Why sustainability reporting needs governance perspective

Oct 03, 2019
Advice for making decision-useful disclosures

Effective corporate sustainability reporting cannot be decision-useful unless it is discussed within the context of a company’s governance structures.

The 2018 Ceres report Disclose What Matters reveals that corporate sustainability disclosures are increasingly common – but not necessarily meaningful. Eighty-six percent of S&P 500 companies last year issued a sustainability report, and more than 70 percent of large global companies disclose data using the Global Reporting Initiative (GRI) standards, the most widely adopted sustainability disclosure framework.

Unfortunately, the report finds that the explanation of how companies’ sustainability and business strategies connect is often mediocre.

Investors and other stakeholders want to understand how management is held accountable for improving sustainability performance. Financial analysts rank board oversight and accountability as the most important sustainability issue in their investment analysis and decision-making. Institutional investors have this year identified board oversight of business-relevant sustainability issues – particularly climate risks – as a top area of engagement.

This is because companies with strong governance systems for ESG issues outperform the MSCI ACWI benchmark. These systems are indicators of future performance given their ability to measure progress toward sustainability goals. Accordingly, more than 80 percent of mainstream investors rely on sustainability data to inform their decision-making.

So what do investors want companies to disclose when it comes to decision-useful sustainability reporting? Three key issues rise to the top:

  • Demonstrate board-level accountability for material sustainability issues

When a sustainability issue is deemed material, boards have a duty to educate themselves on that issue before making business decisions. Disclosing the board oversight structures for sustainability demonstrates how seriously a company holds management accountable for realizing performance on the issue in question. This information also shows how boards integrate these considerations into decisions on strategy, capital allocation and risk.

  • Focus on materiality but don’t ignore emerging trends

Although best-practice reporting focuses on material topics, organizations should also be mindful of how emerging issues may impact their strategy. A good balance can be achieved through effective stakeholder engagement to determine the sustainability issues most likely to be relevant for the company, both now and in the future.

  • Externally assure material sustainability disclosures

In 2018 only 36 percent of the S&P 500 externally assured their sustainability reports. External assurance indicates a high level of both rigor and reliability in the information disclosed and gives investors greater confidence in making investment decisions.

Ceres recommends that companies use independent, externally created standards to frame their disclosures to allow for comparability, which is critical for decision-making. The GRI standards require businesses to disclose the management approach for each material sustainability topic: how it is managed, by whom and what policies, procedures and plans are in place to mitigate or intensify the issue described. This gives investors and other stakeholders a better understanding of how a company approaches an issue, and whether it is going beyond minimal legal compliance toward truly effective management.

Investors care about governance because they care about transparency, accountability and performance. For sustainability disclosures to be effective and decision-useful, they must showcase how companies’ sustainability strategies are integrated within their governance systems for risk oversight and corporate accountability.

Alyson Genovese is director, regional hub: USA and Canada at GRI. Hannah Saltman is manager of governance at Ceres.

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