Matthew Welch of SASB explains why the launch of the new accountability standard marked a big step towards a world where sustainability goals and business objectives are mutually supportive

From rapid population growth and technological innovation to climate change and resource constraints, 21st century economic prosperity faces no shortage of daunting new hurdles. I believe history will show that 2018 was the year capital markets rose to meet these challenges head on.

In recent years, corporations, investors, and regulators alike have become increasingly attuned to the importance of pursuing economic development that is both sustained and sustainable. However, capital markets have often seemed to be moving in the opposite direction, with a widespread – and often problematic – focus on short-term returns. In 2018, a collective effort to nudge capital markets toward a longer-term perspective turned an important corner, bringing the interests of financial markets and broader society into closer alignment.

Our work at the Sustainability Accounting Standards Board (SASB) is both an outcome of this increasing alignment and, ideally, a catalyst for its continued progress. After six years of development, SASB in 2018 issued a complete set of 11 industry-specific sustainability accounting standards, making a modest but hopefully important contribution toward a new era of sustainable enterprise. SASB's standardised performance metrics help corporations more effectively communicate with investors about the environmental, social, and governance (ESG) factors most likely to influence their ability to create value over the long term.

Water management is an ESG factor for drinks firms. (Credit: Diageo)

For beverage companies, this may include water management. For technology firms, it might involve data privacy. For drug manufacturers, the integrity of supply chains is likely to be more important. By facilitating the delivery of consistent, comparable, and reliable information on ESG factors that are most relevant to their business, and therefore to investors, SASB standards represent important infrastructure that can help make capital markets fit for purpose in today's competitive landscape.

Of course, corporate sustainability reporting is not new. It is now a mature practice characterised by a variety of approaches addressing a wide range of audiences and outcomes. However, sustainability reports often do not meet the unique needs of shareholders for comparable and consistent information. In recent years, many leading investors globally have coalesced around a practical solution to integrating the consideration of ESG issues in valuations, portfolio allocations, and corporate engagements.

By viewing sustainability through the lens of "financial materiality" – in other words, narrowing in on the handful of industry-specific ESG issues that matter to financially motivated investors – they can shape a financial future in which sustainability goals and business objectives are mutually supportive.

Climate change is a perfect example of the value of market alignment around ESG issues

Because the SASB standards have financial materiality at their core, companies and investors can use these standards to communicate about performance on key ESG issues without the important financial implications getting lost in translation. As a result, financial capital can begin to flow more readily toward addressing environmental and social issues at a scale that could never be matched by governments and civil society alone.

This convergence is due in no small part to the influence of the Task Force on Climate-related Financial Disclosures (TCFD), which released its final report in June 2017. By design, the TCFD's principles-based recommendations for climate risk disclosure have since become a platform for collaboration and alignment among market participants. Building on that groundwork, SASB has been working with the Climate Disclosure Standards Board (CDSB) to further refine, harmonise, and disseminate our practical tools for implementing the TCFD recommendations.

Climate change is a perfect example of the value of market alignment around ESG issues. Better managing risks and opportunities related to climate change and transitioning to a low-carbon economy can represent an enormous economic opportunity, estimated by some to be as high as $26trn by 2030. Conversely, the OECD has estimated the global cost of inaction on climate change at up to $69trn.

Seeing sustainability as ‘financial materiality’ aligns it with business objectives. (Credit: handrobot/Shutterstock)

Considering ESG issues in investment decisions has historically been portrayed as synonymous with sacrificing financial returns, but this is an out-of-date understanding. Markets and society can mutually benefit from the creation of "shared value" when capital can be allocated toward solutions that both meet an environmental or social need and generate financial returns. SASB standards can help companies and investors do just that, by narrowing down the broad array of ESG issues to just those that are financially material.

With the codification of the SASB standards last year, a new piece of market infrastructure is available to help companies better communicate with investors on these issues. Early market interest is strong and positive, and dozens of leading companies – from Nike and JetBlue to Kellogg's and Diageo – are already using SASB standards to guide sustainability communications with their investors.

So, at SASB, where we are always optimists, we will remember 2018 as the year that sustainable finance went mainstream!

Matthew Welch is president of the Sustainability Accounting Standards Board Foundation.

Main picture credit: London Stock Exchange
capital markets  climate risks  SASB  TCFD  ESG 

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