March 22, 2017

Elisse Walter’s Keynote at CPA Canada Event



Elisse B. Walter, SASB Board Member and Former Chair of the SEC

CPA Canada Event, March 30, 2017


Good evening and thank you, Joy Thomas, for that kind introduction. It is an honour to be here with all of you in Toronto, and particularly an honour to have been invited by CPA Canada, an organisation that has demonstrated an unwavering commitment to the public interest in its efforts to facilitate economic and social development. As the daughter of a CPA, I always feel right at home when I am surrounded by accountants, so thank you for making me feel welcome.

We are here today to have a conversation about the evolving expectations for board and management oversight of sustainability issues. One shorthand for this topic is ESG, which stands for “environmental, social, and governance.”

Personally, I believe that that catch phrase doesn’t really capture the essence of the subject. What we’re talking about is information that is critical to a company’s success or failure but isn’t reflected in its financial statements. We read about these issues in front-page news every day—when oil prices plunge five percent in a single day; when motorists and passengers suffer injuries (or worse) while waiting for their defective airbags to be replaced; when food safety issues at a popular restaurant chain lead to hundreds of customers getting sick and dozens being hospitalized; and when a large commercial bank is fined for deceptive sales practices affecting millions of customers.

Today, I will discuss two reasons driving companies to pay attention to sustainability factors. One takes a macroeconomic perspective, and the other takes a microeconomic perspective, but they both point to a similar path forward.

From the 30,000-foot macroeconomic perspective, sustainability is about trust, which, in many ways, is the essence of corporate governance. In fulfilling their core functions, boards of directors aim to establish confidence and credibility among a variety of stakeholders—first and foremost the shareholders for whom they serve as fiduciary stewards, but also others, from employees to the communities in which they operate.

Meanwhile, from the narrower microeconomic perspective, sustainability is about risk and, significantly, its flip side—opportunity. By more effectively measuring, managing, and communicating about their performance on key sustainability issues, companies can not only avoid problems, but also open doors to new markets, new capital, and new pathways to competitive advantage.

So, let’s start with the big picture.

When you deal with financial markets—as many of us do—uncertainty comes with the territory. So much of our economic future depends on things we do not, or cannot, know. None of us would claim we have a great deal of certainty about where things are headed in today’s global marketplace, even in the short term. In fact, considering the sociopolitical sea change that we are seeing in many parts of the world, we may have less certainty today than we have had in quite some time.

So-called populist movements in the U.S., the UK, France, and elsewhere have reminded us of the old saying, “Everything you know is wrong.” For anyone willing to listen, this evolving—and, some might say, tumultuous—political landscape has sounded an alarm. Public trust in entrenched leaders and institutions has eroded, and the consequences can be highly unpredictable. Although much of the anti-establishment sentiment thus far has been aimed primarily at governments and political figures, business leaders who ignore it may do so at their own peril.

After all, in business, trust may be our most valuable asset. It underlies all our relationships—with investors, customers, suppliers, employees, regulators, trade partners, and so on. Even so, we have sometimes taken it for granted, and mismanagement has chipped away at its foundation. A fundamental premise underpinning the provision of a “license to operate” is that business exists to create value. However, in recent years, oil spills, bailouts, emissions scandals, data breaches, and climate change issues—to name just a few of the culprits—have undermined public faith in the ability of corporations to create value without undue cost. In fact, in a recent poll, fewer than one in five Americans reported high levels of confidence in big business.[1] Meanwhile, in Canada, trust in institutions has fallen to its lowest level in 17 years, including a drop of six percentage points for business institutions.[2] Through our own actions—as managers, executives, directors, and advisors—we have contributed to the erosion of public trust, and we must also be the ones to rebuild it.

As the media unleashes its army of fact-checkers to review and verify politicians’ statements, I would like to point out that this same basic function has been built into the business infrastructure for generations. For roughly a century, in both the U.S. and Canada, mandatory financial reporting and increasingly rigorous auditing practices have worked toward providing investors and the public with reliable, trustworthy information on corporate performance. This noble goal—to provide a true and fair view of a company’s financial condition—occupies many of you every day.

Financial information, of course, remains immensely valuable. However, it is also true that it increasingly tells an incomplete story. Naturally, the world of business has changed since disclosure requirements were established in the early 20th century. Indeed, seismic shifts have occurred even since the 1970s, when much-needed standardisation introduced new levels of comparability and decision-usefulness to financial reporting in both the U.S. and Canada. If conventional financial metrics no longer provide a full picture, then disclosure must continue to evolve along with the world around it. After all, transparency engenders trust, but only insofar as it extends to the most important considerations.

In today’s knowledge-driven economy, market value is a multiple of book value because a company’s ability to succeed relies increasingly on intangible assets—things like patents, processes, brand value, intellectual capital, and customer or supplier relationships. Among the S&P 500, for example, intangibles now account for more than 80 percent of market capitalization.[3] However, these crucial assets are not sufficiently captured by traditional accounting methods and, in the absence of suitable metrics to aid efficient pricing, their value is especially vulnerable to impairment from mismanagement. If companies’ financial statements and financial realities diverge, they expose themselves to increasing scrutiny from a skeptical public, now primed to conclude that self-serving managers focused on short-term gains are quote-unquote “cooking the books.”

Against this backdrop, the U.S. Securities and Exchange Commission—the SEC, where I spent more than 20 years as a staffer, Commissioner and Chairman—has prioritised efforts to improve disclosure effectiveness. In a 2016 request for comments, the Commission sought public input on a variety of possible updates to Regulation S-K, including the disclosure of information on “sustainability matters.”[4] These include the environmental and social impacts of business, as well as their governance—which are the same aspects of corporate behaviour that have increasingly tended to either build, or destroy, public trust and thereby influence a company’s social license to operate. The Commission received 276 non-form letters in response to this outreach, two-thirds of which addressed sustainability matters, 80 percent of those calling for improved disclosure of this type of information.[5]

This should not surprise us. Investors have made their position on sustainability very clear: When it is material to a company’s business, they believe it is important. (If that sounds like a tautology, I believe it is.) Today, approximately half of global institutional assets—about $60 trillion—are managed by signatories to the Principles for Responsible Investment (PRI), which promotes the incorporation of ESG factors into investment decisions. (And that figure is growing steadily every year, by the way.)[6] In the U.S. alone, sustainable, responsible, and impact investing assets have expanded to $8.72 trillion, up 33 percent from just two years ago, and now represent one out of every five dollars invested in the U.S.[7] Indeed surveys show that 73 percent of institutional investors take ESG issues into account in their investment analysis and decisions to help manage investment risks.[8] Increasingly, investors—and we are talking about mainstream investors here—are using this information to facilitate more effective risk management at a portfolio level, more accurate relative valuations at a fundamental level, and more useful benchmarking at an industry or index level.

For example, UBS Asset Management, which handles $670 billion in assets, uses sustainability information to augment more traditional, fundamental analysis—such as a discounted cash flow model—which allows it to identify equities that are both priced attractively today and poised to deliver returns over the long-term. Breckenridge Capital Advisors, managing $25 billion in assets, takes a similar approach, adding an extra layer of rigor to its fundamental analysis of fixed-income securities, where investments have longer time horizons and investors have less appetite for risk.[9] These are just a couple of examples from asset managers. We also see asset owners incorporating sustainability considerations into the evaluation and monitoring of their external managers, and private equity firms performing ESG analysis as part of their due diligence. The list goes on.

As many of you know, I serve on the Board of Directors at the Sustainability Accounting Standards Board (or “SASB”), a nonprofit organization that aims to facilitate more useful corporate disclosure with respect to the handful of sustainability factors that investors care about in each particular industry. I’ll talk more about the SASB in a moment, but right now I want to mention our work with investors. Last year, we formed an Investor Advisory Group, which is now working to articulate the importance of sustainability factors to their portfolio companies, and to stress the need for a market standard to improve the quality and comparability of this information.[10] Among the founding members of the group are two influential Canadian organizations, the Ontario Teachers’ Pension Plan and the British Columbia Investment Management Corporation (bcIMC). These investors, like many in Canada, are leaders in actively shaping the future of our financial markets. In fact, the Pension Investment Association of Canada, which represents more than $1.5 trillion in assets under management on behalf of millions of Canadians, was among those responding to the SEC’s call for feedback last year. In its letter, the association strongly advocated for “improvements in the reporting of material risk factors, including environmental, social and governance factors, so that [its members] can make better investment decisions.”[11]

As these and other institutional investors continue their rise to prominence and fiduciary capitalism grows in influence, there is an increasingly close relationship between public trust and investor confidence. Investor confidence in the quality of financial disclosures is what makes our markets work. Although this confidence is higher than it was five years ago, a growing number of investors are deeply dissatisfied with the quality of the sustainability information being provided to them. In a recent survey of U.S. institutional investors, for example, 71 percent expressed dissatisfaction with the quality of sustainability data.[12] In another survey of Canadian institutional investors, 70 percent said the ESG information companies provide is not good enough to help them assess materiality to the company’s business.[13]

Interestingly, many of the questions that arise today around the reliability of sustainability disclosures are the very same ones that made financial auditing an obligatory practice in the wake of the stock market crash of 1929 that helped usher in the Great Depression. They include questions about the completeness and accuracy of data and the existence and effectiveness of controls.

This comparison is instructive for at least a couple of key reasons. First, and most obviously, it recalls another period in history during which reform and regulation of financial markets served as an effective rallying cry. Equally important, at that time in history, independent audits became commonplace several years before they were mandated, because investors demanded it.

This bit of history—a voluntary reform of corporate disclosure practices in response to market forces—is almost perfectly analogous to what is happening now with the emergence and evolution of sustainability disclosure. The core principles that guided that reform—such as transparency, investor protection, and the use of materiality as a moderator—are still relevant today and continue to guide market regulation.

I have mentioned materiality several times, so let me explain why it is so important in this context. As everyone here likely knows, materiality is a legal concept in both the U.S. and Canada which recognises that some information is important to investors in making investment decisions, while other information is not. By viewing sustainability through the lens of materiality and focusing on the narrow subset of sustainability issues that really matter to a company’s business, improved disclosure on these topics no longer needs to be viewed as corporate largesse. Rather, it is, as it should be, a way to align the long-term interests of companies, their investors, and society at large—a win-win-win of value creation. Materiality defines the line where sustainability issues become business issues.

After all, asking banks or professional services firms to measure, manage, and report data on their greenhouse gas emissions will contribute little to the alleviation of a global temperature increase. Rather, companies in each industry should zero in on the handful of issues on which they are uniquely positioned to gain the most traction and make the biggest difference. For software companies, addressing climate change involves the energy-intensity of data centres. For automakers, it is more about use-phase emissions than about manufacturing. For agricultural firms, it means managing withdrawals in water-stressed regions. In other words, different sustainability issues affect different industries in unique ways. Materiality helps make that distinction, focusing firms on the issues where they can affect performance in a significant way.

This brings us to our second answer to the question of why sustainability matters to companies. It matters because, when it is deployed effectively, it can reduce risk or beckon opportunity. As 21st century markets are reshaped by resource constraints, climate change, population growth, technological innovation, and globalization, sustainability is poised to be the next competitive frontier. In fact, research has already shown that companies can achieve superior results—including return on sales, sales growth, return on assets, and return on equity, in addition to improved risk-adjusted shareholder returns—by focusing on the limited number of materiality-based, industry-specific sustainability topics identified by SASB.[14]

This recognition—that sustainability performance and financial performance are intertwined—is why hundreds of industry-leading companies, representing trillions of dollars in combined market capitalization, have signed the Business Backs Low Carbon statement urging global leaders to implement the Paris agreement on global climate action.[15] It is why food companies are pouring resources into the organic market, where growth is outpacing conventional foods by almost 400 percent.[16] And it is why, according to an Accenture survey, 80 percent of CEOs think their companies are approaching sustainability as a route to competitive advantage:[17] They are cutting costs, they are changing markets with innovative inputs, processes, and products, they are attracting top talent, and they are strengthening their brands.

There is another key development that demonstrates the link between sustainability performance and financial performance: Companies are addressing key sustainability issues alongside their financial statements in public filings. SASB recently published an analysis of SEC filings that shows nearly 70 percent of industry-leading companies are already addressing at least three-quarters of the sustainability topics included in their industry’s SASB standards, and more than a third are already providing disclosure on every SASB topic. Undeniably, companies have acknowledged the existence of, or the potential for, material impacts related to these issues.

But, there is a catch. The same analysis shows that less than 24 percent of reported sustainability topics are being disclosed using metrics, while more than half use boilerplate language, which is nearly useless to investors. In fact, even in those cases where metrics are being used, they are non-standardised, and therefore lack comparability across industry peers.

The question, then, is no longer whether companies should disclose information on material sustainability risks and opportunities; it is how they can improve the effectiveness of the disclosures they are already making. In short, it is not about more disclosure; it is about better disclosure.

Considering the strength of investor demand for useful sustainability information, and the lackluster quality of sustainability disclosure in SEC filings, I would say what we have here is a failure to communicate. To me, this is a missed opportunity. I believe issuers should not view sustainability disclosure as an obligation, but rather as an opportunity to tell their full value-creation story.

In the U.S. and Canada, companies’ public filings include a section called Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A. Its purpose is quite simple: to “give the investor an opportunity to look at the company through the eyes of management.”[18] This makes MD&A an incredibly powerful communication tool, one that is invaluable to an investor’s assessment of his or her investment. For 35-plus years, companies have been using this section of their statutory filings to explain financial statements from an insider’s perspective, to enhance financial disclosure and provide context for its analysis, and to describe not just the “what?” and “how much?” but the “why?” so that investors can better understand whether past performance is indicative of future results. This is the core of what mandatory disclosure is all about.

So why, then, do we have investors getting their sustainability information from ad hoc reports that are neither comparable nor, in many cases, focused on the issues that really matter to that company? Or from questionnaires that are costly and time-consuming to prepare and respond to? Or from direct engagement, where the potential for “selective disclosure” might raise red flags with regulators? These are not the hallmarks of an efficient market.

There is a solution, and it does not require legislation or regulatory action. It requires only that all of us—investors, corporations, auditors, securities lawyers, regulators, and so on—work together to establish and maintain a market standard for the disclosure of this important information within mandatory filings.

Guided by existing, time-tested disclosure requirements, in 2012 SASB began developing that solution—sustainability accounting standards on an industry-by-industry basis. In my view, this approach is quite elegant. It takes cues from existing securities law. Thus, it requires no new regulation. It leaves the materiality determination in the hands of those most knowledgeable about each company, its management.

By using the materiality threshold for disclosure as a lens through which to view sustainability, the standards identify the small subset of industry-specific sustainability factors that are reasonably likely to have a material impact on a company’s financial condition or operating performance. This ends up being, on average, just five topics per industry. (For the sake of comparison, a typical sustainability report includes dozens—or, in some cases, even hundreds—of issues.) It is then up to each company to decide whether those issues are, in fact, material to its business. Furthermore, SASB selects or develops metrics to capture performance on those topics. Moreover, and this part may be most interesting to the auditors in the audience, these performance metrics are supported by rigorous technical protocols that can serve as the basis for suitable criteria in an independent, third-party assurance engagement. Finally, whenever possible, they are metrics that are already used in the marketplace, thus decreasing the cost of implementation. Thus, the SASB standards provide investors with a set of sustainability information that is more focused, more comparable, and more reliable than what they get today—and that can be reported by the issuer without undue burden.

The disclosure requirements are clear. And, now, the standards are out there. SASB standards are available in provisional form for 79 industries. We are working to codify the standards by the beginning of next year.

Of course, SASB is not the only organisation working to improve sustainability disclosure. Just as SASB standards align with existing securities law, they also strive to harmonize with other disclosure frameworks. I won’t go into detail this evening. But, I would like to take a minute to highlight some of the key similarities and distinctions between the SASB standards and the work of the TCFD. The Financial Stability Board’s Task Force on Climate-Related Financial Disclosures was established in late 2015 to develop recommendations with respect to climate-related disclosures. Climate is the Task Force’s singular focus, while the SASB covers the full range of industry-specific sustainability issues.

(A quick aside: Climate change is perhaps the most prominent sustainability issue for good reason: It is one of the few that qualifies not only as a systematic risk—in other words, something that investors cannot diversify away from—but also as a systemic risk—that is, something that could be a source of contagion that extends across markets. This is because it not only impacts most of the economy—72 of 79 industries, according to SASB research[19]—but it also involves long-lived, capital-intensive assets like carbon reserves that are subject to sudden and volatile price changes.)

When you consider these unique characteristics of climate risk, you begin to understand why it is being addressed by multiple organisations at different levels. First, let’s briefly consider how the SASB and the TCFD differ in their approaches to climate risk. The SASB is focused on disclosure to investors, while the TCFD is directed toward a broader range of stakeholders. The TCFD has a global remit, while the SASB has chosen to focus on companies that are traded on U.S. exchanges. The TCFD recommendations reach beyond current disclosure requirements and emphasise forward-looking scenario analysis—for example describing the potential impact of a 2-degree scenario. I could continue but I’ll stop here for now.

Because, despite these differences, what is most significant is that the work of the SASB complements that of the TCFD. In fact, the SASB has committed to harmonize its standards with the Task Force’s recommendations, including updating standards to align with those recommendations. With that alignment, investors will not only be able to understand what a company’s past and current sustainability performance indicates about its future performance (via the SASB standards), they will also be able to gain a clearer picture of how systemic changes in the broader economic environment are likely to impact expectations for that future performance (via TCFD-recommended scenario analyses). For the long-term investor—and, indeed, for the corporate director or executive focused on sustained and sustainable value creation–this represents a powerful combination of set and setting.

TCFD and SASB aren’t the only ones working on improving the disclosure of risks related to climate change. Just last week, the Canadian Securities Administrators (CSA) announced plans to review how large, public companies listed on the Toronto Stock Exchange are disclosing the risks and financial impacts of climate change. According to the CSA, the goal of the review is to help ensure issuers provide high quality disclosure of material information to investors, and will include a review of other efforts including those of the TCFD and SASB.

So now I’ve spent a lot of your time discussing sustainability, moving from the big picture of restoring confidence in the future of free enterprise, to a sharper focus on the opportunities for competitive advantage that can come from taking a materiality-based approach to sustainability, and finally back to the strength of the broader financial system in the face of systemic risks. As I mentioned earlier, uncertainty is part and parcel of financial markets, but it does not prevent us from taking action to move those markets forward, ushering in a new era of accounting, reporting, and financial analysis that presents a more complete picture of how companies create value over the long term. This would avoid unnecessary uncertainty by filling in informational gaps. To quote business guru Peter Drucker, “All economic activity is by definition ‘high-risk.’ And defending yesterday—that is, not innovating—is far more risky than making tomorrow.”[20]

So what does this mean for a company’s directors and executives? One of the most important roles the board plays is safeguarding the assets of the company—and that includes its social license to operate. Directors should therefore work with their executive team to do a few things. They should incorporate material sustainability factors into the firm’s core strategy. They should align on the story they want to tell—both publicly and internally—about how the company sustainably creates value. And they should clarify roles and responsibilities for all sustainability initiatives, including reporting. That may include performing a materiality assessment to determine the most critical sustainability factors, shifting oversight of sustainability reporting, perhaps to the audit committee, and expanding board oversight to the development and maintenance of internal control over sustainability-related objectives for operations, compliance, and reporting.[21]

After all, last year, two-thirds of shareholder resolutions were related to sustainability matters, up from 40 percent just four years earlier.[22] If it matters to shareholders, it should matter to us.

As I conclude, I would like to point out that Ontario has a proud tradition of thought leadership in the field of accounting. More than a century ago, the Companies Act of 1907 became one of the earliest pieces of legislation in the English-speaking world to mandate disclosure of income statement and balance sheet information by commercial enterprises to their shareholders.[23] I would say that spirit of transparency and investor protection is alive and well here today. Interestingly, that 1907 Act is also one of the earliest examples of an accounting organisation demonstrating its influence on disclosure legislation, with the Institute of Chartered Accountants of Ontario providing the professional judgement and intellectual authority that guided its development. Looking at today’s corollary, sustainability reporting does not require new legislation, but it can definitely use the intellect and judgement of CPA Canada and of all of you who have been kind enough to join us here today.

I look forward to hearing your thoughts and answering your questions. Thank you.

[1] Gallup, Confidence in Institutions poll, June 1-5, 2016.

[2] Edelman, “Trust in Canada,” Edelman Trust Barometer 2017 (January 15, 2017).

[3] Ocean Tomo, Intangible Asset Market Value Study (March 5, 2015).

[4] U.S. Securities and Exchange Commission, Business and Financial Disclosure Required by Regulation S-K (April 15, 2016).

[5] Sustainability Accounting Standards Board, “Business and Financial Disclosure Required by Regulation S-K–the SEC’s Concept Release and Its Implications” (September 13, 2016).

[6] Principles for Responsible Investment, About the PRI, accessed March 2, 2017, at

[7] Forum for Sustainable and Responsible Investment, 2016 Report on Sustainable and Responsible Investing Trends (November 14, 2016).

[8] CFA Institute, Environmental, Social and Governance (ESG) Survey (June 5, 2015).

[9] Sustainability Accounting Standards Board, ESG Integration Insights (Q4 2016).

[10] Sustainability Accounting Standards Board, Investor Advisory Group, accessed March 2, 2017, at

[11] Pension Investment Association of Canada, Re: Concept Release: Business and Financial Disclosure Required by Regulation S-K – File Number S7-06-16 (letter to SEC dated July 17, 2016).

[12] PwC, Investors, corporates, and ESG: bridging the gap (October 2016).

[13] RR Donnelley and Simple Logic, 2016 Canadian Investor Survey: New insights into what investors want from disclosure (June 23, 2016).

[14] Mozaffar Khan, George Serafeim, and Aaron Yoon, Corporate Sustainability: First Evidence on Materiality, Harvard Business School (March 24, 2015).

[15] Business Backs Low-Carbon USA, accessed March 3, 2017, at

[16] Organic Trade Association, 2016 Organic Industry Survey (May 2016).

[17] Accenture, UN Global Compact-Accenture CEO Study on Sustainability (2013).

[18] Securities Act Release No. 6711 (April 17, 1987), Concept Release on Management’s Discussion and Analysis of Financial Condition and Results of Operations, 52 FR 13715 quoting Securities Act Release No. 6711, Securities Act Release No. 6711 (April 24, 1987) [ 52 FR 13715]., at 13717.

[19] Sustainability Accounting Standards Board, Climate Risk Technical Bulletin (October 2016).

[20] Peter F. Drucker, “Principles of Innovation,” The Essential Drucker, p. 279, HarperCollins (2001).

[21] Elisse Walter and Aulana Peters, “Directors Can Add Valuable Perspective to SEC’s View of Sustainability,” NACD (July 14, 2016).

[22] Sustainability Accounting Standards Board, Re: Concept Release on Business and Financial Disclosure Required by Regulation S-K (letter to SEC dated July 1, 2016).

[23] George J. Murphy, University of Saskatchewan, “Early Canadian Financial Statement Disclosure Legislation,” Accounting Historians Journal, Vol. 11, No. 2 (Fall 1984).