Sustainability disclosure goes mainstream

Companies emphasize sustainability reporting standards

There are currently a number of global trends, such as climate change, affecting business and the information needs of investors. As a result, companies are increasingly taking a wider view of risks and opportunities associated with their business—and placing greater emphasis on sustainability reporting.

Sustainability disclosure and the purpose of corporations

Business Roundtable recently released a statement on the purpose of a corporation, which was signed by 181 CEOs who committed to leading their companies for the benefit of all stakeholders—customers, employees, suppliers, communities, and shareholders. The statement recognizes the changing expectations of business and its role in society, one of which is how to address climate change.

In an age of transparency, there’s an increasing call for companies to demonstrate a broader purpose to build trust with all stakeholders and ultimately drive long-term value, such as through publishing sustainability reports. Nonfinancial factors can and do have a financial impact that can be realized in both the short and long term.

Executives increasingly take stakeholder considerations into account when they make decisions, and directors have a fiduciary duty to understand the environmental and social impacts of the business and related implications to the company’s risk profile and strategy.

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Sustainability disclosure goes mainstream

Establishing sustainability reporting standards

Companies currently are placing more emphasis on the extent, form, location, and content of their environmental, social, and governance (ESG) disclosures—also called “sustainability disclosures.” Investors, customers, and employees are driving the marketplace transformation and have called for ESG transparency and for bringing sustainability reporting into the mainstream.

Increasingly, companies are responding by measuring, managing, and disclosing ESG performance, as evidenced by the rise in the number of S&P 500 companies that publish some form of sustainability disclosure.

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How ESG disclosures are provided

The growing trend in which companies present or refer to broader nonfinancial measures in financial filings and obtain assurance on this information is based on the realization that such disclosures are an important consideration when evaluating company performance and future growth.

According to research published by the Investor Responsibility Research Institute (the State of Sustainability and Integrated Reporting 2018) on the sustainability reporting of S&P 500 companies:

  • Almost 40 percent voluntarily address some aspect of sustainability in financial filings.
  • In their Forms 10-K, 118 companies (23 percent) address sustainability.
  • In their annual reports exclusively (e.g., the chairman’s letter and other sections), 80 companies (18 percent) discuss sustainability issues.
  • In their proxy statements, 191 companies (38 percent) discuss sustainability beyond board governance and executive compensation.

Companies that aren’t harnessing the power of sustainability reports may be losing favor with investors or losing competitive advantage. They may also be at a disadvantage when attracting and retaining customers and employees.

This Heads Up discusses various developments in the marketplace that have resulted in increased pressure on companies to disclose or improve the transparency of ESG topics and the move by some companies toward disclosing such information in their financial filings.

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