Sustainable Growth Podcast

Robert Eccles: Pinpointing the material issues in ESG

Episode 5 Season 9

What constitutes a material ESG issue – and who decides? In this episode, Robert Eccles, Visiting Professor of Management Practice at Saïd Business School, Oxford University, dives into materiality, the distinction between sustainability and ESG and why views on ESG are so polarised in the US. Robert also tells us what he thinks is the difference between financial and ESG reporting, and how we can find common ground to more efficiently fight climate change.

Jane Goodland, Group Head of Sustainability at LSEG

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  • Jane: [00:00:00] Hello and a very warm welcome to the LSEG Sustainable Growth podcast, where we talk to leading experts in sustainability and finance. I'm your host, Jane Goodland, and this week I had the honour of chatting to Professor Robert Eccles, who's a force of nature and an expert on how companies and investors can create sustainable strategies. Currently a visiting professor at Saïd Business School within Oxford University, he's also an award winning and prolific author, including seminal works on sustainability and the role of business in society. Previously a professor at Harvard Business School, he was also the founding chairman of the Sustainability Accounting Standards Board, SASB, and one of the founders of the International Integrated Reporting Council. But before we listen to the conversation, a quick reminder to follow us so you don't miss any episodes in future. And also, don't forget to rate us on Spotify, Apple Podcasts, or any other platform you use. Right, let's hear from the man himself.

    Jane: [00:01:03] Well hi Bob. Thanks so much for coming in to see us at the LSEG Sustainable Growth Podcast. It's great to have you, and I'm really looking forward to the conversation.

    Bob: [00:01:12] Well, it's a pleasure to be here, Jane, and I think I have to start with a little bit of an apology. We have a new puppy. It's a Bouvier, so it's a very large dog. It's a year old, and he's not quite trained yet. And so, you may hear a dog barking in the background every now and then. There are some people doing work in the next house over. So, if you hear a dog barking, the dog's name is Hugo, and I apologise on his behalf.

    Jane: [00:01:35] Well, do you know, maybe next time you can bring Hugo on to the podcast and we can see what Hugo thinks!

    Bob: [00:01:41] No, he’d have a great time.

    Jane: [00:01:35] So, I'm really looking forward to our chat because I've seen you doing your thing on video and read your articles and so now I get to talk to you in the flesh, which is brilliant. So, talking about articles you have published a fair few, haven't you? And most recently about the ESG culture wars, which we will come on to later in the chat. But before we do, I just wanted to nip this in the bud almost, and really get from you what it is when you're thinking about ESG versus sustainability, because I think this is a key distinction.

    Bob: [00:02:15] You know, it's a good place to start. And I think it's important to note. I mean, I wrote a piece called ‘The Topology of Hate for ESG’ a year or so ago. Kind of getting into this difference between ESG and sustainability. And so, you've got controversy on kind of both ends of the political spectrum. And to give you a short answer to it. I mean, when I think about ESG and my moderate conservative Republican friends, when they think about ESG, it's essentially about material risk factors that matter to value creation. So those things that a company needs to be paying attention to that if they aren't, you know, it's going to hurt their profitability and so forth. Sustainability, you can think about it essentially two levels of analysis. There's the long term sustainability of the company, where the ESG factors become important, and there's how we think about sustainability for society as a whole, systemic issues, climate inequality. And I think there you can distinguish between ESG integration on the company side, which is essentially about not making the world a worse place in ways that would be detrimental to value creation. Compared to its products and services that could be designed very much to make the world a better place for which they're making money. That are creating positive externalities in the world. And they're really independent variables when you think about it that way. A company and Tesla's an example that often comes up. You can say, you know, electric cars are better than, you know, combustion engine cars and diesel, but their ESG ratings tend to be low because of workforce issues. So, a company can be doing good things for the world in terms of products and services, but not have its house in order in terms of how it's managing the material ESG issue. So that would be the way I'd make the distinction.

    Jane: [00:03:53] That's interesting. And I think that you said earlier about, you use the word material ESG issues. So, let's go on to that. Now you're the founding chairman of the Sustainability Accounting Standards Board, which really puts materiality at the very start of that whole reporting process. So, let's just dive into materiality. What constitutes a material issue and who decides.

    Bob: [00:04:16] So again, it's a very good question. I mean, in the SASB context, and we were very clear about this in the beginning was kind of in US parlance, an issue as material if in the total mix of information, it would influence a reasonable investor's decision and what the sustainability issues are that are material in that definition vary by industry. And that's why SASB had an industry classification system of 11 sectors and 77 different industries. Systemic risk is important for banks. It's not for a pharmaceutical company. Safety and clinical trials is. Now it's under the parlance of so-called single materiality, kind of the outside in view sometimes people say. And so SASB was very much focused on what those issues are that are material. And in terms of who decides, ultimately, management will make the determination for what they decide they want to report on, unless there's regulation. But it's very much in an investor context, not a stakeholder context. You know, some things that matter to investors may also matter to stakeholders, not necessarily, but the focus and really the kind of the foundation for determining the single materiality, the financial materiality is those things that investors would care about, that's what the company needs to ascertain.

    Jane: [00:05:28] And then in terms of what those investors would care about. They're caring about it because those issues may well affect a company's operating costs or revenue or reputation or access to markets. So, it's that type of thing, right?

    Bob: [00:05:41] Exactly. Although it gets complicated. Right. Because there's a nuance where there's the single materiality, then the so-called double or impact materiality. And when you contrast, take SASB with Global Reporting Initiative, which was really the first organisation, and hats off to them that started to develop standards for sustainability reporting. Their definition of materiality was really in terms of externalities, things that a company was doing, whether it was operations, products and services that are making the world a worse place, somewhat divorced from, you know, what the financial consequences would be to the company. And we can get into this more. But in the EUs Corporate Sustainability Reporting Directive, they basically have bundled both of those things together. The line can be blurry for a couple of reasons. Things can be impact materiality today. That becomes single materiality tomorrow because the world changes. 50 years ago, carbon emissions wouldn't have been considered single materiality. You know, when you get global warming, that obviously changes. So, there's this notion of dynamic materiality where things can change over time that wouldn't fall under the single or financial materiality definition that can change the other. And this gets to be, you know, particularly nuanced. But this notion of universal owners kind of system level investing, something that from an individual portfolio point of view, a company's carbon emissions. To stay with that example, for someone that's focused on the alpha being generated by that company or what that company's role is in the portfolio wouldn't be considered material. For big pension funds, for big asset managers, they may say. And there's a lot of work being done by a group called the Shareholder Commons. And system level investing. You could say, well, this is material from a financial point of view, because what it's doing, when you aggregate up all of these carbon emissions, they're making the world a worse place in ways that I can't diversify away from, because I can't avoid systemic risk, because my portfolio is so broad and it's so long term and I'm looking for beta not I'm not chasing alpha. And so, for those kind of investors, what would be single materiality. You know, for some could be would be impact materiality for some could be single materiality for them. I mean, there's a lot of important issues here. And you see that in the discussions between IISB and CSRD. And I think unfortunately, a lot of these important issues, at least in the United States, are being lost kind of in the ESG culture wars.

    Jane: [00:08:07] Can we move on and talk about the difference between financial reporting and sustainability reporting, because it strikes me there's a lot of emphasis now with the new standards and regulations about getting sustainability information up to the same quality and credibility as financial reporting. But these two things are quite different, aren’t they? I mean financial accounting is really about the numbers, and backward looking of performance. Whereas sustainability by its nature needs to be a bit more forward looking, doesn’t it?

    Bob: [00:08:34] You know, I've heard this kind of sort of backward looking, forward looking thing. To me, it doesn't, I don't frame it that way as much. I mean, any information that you're going to get on performance is, by definition backward looking, because it has to be something that's already happened, whether it's turnover in your workforce, it's your carbon emissions, it's how much water you use, whatever. I think there's challenges with sustainability reporting of not having standards. And that's why I think the work of the ISSB and the CSRD is important. But then I think people tend to oversimplify the issue a bit and they say, well, we have pretty clear nailed down standards for financial reporting, and there's a lot more judgment that's involved. And so, the sustainability reporting is a little squishy. And if you look at the history of financial reporting, I wrote three short pieces with a colleague of mine at Oxford, Kazbi Soonawalla. You know, financial reporting isn't nearly as cut and dry as people think it is that aren't involved in financial reporting. It's like there's the same arguments and there's the same emotions, and things go back and forth and we're going to do goodwill this way, and we're going to do goodwill that way. And so, I think what's important to note in both cases is that standards are a social construct. They're not derived from the laws of physics. And so, there's not really a technically scientifically correct answer. There's probably better answers than others. And so, with sustainability standards, I think it's important to say we've got to set a standards. There's a social consensus that we're going to represent a company's sustainability performance this way, just like we have revenue recognition policies that say, here's how we're going to recognise their revenues. Here's how we're going to do, you know, write offs, you know, for impaired assets and so forth. I think where the forward looking thing comes in is that, you know, the thesis and people debate this is that one can see a company's sustainability performance as a leading indicator of what their financial performance might be in the future, that if you're doing things in a way that you know, your performance isn't as good as it could be, that it's going to catch up with you, the market's going to recognize that. And if you're improving your sustainability performance and you'll improve your financial performance as well. But I think the kind of forward looking, backward looking, fails to take account of the fact that, by definition, any measure is going to be backward looking. You know, targets are different, but you can have targets for financial performance. You can have targets for sustainability performance, like having, you know, net zero ambitions and so forth.


    Jane: [00:10:57] Now I know that you've done a lot of work on the role and purpose of the organisation, and difference actors in the ecosystem. Can you tell us a bit more about what you're thinking or doing around that, and what companies should be doing specifically?

    Bob: [00:11:10] So, you should do a podcast with my colleague Colin Mayer. I always go back to Colin, and he said, you know, the purpose of a corporation is to produce solutions for people and planet products, which are solutions for people and planet without making the world a worse place. And so, I think that's good guidance. And so, you know, the purpose part is, what are your products and services? What are the problems that they're solving? You know, the ESG integration is that you're sort of not making the world a worse place when you do so, but it can be happening because you don't have laws and regulations that require certain kind of behavior. And you can't expect companies to be sacrificing profitability even over the long term because they're trying to solve some social problem and no one company can solve a social problem. The whole purpose and you have the shareholder stakeholder debate. I think that's another empty debate. Shareholder capitalism. We're going to create value for shareholders. Stakeholder capitalism. We don't care about shareholders. It's an empty debate. Right. You know, you look at the material issues. What are the stakeholders that have made those material issues material. There's stakeholders that you have to pay attention to. And it's not going to be all in the same proportion. And it can't be everybody because every company has limited resources. So, if we were to get clarity, and I think a lot of the confounding to the question you asked in the beginning between ESG as material risk factors and the positive and negative externalities, sort of the impact part, if we were clear about that, it's like, what can companies do? What can companies not do? You know, what really requires public policy? And I think one of the issues you've got, is there’s been there this narrative. That the public sector is failing, the private sector has to pick it up and, quote, do more companies have to do more, investors have to do more? Well, they can only do what they can do within the legal constraints that are established by the fiduciary duty of company law. And it's more complicated on the investor side, how fiduciary duty gets defined by country and by type of fund. But again, I think having those discussions around materiality, around fiduciary duty, are a much more productive way to have a conversation than ESG is good or bad.

    Jane: [00:13:18] This subject attracts a wide range of opinions, and it can get polarised at times can’t it?

    Bob: [00:13:23] It's true. But one of the things I found that's interesting. And you see this. These pressures that exist on both sides that when you have polarization. And, you know, each side will have its own religious text. These pressures that you have to sign on to every element of the Scripture. And I see people struggle with this. And so there will be conservative groups that are doing good work on climate change that my liberal friends say, well, I like the work they're doing on climate change. But they've got a different view around reproductive rights, so I'm not sure I can work with them and like, just for me, that doesn't work. I mean, you find those areas where you can get agreement and you can have major disagreements on other things. You can have disagreements on, you know, whether systemic racism exists. I think it does. Maybe some people don't, you know, should we be supporting Ukraine or not go down the list. But if you're always looking for the reasons not to collaborate with someone on a problem you both are concerned about, and you're emphasising more, the areas where you have disagreement, that just leads to paralysis. And that's not good. But that's kind of the world we're living in. I think it's worse in the United States than it is in the UK, from what I can tell.  But I think what's going to happen. I've been thinking about this in terms of the election. Like how much is at stake in this election around the ESG stuff. I kind of think zero, right? I mean, whether Trump or Biden is the next president and they'll be president for four more years, and they're both old if they're lucky. These fundamental issues, the difference between ESG and sustainability, single materiality, impact materiality, fiduciary duty, the role of the corporation. You know, these are just issues that we have to manage. And right now, they've been confused by a lot of political rhetoric and mostly political theatre. If you look at some of these hearings that have taken place here, if you look at these bills coming out of these red states, you know, it's political theatre. It's not substantive. And that's why, I think, it just doesn't have a long tail. But what are we going to continue to kind of have big disagreements? Let's just say we agree climate change is a problem. Well, there'd be big disagreements about how to solve it, sure, but it's more productive to have those and say, okay, climate change is a Chinese conspiracy or something. It's like those people you just really can't talk to. Just like, I think it's hard to talk to the people that say, you know, no more fossil fuels forever. You know, turn off all the spigots today. You know, it's like it's just it's not practical.

    Jane: [00:15:53] Yeah. And it's kind of reminding me about when I first, got into the industry over 25 years ago. And it was when the notion of responsible investing or it was called ethical investing then, or socially responsible investing, lots of terms. But, that was a time when there was a lot of different viewpoints and perspectives and opinions about what, you know, this was and this wasn't. So, it's not like this debate and sort of tension is a new thing, actually. It's sort of ever present because actually it's just about differences of opinion, isn't it, about big issues like what's the role of an investor, what's the role of a company? And people are allowed to have different views and different opinions, and that's fine. But as you say, progress comes when people find the areas of common and collaborate around then. So, wise words. indeed.

    Bob: [00:16:44] If you look at investment, I think an important distinction. I wrote about this with a professor at Penn Law School named Jill Fisch, A little piece called The Politics of Values Based Investing. The kind of right is sort of impugning left wing, liberal progressive values to ESG, which I think is just sort of silly. But if people want to own a fund that doesn't have any fossil fuel stocks and it's their money, it's fine. You can invest your values if you want. You know they can be left wing values. They can be right wing values. They can be vegan values. You know, they can be carnivore values. And I think that needs to be separate from value based investing. And it's like, okay, within that context, what are the material ESG issues. And so, we're talking about that matter to value creation. But if people want to do value based investing, socially responsible investing, they want to include certain kind of stocks in stocks, whatever. If it's their money, it's their right to do that.

    Jane: [00:17:37] But I mean, it's very much about the merging of values versus fiduciary duty and ESG, kind of material ESG risk factors. So, it's always likely to run and run in terms of that, the grey area. Thank you so much for coming on. You've been fascinating. And I basically encourage anyone to go and check out Bob's website because there's a whole plethora of really interesting articles there to peruse at your leisure. So, thank you again for coming on. And, have a great day.

    Bob: [00:18:07] Thanks, Jane. Nice talking to you. Cheers.

    Jane: [00:18:10] So that's it for this episode. What a fascinating chat that was. Big thanks to Bob for sparing his time and sharing his views and opinions with us on the LSEG Sustainable Growth podcast. If you've got questions, comments, or someone you'd like us to talk to, then do get in touch by email at That's all from me but watch out for the next episode very soon.

    Jane: [00:18:33] Please be aware that the views expressed during this interview are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as investment advice or recommendation.

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