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"Disclosure of Long-Term Business Value: What Matters?"

publication date: Apr 7, 2012
author/source: Deloitte LLP
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Determining Environmental, Social and
Governance Materiality Is One Key to Sustainable, Superior Performance

Report by Deloitte

Deloitte released its research report, "Disclosure of Long-Term Business Value: What Matters?" providing an in-depth look at how companies are determining environmental, social and governance (ESG) materiality and some of the challenges managers face.  The report suggests that sustained and superior performance depends not only on maximizing traditional financial metrics, but on leveraging ESG performance.

According to Deloitte's report, companies have the opportunity to improve performance when they factor in their ESG performance.  ESG elements such as resource efficiency; business model resilience; innovative capacity; brand strength and corporate culture can be as informative as financial metrics for understanding how a business is creating value.

"Companies that adopt a sharper focus on long-term success recognize that their underlying assets – financial, human, manufactured, social or natural – must be managed with a long-term view," said Eric Hespenheide, partner, Deloitte & Touche LLP, who also serves as audit and enterprise risk services global leader for sustainability and climate change services.

Hespenheide continues, "What matters is not only a company's financial performance, but also its performance on dimensions that are sometimes 'intangible' and often difficult to measure in financial terms.  Leading companies are working to bring their reporting on non-financial performance to the same level of maturity as financial reporting. This more comprehensive approach to corporate performance offers a company's stakeholders – including shareholders – a more complete picture of its prospects for future success."

One major challenge for public and private companies alike is determining what information to disclose.  Many companies are trying to apply the principle of materiality from traditional financial reporting to this new set of performance metrics. This exercise, however, is difficult because there is little hands-on guidance about precisely what to do.  Managers may lack the tools and an approach to make these decisions efficiently and rigorously. The result is data that can be difficult to use for making business decisions, both inside a company and externally.

"Properly defining materiality is the holy grail of ESG reporting," says Susanne Stormer, vice president of corporate sustainability at Novo Nordisk.  "To be material, topics need to be important to how both business and investment decisions are made."

Dr. Dinah A. Koehler, Deloitte Services LP, senior research manager for sustainability and climate change, adds, "One of the most critical challenges for companies that want to generate a meaningful sustainability report is developing a decision-making approach for prioritizing their disparate ESG issues based on their materiality.  Some ESG issues, for example, are quantified in monetary units and others in cubic meters, tons, or number of employees."

Koehler continued, "Deloitte supports the use of more structured decision support methods that can help corporate leaders involve internal and external stakeholders in that prioritization. These methods make it possible to jointly assess financial and non-financial information, along with more qualitative value judgments. Armed with that collective input a firm can integrate its ESG program into its strategic decision-making across all functions, from talent recruitment to capital budgeting and reporting decisions. Without a more quantitative, measurable approach to ESG materiality determination, management of ESG issues will remain difficult and sometimes marginalized."

To help maximize value to the company and its stakeholders, four core factors should to be considered in the choice of ESG metrics. They are corporate strategy; value drivers – including stakeholder interests; organizational objectives; and their competitive environment. This approach can help make ESG results core to the firm's business and investment decision-making.

To read the complete report "Disclosure of Long-Term Business Value: What Matters?" please visit: www.deloitte.com/us/esgmateriality .

About Deloitte's Sustainability Services Group

Deloitte's sustainability services group draws on the insights and experience of Deloitte's four primary businesses –  Consulting, Audit, Tax and Financial Advisory Services – and industry-specific practices across corporate strategy and operations, supply chain, mergers and acquisitions, human capital and enterprise risk management.  The result is a comprehensive set of capabilities to address a range of domestic and global business opportunities and risks related to energy supply, demand and efficiency, water and other resource scarcity, carbon and greenhouse gas regulation, and demand for increased transparency and assurance of non-financial performance.  For more information, please visit: http://www.deloitte.com/us/sustainabilityAs used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.  Certain services may not be available to attest clients under the rules and regulations of public accounting

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