“Total Impact Valuation” – Monetizing the Enterprise’s “Cost-Benefit Analysis” of the Impact on Society? This is for CEOs – Advice From The Conference Board

by Hank Boerner – Chair & Chief Strategist, G&A Institute

Today’s question for corporate CEO’s:  Have you examined your company’s “Total Impact Valuation,” a new approach being advanced by The Conference Board, wherein the enterprises’ impact on society is monetized (cost/benefit evaluated and value attached)?

A small group of companies is doing these exercises. Think of their efforts to date as expanding the usual reporting of “Input/Output” to seriously consider (1) Outcomes, (2) Impacts, (3) Cost and Benefit to Society (and to the company).

Such firms as BASF (the German chemical giant), cement industry leaders Holcim/Ambjua Cement and LafargeHolcim, Samsung, Akzonobel (materials), ABN AMRO (Holland, financial services), Volvo (vehicles), and Argo (materials, Colombia) have been doing something along these lines and reporting results for a few years now on web sites, in sustainability reports, in financial statements, in a “total contribution report” or “value-added statement”, and by other means.

Some of these disclosures are third party assured (Argo’s is by Deloitte) and otherwise guided; the big accounting firms are involved (PwC and KPMG included).

This appears to us to have the potential to take corporate sustainability reporting to expanded (new) levels for at least the publicly-traded large caps – that is, if enough investors jump aboard the concept and ask for the information.  (Think about public discussion of the company’s “plus or minus” impact on society beyond the fences.)

Thomas Singer, Corporate Leadership research leader at The Conference Board, presents findings of his sampling of firms (those identified above) and shares his perspectives on the concept in Chief Executive Magazine – it’s our Top Story for you this issue.

BASF shares its “Value to Society” model (there’s a link to this in the article).  The company, explains Singer, monetizes more than 20 different types of environmental, social and economic impacts, including direct and indirect suppliers and even customer industries.

Author Thomas Singer turns out a good amount of strategic advice to company leaders and has been focusing more in his Director Notes on ESG and corporate sustainability.  There’s links to his papers and publications for you in the link.

A major drawback here in the U.S.A.: there is no standard benchmark for measuring progress or lack of, and to guide reporting; there is in turn no way to compare company “A” to “B” for investors, ratings analysts and others.

So what do you think – is this a “we’re a long way from Kansas, Toto” moment for corporate leaders in terms of expectations of shareholders and stakeholders for what the companies will share in their disclosures of the future?  (The “Kansas” reference being the bad old days practices of chemicals and other companies “externalizing” costs to society for environmental mismanagement and minimizing the actual costs of clean up in financial reports.)

The total value practice got underway in Europe – and we will be watching to see if U.S.-based public companies pick up on the concept. Especially those where their foreign peers have the modeling and techniques underway.  That is what happened with corporate sustainability and ESG reporting over time.

Top Stories

CEOs Need To Put This Sustainability Trend On Their Radar
(Tuesday – July 03, 2018) Source: Chief Executive – What if America’s CEOs could understand the full financial impact their company has on society? It could make them rethink their game plan for how they prevent workplace accidents, lessen air pollution, manage waste – the list…

The Words From Davos In 2018: Sustainability, Responsibility…And More In This, The Fourth Industrial Revolution

by Hank Boerner – Chair and Chief Strategist, G&A Institute

The World Economic Forum (WEF) annually convenes business leaders, government officials, celebrities and other luminaries in the Swiss village of Davos-Klosters to explore societal issues and develop or work to advance solutions to same.

This year’s convocation was staged over four days n late-January. Some of the highlights for you:

UN Sustainable Development Goals in Focus
The Government of Denmark and the WEF signed a memorandum of understanding to move ahead with a partnership to improve the state of the world through a public-private cooperation. The agreement provides a model framework that could lead to improvement over the long-term.

And, adoption of the approach by other nations. Consider what this European nation and the WEF have in mind:

  • They will pursue public-private partnership to promote green growth.
  • Develop a technology and innovation partnership.
  • Work together to encourage greater adoption of the SDGs.
  • Support the mobilization of private capital for infrastructure through the WEF-led initiative, the Sustainable Development Investment Partnership.
  • Support trade and investment through the Global Alliance for Trade Facilitation (a multi-stakeholder initiative).
  • Work to implement the WEF’s System Initiative on Education, Gender and Work.
  • Denmark will assign a Ministry of Foreign Affairs senior advisor to the WEF New York City office (a second such WEF appointment for Denmark).

Prime Minister Lars Lokke Rasmussen said: “Denmark has an ambitious agenda to promote public-private partnerships…in terms of sustainable growth, social cohesion and technological skills. We are delighted to team with WEF to create concrete progress on these agendas…to create better lives for more people and sole the urgent climate crisis. We must build bridges across sectors, borders and old divisions…”

Addressing Modern Slavery
Influentials addressed the need for coordinated global action to end modern slavery – that was championed by US Senator Bob Corker (R-Tennessee); Monique Villa, CEO of Thomson Reuters Foundation; and, Gary Haugen, CEO of the International Justice Mission.

Senator Corker drew attention to the new Global Fund to End Modern Slavery (“GFEMS”), a public-private partnership to fund programs in countries where such practices are prevalent.

The initial funding is from the United States and United Kingdom; the goal is to raise US$1.5 billion-plus and develop a global strategy to address modern slavery. (It’s estimated that as many as 40 million people now live in modern slavery conditions. This is said to be a $150 billion global business.)

There are three pillars adopted by GFEMS: (1) leverage the rule of law; (2) “energized” engagement with business sector (3) work to sustain freedom.

Jean Baderschneider is CEO of the new Global Fund. The fund’s work will be modeled on the global effort to fight AIDS, TB and malarial infections, bringing together governments, the private sector and NGOs.

Tech-Reskilling Drive Announced
The Information Technology industry is going to work to target 1 million people to offer resources (such as on-line tools) and training opportunities to “re-skill” adults to help them meet the requirements of the tech industry for employment, as well as continue their education and learn more about today’s technology.

Big names in tech are signed on: Accenture, CA Technologies, Cisco, Cognizant, Hewlett Packard Enterprise, Infosys, Pegasystems, PwC, Salesforce, SAP, and Tata Consultancy Services. The coalition is seeking more members to help develop tools and processes to address the “barriers preventing adults from re-skilling or successfully completing training, initially in the United States. There are plans to scale to other geographies.

The coalition’s “SkillSET” is hosted on the EdCas AI-powered Knowledge Cloud Platform, accessible to all.

ISO 20121:2012 Certification for Davos
The conference was awarded the ISO certification for “sustainable event planning and operation” by DNVGL (a certifying body). ISO 20121 is a framework for identifying and managing key social, economic and environmental impacts of an event.

Sustainability measures implement by the Forum included carbon compensation for all air travel by the staff, media and participants; promotion of “sustainable transport” in Davos (walk don’t ride); energy efficiency; water management; sourcing of renewable energy; reduction of waste and recycling.

Ending With A Call to Action
The 2018 Forum closed with a call to action to “globalize compassion” and “leave no one behind.” This, the 48th WEF Annual Meeting, closed on a creative note with four artists sharing visions of how painting, photography, film and dance can inspire empathy with other people’s stories.

Across all of the 400 sessions, the Davos organizers said, “…one key theme kept emerging, the need to embrace our common humanity in the face of rapid technological changes ushered in by the Fourth Industrial Revolution.”

And so the call for a spirit of inclusion, diversity and respect for human rights…this characterized the 2018 gathering, said Sharon Burrow, one of the seven female co-chairs of the meeting (she is General Secretary of the International Trade Union Confederation).

Important outcomes of the meeting included these developments, on the theme of “mending our fractured world”:

  • Preparing workers for the future.
  • Safeguarding our oceans.
  • Closing the gender gap.
  • Tackling waste and pollution.
  • Unlocking nature’s value.
  • Making meat sustainable.
  • Bridging the digital divide.
  • Fighting financial crime and modern slavery.
  • Taking on fake news.
  • Securing air travel.

And…advancing the Fourth Industrial Revolution, which includes Forum centers at work with social, public and private sector partners in numerous countries.

As Oliver Baitch writing in Ethical Corp observed, having spent four days at the conference:

“First, and foremost, sustainability is here to stay. Long gone are the denials or debates as to whether “non-financial” or “soft” issues are the preserve of global business. Themes such as citizenship-centred science, a post-oil energy matrix and tax transparency have shifted from side-room workshops to the main stage.

“Second, companies are beginning to put their money where their mouths are. Davos 2018 saw a litany of firm, measureable corporate commitments – professional services firm PwC promising to cut its carbon emissions by 40% by 2022 (having cut them by 29% since 2007) through to Coca-Cola pledging to collect and recycle the equivalent of every bottle or can it sells globally by 2030.”

You can read his summary of the 2018 confab at: http://www.ethicalcorp.com/will-sustainability-be-ceos-trays-after-davos

And, of course, there is a significant amount of related information at the WEF web site:  https://www.weforum.org/

Will We See Mandated Corporate Reporting on ESG / Sustainability Issues in the USA?

by Hank Boerner – Chairman – G&A Institute

Maybe…U.S. Companies Will Be Required…or Strongly Advised… to Disclose ESG Data & Related Business Information

Big changes in mandated US corporate disclosure and reporting on ESG factors may be just over the horizon — perhaps later this year? Or perhaps not…

Sustainable & responsible investing advocates have long called for greater disclosure on environmental and social issues that affect corporate financial performance (near and long-term). Their sustained campaigning may soon result in dramatic changes in the information investors and stakeholders will have available from mandated corporate filings.

We are in countdown mode — in mid-April the Securities & Exchange Commission (SEC), the agency that regulates many parts of the capital market operations and especially corporate disclosure and reporting for investors issued a Concept Release with a call for public comments.

Among the issues In focus are potential adjustments, expansions and updating of mandated corporate financial reporting. One of these involves corporate ESG disclosure. The issue of “materiality” is weaved throughout the release.

Among the many considerations put forth by SEC: expanding corporate disclosure requirements for corporate financial and business information to include ESG factors, and to further define “materiality.” Especially the materiality of ESG factors.

The comment period is open for you to weigh in with your opinion on corporate ESG disclosure and reporting rules — or at least strong SEC guidance on the matter.

SEC has been conducting a “Disclosure Effectiveness Initiative,” which includes looking at corporate disclosure and reporting requirements, as well as the forms of presentation and methods of delivery of corporate information made available to investors. (Such as corporate web site content, which most feel needs to be updated as to SEC guidance.)

The umbrella regulatory framework — “Regulation S-K” — has been the dominant approach for corporate reporting since 1977 has been the principal repository (in SEC lingo) for filing corporate financial and business information (such as the familiar 10-K, 10-Q, 8-K, etc.).

Investors Want More Corporate ESG Information

For a number of years now, investment community players have urged SEC to look at mandating or offering strong guidance to public company managements to expand disclosure and reporting to substantially address what some opponents conveniently call “non-financial,” or “intangible” information. An expanding base of investors feel just the opposite — ESG information is quite tangible and has definite financial implications and results for the investor. The key question is but how to do this?

Reforming and Updating Reg S-K

In December 2013 when the JOBS Act (“Jumpstart Our Business Startups”) was passed by Congress, SEC was charged with issuing a report [to Congress] on the state of corporate disclosure rules. The goal of the initiative is to improve corporate disclosure and shareholders’ access to that information.

The Spring 2016 Concept Release is part of that effort. The SEC wants to “comprehensively review” and “facilitate” timely, material disclosure by registrants and improve distribution of that information to investors. Initially, the focus is on Reg S-K requirements. Future efforts will focus on disclosure related to disclosure of compensation and governance information in proxy statements.

Asset managers utilizing ESG analytics and portfolio management tools cheered the SEC move. In the very long Concept Release – Business and Financial Disclosure Required by Regulation S-K, at 341 pages — there is an important section devoted to “public policy and sustainability” topics. (Pages 204-215).

ESG / Sustainability in Focus For Review and Action

In the Concept Release  SEC states: In seeking public input on sustainability and public policy disclosures (such as related to climate change) we recognize that some registrants (public companies) have not considered this information material.

Some observers continue to share this view.

The Concept Release poses these questions as part of the consideration of balancing those views with those of proponents of greater disclosure including ESG information:

• Are there specific public policy issues important to informed voting and investment decisions?

• If the SEC adopted rules for sustainability and public policy disclosure, how could the rules result in meaningful disclosures (for investors)?

• Would line items about sustainability or public policy issues cause registrations to disclose information that is not material to investors?

• There is already sustainability and ESG information available outside of Commission (S-K) filings — why do some companies publish sustainability, citizenship, CSR reports…and is the information sufficient to address investor needs? What are the advantages and disadvantages of these types of reports (such as being available on corporate web sites)?

• What challenges would corporate reporters face if ESG / sustaianbility / public policy reporting were mandated — what would the additional costs be? (Federal rule making agencies must balance cost-benefit.)

• Third party organizations — such as GRI and SASB for U.S. company reporting — offer frameworks for this type of reporting. If ESG reporting is mandated, should existing standards or frameworks be considered? Which standards?

The Commission has received numerous comments about the inadequacy of current disclosure regarding climate change matters. And so the Concept Release asks: Are existing disclosure requirements adequate to elicit the information that would permit investors to evaluate material climate change risk? Why — or why not? What additional disclosure requirements– or SEC guidance — would be appropriate?

Influential Voices Added to the Debate

The subject of expanded disclosure of corporate ESG, sustainability, responsibility, citizenship, and related information has a number of voices weighing in. Among those organizations contributing information and commentary to the SEC are these: GRI; SASB; Ceres; IEHN; ICCR; PRI; CFA Institute; PWC; E&Y; ISS; IIRC; BlackRock Institute; Bloomberg; World Federation of Exchanges; US SIF.

The overwhelming view on record now with SEC is that investor consideration of ESG matters is important and that change is needed in the existing corporate reporting and disclosure requirements. You can add your voice to the debate.

For Your Action:

I urge your reading of the Concept Release, particularly the pages 204 through 215, to get a better understanding of what is being considered, especially as proposed by proponents; and, I encourage you to weigh in during the open public comment period with your views.

You can help to ensure the SEC commissioners, staff and related stakeholders understand the issues involved in expanding corporate disclosure on ESG matters and how to change the rules — or offer strong SEC guidance. Let the SEC know that ESG information is needed to help investors better understand the risks and opportunities inherent in the ESG profiles of companies they do or might invest in.

SEC rules or strong guidance on ESG disclosure would be a huge step forward in advancing sustainability and ESG consideration by mainstream capital market players.

Information sources:

The SEC release was on 13 April 2016; this means the comment period is open for 90 days, to mid-July.

Helpful Background For You

Back in 1975 as the public focus on environmental matters continued to increase (all kinds of federal “E” laws were being passed, such as the Clean Air Act and Clean Water Act), stakeholders asked SEC to address the disclosure aspects of corporate environmental matters.

The initial proposal was deemed to have exceeded the commission’s statutory authority.

In 1974 the ERISA legislation had been passed by Congress, and pension funds, foundations and other fiduciaries were dramatically changing the makeup of the investor community, dwarfing the influence of one once-dominant individual investor. After ERISA and the easing of “prudent man” guidelines for fiduciaries, institutional investors rapidly expanded their asset holdings to include many more corporate equities.

And the institutions were increasingly focused on the “E,” “S” and :”G” aspects of corporate operations — and the real or potential influence of ESG performance on the financials. Over time, asset owners began to view the company’s ESG factors as a proxy for (effective or not) management.

While the 1975 draft requirements for companies to expand “E” and “S” information was eventually shelved by SEC, over the years there was a steady series of advances in accounting rules that did address especially “E” and some “S” matters.

FAS 5 issued by FASB in March 1975 addressed the “Accounting for Contingency” costs of corporate environmental liability FASB Interpretation FIN 14 regarding FAS 5 a year later (September 1976) addressed interpretations of “reasonable estimations of losses.” SEC Staff Bulletins helped to move the needle in the direction of what sustainable & responsible investors were demanding. Passage of Sarbanes-Oxley statutes in July 2002 with emphasis on greater transparency moved the needle some more.

But there was always a lag in the regulatory structure that enables SEC to keep up with the changes in investment expectations that public companies would be more forthcoming with ESG data and other information. And there was of course organized corporate opposition.

(SEC must derive its authority from landmark 1933 and 1934 legislation, expansions and updates in 1940, 2002, 2010 legislation, and so on. Rules must reflect what is intended in the statutes passed by Congress and signed into law by the President. And opponents of proposals can leverage what is/is not in the laws to push back on SEC proposals.)

There is an informative CFO magazine article on the subject of corporate environmental disclosure, published September 9, 2004, after the Enron collapse, two years after Sarbanes-Oxley became the law of the land, and 15+ years after the SEC focused on environmental disclosure enhancements. Author Marie Leone set out to answer the question, “are companies being forthright about their environmental liabilities?” Check out “The Greening of GAAP” at: http://ww2.cfo.com/accounting-tax/2004/09/the-greening-of-gaap/

And we add this important aspect to corporate ESG disclosure: Beginning in 1990 and in the years that followed, the G1 through G4 frameworks provided to corporate reporters by the Global Reporting Initiative (GRI) helped to address the investor-side demand for more ESG information and the corporate side challenge of providing material information related to their ESG strategies, programs, actions and achievements.

The G&A Institute team sees the significant progress made by public companies in the volume of data and narratives related to corporate ESG performance and achievements in the 1,500 and more reports that we analyze each year as the exclusive data partner for The GRI in the United States, United Kingdom, and The Republic of Ireland.

We have come a very long way since the 1970s and the SEC Concept Release provides a very comprehensive foundation for dialogue and action — soon!

Please remember to take action and leave your comments here:
http://www.sec.gov/rules/concept.shtml