Societal, technological and geopolitical change, the impacts of climate change and the interconnectedness of these issues present risks and opportunities to companies that must be understood and managed. This piece pinpoints three key trends with environmental and social implications that are already impacting businesses and capital markets.

The landscape of environmental and social risks important to business is depicted in the World Economic Forum’s annual Global Risks Report³.

Some of these issues may be important to all companies and some may be more or less important to particular industries. What is key is that companies navigate both the environmental and social mega-trends, and the industry and company specific issues to the benefit of their investors and other stakeholders⁴.

Costco: “Do the right thing. It is a philosophy embedded in our culture… members of our leadership team and beyond realize the key to long-term success is not high margins; rather it is how you treat, engage, and include people: our members, our employees and our suppliers alike.⁵”

Costco’s first sustainability principle is: “For Costco to thrive, the world needs to thrive. We are committed to doing our part to help.⁶”

Institutional investors are becoming more sophisticated in the integration of environmental, social and governance (ESG) issues into their investment decision-making (also referred to as responsible investing). This movement is growing globally.

Responsible investing in the United States grew to $12 trillion in assets under management in 2018, an increase of 38% in the past two years⁷. In Canada, there were over $2 trillion in responsible investment assets under management, an increase of 41.6% in two years. This represents over half of Canada’s investment industry⁸.

As well, impact investing (a subset of responsible investing that seeks a social and/or environmental benefit in addition to financial gain), while still in its infancy in Canada⁹, marks a growing trend. Importantly, investors are committed to measuring and managing impact¹⁰– a trend that may affect corporate reporting.

Institutional investors are looking for reliable, comparable ESG information that will enhance their investment analysis, engagement and voting decisions. Currently institutional investors purchase selected ESG data from third parties because corporate disclosures are not always providing the evolving ESG metrics and information capital markets are seeking.

“Risks and opportunities for long-term capital differ fundamentally from those for short-term capital. Metrics also differ: short-term metrics tend to be more accessible and reliable, but they often do not capture disruptive changes in economies or markets. These long-term disruptive changes include climate change, cybersecurity, demographics, and many other factors¹².”

Excerpt 2018 Summit on Focusing
Capital on the Long Term

Knowing how environmental and social issues impact stakeholders¹⁶ and understanding stakeholders’ expectations¹⁷ of companies can contribute valuable insights for identifying strategic opportunities and risks and creating long-term value. It can also help to build trust, brand reputation and resilience.

“Effective engagement with non-shareholder stakeholders is equally vital to sustain the long-term interests of an organization and to ensure that a board discharges its management oversight responsibilities.¹⁸” CPA Canada Stakeholder Engagement Briefing.

Transparency and engagement are key to developing and retaining trust with stakeholders. In today’s market, attention to social media is particularly important. Information posted on social media can be misleading or even deceptive with often little time to fact-check and respond. More engaged stakeholders are more likely to support and trust company responses.

“The real difference between shareholder activists and non-financial stakeholders can be seen in the power of social media to shape the discussion. Non-financial stakeholders concerned with environment, social and local issues can often gather more online support for their concerns than activist shareholder can gather for theirs.¹⁹” CPA Canada Stakeholder Engagement Briefing

Successful companies and boards are adept at handling the interconnectedness and complexity of the business issues related to environmental and social matters. They challenge their existing models. They bring together diverse stakeholders with different points of view. They take the time to develop, adapt and test innovative approaches and behaviours. And they dialogue and report strategically with investors and other stakeholders.

Boards and executives that recognize and monitor trends such as those outlined in this publication will be better equipped to provide effective oversight of how their companies are dealing with environmental and social issues. And importantly, their companies will be better positioned to create long-term, sustainable value.

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