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Deloitte, Ceres Reports Link Long-Term Business Value to Corporate Disclosures
June 22, 2012
An organization’s understanding of how its stakeholders perceive and value environmental, social and governance (ESG) issues is central to developing a strategy that may lead to financial benefits, according to a new report from Deloitte.
The report, titled “Drivers of Long-Term Business Value: Stakeholders, Stats and Strategy,” discusses the impact employees, suppliers, shareholders, community members and other people or groups involved with an organization can have on business performance.
Today, there is a broader range of stakeholders than there was in the past. This is contributing to raising the bar on business performance as evidenced by regulatory pressure, consumer boycotts and decreasing market valuations for organizations reporting labor, health or environmental issues.
“It is essential for businesses to understand what their stakeholders consider to be of value in the business and how those stakeholders perceive the business’s actions,” says Eric Hespenheide, a partner at Deloitte & Touche LLP who serves as audit and enterprise risk global leader for sustainability and climate change services. “By determining a value for ESG issues, a company can better articulate the interdependencies of various stakeholders and their role in how the company generates long-term business value.”
This process involves identifying key stakeholders who consider an organization’s industry, its business model, its value proposition, its product portfolio and its competition. In addition to recognizing what issues stakeholders care about, it is also necessary to determine the expected level of ESG performance and how it parallels societal norms, the performance of industry peers, an ideal or aspirational level or an unacceptable state. To do this, companies should regularly consult with key interest groups — both internal and external — to fully understand how, when, why and by how much an ESG issue might impact the business.
In addition to stakeholder engagement, issuing a steady stream of positive and credible ESG performance reports can create a halo effect and may help insulate a company from criticism and protect its valuations.
A Review of Corporate Water Risk Disclosure in SEC Filings
A separate report issued this week by Ceres, shows that overall corporate disclosures of water-related risks have increased since 2009, but most reporting remains weak and inconsistent.
Since 2010, the Securities and Exchange Commission has required companies to disclose financially material risks from climate change to their investors. These risks include “significant physical effects of climate change, such as effects on the severity of weather (for example, floods or hurricanes), sea levels, the arability of farmland, and water availability and quality.”
In light of this guidance, the report – titled Clearing the Waters: A Review of Corporate Water Risk Disclosure in SEC Filings – analyzes changes in water risk disclosure by more than 80 companies between 2009 and 2011, finding that though reporting has risen, it is lacking especially in regard to data on financial impacts, quantitative water metrics and potential supply chain risks. The report covers water use in eight water intensive sectors: beverage, chemicals, electric power, food, homebuilding, mining, oil & gas and semiconductors.
Brooke Barton, senior manager for Ceres’ water program, presented the results of the report yesterday in the “Emerging Best Practice in Corporate Water Disclosure” session at the Rio+20 Corporate Sustainability Forum in Brazil, where water issues are a critical focus of international discussions.
As a result of the increasing impacts of climate change and economic and population growth, many regions of the world are on course to suffer major fresh water deficits in the next 20 years. Recent studies suggest the world may face a 40 percent global water shortfall by 2030. Drought and flood cycles have also led to billions of dollars in losses for corporations worldwide. Drought in China in the spring of 2012 left 3.5 million people with limited or no access to drinking water and cost the affected provinces an estimated $2.3 billion. Flooding in Thailand in November 2011 cost the semiconductor industry an estimated $15-20 billion.
Key findings of the report include:
- Significantly more companies are disclosing exposure to water risk, with a focus on physical risk: 87 percent of companies now report physical risk exposure versus 76 percent in 2009, with the biggest increases coming from the oil and gas sector.
- More companies are making the connection to climate change: In 2009, only eight of the 82 companies assessed (10 percent) disclosed that climate change posed growing physical risks in the form of water scarcity, flooding or quality issues to their operations and supply chains. In 2011, that number jumped to 22 (27 percent).
- There is a continued lack of quantitative data and performance targets: Despite improvements in overall disclosure, data on company water use and the financial impacts of water-related risks remain infrequent in financial filings.
“Most companies recognize the need to disclose water risk, but so far the information they are providing lacks specificity and the hard numbers their shareholders require to invest responsibly,” said Mindy S. Lubber, president of Ceres. “Water issues are one of the most immediate and deeply felt impacts of climate change across the world, and leaders at Rio+20 are well aware of that reality. Whether through water scarcity, extreme weather or loss of property to floods, corporations and their suppliers across the globe are exposed to water risks and can do more to avoid them. Disclosure is the first step, and it must be followed quickly by action.”
In light of these risks, the report recommends that companies:
- Undertake ongoing and more robust analysis of potential water-related risks
- Augment qualitative disclosure with more quantitative data in SEC filings
- Ensure compliance with the SEC’s guidance on climate change disclosure
- Provide investors with information on how they are mitigating water risks
Companies seeking to develop more comprehensive management responses to water risk can read the 2011 Ceres report, The Ceres Aqua Gauge: A Framework for 21st Century Water Risk Management.
Earlier this week, a group of 45 chief executive officers, representing a diverse range of global companies and regions, called on governments attending the Rio+20 Earth Summit to make global water security a top priority.
Bart King is a PR/marketing communications consultant and principal at Cleantech Communications.