Our Senior Associate Sakari Sedbom, who is expert in securities markets’ disclosure obligations and market abuse, is currently writing his doctoral dissertation about listed companies’ disclosure of ESG-information.
Q: What is your dissertation about?
I have for the past few years worked alongside my work at D&I on a doctoral dissertation about listed companies’ disclosure of environmental, social and governance information (ESG-information). My dissertation is still in progress, but I think that I am already on the final stretch.
As a topic, ESG-information is very current. Ten years ago, there were only a few companies that voluntarily published an annual corporate social responsibility statement, an environmental statement or something similar. Since 2018, certain large public interest entities with more than 500 employees during a financial period have been required to publish an annual report on non-financial information. In the report, a company is for example expected to disclose (i) relevant information on the actual and potential impacts of its operations on the environment, and on how current and foreseeable environmental matters may affect the company’s development, performance or position; (ii) material information on social and employee matters; (iii) material information on potential and actual impacts of the company’s operations on human rights; and (iv) material information how the company manages anti-corruption and bribery matters and their occurrence. All in all, the legislation requires certain large companies to provide an annual report, where they quite comprehensively disclose ESG-information, which is material for the company’s stakeholder’s when assessing the company.
For listed companies, the report is part of the company’s periodical disclosure obligations and subject to the general principles of Finnish securities market act, meaning for example that a company may not provide materially false or misleading information in the report. However, the legislation concerning the obligation to publish the report is not very precise on what exactly needs to be reported and how. Therefore, there is an obvious need for research on what ESG-information needs to be published and how. In addition, the increase in available ESG-information appears to have changed how investors analyse companies, because ESG-information offers new ways to analyse risks associated with a company. This in turn gradually changes, what information investors in general consider material, when making their investment decisions. Therefore, there is a need for research, which defines what information is to be considered material.
Q: Tell us more about ESG-investing and socially responsible investing. Are these new concepts?
As a concept, ESG-investing is quite new, as only during the past five years or so investors have started to use more and more ESG-information as part of their investment analysis. Although, the term ESG can be attributed to UN’s Global Compact Report published in 2004, ESG-investing truly picked up only after the UN’s Sustainable Development Goals were set in 2015. In recent years also many scandals, such as car manufacturers’ emissions scandals and scandals relating appalling working conditions in clothing industry companies’ supply chains, have made investors more aware of ESG-factors and what effect they have on a listed company’s share price.
As a term, ESG-investing is sometimes used as a catchall label to describe any investing, which has an element of environmental or social purpose. If viewed narrowly, the term can be only considered covering investing in debt and/or equity issued by companies, which score favourably on ESG factors. If viewed broadly as a catchall label like socially responsible investing (SRI), it can be noted that there are many investment strategies, which benefit from ESG-information and which are not necessarily conceptually new. For example different forms of ethical, philanthropic, impact, responsible and transitional investing rely on ESG-information. Also traditional professional investing, which cannot be labelled as any of the aforementioned strategies, nowadays rely more and more on ESG-factors as evidenced by the statements made by some of the largest institutional investors earlier this year. Therefore, it is apparent that ESG is not just a temporary phenomenon.
Q: Why do you think this ESG-information should be a matter of interest in the board of directors?
ESG-factors are still a fairly new way to measure a company’s performance and evaluate risks associated with a company. If used efficiently, ESG-information can help companies to improve their competitiveness, ability to avoid the realisation of risks and help to receive funding. From an investors’ perspective, ESG-information gives a picture about the quality of a company’s leadership and governance as well as the company’s ability to generate value in the long-term.
As investors’ analyses on ESG-factors become more and more sophisticated, companies may no longer consider ESG-information only as a tool for marketing or promoting their good deeds. Rather, I would advise companies to pay attention that their ESG-disclosures are correct, are not misleading and give a comprehensive enough picture of the company’s governance related to the ESG-matters. This is because if it is later discovered that a piece of information has been incorrect or materially misleading, it may cause a company considerable reputational damage when revealed. When considering how to create reputational value for a company in the long term, it should be kept in mind that it usually takes much longer to build a reputation than to lose it – or as once put by Warren Buffet: “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
Q: What inspired you to begin writing a doctoral dissertation in the first hand?
It is not possible for me to name one event or situation, as it has been a long process to become interested in securities law. In general, I have always been interested in companies and how our economy works. However, I think that my student exchange in 2012 at the University of Copenhagen had a quite big impact on my thinking as I ended there in a corporate governance course, where corporate social responsibility was a central topic. Another thing has certainly been the participating in the writing of two books on listed companies’ disclosure obligations here at D&I. Therefore, it somehow felt quite natural to continue to write a doctoral dissertation.
Q: If you could choose anyone in the world, whose brain would you like to pick for your dissertation?
This is hard, because there are many intelligent people, who have inspired me. However, if one person needs to be chosen, Jesper Lau Hansen is a person whose work I truly admire.