The head of one of the world's most well-known conservation organizations has said a serious defect in corporate performance reporting means that the overall impact of a company's operations on the environment is too often ignored.
Pavan Sukhdev, president of the board of the World Wide Fund for Nature's WWF International, called for companies to move toward fully integrated reporting that includes detailed assessments of their effect on physical, natural, human and social capital.
"It is about private profits versus public losses. [Not taking account of this] has been the biggest free lunch in the history of the universe. This cannot go on," said Sukhdev, a former Deutsche Bank managing director and author of U.N. reports into the effect of environmental issues — most recently the U.N. Environment Program's Towards a Green Economy.
But he also said there was cause for optimism: "There is a serious interest in the investor community to understand true performance," he said, which included full assessment of environmental and social impact. And he noted that companies fully appreciated the impact of environmental issues "by design, by decree or by disaster."
"By decree, the U.K. is going to have a sugar tax — the chancellor saw that the cost to the [National Health Service] was £5.5 billion for diabetes and obesity and the £27 billion in annual labor losses," said Sukhdev, who was speaking at an S&P Dow Jones Indices conference on the investment implications of environmental, social and governance principles. "Meanwhile, by disaster, BP saw 11 lives lost in the Gulf of Mexico oil platform blow-out, which was the worst thing, but the CEO lost his job and shareholders lost £70 billion of market cap in a few weeks."
"Third-party impacts are a risk tomorrow but then the day after tomorrow is when they become a cost as they hit the bottom line," he added.
Sukhdev also said too much of the existing effort to quantify environmental risks for companies had been ineffective, citing his own involvement commercially with a chemical company and the risk factors cited in its annual report. He said these were insufficiently broad and did not focus enough on environmental issues, such as the potential for water pollution.
"I found it was too familiar to me," he said. "There is a serious defect in corporate performance reporting. The linear approach to risk management does not seem to acknowledge that enough. We need to look at all capital classes, not just financial. How often do we see companies reporting holistically? We need a framework that is cognizant of ecological and environmental risks."
He said there are some firms leading the way in this kind of financial reporting, but he also said there was a need for "rules and regulations," noting that the legal principle of "polluter pays" had long existed.
"There is a regulatory gap — the 'ask' is not there from accountancy regulators for information" on the costs of environmental and other risks, he said.
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