PwC recently announced survey findings indicating increasing investor interest in sustainability. We joined Kayla Gillan – Leader, PwC Investor Resource Institute, and Don Reed – Managing Director, Sustainable Business Solutions Practice, to learn more about what PwC is doing in the sustainability space, and how sustainability matters for operating businesses and investors.
24 June 2014
Sustainability: Please tell us about PwC’s business model for sustainability.
Don: There are two main components to our model. First off, we have heard increasingly from investors that they need to know what “sustainability” means for their strategy. We are helping these investors to understand this broad range of emerging risk and opportunity. Second, we have heard that there is a high level of dissatisfaction with the quality and consistency of data coming from companies related to their ESG or sustainability-related performance. We are working with individual company clients and standard setting boards to help develop this reporting landscape so that it works well for everyone.
Don: Investors are trying to apply sustainability to their strategies. Businesses are trying to articulate what they are doing in the sustainability space, and why that should matter to investors. We are trying to help both sides of this discussion understand each other.
Sustainability: Does PwC see this area as strategic for its business?
Don: Yes. Urbanization, climate change, resource scarcity, shifting global power dynamics, and sustainability are some of the mega-trends we are working on with both investors and operating businesses. Our investment in sustainability services ramped up significantly roughly five years ago, and has continued in the form of new hiring and acquisitions, with several hundred dedicated employees globally. This is direct response to client demand for help seizing the investment, compliance and competitive opportunities in this space.
Kayla: I think that people join PwC because of the innovation and cutting edge nature of the firm, and this is one example of that. Sustainability has been identified by investors as a key area to understand and manage. Sustainability is a megatrend, and PwC is staffing accordingly.
Sustainability: Tell me more about the customers for Sustainability at PwC
Don: Sustainability is a relevant concept across a huge range of clients we serve. As mentioned, our business focus is particularly strong on operating and financial services companies. Increasingly government, federal state and local, are also growing in this space, but much of our emphasis as a firm is on operating companies, banking and private equity. The real power here is in cross pollination, where can take what we learn on what investors are looking for and help inform operating businesses and vice-versa. We are helping both sides to improve communication in an area of increasing opportunity.
Sustainability: Tell us about the survey findings.
Kayla: The headline finding is that 80% of investing institutions are most likely to consider sustainability-related issues such as climate change, resource scarcity and social responsibility in their investment strategies, and an important point is that we didn’t use the word “sustainability” in the survey. We asked about climate change, water scarcity, corporate social responsibility and corporate governance issues specifically. We were pretty specific about what we asked about so as not to bias the survey towards those already interested in “sustainability”.
Sustainability: What does the survey tell us about specific questions or issues which are increasingly being asked by investors?
Kayla: I think, for example, climate change regulatory risk (e.g. new CO2 emissions regulation), climate change market risk (e.g. risk of disruption from lower green-house gas emitting technology), and climate change physical risk (e.g. risk from heat waves, water shortages etc..), and resource scarcity were found to be very material for investors and how they understand the operating performance of businesses. While it might not seem like news that 80% of investors we surveyed think these issues are material, I can say that prior to coming to this role a few years ago when I was at the SEC, we put out an interpretive release reminding folks that climate change was a risk that needed to be evaluated for material. You should have seen the uproar! We have come a long ways in a fairly short time.
Sustainability: So “sustainability” is becoming a mainstream concept for investors?
Kayla: When considered in terms of material risks, yes. Some investors will roll their eyes if you talk generally about “sustainability”. But when you talk about how companies are dealing with specific real-time issues – like resource scarcity, water quality, and supply chain interruptions because of extreme weather – then investors very much care. In this same vein, SASB (the Sustainability Accounting Standards Board) is all about developing concrete data points which are highly relevant to business operations and potentially part of a new mandatory reporting mechanism.
Sustainability: What is your sense of the time horizon for mandatory reporting on sustainability?
Kayla: I think we will see this first outside of the United States. In terms of main drivers, I see the market driving disclosure even more than regulators.
Sustainability: Please expand on the market forces at work.
Don: More companies simply have more value at stake on these issues. It’s not just a compliance issue but a business value and risk issue. Compliance is now often below the minimum standard for properly managing business risk. You see this already when you look at what businesses are saying about sustainability issues in their 10-K filings. Many companies discuss going beyond compliance to manage risks. This – in turn – drives investor desire for greater transparency and comparability, which creates an incentive for businesses to develop reporting standards. I think this dynamic may eventually drive mandatory reporting, although this will not occur first in the United States.
Kayla: I think it’s important to be pragmatic about what is on the SEC’s plate. They are still not done with Dodd-Frank rule making. Also, political differences around sustainability related regulatory actions increase the prospect for congressional hearings. Sustainability will continue to evolve and increase in its importance for investors and business, but this evolution will be as much driven by investors trying to understand risk as by regulators, at least in the United States.
Note: This interview conducted by Sustainability Managing Editor Tim Nixon