4 things you should know about sustainability reporting practices
While disclosure is generally on the rise, this greater transparency does not always produce significant changes in practice. At least not yet.
A new report by The Conference Board reveals the latest trends in sustainability reporting. The analysis examined how nearly 6,000 companies in 26 countries are reporting on more than 90 environmental and social practices, ranging from greenhouse gas (GHG) emissions to boardroom diversity to water consumption.
As companies prepare for the sustainability reporting season, here are four takeaways.
1. Sustainability reporting continues to increase
Across the global sample, nearly one-quarter (23 percent) of companies report their GHG emissions. That’s up from 21 percent last year. And in the U.S. sample (made up of the 250 largest companies by revenue), 56 percent of companies report GHG emissions. Last year, 49 percent of U.S. companies in the sample reported this data.
Climate risk disclosure is also on the upswing: Across the global sample, 9 percent of companies report climate-related risks, up from 6 percent last year. Almost half of U.S. companies examined (47 percent) disclose climate risk, a significant increase from 36 percent last year.
The analysis also found increases in disclosure of water consumption: One in five companies in the global sample report how much water they consume, up from 18 percent last year. Such disclosure is also up in the United States, as more than one-third (34 percent) of companies in the sample report this data, compared to 29 percent last year.
What’s fueling the disclosure momentum?
In part, it’s the prominence of climate issues in the voting policies of several large institutional investors, including BlackRock and State Street. In some cases, investors themselves are required to disclose their exposure to climate-related risks.As more companies report nonfinancial data, there is greater demand from investors for reliable, high-quality and comparable data.
In the U.S., for example, the two largest public pension funds — the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) — are required by California law to report the climate-related financial risks of their portfolios as of the beginning of this year.
There is also the fact that sustainability disclosure requirements in Europe are influencing the reporting practices of companies in other jurisdictions, including U.S. companies. The recent implementation of the European Union’s nonfinancial reporting directive, for example, is resulting in increased disclosure by both European and foreign companies operating in Europe, as the latter are also subject to the requirements.
2. Increased disclosure isn’t always translating into changing practices
While disclosure is generally on the rise, this greater transparency does not always produce significant changes in practice — at least not yet. This disconnect highlights the fact that disclosure does not necessarily drive performance — at least not immediately. It may also reflect that many companies may be responding to reporting requests but have not yet made sustainability an integral part of their business strategy.
For example, GHG reporting by companies in the S&P Global 1200 index has increased over the last three years, from 45 percent of companies reporting on these emissions three years ago to 61 percent this year. However, the median emissions of companies in this index also has risen over the last three years, from 591,000 metric tons to 786,000 metric tons of GHGs. Even when measured by revenue intensity (GHG emissions per revenue), median emissions are back up to the levels recorded three years ago after a slight dip in the last two years.
The trend is similar for water consumption: Half of S&P Global 1200 companies report this information, up from 37 percent two years ago. The median volume of water consumed by these companies also has increased, from 4.4 million three years ago to 5.2 million most recently. As with GHG emissions, water consumption also has increased over the last three years when measured by revenue intensity.
3. Growth in sustainability reporting is creating demand for better data
As more companies report nonfinancial data, there is greater demand from investors for reliable, high-quality and comparable data. External assurance is one way to help provide some confidence. In a recent survey by McKinsey, virtually all investors surveyed agreed that sustainability reports should undergo some audit.
The Conference Board’s analysis found that, across the global sample, 17 percent of companies opt to have some of their sustainability information externally assured. In the U.S. sample, one-third of companies undergo assurance for sustainability data, up from 28 percent last year. While assurance is becoming more common, there is still much variation in this practice, with notable differences both in the levels obtained by companies and the types of organizations providing the assurance.
Sustainability assurance is not perfect, but it likely will become more important: 70 percent of survey respondents believe the need for assurance will increase over the next five years. Notably, almost 90 percent of respondents currently obtaining assurance for their sustainability data believe there would be implications if they discontinued the practice. The most significant potential consequences they mentioned include diminished credibility, pushback from investors and other stakeholders, and reduced scores from ratings agencies.
4. Is the disclosure frenzy creating reporting fatigue?
Transparency is a good thing, and we can celebrate the increased attention by corporations to sustainability disclosure. At the same time, we should not focus too narrowly on disclosure. There is a real possibility that the requirements of various reporting frameworks and rating agencies may push companies — many of which have noted "reporting fatigue" — to prioritize responding to reporting requests over addressing the underlying sustainability challenges and opportunities that a particular company faces. Indeed, the sheer size of the ever-changing sustainability reporting arena (which only grew with the addition of the World Economic Forum’s draft framework (PDF)) can itself compromise energy and attention.
Companies face a daunting challenge in this environment: being mindful of the expectations for increased and standardized ESG disclosure, while at the same time focusing their sustainability efforts on the issues that are most material to their business and telling their story authentically and effectively to multiple constituencies.
Achieving that balance will require a coordinated — and sustained — effort across the C-suite but should yield long-term returns for stockholders and other stakeholders alike.