Nearly all S&P 500 companies provide some form of environmental,
social, and governance (ESG) or sustainability reports today, but there are
growing concerns by a range of stakeholders—investors, employees, customers,
regulators, and activists—regarding the quality, comparability, and usefulness
of these reports. For a variety of reasons discussed below, and based on
analysis of several approaches to disclosure, we expect increasing stakeholder demands
for more transparent and higher quality ESG reporting.
The Current State of
In a post in the Harvard Law School Forum on Corporate Governance, the Investor Responsibility Research Center Institute’s Jon Lukomnik describes the current state of ESG reporting based on findings of a 2018 report by the Sustainable Investments Institute (Si2): “Most companies reporting on sustainability issues are navigating the landscape in their own way, using multiple reporting models and customizing guidance for their own needs. […] But Si2 also found a surprising share of companies are including sustainability information in their financial filings—annual reports, Forms 10-K and proxy statements—indicating elementary but growing acceptance that sustainability information is material to investors. All these findings show most companies are paying attention and adapting to raised expectations from stakeholders, including but not limited to investors. Integrated reporting just may be the future of corporate disclosure its proponents assert, even if change is slow and constantly shifting.”
Among Si2’s other findings cited in the Harvard blog
Of all the S&P 500 companies, 92 percent posted
public sustainability data on their sites.78 percent publish sustainability reports, and
these come in the form of a download or are posted on a website.97 percent of companies with such reports
customized their sustainability reporting rather than adopting a single
structure.35 of the 395 reporting companies pointed to the
Sustainability Accounting Standards Board (SASB) frameworks and 4 companies
pointed to the International Integrated Reporting Council frameworks as having
helped shape their own.In 2018, a total of 14 S&P 500 companies published
an integrated report.Demands for More Transparent,
Higher Quality ESG Reporting
ESG reporting has been of growing importance and concern to institutional investors for a number of years. BlackRock has cited ESG disclosure as one of the priorities of its stewardship program, stating that “the quality of information which underpins both investors’ and businesses’ pursuit of greater sustainability is uneven and presents a barrier for further progress in sustainable finance.”
Institutional investors understand that ESG issues may pose huge financial risks. The World Economic Forum’s The Global Risks Report 2019 shows that ESG-related matters account for more than half of the world’s top 10 risks in terms of both likelihood and impact. Investors are demanding information—and seeking engagement with companies—on core ESG issues and their impact on such companies.
Employee activism regarding ESG issues is in its early
stages but is growing rapidly. Millennials have a particular interest in ESG
issues. And the number (and success) of shareholder proposals relating to ESG
the “E” and the “S”—continues to increase.
Shearman & Sterling LLP’s 2019 Corporate Governance & Executive Compensation Survey identifies other forces driving ESG, including the proliferation of ESG research and ratings firms. Institutional Shareholder Services and Glass, Lewis & Co. have indicated they will make voting recommendations based on ESG positions taken by a company, and state governments and European countries have been catalysts for change.
In August, the Business Roundtable released its “Statement on the Purpose of a Corporation,” which, according to its press release, redefined the purpose of a corporation “to promote ‘an economy that serves all Americans.’” The statement was signed by 181 CEOs who committed “to lead their companies for the benefit of all stakeholders—customers, employees, suppliers, communities and shareholders.” The statement concluded, “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.” In light of this statement, expectations will be high for organizations to articulate in their ESG disclosures how they are meeting their commitments to stakeholders and reconciling competing interests.
Considering an ESG disclosure
According to a recent World Economic Forum whitepaper, there is general agreement that one of the biggest problems with ESG reporting is that a specific organization’s ESG data, thanks to varying voluntary reporting standards across industries, geographies, and other factors, isn’t easily compared to other organizations’ reporting. To date, over 100 ESG standard-setting initiatives have been developed, causing option overload. Among the most prominent are SASB, the Global Reporting Initiative, and the Task Force on Climate-Related Financial Disclosure.
The Financial Times has reported that poultry business Sanderson Farms received a shareholder proposal urging the company to follow SASB’s guidelines in its ESG disclosures, and that similar requests are expected to be submitted at other companies across sectors during the 2020 proxy season.
Given the heightened focus and attention on ESG reporting, boards
should encourage their management teams to reassess the scope and quality of
the company’s ESG reports and disclosures—including benchmarking against peers,
consideration of the methodologies and standards of various ESG raters, and
understanding the expectations of investors and other stakeholders—and review
various ESG reporting frameworks for possible adoption by the company. To bring
the right focus and attention to the effort, a board committee, such as the
audit or governance committee (depending on bandwidth and expertise), should
oversee the effort. Management’s disclosure committee should be part of these
discussions to help ensure that the company has the necessary infrastructure, including
disclosure controls and procedures, to support its ESG reporting.
For more about connecting ESG, strategy, and long-term value, see The ESG journey: Lessons from the boardroom and C-suite.