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Two Steps Forward

At last, corporate sustainability reporting is hitting its stride

corporate reporting hitting its stride

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It wasn’t very long ago that sustainability reporting was perceived as a corporate backwater. The fruits of the labors of sustainability professionals producing such reports were seen as a dense thicket of data, often presented with insufficient context, or a glossy PR tool used to placate investors, activists and others.

Now, they’re ubiquitous. Some 90 percent of the largest 500 companies by market cap in the Russell 1000 Index publish them, according to a report issued last week by the Governance & Accountability Institute.

It’s not just the quantity, of course. The importance of corporate reporting is rising amid companies’ efforts to assess, quantify and communicate climate risk, various ESG metrics and progress toward net-zero and other goals. And while the lack of standards and consistent reporting methodologies continues to bedevil both producers and consumers of such reports, there are mounting efforts to bring order to the chaos. Among the most recent developments:

  • Last week, BlackRock, the world’s largest asset manager, issued a paper calling for a convergence of standards — a single reporting framework for ESG — "to achieve a globally recognized and adopted approach to comprehensive reporting."
  • Last month, the U.K.-based International Financial Reporting Standards (IFRS) Foundation issued a Consultation Paper on Sustainability Reporting, proposing a new Sustainability Standards Board to develop global sustainability standards. Its objective would be to "develop and maintain a global set of sustainability-reporting standards initially focused on climate-related risks" which is "coherent with and connected to financial reporting."
  • And in September, a group of five sustainability reporting organizations — Sustainability Accounting Standards Board, Global Reporting Initiative, International Integrated Reporting Council, CDP and Carbon Disclosure Standards Board — joined forces and said that they plan to work together to develop "a comprehensive global corporate reporting system."

The importance of corporate reporting is rising amid companies’ efforts to assess, quantify and communicate climate risk, various ESG metrics and progress toward net-zero and other goals.

And, of course, there's the Big Four accounting firms, which in September issued a set of metrics for companies to use for ESG reporting globally.

There’s no lack of an audience for consistent and comparable data, as the IFRS paper points out:

Institutional investors are demanding better disclosure of climate risks and sustainability indicators as they face an increasing set of expectations from their customers, clients and beneficiaries.

Large companies are seeing increased demands for reporting, driven by regulation, consumers, investors and the recognition of the impact that managing sustainability risks can have on long-term value creation.

Central banks are increasingly focused on climate-related risks and sustainability more broadly as important drivers of their financial stability work. Some regulators around the world are starting to incorporate climate analyses into stress tests, and regulatory stress testing of banks and insurers increasingly includes estimates of climate-change impacts.

Regulators’ interest in sustainability reporting is growing. The International Organization of Security Commissions, whose members includes the national securities commissions, is considering how to be involved in sustainability finance and reporting.

And, of course, job seekers, current employees, advocacy groups, students and some consumers are seeking to identify the "good" companies, at least from a sustainability perspective.

All of this is putting new pressure on company sustainability departments to up their game, looking not just at what their executives and boards want to communicate — and what information legal counsel will allow — but also on the criteria that external stakeholders are using to assess companies’ risk and resilience. And not just in standalone sustainability reports. Increasingly, such information will need to go into financial reporting, too.

As BlackRock noted:

We anticipate that companies will increasingly be expected, under existing accounting and audit standards and processes, to take climate risk into consideration in preparing financial statements. Assumptions and materiality judgments that are inconsistent with a company’s stated position on the transition to a low-carbon economy may be challenged by investors, auditors and regulators, and therefore ought to be explained and justified. Given the recognition of the materiality of sector-specific sustainability risks to long-term investment returns, we expect increased investor scrutiny of the assumptions underlying financial reports, with concerns reflected in engagement and voting.

Another growing development should send a shiver down the spine of any sustainability exec: At the same time that institutional investors’ interests in environmental issues is on the rise, many investors are frustrated by what they perceive to be greenwashing by corporate boards, according to an annual survey undertaken by asset management giant Schroders, which assessed the views of institutional investors managing $25.9 trillion across 26 countries.

That aligns with a recent glass-half-full assessment conducted by GRI and Globescan, of 1,000 respondents in each of 27 global markets, of how much trust they put in how companies communicate their sustainability performance. The level of trust rose to 51 percent this year, the highest since the survey began in 2003, when it was at 30 percent. 

That’s hardly cause for celebration. It means roughly half still don’t trust such communications.

The Schroders report found that while environmental issues were the most important engagement issue for shareholders, many are frustrated at the failure of some firms to come forward with sufficiently ambitious and quantifiable climate strategies.

If that’s not a shot across the bow, I’m not sure what is.

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