents an advance over sustainability reporting, this investor migratory pattern should become only more pronounced over time. And that will be good news for companies with value-based ESG programs.

To read more and to download the issue Click here.

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