April 5, 2011
A little over a year ago, the U.S. Securities and Exchange Commission (SEC) issued guidance requiring companies traded publicly in the United States to report on the risks and opportunities their operations face due to climate change. The guidance came after three years of persistent advocacy from a coalition of investors and nonprofits including Ceres, Environmental Defense Fund, and Pax World Management Corporation, and the announcement was hailed as a major breakthrough for investor groups looking to minimize long-term risk in their portfolios.
While the SEC guidance was significant because it was the world’s first economy-wide climate change disclosure requirement, it is also part of a growing number of requirements worldwide that have put more pressure on companies to disclose more information about their environmental, social, and governance (ESG) performance.
Despite this global momentum, companies have been slow to respond. To help company managers stay ahead of this trend, BSR has put together a few key points for managers to consider in developing reporting strategies for the next several years.
The Trend Toward Integrated and Mandatory Reporting
In 2010, several developments emerged signaling the increasing likelihood that companies will need to report ESG information alongside financial data:
- The U.S. government passed a bill requiring U.S.-listed companies to report whether their products contain "conflict minerals"—tin, tantalum, tungsten, or gold from the Democratic Republic of the Congo or an adjoining country. A second provision in the bill requires oil, gas, and mining companies to publicly disclose their payments to governments for the extraction of natural resources.
- Several stock exchanges, including those in Istanbul and Brazil, signed on to the UN Principles for Responsible Investment (PRI) and have added ESG disclosure as part of their listing requirements.
- The Johannesburg Stock Exchange, also a PRI signatory, modified its listing requirements to include integrated reporting, making South Africa the first country to mandate integrated reporting.
- The International Integrated Reporting Committee (IIRC) was formed with the mission to “create a globally accepted integrated reporting framework” that gathers financial, environmental, social, and governance information in a clear and comparable format. (BSR CEO Aron Cramer serves as an advisor to this group on what such a framework should look like.)
In addition to these developments, an increasing number of investors are using ESG data to help inform their decisions. Bloomberg, which launched a data service in 2009 to provide analysts with ESG data alongside financial data on their terminals, reported that 5,000 unique customers in 29 countries accessed the data—an increase of 29 percent from the previous year. Importantly, these are largely mainstream investors, not just mission-driven or “socially responsible” investors. Consensus among the investment community is that ESG integration eventually will be the expectation rather than the exception.
Despite these trends, research indicates that companies are not changing their reporting practices. A recent Ceres report, which looked at the annual filings of companies in a broad range of industries, found that, over the last year, it was rare for companies to provide robust reporting on climate change in their 10-K filings. While the report commended Siemens—which provided data on the opportunity it has to generate revenue from environmental products and services designed for a low-carbon economy—and Chiquita Brands International—for disclosing the impact of extreme weather conditions on crop size and quality, and for quantifying the financial cost it incurred in 2010 due to weather-related disruptions—Ceres noted that the vast majority of companies that mentioned climate change did so only in vague and general terms.
Bringing Rigor to Sustainability Reporting
Based on BSR’s experience helping companies respond to the SEC guidance and develop integrated reports, we recommend the following actions for company managers developing reporting strategies for the next several years:
- Align sustainability and financial reporting timelines. The momentum toward integrated or mandatory reporting will require that companies align their financial and corporate responsibility reporting timelines. The time pressure and challenges of coordinating ESG data collection across a global corporation can make this a trying exercise. Data-management systems tailored for ESG data, such as Credit 360, One Report, and SAP’s Sustainability Performance Management software, can help by removing the manual collection effort of reporting. These systems also help improve the consistency of data from global operations and, in some cases, even facilitate data collection from suppliers.
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Increase robustness and credibility of ESG data. Right or wrong, company managers often say they feel less liable for data in corporate responsibility reports than they do for data in annual reports. Because integrated and mandatory reports are subject to the scrutiny of regulators and investors, they are uncomfortable with the accuracy of ESG data and hesitate to include it except where absolutely necessary.
Owners of ESG data—often the corporate responsibility or sustainability team—should consider where this discomfort exists and work with representatives from those functions to gather and review the data. Getting input from legal, finance, or internal audit and compliance teams can help ensure that they are comfortable with the credibility of data. Data-management systems such as those described above can also help build confidence in ESG data.
- Go beyond mandatory reporting and pursue leadership. Company managers need to remember that mandatory reporting requirements do not have to create a ceiling for reporting. Mandatory reporting may lead to more conservative reporting overall, but it doesn’t prevent companies from continuing to release standalone corporate responsibility reports or using the web to provide updates on sustainability progress. Mandatory and integrated reporting should be seen as an opportunity to reach regulators and investors rather than a limitation on transparency.
While we are still in the early stages of the transition to integrated and mandatory reporting, company managers should seize the moment to reassess how they view the sustainability reporting process. By bringing in the same kind of rigor, focus, and consistency used in annual financial reporting to the development of sustainability reports, company managers will be better positioned to make the inevitable move to integrated reporting.
Let’s talk about how BSR can help you to transform your business and achieve your sustainability goals.