Presentation by Vittorio Lusvarghi, chair of the Professional Accountants in Business Committee Sustainability Task Force, at the Institute of Cost Accountants of India's National Cost Convention, New Delhi, India, March 2012.

1. Investor Demand for Environmental,
Social, Governance (ESG) Disclosures
Implications for Professional
Accountants in Business (PAIBs)
New Delhi, India, March 15, 2012
Vittorio Lusvarghi, Chair, PAIB
Committee Task Force
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2. Understanding ESG
What is ESG?
• Environmental: Impact on climate change, risks and
performance, e.g., GHG emissions, waste, etc.
• Social: Health and safety, training and development, staff
turnover, diversity, etc.
• Governance: Conduct/litigation, board effectiveness, e.g.,
board composition, duration, remuneration
ESG factors play a large part in helping companies
achieve sustainable organizational success
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3. The issues
What are our key findings?
• ESG disclosures are increasingly used by investors to
understand a company’s material ESG factors and how
they impact overall performance
• Investors are becoming more sophisticated in their
investment approaches and gravitating to:
– Greater ESG integration
– Certain types of disclosures and key performance indicators
– Assessing financial outcomes of ESG factors
• Managerial accountants need to support their
organizations in addressing the demand for ESG
information
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4. Short term versus long term
Why are ESG factors important?
• ESG factors impact overall performance over a longer time
horizon
• ESG risk and performance will affect an organization and
its ability to create sustainable value
• Institutional investors theoretically have a long-term
horizon
• Many institutional investors are therefore considering their
ownership rights from a broader perspective, although
there are many challenges ahead.
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5. Investors
Investor approaches
• Negative ESG screening—excluding specific industries
or sectors, such as alcohol
• Positive ESG screening— or ―best-in-class‖ investing,
whereby the scope of the investable universe is restricted
to highly rated ESG companies
• Engagement—involving a dialogue between a
shareholder and a company with the aim of improving the
company’s value through greater incorporation of ESG
factors
• ESG integration—involves integrating specific ESG
criteria into valuations of a company
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6. Challenges
Challenges to mainstreaming ESG
• ESG issues are complex and multifaceted
• Many investors/fund managers are overly focused on
short-term financial results
• ESG disclosures lacking from companies
• Where disclosed ESG information can be of poor quality
and reliability
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7. Metrics 1
What ESG KPIs and information do investors seek?
39 core ESG KPIs listed and available in report, including:
• Environmental:
– Total direct and indirect GHG emissions (scope 1, 2 and 3)
– Total waste and type of waste (hazardous versus non-hazardous)
produced by product and volume
– Percent of waste reused in the manufacturing process
– Total amount of energy used by the organization
• Social:
– Total workforce accidents and fatalities
– Lost time from accidents
– Total or average investment/expenses on training
– Employee turnover rate
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8. Metrics 2
What ESG KPIs and information do investors seek?
• Governance e.g., Board effectiveness
– Board composition and diversity
– Duration
– Remuneration
• Stakeholder engagement:
– Frequency and main issues arising
• Conduct/ethics:
– Corruption
– Total amount of remediation and fines
– Payments to government(s) and total value of financial and in-kind
contributions to political parties, politicians, and related institutions
– Voting right parity
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9. Focus on relevant issues
What ESG KPIs and information do investors seek?
• A few relevant disclosures on risks, opportunities and KPIs
• Both leading and lagging indicators are important
• Financial implications of ESG factors, for example on
– Cash flows/earnings
– Revenue growth
– Cost reduction
How different are the needs of investors from those of
wider stakeholders?
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10. What can accountants do?
The implications for PAIBs & their organizations
• Engage investors to understand their ESG needs
– Disclosure policies can affect the types of investors you attract
• Incorporate ESG factors into governance and oversight
– Leadership and governance structures reinforce importance of ESG
• Link non-financial and financial performance
– Link ESG factors to financial drivers of performance
– Integrated reporting can help drive change
• Relevance depends on materiality, timeliness and
comparability
• Break down internal silos
– Functions, processes, systems and data need to be more connected
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11. Where to go for more information?
Practical guidance is available in the report
Including:
• Sustainability reporting: Global Reporting Initiative
www.globalreporting.org
• Integrated reporting: International Integrated Reporting
Council www.theiirc.org
• CDP Project/Climate Disclosure Standards Board: Climate
Change Reporting Framework www.cdsb.net
• A framework for valuing non-financial performance
http://investorvalue.org/framework.htm
• India: National Voluntary Guidelines on Social,
Environmental, Economic Responsibilities of Business
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12. Where to go for more information?
Report and summary
• Report available at www.ifac.org/paib
• Executive summary also available and included in your
conference papers
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