CPAs and the New Social Contract: The Rise of the Warrior Accountant

Asset owners such as pension funds, insurance companies, sovereign wealth funds and foundations are pushing asset managers to take ESG factors into account when implementing their investment mandates. Retail investors are buying more ESG products: the overall value of global assets under management in ESG-related funds increased from US$22.9 trillion in 2016 to US$40 trillion in 2020. In Canada, professionally managed assets using some form of responsible investment strategy have reached C$2.1 trillion, up 42% over two years.

Larry Fink, CEO of BlackRock, the world’s largest asset manager, pushed ESG investing into the headlines when he wrote to clients in January 2020 that “sustainability should be our new standard for investing.” BlackRock is asking investees to publish disclosures aligned with SASB and TCFD.

Impact and responsible investors go a step further and want to see funds and companies translate dollars into environmental and social improvements such as reducing poverty and empowering disadvantaged groups (Marc Foran interview).

Pension funds are a key driver of ESG disclosure. The Canada Pension Plan is the largest investor in Canada and while its investment board is not required to by law, it actively considers ESG factors and works with investees to improve ESG management. The Ontario Teachers’ Pension Plan asks companies they invest in from around the world to report according to the SASB framework.

Many companies report increased shareholder engagement around ESG with investors using voting rights to push management on their ESG performance. Shareholder proxy companies such as Institutional Shareholder Services and Glass Lewis have incorporated ESG issues into their Canadian proxy voting guidelines (Glass Lewis specifically incorporates the SASB framework). For many listed companies, the fear of not having answers for shareholders can be a powerful motivator to get their ESG reporting ducks in a row. The 2020 AGM season in the United States saw several companies face shareholder resolutions related to human capital, covering issues such as human rights in the supply chain and health and safety. Resolutions at the AGMs of Genuine Parts and O’Reilly, which called for the disclosure of employees’ racial and ethnic breakdown, passed against management recommendations. Companies may continue to face calls to share the pain of the covid-19 crisis by limiting share buy-backs, cutting dividends and limiting executive bonuses.

More than 100 organizations, ranging from Moody’s, Bloomberg and Dow Jones to MSCI and Sustainalytics, produce ratings and rankings of “top ESG performers” and “most sustainable” companies. To get in investors’ good books, companies seek to improve their ratings. Todd Coakwell CPA, CMA, Senior Director of Sustainability and ESG for Saskatoon based fertilizer company Nutrien, says, “If corporations don’t disclose ESG performance and work to get their ratings up among the indices, they can expect shareholder activism coming down the line.” Stock exchanges are increasingly looking to facilitate ESG performance and in 2019 the TSX joined the UN Sustainable Stock Exchanges Initiative.

John McKenzie CPA, CA, CEO of TMX Group, which runs the Toronto Stock Exchange, says TMX has seen firsthand skyrocketing demand for ESG disclosures locally. “As a reporting entity ourselves, we have gone from a handful of investors asking about our ESG report in 2019, to a year later when I get asked in almost every meeting.”

Governments such as those of the United Kingdom, the EU, the Netherlands, Japan, China, Australia, India, Taiwan, Brazil and South Africa are increasingly turning voluntary ESG guidelines into mandatory reporting requirements. The push for mandatory reporting is expected to continue and Ontario will likely not be immune. In recent years, the OSC has asked issuers to address inconsistencies between their annual and sustainability reports. The US SEC added a requirement for companies to disclose material human capital resources in August 2020. Even without mandatory rules, companies trading in European markets that have more detailed ESG disclosure requirements may be forced to comply.

Some government programs push ESG reporting by stealth. “Green strings” are attached to federal infrastructure funding in Canada, requiring companies to report on the number of women and First Nations people employed on projects. The Large Employer Emergency Financing Facility, the federal government’s covid-19 relief package for business, requires recipients to issue climate-related disclosures consistent with the TCFD. As well as attaching green strings to physical developments like the Ontario Greenbelt Plan, the Ontario government adds “social strings” to infrastructure projects, requiring “community-benefit agreements” that build jobs, education and other social goods for local communities into development plans.

Community groups, activists, customers and the media are pressuring large companies to improve their ESG disclosures too. For decades, First Nations communities have engaged with companies on resource developments in Ontario, such as the Ring of Fire mineral belt, to ensure communities benefit from extractive developments on their land. Employees and whistleblowers are exposing unfair or discriminatory work practices, often on social media—the #MeToo movement being a prominent example. “Companies need to be ready for this type of scrutiny and dialogue by having identified, collected and examined data on their ESG risks. And, by being transparent about their results and the progress they’re making,” says Marc Foran of Rally Assets.

Bell (BCE Inc.) publishes a stand-alone “corporate responsibility” report prepared in accordance with the GRI, SASB and the UN SDGs. In its 2019 report, Bell provided significant disclosures about mental health in the workplace and community, including both qualitative discussion and quantitative metrics on employee mental health resources, training and initiatives. The report also included metrics on the societal impact of Bell’s “Let’s Talk” campaign, which focuses on improving community mental health.