Corporations in North America are starting to realize the importance of environmental, social, and governance (ESG) metrics and performance. While ESG has been at the forefront of the minds of European investors, the trend is beginning to shift towards the other side of the Atlantic. A recent webinar hosted by the CPA-Ivey Centre for Accounting and the Public Interest explored the rising tide of ESG for corporate decision-makers. Ivey’s Nadine de Gannes, HBA ’09, Assistant Professor of Managerial Accounting and Control, and Sustainability, guided an informed discussion between panellists Judy Cotte, CEO of ESG Global Advisors, and Christopher Chen, Managing Director of Compensation Governance Partners, on ESG trends, tying ESG to compensation and the evolving role of the accounting profession.
Shift towards ESG
Winding the clock back only five years, corporations and wealth managers were debating if ESG metrics were a fad, or merely a passing fancy. But now, according to Cotte, it’s hard to overstate the extent to which both institutional and individual investors focus on this topic.
“I think, given how ESG factors relate to really broad secular changes like the changing nature of corporate value, changing societal expectations for corporations, and the challenges of climate change, the focus on ESG is really here to stay and growing,” she said.
Cotte said she believes large pension funds, sovereign wealth funds, foundations, endowments, and large asset managers are all shifting their sights onto ESG, despite slow initial adoption.
“While many companies have underestimated the pace of change in this area, I think they are starting to realize it as North American shareholders really start to step up their efforts,” she said.
Linking ESG to compensation
Even though there is a growing shareholder demand to hold companies to account for ESG performance, it requires a buy-in and commitment from C-Suite leadership. An important part of this evolving conversation will be the establishment of measurable targets that can be tied to executive compensation. According to Chen, what gets measured tends to get done, and subsequently paid.
“What I think you will see is more of a carving out of an increasingly more significant portion of pay packages for executives focused on ESG,” he said.
Role of accountancy
Currently, there is no consistent application of ESG principles, and companies are approaching their application with varying levels of sophistication. While accountants already play an important role in risk management, governance, and oversight, there will be leadership opportunities for the accounting profession as ESG standards and measurement of intangible assets evolve.
“This creates really interesting opportunities for accountants, both at the company side to tell their value creation story and also to help investors build valuation models to predict future value in a non-traditional way,” said Cotte.
Continuing research
As the integration of ESG metrics into incentives gains momentum, further research is needed on both the creation and impact of such metrics on a spectrum ranging from environmental impact to employee well-being and healthy corporate culture. De Gannes, along with her co-author Ainsley Gonder, sets the stage in a CPA Ontario-sponsored whitepaper titled “Integrating ESG into Incentives", which states: “Integrating ESG metrics into incentive systems directs executive attention, and ultimately the time and resources needed to operationalize ESG goals. This is an inflection point; the ways in which we decide to shape and integrate ESG define a system of valuation directed by corporate interests and responsibilities. Decisions we make today frame the picture of our future, begging the question: what do we want it to look like?”
