Ceres demands better corporate sustainability reporting
In 2008, the world was plunged into a financial crisis because investors made bad decisions on financial risks they didn’t fully understand. Ten years later, a new crisis is brewing. But this time, the risks are sustainability issues such as climate change, water scarcity and human rights abuses.
The evidence is clear that sustainability risks affect the corporate bottom line. A recent study by the Universal Ecological Fund found that by 2028, climate change will cost the $360 billion per year, about half the expected growth of the economy. In 2016, multi-national corporations disclosed that they experienced $14 billion of losses from water-related risks, a five-fold increase since the previous year.
But although a growing number of investors are integrating sustainability into their investment analysis, they remain the exception rather than the rule. Why?
It’s not that the information isn’t out there. Companies, particularly large businesses, have been disclosing information on their sustainability plans and performance for years. The problem is that the information companies provide largely isn’t useful to investors.
That’s the main finding of Disclose What Matters, a new Ceres report that analyzes the sustainability disclosure practices of some of the world’s largest companies. We find that most global companies provide comparable disclosure - with around 70 percent of large global companies using the GRI Standards.
But far fewer companies disclose their sustainability performance in a way that is financially relevant. And most large companies don’t produce sustainability disclosures in as rigorous a manner as financial disclosures; for instance, by externally verifying their reports.
The takeaway of the report is clear: The quality of sustainability disclosures provided by most businesses needs to improve to help the market make informed decisions. Market efficiency depends on good information. Without it, both companies and investors suffer.
Investors recognize this reality and have been putting increasing pressure on companies to provide comparable, financially relevant and reliable disclosures on their sustainability performance. What’s interesting though, is that investors are not just asking for better sustainability disclosures - they are looking for companies to demonstrate that they have the right governance systems that support the production of these disclosures.
The recently launched Climate Action 100+ initiative, which is supported by 289 investors with nearly $30 trillion in assets under management, calls on the world’s largest greenhouse gas-emitting companies to ‘improve governance on climate change, curb emissions and strengthen climate-related financial disclosures.’
ROLE FOR CORPORATE SECRETARIES
Given this focus by investors, it is increasingly clear that developing this kind of ‘decision-useful’ sustainability disclosures can no longer be the exclusive function of a company’s sustainability department. Investor relations and the CFO’s office should be, and in many cases are, involved. Given the focus on governance, the corporate secretary also needs to play an important role.
The corporate secretary should work proactively with their company’s investor relations and sustainability teams in a number of key ways, including tracking the growing investor focus on sustainability issues and driving the internal analysis of whether certain sustainability issues are material to their company. Building on that understanding of investor focus and materiality, they should then facilitate decision-making on which issues should be brought to the board’s attention and how they should be disclosed publicly.
In fact, our report finds that investors pay very close attention to whether a company’s board oversees sustainability issues, and the quality and scope of their materiality assessments. Both indicators are seen as important evidence that a company is prioritizing sustainability issues as important to the bottom line.
However, we also find that disclosure on these indicators is limited. Most companies disclose that they have the relevant systems in place. But they don’t connect the dots back to decision making, particularly in terms of business strategy and performance.
The Society for Corporate Governance recently released two primers on sustainability that have useful background for corporate secretaries who want to better understand the growing investor focus on sustainability and the legal perspectives to keep in mind when disclosing sustainability performance.
What can corporate secretaries and other governance professionals within companies do to bridge the gap and provide useful information to the investor community? Disclose What Matters offers the following recommendations:
1. Commit to the complete use of sustainability reporting standards
Corporate secretaries should educate themselves on the various sustainability-related disclosure standards, and involve themselves in the internal discussions on the most appropriate standards that their companies should adopt.
Our report recommends that all companies should use GRI Standards, but should also consider other relevant disclosure frameworks that can provide a better focus for the specific information they must disclose. Corporate secretaries should also drive the discussions on whether and when to use additional frameworks, such as those from the Sustainability Accounting Standards Board or the Task Force on Climate-related Financial Disclosures, which are particularly prized by the investor community.
2. Disclose the impacts of governance systems for sustainability
Most large global companies disclose the use of relevant systems to show how they prioritize sustainability issues and whether they see these issues as financially relevant. But they don’t disclose how these systems link to decision-making on business performance. Corporate secretaries can help connect these dots.
3. Externally assure material sustainability disclosures
When companies can provide robust external assurance prepared with the same level of rigor as financial disclosures, these disclosures will provide the ‘investor-ready’ and mature approach that investors look for in sustainability disclosures. Corporate secretaries can drive the decision making on this.
Disclosure for its own sake isn’t the point. As strategic agenda setters, corporate secretaries can help companies bridge the gap and provide executable, relevant information to investors, to help companies move from simply ‘disclosing more’ to ‘disclosing what matters.’
Veena Ramani is program director of the capital market systems at Ceres