Corporate Sustainability Reporting is Growing Up
Issue #45: A weekly update on responsible investment.
It has been almost one year since the Business Roundtable gathered 181 CEO’s of some of the world’s largest companies to declare:
“Companies should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.”
While the world has seen tremendous challenges since that statement, the companies who committed to this declaration have shown that they will prioritise the health and safety of their employees and their customers in their corporate actions.
In this vein, last week Bloomberg Green wrote on the evolving world of corporate sustainability reporting. Bloomberg emphasised that even companies outside the Business Roundtable are massively improving how they manage their reporting. Companies are being pushed by their investors to report on areas such as greenhouse gas emissions, human rights records and wastewater management.
Many are also proving that they will adopt reporting to one of the emerging ESG reporting standards. For example, Sustainability Accounting Standards Board (SASB) metrics saw a rise in reporting from 118 companies in 2019 to 279 companies this year. SASB also found that 150 investors use its metrics in their investment process.
As the pressure to report continues to grow we are seeing more and more companies dedicate resources to communicate their sustainability strategy. For example, Facebook recently published their first major Sustainability Report for the 2019 financial year.
On the investment side, in the future it will be as important for people in the investment industry to interpret an ESG report as it will be for them to analyse the balance sheet or cash flow statement of a firm.
Nossa Updates:
Anuj A. Shah from KKS Advisors will join as Nossa Data’s first advisor
On top of writing this weekly newsletter, I am actively building out the technology product: Nossa Data. Nossa Data is software which supports companies with their ESG data management and reporting. To welcome Anuj as our first advisor we did a Q&A to learn a bit more about his background and what he has been hearing in regards to corporate ESG reporting.
Here is a teaser:
What kinds of discussions have you heard from your corporate clients in regards to ESG reporting?
It is a pain point and a major cost center for organisations! We even see ESG reporting as a problem within the investment management community who are increasingly expected to produce these reports for their clients. In both cases, organisations often don’t have this skill in house, which has led to a significant demand for the type of talent who can do this work.
Overall, I view this as an evolving market instead of a mature market. Corporates are receiving external pressure from investors to disclose ESG information but lack the digital solutions that could help sustainability professionals better perform their jobs. And the lack of standards around disclosures makes the industry the wild west, with the entire process taking too much time and screaming out for more efficiency.
Top stories
Will the Cruise Industry Use the Pandemic Pause to Go Greener?
With cruise lines shut down, now might be the time for an environmental overhaul that shrinks the industry’s sizable carbon footprint. When COVID-19 struck earlier this year, ships with sick passengers were stranded at sea while officials dealt with the fallout. Even before the pandemic, cruise ships have proven to be a Petri dish of illnesses. Now could be an opportunity for the cruise lines to engage in environmental and social governance (ESG), both from an environmental standpoint — reducing waste, reducing water, reducing emissions, improving poor dumping as well as grey- and black-water bilge efficiency, improving labor practices and sourcing locally.
Karma Impact.
Social-Impact Efforts That Create Real Value
Companies are under growing pressure to improve their performance on ESG dimensions in the future. The challenge for many corporate leaders is that they aren’t sure how to do that. They lack understanding of exactly where they should be focusing their attention and how they should be communicating their ESG efforts. Many executives incorrectly believe that simple actions will suffice: improving ESG disclosures, releasing a sustainability report, or holding a sustainability-focused investor relations event. Some companies take those actions, fail to see a benefit, and grow disappointed or frustrated.
Harvard Business Review.
Climate-Related Disclosure is a Catalyst for Stronger Business Performance
Peggy Smyth, CFO, at National Grid comments on why her organisations views ESG reporting as important. She shares:
“Like many organizations, at National Grid, we publish an ESG databook, which provides information on our emissions, waste, and other climate-related metrics, as well as key social and governance-related data points. We hold ourselves accountable for improving upon these metrics every year. ESG has become the norm, rather than the exception.”
SASB.
ESG Disclosure Standards for Investment Products
“The interest in investment products with features related to environmental, social, and governance (ESG) matters4 has grown exponentially during the past several years. Driving this growth has been an increasing awareness among investors of environmental and social matters, a greater availability of ESG data and information that can be used in investment decision making, and heightened regulatory focus on ESG and sustainable investment products.” The CFA Institute is developing a voluntary, global industry standard to provide greater product transparency and comparability for investors by enabling asset managers to clearly communicate the ESG-related features of their investment products. The Institute has issued a public consultation paper available for comment.
Read the CFA Announcement.
Making a Better Business Case for ESG
Building a clear ESG business case for corporations and investors won’t be easy. What are the most pressing barriers?
- There is too much diversity in self-reporting. Corporations are self-reporting using very different ESG metrics. They generally do so without audits to determine the accuracy of the data. As a result, validating or comparing performance is difficult.
- ESG ratings done by organizations outside companies lack standardization. Third-party ESG data providers and raters, much like companies evaluating themselves, use different data and different rating systems, leading to wildly differing assessments.
- Reporting ESG metrics does not equate to using smart ESG strategies. The ESG data we do have may not be the type we want. We need to understand the results of good ESG strategies and executions, rather than any.
- Non-financial ESG metrics are reported as completely divorced from financial metrics. Very few companies are tracking the return on their ESG investments or efforts in their accounting systems. Thus, there are virtually no connections being made between accounting data and sustainability investments.
- Intangible company value isn’t properly tracked. Accounting itself is an inadequate tool for ESG measurement because it is poor at monetizing intangibles, which typically make up 84 percent of a company’s value today and include many sustainability benefits, such as brand reputation and risk mitigation.
Stanford Social Innovation Review.
Reports Highlight
ESG Disclosure Trends in SEC Filings
These are unprecedented times, and companies are facing important issues as they navigate the current economic, political, and social climate. The COVID-19 pandemic and Black Lives Matter movement have put the spotlight on public companies’ management of ESG issues like never before.
2020 ESG Topics Take the Spotlight in Quarterly Reports
So far in 2020, employee welfare, health and safety and business continuity issues have taken the spotlight in quarterly reports filed with the SEC. For example, in first quarter 10-Q filings, 38 out of 50 top companies by revenue in the Fortune 100 (or 76%) included disclosure on employee health and safety. Nearly all of these disclosures referenced COVID-19 and measures companies were taking to protect and promote employee welfare. Many companies also highlighted their business continuity planning in disclosures in light of potential COVID-related disruptions.1 This disclosure was in line with recent SEC disclosure guidance in Topics №9 and 9A, which both emphasize the importance of disclosing material information regarding employee matters due to the pandemic, such as employees’ transition to remote working arrangements, the modification of operations to comply with health and safety guidelines to protect employees, and constraints on human capital resources and productivity. The impact of COVID-19 on corporate operations cannot be overstated, and investors are interested in how companies are responding in terms of safety, logistics, and operational continuity.
Read about the changes in corporate reporting by JD Supra.
Useful tools:
Academic ESG Review: The UNPRI has developed a tool that aims to provide an overview of ESG related data for both academics and investors to gain a better understanding of the variety of data available. The tool is based on a multi-disciplinary review covering a range of fields including finance, economics, environmental economics, accounting and management. It is an intentionally broad list, encompassing a wide array of material — for a curated list of the very best academic research available.
Explore the tool.
