Leading Sustainable Organizations
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Companies and investors are being asked to support the 17 Sustainable Development Goals (SDGs) for 2030 — what some have described as “the closest thing the Earth has to a strategy”— since the public sector alone does not have the resources to do so. At the same time, companies must create value for their shareholders to create the returns they need for their ultimate beneficiaries. In essence, both are being asked to do good and do well at the same time. This raises a number of obvious challenges:
- Unlike with financial performance, there are no universal standards for how to measure a company’s environmental, social, and governance (ESG) performance.
- As a result, there is a large ecosystem of nongovernmental organizations (NGOs) and data vendors attempting to solve this problem—so many that both companies and investors struggle with which ones to use.
- Companies remain skeptical about whether their shareholders will reward them for ESG performance over the long term.
- The 17 SDGs, which have 169 targets, are about improving the planet, whereas ESG metrics are about a company’s performance. What is missing is a way to show how these are related to each other.
- Investors remain frustrated with companies that do a poor job of explaining how their ESG performance contributes to financial performance.
- Without strong support from the investment community, the corporate community cannot make the contributions necessary to achieve the 2030 goals.
These challenges are surprisingly manageable. The key lies in leveraging the work of the Sustainability Accounting Standards Board (SASB) in the context of the SDGs.
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The concept of “materiality” is central to linking ESG outcomes to their impact on SDGs. In financial reporting, material issues are those that are important to investors. Increasingly, these material issues include ESG issues. SASB has identified the material ESG issues in 10 sectors (subdivided into 79 industries) and, through its “Provisional Standards,” has recommended key performance indicators (KPIs) for reporting on them.
While SASB’s industry-level KPIs represent a company’s ESG outcomes, these outcomes also have an impact on organizations and people outside the company, which to varying extents contribute to SDGs. Thus, a relationship between ESG outcomes and SDG impacts exists via the concept of materiality.