ESG Point/Counterpoint: Should environmental, social and governance reporting be standardized and mandated?

• Position: THE CHARACTER OF THE CORPORATION

FOR: Time to bring corporate reporting into the 21st century.

By Anne Simpson, Director, Board Governance & Strategy, CalPERS; Directors & Boards Editorial Advisory Board Member

What drives company value? What are the risks? Balancing these twin issues is at the heart of corporate reporting. As investors increasingly call on companies to provide more insight on environmental, social and governance drivers of risk and return, corporate boards are responding with a wide array of supplemental reporting.

The reason is clear. Investors are looking beyond the mandatory financial reporting to gain understanding of what drives value creation and where risk may reside. The company balance sheet is one example. In the S&P500, 85% is now made up of intangibles and just 15% comprises the fixed assets which traditional financial reporting covers. The bulk of company value simply is not captured by the financials.

This reflects a profound shift in the U.S. economy. Intangibles such as human capital, reputation and intellectual property are the source of competitive advantage and also potential constraints on growth. Investors have been asking companies quietly to do more on their reporting around these factors which are so vital to long-term sustainability.

Asset owners, including large pension funds like CalPERS are moving to focus engagement and action, where needed, to ensure that companies report on sustainability risk and opportunity.

One example of how ESG is moving to the mainstream is the building of a powerful alliance of investors in the $32 trillion group Climate Action 100+, which CalPERS chairs and is also a founder. The group is engaging corporate boards with three goals: to ensure boards exercise governance oversight of climate change risks and opportunities; that companies with a systemically important impact on global warming set targets for bringing down greenhouse gas emissions in line with the Paris Agreement; and that companies disclose risks in line with the framework developed by the Taskforce on Climate Related Financial Disclosure. That framework was developed at the request of the global central banking body, the Financial Stability Board.

However, to the disappointment of many--including supporters of this work like CalPERS --the vital signs are missing in the reporting standards overseen by the financial bodies responsible. When CalPERS attempted to assess its "carbon footprint" in publicly listed companies worldwide, we found...