Sustainability disclosure goes mainstream has been saved
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
- Establishing sustainability reporting standards
- How ESG disclosures are provided
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Enhancing trust in ESG disclosures
Significant progress has been made in corporate reporting of environmental, social, and governance (ESG) information, as evidenced by the rise in the number of S&P 500 companies that publish some form of a sustainability disclosure. At the same time, institutional investors, asset managers, lenders, credit raters, and insurers are increasingly relying on companies’ ESG disclosures to make important decisions regarding the allocation of capital. Against this backdrop, there continues to be a growing call for companies to enhance the quality, comparability, and usefulness of their ESG disclosures.
A number of factors are driving this call to action:
- ESG investing continues to accelerate at breakneck speed. For example, UBS saw more than $71 billion of flows to ESG funds and pandemic bonds in the second quarter, bringing its ESG assets under management to $1 trillion for the first time. In addition, “[a] new record was set in 2019 for the volume of sustainable debt issued globally in any one year, with the total hitting $465 billion globally, up a remarkable 78% from $261.4 billion in 2018.”
- According to the Harvard Law School Forum on Corporate Governance, the role that sustainability and nontraditional metrics play in investment decision-making is growing. “Investors are seeking [quantitative ESG] metrics to evaluate a company’s approach to sustainability and its drivers of long-term growth.”
- Although investors are increasingly relying on ESG disclosures, they remain dissatisfied with the level of appropriate quantitative ESG information, lack of comparability over time, and questionable data quality. In 2019, only 29% of S&P reporting companies obtained external assurance on their sustainability information.
The lack of standardized investor-grade information in ESG reporting has become a sticking point among issuers, investors, and standard-setters. It is clear that institutional investment decision-makers and other capital market participants need standardized and increasingly quantitative ESG disclosures that are assured and can be used by investors to efficiently evaluate ESG information and integrate it into their decision-making process.
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.
Establishing sustainability reporting standards
Companies currently are placing more emphasis on the extent, form, location, and content of their 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.
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.