A Pragmatic Approach to ESG Metrics and Disclosure
Listen to Episode 47 on Apple Podcasts
Guest: Kristen Sullivan, leader of sustainability and KPI services at Deloitte
Hosts: Dottie Schindlinger, Executive Director of the Diligent Institute, and Meghan Day, Senior Director of Board Member Experience for Diligent Corporation
In this episode:
- What is the current status of ESG metrics and disclosures? Sullivan gives us a lay of the land, including some common misconceptions about different standards.
- How can directors contribute to the ESG conversation? Sullivan discusses her tips for how directors can fully embrace ESG from a board perspective.
- What should boards expect from the ESG conversation in 2021? Sullivan shares her insights on how ESG disclosures and metrics will continue to evolve as we move into a new year.
Summary:
With the pandemic, wildfires, flooding and more catastrophic events, ESG issues will only grow in prominence this year, but effective ESG metrics and disclosure remains elusive for many companies.
In this episode, Kristen Sullivan, leader of sustainability and KPI services at Deloitte, provides practical and straightforward insights on ESG metrics and disclosures for corporate directors as well as her predictions for where the ESG conversation is headed in 2021.
What is the current status of ESG metrics and disclosures?
To contextualize the discussion, host Dottie Schindlinger first asked about the current state of ESG metrics and disclosure after a pivotal year. Sullivan detailed first the state of confusion surrounding ESG metrics amid all of the change happening in the ESG landscape. With many different organizations publishing their own set of standards, methods, and metrics, Sullivan notes, “[There has been] evolution in the alphabet soup of standards and frameworks.”
She remains concerned by the misconceptions surrounding the sheer amount of different ESG metrics and disclosure standards. For example, she notes that the WEF/IBC did not publish a new set of standards, but a framework.
Sullivan then discussed the progress being made in the ESG space, and the corresponding progress needed to make ESG standards more effective tools to provide disclosures and manage risks. In particular, Sullivan emphasizes the fact that many of these standards are not mandatory, and that we have a long way to go before providing high-quality, thorough ESG disclosures would be the norm.
“Investors have made it clear that the quality, relevance, and timeliness of ESG disclosure is not sufficient.”
–Kristen Sullivan, leader of sustainability and KPI services at Deloitte
Lately, Sullivan has noticed a shift in the appetite for clarity surrounding ESG disclosure, and that the creation of more authoritative standards are merely a reflection of this change. This appetite for clarity and transparency, says Sullivan, likely stems from a greater understanding in the corporate world of ESG disclosure as an essential tool to drive value.
How can directors contribute to the ESG conversation?
Sullivan believes that directors can add fresh perspective to the ESG conversation: “We need to shift the perspective from chasing each standard to stepping back and thinking about the concept of purpose and understanding the needs of your stakeholders.”
That said, Schindlinger then asked Sullivan about how directors could best handle rapidly evolving ESG issues, metrics, standards, and more. For Sullivan, the answer lies in fully embracing and integrating ESG into the role of the board.
“How do you truly integrate ESG into the business? That is exactly where the board has purview and oversight.”
–Kristen Sullivan, leader of sustainability and KPI services at Deloitte
She recommends the following big-picture inquiries for boards:
- How does ESG play into the long-term business strategy?
- What are ESG risks that could manifest quickly?
- How can boards broaden their perspective?
- What role does the Audit or Compensation committee play?
- What is the role of external assurance to give us confidence?
Asking these existential questions will help to truly embed ESG into the performance and culture of organization. These questions also highlight the need for transparency and connectivity around ESG between committees. For Sullivan, the key result of these inquiries will ensure companies have the right governance structures in place before rushing too quickly into using different metrics and standards.
Ensuring that ESG disclosure is a priority of the board works in a top-down fashion; setting the tone for the rest of the company. In Sullivan’s words: “Directors have such an important role to play in understanding these evolving trends.”
What should boards expect from the ESG conversation in 2021?
To conclude, Sullivan provides some insight on the future of ESG metrics and disclosure, and what we’re likely to see in 2021. Top of mind for her, unsurprisingly, is continued and increasing focus on ESG disclosure at the corporate level. At this point, companies of all shapes and sizes understand ESG disclosure as a lasting responsibility, particularly after the events of 2020.
The new presidential administration in the U.S. plays a large role in her predictions as well: “This agenda is not going to be driven out of Washington. As this new administration takes shape, I don’t think companies are waiting.”
Sullivan highlights new regulatory action taking shape, which will accelerate movement towards further standardization and accountability.
“You can make these bold, ambitious goals, but you’re going to be held accountable. How are you really implementing the strategies, these mechanisms, and delivering on high-quality disclosures?”
–Kristen Sullivan, leader of sustainability and KPI services at Deloitte
Increased public and political scrutiny of corporations’ actions surrounding ESG will then result in greater accountability. For Sullivan, this will continue to affect board committee structures: “We’ve seen generally the position of the nominating/governance, audit, and compensation committees. I think there’s a role for dedicated sustainability-focused committees as well as current committees integrating ESG as well.”
Similarly, Sullivan predicts greater ESG influence at the management level: “I think a Chief Sustainability Officer will become more commonplace in the US. This is a strategic issue. How do we make sure that we’re putting the right champion with the right authority in place? Do you need a CSO, or do you need a mechanism throughout the organization to promote ESG? I think you need both.”
Also in this episode…
Schindlinger and Sullivan discuss S&P podcast “ESG Insider,” in particular an episode about a CEO from a large utility company and the way she was able to engage with her board as they moved towards a decarbonized economy. For Sullivan, hearing this CEO’s story was a sign of what’s to come for companies and ESG responsibility.
Resources in this episode:
