How Accounting Can Help Build a Sustainable Economy
... Environmental, social, and corporate governance (ESG) issues are often referred to by investors as “nonfinancial information.” As Robert G. Eccles, a professor of management practice at Harvard Business School points out, that’s not because these issues don’t have financial consequences. Rather, it’s because there are no standards for how to measure and report on ESG issues, unlike a company’s financials. Eccles, a mathematician by training and one of the foremost experts in corporate reporting, has for the past five years been working to create sustainability accounting standards for the investment community (he is also the chairman of ESG asset management firm Arabesque Partners). It’s been slow going. As world leaders gathered in Paris for the 2015 United Nations Climate Change Conference, I spoke with Eccles about the effort to provide nonfinancial information with the same level of accounting rigor as traditional reports—and what that would mean for the global effort to build a sustainable economy.
HBR: ESG investing of all flavors seems to be gathering momentum. Are you encouraged by this trend?
Eccles: Yes — but with a caveat. Long-term asset owners, such as pension funds, are increasingly putting pressure on their asset managers to look beyond the traditional financial information in developing their investment strategies. As a result, there is a lot of “greenwashing” by asset managers who are rushing to tweak their models to claim they are doing this — too often funds retrofit existing products and call it a “green investment.” I met with some senior folk at a major bank and they were laughing cynically about this asset manager who came into see them and said “We pulled Exxon from our portfolio and replaced it with Google and now we are a green fund.” All the flim flam and hocus pocus will shake out eventually once a company’s ESG reporting becomes standardized...
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