Environmental Reports Mitigate Asset Management Risks, But Are Ignored by Bankers

More information is available showing vastly different perspectives on the use of corporate EHS/CSR reports.  But there are opportunities to close this gap.

On one hand, the Asset Management Working Group of the U.N. Environment Programme’s Finance Initiative (UNEP FI) reported that

(There is a) very real risk that (the advisor) will be sued for negligence on the grounds that they failed to discharge their professional duty of care to the client by failing to raise and take into account ESG [environmental, social and governance] considerations

UNEP FI is a partnership between the United Nations and more than 180 financial institutions with over $2 trillion under management.  According to a Reuters report out of London, Paul Watchman, one of the report’s authors said that “money managers have a legal responsibility to raise environmental, social and governance (ESG) issues when tendering investment and advising clients”.

Yet a study earlier this year of the UK banking sector concluded that financial analysts exhibited ” ‘cynicism to complete dismissal’ of all voluntary narrative reporting including social and environmental reports.”

One of the study’s authors, Richard Slack (a Reader in Accounting at the Newcastle Business School at Northumbria University) continued:

Social and environmental reporting was universally considered irrelevant and incapable of influencing a financial forecast… analysts are dismissive of anything other than financial metrics, and they deem large sections of voluntary narrative reporting as useless or worse. Analysts have been shown up to be narrow in their approach, often formulaic and rules-driven, and highly unlikely to be a source of change in respect of social and environmental issues.

Can these opposing views be reconciled?

In our opinion – yes, but companies must truly embrace the idea that the financial industry is a key customer in the context of their EHS/CSR reports.  Doing so will require that EHS/CSR staff look beyond their typical boundaries and comfort zones.  This involves steps like:

–       Establishing working relationships with Investor Relations, Finance, Internal Audit, Accounting and Risk Management functions

–       Gaining detailed understanding the metrics, benchmarks and reporting used by each

–       Understanding what makes financial information credible across different users of the information

–       Developing EHS/CSR metrics that reflect and/or adapt traditional financial metrics used by other company functions that are meaningful to the company’s “financial customers”

Investing time in determining how EHS/CSR reports can provide usable/credible information for the financial community will benefit everyone involved in producing and using the reports.

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