Magazine article Strategic Finance

SUSTAINABILITY REPORTING INCREASES: Nonfinancial Reports-Including Those on Environmental, Social, and Corporate Governance Issues-Are the New Norm

Magazine article Strategic Finance

SUSTAINABILITY REPORTING INCREASES: Nonfinancial Reports-Including Those on Environmental, Social, and Corporate Governance Issues-Are the New Norm

Article excerpt

For the sixth consecutive year, the Governance & Accountability Institute (GAI) has surveyed the sustainability reporting practices-environmental, social, and corporate governance (ESG)-of companies included in the S&P 500 Index. Its analysis of 2016 reports shows a modest increase for the year to 82% but a quadrupling since the first study in 2011 when only 20% of the index reported. Louis Coppola, executive vice president and cofounder of GAI, notes that leading-edge reporters "are seeing dramatic benefits from their efforts and are also increasingly engaging with investors to help make ESG data more strategically useful for decision-making by both company management, stakeholders and investors."

Globally, the rate of corporate responsibility/sustainability reporting is even higher, according to the Global Reporting Initiative (GRI), a pioneer in developing sustainability disclosure standards. GRI reports that 92% of the 250 world's largest corporations report on their sustainability performance. Large European companies are required by European Union directive to report on their performance regarding environmental, social, employee-related, human rights, anticorruption, and bribery matters.

Corporations based in the United States have no mandatory requirements for sustainability reporting, but the Sustainability Accounting Standards Board (SASB) sets disclosure standards from a U.S. perspective. Additionally, the International Integrated Reporting Council (IIRC) promotes corporate reporting that integrates both nonfinancial and financial plans and performance.

The quality of the information provided in sustainability reports has also been studied by GAI and the CSR-Sustainability Monitor[R] (CSR-S Monitor) from Bernard M. Baruch College of the City University of New York. This tool uses 11 components called contextual elements to analyze reports: chair's/executive message, environment, philanthropy & community involvement, external stakeholder engagement, supply chain, labor relations, governance, anticorruption, human rights, codes of conduct, and integrity assurance.

Analysis of 572 of the CSR-S reports of the world's largest corporations included in the Fortune 500 and Global 500 corporate rankings shows that the four topical areas of highest reporting quality in descending rank order are: philanthropy, environment, labor relations, and chair's message. The four areas of lowest reporting quality in decreasing quality order are: external stakeholder engagement, integrity assurance, governance, and anticorruption.

The Baruch/GAI study also examined the extent of use of GRI's Sustainability Reporting Framework and found that 84% of the publishing companies utilized the Framework. Perhaps not surprisingly, the quality scores of the companies that used the GRI Framework were significantly higher than those that didn't use the Framework in all topical areas, but the quality rankings by area had no significant change.

Mert Demir, director of research at the Baruch Center, said, "As companies pursue sustainability objectives, they increasingly face the necessity to address growing stakeholder concern and expectations regarding comprehensive, detailed, and material ESG information to complement the financial information that they believe to be insufficient to assess the big picture alone. And in this respect, following a reporting framework-GRI in particular-seems to make a big difference."

The SASB examined the quality of sustainability reports using information from U.S. Securities & Exchange Commission (SEC) filings. The SASB 2016 annual report shows a much lower overall reporting quality for U. …

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