Report: Companies lagging on sustainability disclosure

Companies are, on the whole, doing the least they can get away with in terms of revealing their exposure to risks and other effects of sustainability-related issues, denying investors the level of information they need to make considered decisions, according to a new report.

The Sustainability Accounting Standards Board (SASB) on December 1 released its first annual report analyzing the effectiveness of sustainability disclosures. The research is based on the latest Form 10K or Form 20F SEC filings for the top companies in a variety of industries. SASB develops sustainability accounting standards designed to help public corporations report material information to aid investors.

Among other things, the report finds that:

• Overwhelmingly, companies recognize the existence of, or the potential for, material impacts related to the sustainability topics included in SASB standards – 69 percent of companies studied report on at least three quarters of the sustainability topics included in their industry standard, and 38 percent provide disclosure on every SASB topic
• But the most common form of disclosure uses generic boilerplate language, which SASB says is inadequate for investment decision-making. Such non-specific information is used 53 percent of the time when companies address an SASB topic
• Companies use metrics, which are described as more useful to investment analysis, in less than 24 percent of cases, though even then the metrics are non-standardized and so cannot be compared across industries.

‘Although companies have begun to address a growing number of sustainability factors in their SEC filings that have impacted – or are likely to impact – their financial condition or results of operations, the quality of these disclosures has been lacking,’ the report authors write. ‘This puts investors at a disadvantage when it comes to fully understanding their risk exposures.'

They add that SASB’s findings ‘demonstrate that, by and large, companies are taking a minimally compliant approach to sustainability disclosure, providing the market with information that is inadequate for making investment decisions.’

Boilerplate disclosures may be less compliant than many companies believe, according to the authors. One popular location for the disclosure of material sustainability information is the management discussion and analysis (MD&A) section of SEC filings, which requires companies to address known trends, uncertainties and events that are reasonably likely to have a material impact on the company’s financial condition or results of operations.

SASB notes that SEC interpretive guidance on MD&A disclosure emphasizes that companies should identify and discuss KPIs, both financial and non-financial, used to manage the business and that would be material to investors. It also notes that boilerplate disclosure may be less legally protective than many companies believe: based on case law, generic disclosure may increase the risk of Rule 10b-5 claims that the disclosure was materially false or misleading, the authors write.


INDUSTRY DIFFERENCES
Although the broad trends identified apply to nearly every industry covered, important differences exist between and within sectors. For example, sustainability disclosure tends to be of somewhat higher quality overall in those industries with business-to-customer models, such as transportation, services and consumption, compared with business-to-business operations further up the value chain, such as resource transformation and non-renewable resources.

‘This may reflect the importance of brand value to such enterprises, and the susceptibility of intangible assets to impairment from reputational damage,’ the authors note.

Despite a generally higher level of disclosure in business-to-customer industries, SASB also finds boilerplate language to be more common among those types of companies. Other industries, particularly those that are more strictly regulated – such as financial services and non-renewable resources – tend to provide fewer but more tailored disclosures.

In general, companies most commonly address SASB topics related to social capital (87 percent of entries analyzed provide some form of disclosure), human capital (83 percent) and the environment (82 percent). But they much less frequently address SASB topics related to business model and innovation (69 percent).

Although social capital topics are the most likely to be addressed, however, they are also the most likely to be disclosed using boilerplate language (59 percent of reported topics) and the least likely to be disclosed using metrics (17 percent of reported topics). On the other hand, disclosures related to human capital tend to be of the highest quality, with 37 percent of available disclosures using metrics – much more than in other areas.


KEY FINDINGS

• Sustainability disclosure tends to be of higher quality overall in industries with business-to-customer models, as opposed to business-to-business operations.
• Boilerplate language – which SASB calls inadequate for investment decision-making – is the most common form of disclosure in all regions except Europe.
• 69 percent of companies report on at least three quarters of the sustainability topics included in their SASB industry standard.