Non-financial information must become part of corporate governance
The world economy is at a crossroads. With climate risk materializing, populism gaining traction in many jurisdictions and youth marching for climate action, the involvement of all stakeholders is crucial to shift our economies towards a more sustainable path.
We might well be the last generation which has the opportunity to act before the consequences of human activity on our planet become irreversible.
And law-makers do not have the power to change the course of events alone: the role of civil society and corporates will be key to make this shift happen.
The matter is urgent. The economic implication of global warming become obvious.
The latest IPCC (The Intergovernmental Panel on Climate Change) report estimates the rise of sea level in the southern hemisphere alone will create 280 million refugees.
Severe droughts can trigger a sovereign debt crisis in some fragile countries like Zimbabwe. Extreme weather events like floods are more likely to happen, making businesses endure severe losses. Climate is becoming a matter of financial stability.
Awareness about those issues in the corporate world has become more acute in the past few years.
The PACTE law adopted last April in France redefined the role of companies for society, encompassing social and environmental issues and allowing them to adopt a specific purpose broader than profit.
This is the beginning of a global trend: a few weeks ago, the Business Roundtable, which gathers CEOs of some of the biggest US companies, acknowledged that corporates should put social responsibility above profit in a first- of-its-kind common statement.
Sustainable growth has also been at the heart of the G7 summit’s discussions in Biarritz at the end of August. The « Business for inclusive Growth » initiative spearheaded by Emmanuel Faber – CEO of Danone – in partnership with the OECD has already gathered 34 companies with 3.5 million employees worldwide.
The financial system needs to sustain this global shift and ESG (Environmental, Social and Governance) factors into account in investment decisions.
Yet non-financial information has long been seen as an unnecessary burden. We need a substantial improvement in the quality and relevance of non-financial data for at least two reasons.
First, ESG is becoming increasingly material and could become as relevant as financial data in the short term.
Governance and social issues have long been considered as drivers of growth and stability for companies, but their importance is increasing due to reputational risks that are easily reflected on financial markets.
Environmental risk was long overlooked, partly because of the so-called “Tragedy of the horizon” as defined by the current governor of the Bank of England, Mark Carney.
Yet climate change and the increase in the frequency of extreme weather events make climate physical risk a reality for companies, with already important implications today.
Second, pressure from investors, share-holders and asset owners pushing for more relevant disclosure has been mounting over the past few years.
Structures such as the UN-backed Principles for Responsible Investments or the One Planet Sovereign Wealth Funds Coalition and One Planet Asset Managers Working Group are emerging, gathering investors of all sizes and types. Those investors want to efficiently integrate ESG factors in their investment strategies. This can only be achieved through relevant and comparable non-financial disclosure by corporates.
Non-financial data lacks coherence and relevance to final users’ needs. There is no harmonised set of relevant ESG indicators at the European level, leaving companies to write hundreds of pages of reports that are difficult to use for investors.
A lot of ESG data are provided by non-financial reporting agencies and data providers. But the lack of standardized metrics between companies makes it nearly impossible to compare indicators such as greenhouse gas emissions – as the scope of emissions is not precisely defined or even the headcount within companies.
To be effective, ESG strategies must be closely integrated into corporate governance patterns. Non-financial reporting should be incorporated in management reports be formally discussed regularly by relevant gov- ernance bodies.
Initiatives of all kinds have been flourishing over the last few years, but I firmly believe the time has come for further standardization and clarity in order to mainstream the use of non- financial information in corporate governance and as a result in financial decision making.
France will push for evolutions in this sense at the European level and support the creation of statutory ESG disclosure standards for companies, following the conclusions of a thorough report released in July 2019 by Patrick de Cambourg, President of the French Accounting Standards Authority. By defining which ESG factors are relevant and by fostering efficient disclosure of those factors, we can shift the economy towards a more sustainable path.
Europe should be at the forefront of this ambition and create a new form of corporate governance that is more responsible and in line with our long term commitments, such as the objectives of the Paris Agreement and the UN Sustainable Development Goals.
It will pave the way for the capitalism of the 21st century a capitalism based on the common values of our continent. We owe it to future generations urging us to achieve this urgent transition.