Nonfinancial disclosure alone does not necessarily translate into better sustainability performance, as some companies may tick the boxes without tipping the scales, concludes a new report by The Conference Board.
Conducted in partnership with the Rutgers Center for Corporate Law and Governance, Sustainability Practices: 2018 edition analyzes data on sustainability disclosure and performance among companies in 23 countries, spanning Asia-Pacific, Europe, and North America. In all, data on more than 90 environmental and social practices for over 5,000 companies were analyzed to reveal how they are responding to the increased demand for transparency on their nonfinancial impacts. Practices analyzed in the report include atmospheric emissions, water consumption, waste and raw material consumption levels, board diversity and gender pay equity, and the adoption of policies to safeguard human rights in the supply chain. The report is complemented by the Sustainability Practices Dashboard, a comprehensive database and online benchmarking tool enabling users to segment data by 11 sectors under GICS, the Global Industry Classification Standard, and four company size groups (by annual revenue).
The report finds that nonfinancial disclosure alone has not yet necessarily translated into performance improvements. A case in point is gender diversity in the boardroom, which certain jurisdictions have hoped to foster by mandating more transparency on board composition. In Japan, where such disclosure requirements are in place, 99 percent of publicly traded companies do report the percentage of women on boards, yet women account for only three percent of directors. Similarly, 70 percent of companies in Taiwan report board diversity figures, yet women account for a meager seven percent of directors. More appreciable results can be seen in the United States (where, in addition to mandatory disclosure under SEC rules, large institutional investors such as CalPERS and Vanguard have been instrumental in the more recent progress recorded on this issue: 21 percent of U.S. public company directors are now female, an uptick from only a couple of years ago) and in European countries such as France (where, due to the legislative quota, women hold a median of 40 percent of board seats). For these reasons, existing reporting requirements are more effective when they include due diligence mechanisms to achieve not only greater disclosure but also performance improvements.
“Companies can benefit much more by embracing not only the letter but the spirit of the reporting instruments, mandatory or voluntary, which ultimately are intended to drive improvements in sustainability performance,” said Thomas Singer, principal researcher at The Conference Board. Singer is a co-author of the report with Anuj Saush, senior researcher, The Conference Board Sustainability Center, and Anke Schrader, senior researcher, The Conference Board China Center for Economics and Business.
“There is no doubt that companies are becoming increasingly attuned to the importance of reporting on their non-financial performance,” said Professor Sarah Dadush of Rutgers Law School. “This year’s Sustainability Practices study persuasively documents and confirms this trend. More important, however, it draws attention to the reality that more reporting does not necessarily mean better reporting or indeed better sustainability performance. For reporting requirements (whether mandatory or voluntary) to be effective in terms of generating positive change in sustainability performance, the quality of the reporting requirements must itself be improved.”
Shareholder pressure has been a major driver of transparency on corporate sustainability in the last few years. Increasingly, even mainstream institutional investors are using sustainability data to assess investment options and urge portfolio companies to test the long-term viability of their business strategy. Recent examples include BlackRock’s Larry Fink’s January 2018 letter to CEOs and the October 2018 petition that CalPERS and the New York State Comptroller submitted to the SEC to develop a cohesive ESG reporting framework. Companies’ boards and senior management need to reassert that they are the best suited to set the strategic direction of the firm but should also consider using the rising demand for environmental, social and governance (ESG) information to identify and manage risks and opportunities associated with these practices. Moreover, companies should be aware that, in the current business environment, public communications on sustainability can become an effective tool to strengthen the relationships with key stakeholders.
Other key findings include:
- Driven by mandatory reporting requirements, companies in Japan have the highest overall sustainability disclosure rate – Across the 91 practices examined, companies in Japan had an average disclosure rate of 31 percent. Mandatory environmental reporting requirements have been a clear driver of disclosure in Japan. Since 2006, for example, certain companies in Japan have been required to disclose greenhouse gas (GHG) emissions. The next three countries with the highest disclosure rates-United Kingdom, United States, and Taiwan-all shared an average disclosure rate of 26 percent. Nine countries had average disclosure rates in the single digits. Transparency regarding sustainability practices is particularly low among companies in Malaysia, Indonesia, Poland, and Pakistan, where average disclosure rates were below 5 percent.
- Larger companies, more subject to stakeholder scrutiny, tend to disclose more widely in all regions – Across regions and countries, sustainability disclosure rates generally increase with company size. The largest companies by revenue consistently have higher disclosure rates than companies in lower revenue groups, and in some cases the differences are quite significant. Companies in the largest revenue group (with annual revenues of $5 billion or more) have an average disclosure rate of 29 percent across all the practices examined, double the average disclosure rate of companies in the next-highest revenue group. Large companies are generally more prone to stakeholder scrutiny. In addition, many of the nonfinancial reporting requirements introduced in recent years, including those by stock exchanges, often apply primarily to larger companies.
- Globally, 16 percent of companies opt for external assurance, a figure that is likely to increase as stakeholders put greater demand on the quality and reliability of nonfinancial data – The use of external assurance is most prevalent among companies in Japan and Taiwan, where 42 percent of companies obtain some assurance of their nonfinancial data. Overall, this practice is most common among larger companies. More than two-fifths of companies in the largest revenue group have opted for external assurance of their sustainability reports, compared to 17 percent of companies in the next largest revenue group, and virtually no companies in the smallest revenue group. This finding is likely due in part to the extra cost and resources required to conduct external assurance and verification of nonfinancial data.
- Recognizing potential climate-related business impacts, 1 in 4 companies globally reports having a climate change strategy – This figure is highest in Japan, where 81 percent of companies have such a strategy, followed by companies in Taiwan (62 percent), the US (47 percent), the UK (39 percent), France (37 percent), and China (37 percent). Across the global sample, 21 percent of companies report their GHG emissions. However, more than three-quarters (78 percent) of companies in the UK report GHG emissions, driven largely by the mandatory GHG reporting requirements introduced by the Climate Change Act 2008. The next-highest levels of emissions disclosure were among companies in the US (49 percent) and Taiwan (48 percent).
- Companies in some of the countries with the greatest water risks have some of the lowest disclosure of water use – For countries expected to experience high levels of water stress in the future, such as India, Pakistan, and Spain, the low levels of disclosure related to water consumption could be concerning. In Spain, 16 percent and in India, 8 percent of companies report total water consumption. In Pakistan, only 1 percent of companies report this data. Not all sectors and companies are equally exposed to water risks, and in cases where water is not a material issue, there is little reason to expect companies to report data on their water usage. However, it is unlikely that in Pakistan, for example, water is not a material risk for 99 percent of companies.
- Globally, women fill less than 1 in 5 board seats, prompting efforts in several countries to foster greater female representation in business leadership – Across regions, just under half of companies report data on the gender makeup of their boards. The median percentage of women on boards of companies that report this figure is only 17 percent. The highest median percentage of women on boards is among companies in Europe (25 percent), followed by North America (20 percent). Women’s representation on company boards is lowest among companies in Asia-Pacific, where women account for only 9 percent of director positions. Companies in France have the highest median share of women directors (40 percent), followed by Italy (33 percent), and Belgium (30 percent). The low level of gender diversity on company boards has triggered efforts in several countries to foster female representation on boards. Norway, for example, in 2003 became the first country to pass a quota mandate for women’s representation on corpor.sustainability-reports.comate boards. Since then, several European countries have followed suit, including Spain, Belgium, France, Italy, the Netherlands, and Germany. In the US, a new California law will require companies “whose principal executive offices” are in California to have at least one woman on their boards by the end of 2019.