IR30: The changing emphasis on environmental reports
‘If the capital markets were to exercise preference for companies with superior environmental performance, this would constitute a powerful mechanism for environmental self-regulation in the market.’
Few would disagree with this statement now, just as few would have when it first appeared in IR Magazine in March 2003, citing a booklet entitled Environmental information in the mainstream equity sector.
Few would argue, either, that such a large ‘if’ has reduced in size since then. If the past 15 years show anything, it is that self-regulation starts with external regulation, and that markets rarely exercise preferences they can afford to defer. With external regulation over companies’ environmental impact has come a determination from firms to become thought-leaders in ESG and outperform in their sector.
Martin de Sa’Pinto’s cover story Emphasis on the environment points to progress in ESG reporting up until that year. SRI in the US stood at $2.3 tn, versus $65 bn in 1985. Companies able to show greater awareness of environmental performance enjoyed a lower risk profile and lower cost of capital. But preparing performance reports designed to give investors the information they needed was by all accounts rather daunting.
As Rob Lake, then head of SRI engagement and corporate governance at Henderson Global Investors comments in the article: ‘We’re not interested in pictures of people planting trees. We want to see that a company has thought about how to address the issues that affect it. If it uses a lot of energy, what are its policies for dealing with carbon dioxide emissions?’
To quantify this next big ‘if’, companies set out on a quest for the Holy Grail of environmental performance data. SRI investors, meanwhile, began ratcheting up demand for emissions data, responses to incidents, trends and descriptions of management systems. The Global Reporting Initiative (GRI), founded just six years before the article was published, responded to concerns over comparability of company reports by aiming to standardize performance criteria that would make producing and interpreting this evidence easier. Today, the GRI is a trusted source for policy makers, regulators and companies alike.
In 2016, it launched a new membership and engagement program of 550 entities from 69 countries, called GRI GOLD Community, the aim of which is to get the best out of sustainability reporting. The sheer take-up in numbers shows how eager corporate entities today are to be associated with the prestige of sustainability-focused societies.
Sa’Pinto’s feature makes little mention of how the companies responded to public demand for their environmental track records but, by 2015, after the hardship of the financial crisis and the widespread adoption of social media, ESG performance was as much about a firm’s reputation on Main Street as on Wall Street. Environmental reporting has grown even more important, with new assessment bodies created, such as the Climate Disclosure Standards Board and the International Integrated Reporting Council, and with data used in reports becoming integrated into companies’ marketing and consumer service strategies.
The Addis Ababa Action Agenda of 2015 led to the United Nations’ announcement of its 17 Sustainable Development Goals, of which seven focus on environmental impact. Since then, former mayor of New York Michael Bloomberg has created the Task Force on Climate-related Financial Disclosures, another body that, according to its own mission statement, seeks to help investors, lenders, insurers and other stakeholders ‘understand what financial markets want from disclosure in order to measure and respond to climate change risks, and encourage firms to align their disclosures with investors’ needs.’
So many new players in the reporting world suggests there may be too many competing specialties and interests but, as Helle Bank Jorgensen of B.Accountability wrote for IR Magazine earlier this year, ‘the major reporting players agree they are in fact collaborating, not competing.’ She writes, however, that for corporates, the main challenge remains using the small amount of human capital they have to dredge up reports from large volumes of information across multiple frameworks and standards yet to be synthesized.
In the same article, Tim Mohin, chief executive of GRI, recommends what he calls ‘the four Cs of effective reporting’: concise, current, consistent and comparable. Annual reports are not mandatory by GRI standards, he explains, and reporting more frequently ‘would mean the need for fewer indicators, hence concise and current, while consistency and comparability between standards are essential for investors to screen and engage with company information.’