On July 16, the Governance & Accountability Institute (G&A) released Trends on the sustainability reporting practices of S&P 500 Index companies, its annual study of the non-financial disclosure and reporting activities of companies in the S&P 500 Index. G&A finds that 90 percent of these companies issued a sustainability report in 2019, up from 86 percent the prior year. See Large Company Sustainability Reporting Inches Up Still Further, May-June 2019 Update. Sustainability reporting has increased dramatically since G&A began its annual survey nine years ago. In 2011, only 20 percent of S&P companies released such reports; 53 percent did so in 2012. The tally rose to 72 percent in 2013, and 75 percent in 2014. The 90 percent level in 2019 is another new high.
Industry Sectors
The industry sectors with the highest percentage of S&P 500 companies that issued sustainability reports in 2019 were Utilities and Materials; all the companies in Utilities issued such reports, and all but one in Materials did so. Consumer Staples came in third with 94 percent reporting (31 out of 33 companies). At the other end of the spectrum, the industry sectors with the lowest percentages of companies issuing reports were Communication (5 non-reporters/24 percent of the sector), Information Technology (10 non-reporters/15 percent of the sector), Health Care (8 non-reporters/13 percent of the sector), and Real Estate (4 non-reporters/13 percent of the sector).
Use of Standards and Frameworks
The 2020 G&A report also looks at the use of four reporting approaches: The Global Reporting Initiative’s (GRI) disclosure framework, the Sustainability Accounting Standards Board’s (SASB) disclosure standards, the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), and disclosure of company alignment with the United Nation’s Sustainable Development Goals (SDGs). G&A finds that, in 2019:
51 percent of the S&P 500 reporting companies made some use of GRI standards.
25 percent of S&P 500 reporters referenced or reported in alignment with SASB standards.
16 percent of the S&P 500 referenced the TCFD recommendations, while 5 percent reported in alignment with TCFD.
36 percent of S&P 500 reporters included discussion of company alignment with specific UN SDGs
Many companies use more than one reporting approach. As G&A notes, the two most popular approaches, GRI and SASB are “not in competition with one another” and have different objectives aimed at different audiences:
“GRI is designed for disclosure on a wide range of ESG issues and topics relevant to stakeholders [as determined by each company] * * * . SASB is more refined focusing on a selected few disclosures relevant to a company’s overall sector and is geared more toward an investor audience. * * * Many companies are reporting using hybridized approaches.”
Assurance
Enhancing the credibility of sustainability reporting by obtaining third-party assurance of the company’s disclosures is becoming more common. G&A also looked at the prevalence of assurance in its 2020 report. It found that:
Twenty-nine percent of S&P 500 companies obtained some level of external assurance for at least some portion of their sustainability disclosures.
Five percent of the S&P 500 obtained assurance of the company’s entire sustainability report, while 55 percent sought assurance of specified sections of the report. For the remaining 40 percent, assurance only addressed disclosures regarding greenhouse gas emissions.
The levels of assurance varied. “An overwhelming portion (78%) of external assurance statements are provided at a limited/moderate level, while 8% are seeking a high/reasonable level of assurance.”
The majority (52 percent) of external assurance providers were engineering firms, while most other assurance engagements were performed by accountants (24 percent) or “small consultancies” (24 percent). (Auditor assurance of sustainability reporting is discussed in Want to Improve the Reliability of Your ESG Reporting? The CAQ Suggests Asking Your Auditor for Help in this Update.)
Comment: Most companies face some level of investor, customer, and/or supplier demand for more transparency concerning ESG issues, particularly those related to its supply chain integrity and climate change response. In this regard, in the press release announcing the 2020 report, Hank Boerner, G&A’s Chairman, Chief Strategist & Co-Founder, observes: “Over our years of research, we have seen a steady expansion of reporting in response to important drivers. These drivers include peer pressure, increasing demand from investors and other important stakeholders for greater disclosure of the corporate ESG strategies, actions, and achievements. This has led to a drive within the corporate sector to achieve industry leadership, gain a competitive advantage – and very important, to excel in the competition for capital.”
For audit committees, these types of disclosures may give rise to oversight challenges involving nature and content of the information and the controls and procedures to assure its accuracy and reliability. As investors rely more heavily on ESG disclosures as part of their decision-making, the reputational and liability risks associated with inaccurate disclosure increase. To address these risks, audit committees should explore with management the nature of the controls and procedures to which sustainability disclosures are subject. These controls should be as rigorous as those to which traditional financial reporting is subject. Obtaining third-party assurance over sustainability disclosures should also be considered.
Over time, there is likely to be substantial pressure to standardize disclosures on an industry-by-industry basis, so that investors will be able to compare company performance. Comparison is currently difficult because each company is free to present whatever information it thinks appropriate in whatever format it chooses. In this regard, SEC reporting companies and their audit committees should consider becoming familiar with the Sustainability Accounting Standards Board’s ESG disclosure standards that apply to the industry or industries in which they operate. See SASB Releases its Codified Standards, December 2018 Update. SASB’s standards provide a framework for disclosure of material information that is decision-useful to investors and that permits comparison between companies in the same industry.