Sustainability considerations are often not a core part of how companies define and develop their business strategy, evaluate their performance and the disclosures that they include in the corporate reporting. It looks very likely that this approach will need to change, with a number of key figures in the financial industry having recently made public statements about the increasing need for companies to take their sustainability impacts and policies more seriously.
Mark Carney, the outgoing governor of the Bank of England, stated in December that there could be huge impacts on companies and industries as a result of climate change unless strong action is taken soon. He warned that companies and industries not making progress towards zero-carbon emissions will suffer financially, and lose out on capital from investors. He predicted that the required change in how companies and industries operate in response to climate change may result in financial collapse in the global markets. The longer it takes for serious actions on climate change, the greater the risk of this collapse is.
BlackRock CEO Larry Fink added to this point of view on the impact of climate change on the financial markets in his annual letter to CEOs. He wrote that climate change will cause there to be a significant reallocation of capital in the financial industry. He pointed out that clients are increasingly asking for BlackRock to move their capital into sustainable strategies. Even a small percentage of movement of capital invested in this way would have dramatic impacts. He stated that BlackRock has committed to “place sustainability at the centre of [its] investment approach.” Fink warned that considerations of the progress that companies are making on embedding sustainability in their business and reporting of relevant disclosures will factor strongly into BlackRock’s decision on whether to vote against management and board directors.
It is not just climate change and environmental considerations that will impact the investment of capital. Goldman Sachs CEO David Solomon has announced that starting on the 1st of July in the United States and Europe, the investment bank wouldn’t take companies public unless the company had at least one “diverse” board member. This will increase in 2021 to the need for there to be two “diverse” board members. The meaning of “diverse” in this context is not completely clear, but Solomon did point out that there would be a focus on women.
This demonstrates that increasing need for companies to seriously consider their sustainability impacts, their approach to addressing them, and the disclosures included in their corporate reporting. While there is a high level of focus on climate change, broader social sustainability impacts must also be considered.
The best approach to ensuring that a company is addressing its sustainability impacts is to define the key material issues of the company through engagement with stakeholders and consideration of its operations, develop the strategies and policies that will address these issues, and select metrics and disclosures that the company will use to measure progress internally, and include in its corporate reporting for investors.
For more information, take a look at our guide Navigating through the sustainability reporting landscape.