Distracted from actually ‘doing’ sustainability by too many info requests?
I joined a webinar this week, ‘What story is your sustainability information telling investors?’ run by MSCI and SASB. I hope they don’t mind if I structure my message using their fascinating presentation.
I have banged on about the value to a business of reporting. But the greater value of it is how you do it – including a process called materiality assessment. Don’t yawn!
Materiality helps cut through the noise. This noise between what investors need to know to make decisions and what companies offer to disclose. The noise is created by uncertainty on what to report, how to report it, and where to report it. Above all, not knowing what material topics should be reported just amplifies the noise.
Investors want the truth, and a fair portrayal of performance. BUT many sustainability reports are still not providing this. The webinar reminded us of a 2013 study of GRI A and A+ reports in the Accounting, Auditing & Accountability Journal (USA). It showed that, ‘90% of the significant negative corporate (social or environmental) events were not reported.’ How can an investor decide on the company’s place in their portfolio if they rely on information on how the company manages the wider set of (sustainability) risks?
Another useful reminder in the webinar was PwC’s study “Sustainability goes mainstream” from 2014 – 80% of investors in US Listed companies are dissatisfied with corporate disclosures on sustainability (relevance/materiality, processes used to define what’s material). Also, the webinar cited ‘Corporate Sustainability: First Evidence on Materiality,’ Working Paper by Khan et al (Harvard Business School, 2015) in which, using SASB’s framework, the researchers found that:
- Firms with good performance on ‘material sustainability issues’ and concurrently poor performance on ‘immaterial sustainability issues’ enjoy the strongest financial returns
- 80% of corporate disclosures on sustainability are immaterial, having no correlation to financial performance
The noise is also produced by questionnaires and surveys on sustainability (anything from ESG analysts, ratings agencies, NGO campaigns, global disclosure initiatives). SASB’s and others’ disclosure standards can help to cut the noise, if only the survey makers would apply the principle of materiality.
So, the new KPI I (half-playfully) refer to is Information Request Noise Burden, measured in number of information requests, time to process (in person-days), number of employees involved. SASB showed General Electric’s effort to calculate these metrics in 2014:
- Information requests – 650+
- Process – approx. 3 months
- Employees involved – 75+
Why this KPI? Well, all this questionnaire fatigue and ‘information asymmetry’ mean that a company is distracted from actually delivering their sustainability strategy. Surely this is a threat to performance improvement?
I spoke to a large UK property and construction group today about CDP. They did their CDP Disclosure in 2016 because a (presumably significant) investor requested it. They told me that they had avoided it previously ‘because it distracts us from getting on with doing what we set out in our Sustainability Commitments’. Oh, dear.
Questionnaires and surveys evidently (from SASB’s perspective) avoid applying the materiality principle themselves, so they add ‘noise to the mix, masking what matters’.
So, good on MSCI – they apply the materiality principle, and showed us an example of their work in the Utilities sector. There you have it! A double whammy benefit from using materiality effectively:
- Reporting organisations produce better quality reports meeting stakeholder needs
- Ratings agencies and survey makers cut the noise and burden faced by reporting companies.