Sustainability Perspectives for Accounting and Finance Professionals. Duquesne University

Transcription

1 Sustainability Perspectives for Accounting and Finance Professionals Duquesne University 6th Annual Accounting CPE Conference November 16, 2017 Mike Krzus Senior Advisor BrownFlynn Ltd. All Rights Reserved.

2 What is sustainability? 2

3 to balance the imperative for long-term viability of the company and the world it relies on to create economic value with the demands for short-term competitiveness and profitability. Michael P. Krzus. Integrated reporting: if not now, when? IRZ Zeitschrift für Internationale Rechnungslegung, June

4 Historical perspective 4

5 Reflections on the economic crisis The financial system meltdown is an extreme example of short-term market failure. Lack of underlying information on certain types of transactions was a major cause of this collapse. Short-term earnings are an especially unreliable guide in the current economic environment and so investors are looking for other measures of performance. The global climate crisis is an example of long-term market failure. The result is increasing demands for information on ESG issues. The sustainability of the accounting profession. CalCPA, Young and Emerging Professionals Conference, June Grant Thornton. 5

6 Background 6

7 Sustainability and the Accounting Profession 1994 AICPA, Improving Business Reporting A customer focus (The Jenkins Committee) 1997 PwC, Pursuing Value: The emerging art of reporting on the future 1998 ICAEW, The 21st Century Annual Report 1999 Professor Cindy Williams, The Securities and Exchange Commission and corporate social transparency 1999 PwC, ValueReporting. How can you value what you cannot see? 7

8 Sustainability and the Accounting Profession 2001 Strengthening Financial Markets: Do investors have the information they need? (The Garten Report) 2001 ICEAW, Sustainability and Corporate Reputation: Key points from a Centre for Business Performance roundtable PwC. The ValueReporting Revolution: Moving beyond the earnings game KPMG, New Directions in Business Reporting: Performance reporting, communications, and assurance AICPA, Special Committee on Enhanced Business Reporting. 8

9 Context 9

10 Frameworks and standards 10

11 Data providers 11

12 Investors 12

13 the times they are a-changin. Bob Dylan,

14 The future was predictable, but hardly anyone predicted it. Attributed to Alan Kay, former researcher at Xerox PARC facility and Apple fellow 14

15 Accounting and finance professionals 15

16 The financial community will increasingly acknowledge that issues previously considered nonfinancial have clear potential to have a material impact on financial performance in both the short- and long-term. José Luis Blasco, KMPG Global Head of Sustainability Non-Financial is the New Financial. Responsible Investor, October 17,

17 The merging of financial and nonfinancial reporting will accelerate quickly in the next few years and it is the finance teams that will be expected to deliver the disclosures. José Luis Blasco, KMPG Global Head of Sustainability Non-Financial is the New Financial. Responsible Investor, October 17,

18 People 18

19 $30 trillion Wealth transfer from baby boomers to millennials in the coming decades Accenture. The Greater Wealth Transfer,

20 36% Of baby boomers believe investments are a way to express values (vs. 67% of millennials) U.S. Trust. U.S. Trust Insights on Wealth and Worth

21 66% Of wealth will be controlled by women in the U.S. in the next 10 years MSCI. Exploring the ESG Quality of Fund Holdings,

22 76% Of women express a high level of interest in ESG performance Morgan Stanley Institute for Sustainable Investing. Sustainable Signals: The Individual Investor Perspective,

23 Markets 23

24 Components of S&P 500 market value 17% 32% 68% 80% 84% 83% 68% 32% 20% 16% Ocean Tomo. Intangible asset market value study, accessed November

25 Investors 25

26 Data 26

27 Data providers 27

28 Short-termism 28

29 Global competition Earnings expectations Faster information flows term Shortterm investor and market horizons The cycle of shorttermism Short- goals & metrics Short-term incentives & decisions Dominic Barton, Jonathan Bailey, Joshua Zoffer. Rising to the challenge of short-termism, FCLT Global, September

30 Short-term performance pressure is rising 2016 survey of executives and board members 87% feel 55% would pressure to deliver strong financial performance within two years or less 65% say shortterm pressure has increased over the past five years sacrifice value to hit quarterly targets Dominic Barton, Jonathan Bailey, Joshua Zoffer. Rising to the challenge of short-termism, FCLT Global, September

31 Source of short-term pressure 40% 55% of executives and board members point to themselves as the cause of short-term pressure Dominic Barton, Jonathan Bailey, Joshua Zoffer. Rising to the challenge of short-termism, FCLT Global, September

32 creating shareholder value is not the same as maximizing short-term profits. Marc Goedhart, Tim Koller, and David Wessels. The real business of business. McKinsey, March

33 Long-term capitalism 33

34 34

35 Founders of FCLT Global 35

36 36

37 SII network partners 37

38 SII CEO Investor Forum Investors with $25 trillion assets under management BD, Citi, Humana, IBM, Nielsen, PGE, Welltower Aetna, Delphi, Telia (Sweden), Prudential Financial, Inc., CA Technologies, Voya Financial, Inc., Allstate 38

39 Intrinsic investors overwhelmingly favor decisions that lead to long-term value creation even at the expense of short-term earnings shortfalls. Rebecca Darr and Tim Koller. How to build an alliance against corporate short-termism. McKinsey, January

40 Reporting and long-term strategy 40

41 Reporting matters Influences decisions and actions of management An essential element of governance Influences decisions and actions of shareowners and other stakeholders Affects resource allocation in society Critical for investor confidence 41

42 Frameworks and standards 42

43 43

44 10 elements of a long-term strategy 1. Clear statement of purpose, mission, and vision 2. How the company s business model creates value 3. Management s view of the market 4. Sources of competitive advantage 5. Strategic goals 44

45 10 elements of a long-term strategy 6. Detailed execution roadmap 7. Medium- and long-term metrics and targets 8. Capital and non-capital investments 9. Overview of risks 10.Executive and director compensation 45

46 Materiality Governance 46

47 Why should you care? 47

48 Long-term firms exhibit stronger fundamentals and performance. McKinsey Global Institute. Measuring the Economic Impact of Short-Termism. Discussion Paper. February

49 From , the revenue of long-term firms cumulatively grew on average 47% more than the revenue of other firms, and with less volatility. McKinsey Global Institute. Measuring the Economic Impact of Short-Termism. Discussion Paper. February

50 Long-term firms invested more than other firms from cumulatively, by 2014, long-term companies on average spent almost 50% more on R&D than other companies. McKinsey Global Institute. Measuring the Economic Impact of Short-Termism. Discussion Paper. February

51 Long-term companies exhibit stronger financial performance over time. On average, their market capitalization grew $7 billion more than that of other firms between 2001 and McKinsey Global Institute. Measuring the Economic Impact of Short-Termism. Discussion Paper. February

52 Long-term firms added nearly 12,000 more jobs on average than other firms from McKinsey Global Institute. Measuring the Economic Impact of Short-Termism. Discussion Paper. February

53 Wait, what about litigation risk? 53

54 Robert G. Eccles Setting Standards for Nonfinancial Information. Stockholm School of Economics, November

55 create value for the collective of all shareholders, present and future. Marc Goedhart, Tim Koller, and David Wessels. The real business of business. McKinsey, March istockphoto 55

56 Thank you 56