As devastating as the upheaval of recent months has been, the coronavirus pandemic and the civil unrest over racial inequality should ultimately make businesses more committed to sustainable practices in a way that will benefit not only their investors and workers, but also their community as a whole.
In August 2019, the Business Roundtable, a group whose members are CEOs from some of the nation’s largest companies, redefined the purpose of a corporation from simply making profits for shareholders to benefiting multiple stakeholders—customers, employees, suppliers, communities and shareholders. The statement followed years of increasing pressure on businesses to pay more attention to the way they operate, especially when it comes to their practices regarding environmental, social and governance issues, or ESG.
It’s not a passing fad. The Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce said in a statement, “Almost 86% of the S&P 500 conduct their own annual sustainability report.”
This commitment, though, is facing perhaps its greatest test yet.
All over the world, the public at large has watched closely as political, community and business leaders have reacted to the human and economic toll of COVID-19 and the social unrest surrounding demands for racial justice. What the public has seen—reflected in a quick adoption of new workplace policies like social distancing and working from home, as well as frank discussions of racial inequality—suggests that the Business Roundtable’s message is gaining some traction.
It’s a reflection of a shift in public attitudes toward ESG. Before this year, companies’ ESG efforts may have been more about the environmental component, but the events of the past few months have compelled businesses to put more of their focus on the social and governance components.
No longer can companies ignore social concerns and worker safety—not to mention disaster preparedness, continuity planning and employee treatment through benefit programs. All of this should only propel interest in sustainability reporting.
None of this change is easy, of course. But it does provide a silver lining amid the health crisis and gives companies a chance to make lasting change. With the shortcomings of so many businesses on display, companies can begin to address their weaknesses with the understanding that good corporate practices are not only the right thing to do, but also the trademark of sustainable and resilient businesses.
Who makes change happen?
The auditing profession—one in which the themes of accountability, standards-based analysis and objectivity are central—is well-positioned to be a part of this movement.
Auditors understand how to measure and verify indicators that drive performance, conduct analysis and deliver reporting solutions to the business community. After all, those measurements matter, and they will drive greater accountability.
Companies will increasingly focus on social equality, climate action and innovation. But measuring each will vary depending upon how the company views its role in making outcomes that benefit society. What will emerge, too, will be those companies that are committed to the cause versus those that seek greater assets from investors.
Around the United States, groups like the American Institute of Certified Public Accountants and Center for Audit Quality have added sustainability reporting to their 2020 focus areas. But without broadly adopted ESG reporting standards, many business leaders question its viability.
Still work to do
Many issues remain, like which framework best aligns to an organization’s goals, how to ensure data integrity, and what level of assurance best supports stakeholder communications. Many businesses have been quick to come up with easy answers, but many are struggling to find enduring solutions. Auditors will have to be part of the solution.
Consider three resources:
- Sustainability Accounting Standards Board: This group promotes a set of principles that are strong in that they assess the concept of materiality, a topic that resonates with financial minds. But these principles are also lengthy and apply best to public, not private, businesses.
- Task Force on Climate-related Financial Disclosures: This group addresses perhaps the most important of all sustainability topics—climate change—but is focused so much on one environmental issue that its broader sustainability application is debatable.
- Principles for Responsible Investment: The PRI’s Sustainable Development Goals, which have gained broad adoption among asset managers, include 17 important sustainability topics facing the world, but the group requires paid signatory membership to engage with the data from its community.
Standard-setting is a marathon, not a sprint, and auditors will have the chance to play a critical role in developing sound practices. Of course, market feedback will be needed to develop a new generation of ratings, analysis and products to achieve sustainability goals. As this occurs, investor behavior will change and adjustments will be needed.
But what’s unlikely to change is investors’ interest in transparency and performance. Auditors will need to understand the sustainability issues facing companies and offer flexibility to determine which practices drive the greatest long-term value.
The takeaway
As the world continues to deal with the pandemic, we hope to see bolder corporate announcements that are rooted in science and address the foremost sustainability issues. Such commitments set an expectation for other companies to follow. Companies have the chance to transform the world, and we need every company accelerating and amplifying its positive impact—after all, without healthy people and a healthy planet, there cannot be a healthy economy.
