China Sustainability Tribune: You once said that the decisions made by large enterprises and investors can have a major impact on the realization of the Sustainable Development Goals (SDGs).

As an expert on integrated reporting and sustainable strategies, could you please share with us what kind of work are you currently working on to change the behaviours of large enterprises and investors, and to promote private sector’s contribution to realizing SDGs? What has been the biggest effect so far?

Prof. Eccles: One of the key things to change behavior is providing people information that will influence their decision-making process. In this particular case, businesses need to be able to measure and report on their environmental, social, and governance (ESG) performance. Investors can then factor this information into their investment decisions. When investors reward enterprises with good ESG performance, enterprises will have an incentive to improve it. The challenge for investors is the uneven reporting by enterprises — some do, some don’t, and finding this information isn’t easy with it often being buried in a sustainability report or is somewhere on the company’s website. Even when it is reported, it isn’t being done so to a set of standards that are properly audited.

Global Reporting Initiative (GRI) has been a leader in developing these standards for stakeholders. The Sustainability Accounting Standards Board (SASB) has done the same for investors, although it is at an earlier stage with its first set of standards published late last year. I was privileged to be the Founding Chairman of SASB and are proud of what we’ve done.

A set of standards based on an identification of the material ESG issues in 77 industries (organized into 11 sectors) has been developed. The key thing now is for enterprises to start using them and, eventually, for regulators to encourage them to do so. One suggestion for China is that the China Securities Regulatory Commission (CSRC) study the possible adaptation of SASB’s standards in China for all listed companies. All in all, the governments need to set standards and mandatory reporting requirements for ESG information just as they do for financial information based on accounting standards. Until that happens, ESG information will be a poor cousin to financial information.

China Sustainability Tribune: A common debate centering on ESG investing is that incorporating ESG factors into the investment decisions will affect performance. However, some studies show that enterprises with good ESG practices will have a lower cost of capital, lower volatility, and less bribery, corruption and fraud in the long run. Therefore, is the requirement of capital focusing on long-term benefit contrary to the property of capital aiming at seeking profit?

How will you help the enterprises and investors overcome the contradiction between long-term benefit and short-term benefit?  

Prof. Eccles: You raise two questions here, but they are closely related, that is, the relationship between ESG and financial performance and time frames.

First, the body of evidence that ESG helps, doesn’t hurt performance, is now pretty convincing. Professor George Serafeim of the Harvard Business School with various colleagues (including me) has produced the most important body of work here. What is clear is that if enterprises focus on the material ESG issues, i.e., the ones that affect financial performance (as shown by SASB) they will improve their financial performance. The key word here is material. If a company overinvests in every ESG issue of interest to any stakeholder, this will hurt its financial performance. This is no different than overinvesting in advertising, marketing, manufacturing capacity, and R&D. But the proper level of investment in the material ESG issues, which vary by industry, will contribute to financial performance. All these studies and having greater clarity about what ESG integration really means should help both enterprises and investors overcome this false perception.

Second, these studies have also shown that it takes years, not months, before ESG performance contributes to financial performance. Thus, both enterprises and investors looking for the benefits from ESG must have a long-term view.

ESG and long-termism are two sides of the same coin. Solving the problem of excessive short-termism in the capital markets, which is especially pronounced in the U.S. and China (probably even more so) isn’t something ESG alone can solve. Asset owners need to give asset managers mandates that encourage ESG integration and that are sufficiently long term. Governments need to consider tax incentives that encourage long-termism. Boards of directors need to support CEOs who have a long-term view. So must fiduciaries of fund managers. This is a really complicated problem to solve.