Embedding Sustainability Performance and Long‐Term Strategy in the Earnings Call

• Date: 01 June 2020
• Author: Tensie Whelan,Brian Tomlinson,Kevin Eckerle
• DOI: http://doi.org/10.1111/jacf.12408
• Published date: 01 June 2020

Journal of Applied Corporate Finance

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JOURNAL OF APPLIED CORPORATE FINANCE Sustainable Financial Management VOLUME 32 | NUMBER 2 | SPRING 2020

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IN THIS ISSUE:

Sustainable

Financial

Management

VOLUME 32

NUMBER 2

SPRING 2020

APPLIED

CORPORATE FINANCE

Journal of

10 China’s Economy Is Not Overtaking America’s

Michael Beckley, Tufts University and American Enterprise Institute

24 An Honorable Harvest: Universal Owners Must Take Responsibility

for eir Portfolios

Frederick Alexander, The Shareholder Commons

31 Global Public-Private Investment Partnerships: A Financing Innovation

with Positive Social Impact

Patrick Bolton, Columbia University, Xavier Musca, Crédit Agricole Group, and

Frédéric Samama, Amundi Asset Management

42 Columbia Law School Roundtable on e Future of Capitalism

Panelists: Sir Paul Collier and Colin Mayer, University of Oxford; Alan Schwartz,

Guggenheim Partners; and Steve Pearlstein, George Mason University.

Moderated by Kristin Bresnahan, Millstein Center, Columbia Law School.

64 Sustainability at Walmart: Success over the Long Haul

Katherine Neebe, Walmart

72 How One Company Drives Ownership Behavior To Innovate and

Create Shareholder Value: e Case of Varian Medical Systems

J. Michael Bruff, Varian Medical Systems, and Marwaan Karame, Fortuna Advisors

78 Attracting Long-Term Shareholders

Sarah Keohane Williamson and Ariel Babcock, FCLTGlobal

85 Embedding Sustainability Performance and Long-Term Strategy

in the Earnings Call

Kevin Eckerle and Tensie Whelan, New York University Stern School of Business,

and Brian Tomlinson, Chief Executives for Corporate Purpose

100 Using the Return on Sustainability Investment (ROSI)

Framework to Value Accelerated Decarbonization

Kevin Eckerle and Tensie Whelan, New York University Stern School of Business, Bryan DeNeve

and Sameer Bhojani, Capital Power, and John Platko and Rebecca Wisniewski, ALO Advisors, LLC

108 “Non-Financial” Is a Misnomer, but Doesn’t Have to Be a Missed Opportunity

Gail Glazerman and Jeff Cohen, Sustainability Accounting Standards Board

117 A Preliminary Analysis of SASB Reporting: Disclosure Topics,

Financial Relevance, and the Financial Intensity of ESG Materiality

Cristiano Busco, University of Roehampton and LUISS University, Costanza Consolandi,

University of Siena, Robert G. Eccles, University of Oxford, and Elena Sofra, LUISS University

85

Journal of Applied Corporate Finance • Volume 32 Number 2 Spring 2020

e information shared in quarterly reporting moves markets.

Institutional investors put great value on the transparency and

outputs of frequent periodic reporting. And IR ocers consis-

tently identify the earnings call as the most important venue

in which to communicate their company’s story to the capi-

tal markets.¹ Within the C-suite, preparing for the earnings

call and its associated package of disclosures² requires signi-

cant commitment of time and resources.

Nevertheless, quarterly reporting is routinely identied as

a potential source or amplier of short-term market pressures.³

Management focus on hitting quarterly nancial targets can

cause overweighting by both the C-suite and equity markets

of in-year or in-quarter performance benchmarked to a narrow

1 Brown, Lawrence D. and Call, Andrew C. and Clement, Michael B. and Sharp,

Nathan Y., “Managing the Narrative: Investor Relations Ofcers and Corporate Disclo-

sure” (February 2018). Fox School of Business Research Paper No. 17-015; Mays Busi-

ness School Research Paper No. 2934937. Available at SSRN: https://ssrn.com/ab-

stract=2934937 or http://dx.doi.org/10.2139/ssrn.2934937.

2 The earnings call is part of a package of disclosures (some of which are manda-

tory) that are delivered in connection with continuous quarterly reporting, including the

release, the related deck, the call itself, and the 10-Q—whose elements are prescribed.

3 “Quarterly earnings hysteria is bad for business” (Business Insider): https://www.

businessinsider.com/blackrock-ceo-larry-nk-letter-to-sp-500-ceos-2016-6.

set of nancial indicators. And this practice ends up subor-

dinating strategic issues with a longer-term time horizon, as

well as those that are harder to quantify in the near term,

resulting in insucient analysis and reporting of these issues

in the earnings call.

As one cited example, management teams are widely

understood to cut research and development (or other

discretionary) spending to meet earnings targets. Chief

nancial ocers have admitted to such behavior in much

cited surveys; and empirical studies have conrmed the

tendency of companies that regularly provide, and then

manage to just meet or beat, their qua rterly EPS targets to

display pronounced “discontinuities” in t heir R&D spend-

ing—a patter n that suggests that corporate R&D spend ing

is viewed as a discretionary and expendable “plug,” readily

sacriced to avoid a short-term earnings m iss. What’s more,

4 The most widely cited survey is summarized in Graham, John R., Campbell R.

Harvey, and Shiva Rajgopal, “The Economic Implications of Corporate Financial Report-

ing,” Journal of Accounting and Economics, 2005, v 40(1-3,Dec), 3-73: https://www.

nber.org/papers/w10550.

5 Almeida, Heitor, “Is It Time to Get Rid of Earnings-per-Share (EPS)?” (October 27,

n this paper, we begin by discussing concerns that existing reporting practices,

including those used in quarterly earnings calls, underweight ESG disclosures and

amplify short-term pressures on corporate management. Then we survey the broad market

trends that are encouraging greater focus on ESG and long-term strategy disclosures. Building

on extensive interactions with market participants, including sell-side analysts, we set out

practical recommendations and a framework for how issuers can embed disclosures on ESG

and long-term strategy, and the expected effects of ESG execution on earnings and long-run

value, into the content of the quarterly earnings call. These recommendations can be readily

operationalized to meet the increased demand for ESG and long-term strategy information

across the reporting ecosystem.

by Kevin Eckerle and Tensie Whelan, New York University Stern School of Business, and

Brian Tomlinson, Chief Executives for Corporate Purpose

Embedding Sustainability Performance and

Long-Term Strategy in the Earnings Call

I