Let’s talk about why sustainability needs to be boring.
Most of us have retirement plans that are invested in stocks and bonds. The companies who issue those securities must report on an annual basis to various regulatory bodies about their operating performance. These annual reports are then compared, analyzed, and made public so that you and I can make informed decisions about where to invest our hard earned dollars. This information is available because these companies are required by law to follow standard and acceptable accounting practices. Thousands of lawyers, finance professionals and government regulators (collectively, the “enforcers”) make their living by litigating, auditing and, if necessary, forcing companies to comply and fairly report their results.
So how does this relate to sustainability? Major organizations whose missions are to promote sustainability reporting are defined by a blend of acronyms such as GRI, IIRC, CRD, CDSB, CDP and a variety of other industry specific organizations. One important organization is the Sustainability Accounting Standards Board. SASB’s mission is to establish industry-specific standards for corporate sustainability disclosure, with a view towards ensuring that disclosure is material, comparable, and decision-useful for investors (my emphasis). This mission statement was crafted so that in a world focused on corporate responsibility and liability reported amounts and methods can be relied upon. Their board leadership reflects the serious nature of this mission and is populated with individuals with long professional histories in the financial reporting world. It includes two former chairpersons of the Securities & Exchange Commission (SEC), a former chairman of the Financial Accounting Standards Board, as well as CEOs and treasurers. Clearly they believe in the importance of sustainability reporting and the necessity of it being able to withstand the scrutiny of the enforcers.
My company, Host Hotels & Resorts, Inc., took a small step toward helping SASB achieve that mission this year by adopting the standards for energy and water management specific to real estate owners, developers and investment trusts. We elected to disclose these statistical metrics in our 2016 Form 10-K, which is the legally required annual report filed with the SEC. Only two of the over 200 publically traded companies in the National Association of Real Estate Investment Trusts elected to report these metrics. And that attracted the attention of the SASB. They invited us to speak with their Board to understand why we used their sustainability standards and what specific issues and concerns senior management had about taking this step.
The “why” is simple: We wanted to brag about all the smart sustainability money being spent on infrastructure at our hotels and prove that it was making a difference to the bottom line. Investments such as LED lights, water saving fixtures, solar panels, co-generation plants, grey-water recycling, etc. all had contributed to our success. The “how” is much more difficult. First, we invest to make money for our shareholders, so any sustainable investment had to achieve a rate of return above our cost of capital. Second, whatever we reported needed to meet the minimum threshold of high-quality auditing standards. We hired third parties to verify our utility usage and then adjusted the results for differences in heating and cooling days and changes in utility rates. We took this latter step because we wanted to assure an apples-to-apples comparison consistent with how we present the rest of our financial performance metrics. As expected, the energy and water metrics showed that our operations had become more efficient, and thereby more sustainable, and more importantly, positive for the bottom-line. However, we explained to the SASB that the single most challenging issue to reporting is defining what constitutes sustainable investing. Is it painting a roof white, installing energy efficient cooling towers, or covering a roof in Hawaii with solar panels? Arguably the answer is yes to all three, but what if we needed to paint the roof, or replace the cooling units or the local government required us to source power sustainably? Is it still sustainable investing and does how we define it matter to investors?
Today, in a world that is defined and evaluated by dedicated and professional enforcers, companies need a rulebook to protect their shareholders and deliver on a more sustainable future. Regardless of what we believe is the most sustainable answer, companies can’t accept the potential liability of false or misleading information and the public shouldn’t have to guess what investments are sustainable and not just greenwashing. Truthfully, it may have been more impactful to report the tens of millions of dollars invested, but I can’t report what I can’t define consistently. To solve this dilemma we need to support organizations like the SASB that establish and require rules to allow comparability between companies. We need to apply those rules consistently in documents that carry risk (e.g. the 10-K) and then let the enforcers evaluate if the investments are material, promote comparability and are useful to investors. Making rules and following rules: Boring, perhaps. But I believe boring will be what drives long-term success in sustainability.