The Governance & Accountability Institute (G&AI) has released 2023 Sustainability Reporting in Focus, the twelfth annual edition of its series tracking sustainability reporting trends. G&AI’s research analyzes sustainability reporting by companies in the S&P 500 index and the Russell 1000 index. G&AI observes in the 2023 report that “annual sustainability reporting is now firmly established as not only a best practice, but as essential for large- and mid-cap U.S. publicly traded companies alike. As a result, U.S. companies are better positioned than ever before for expected new regulations on climate reporting.”
G&AI first published an analysis of S&P 500 company sustainability reporting in 2012. Since that time, sustainability reporting has gone from relatively rare to almost universal; G&AI’s initial report found that just 20 percent of S&P 500 companies published sustainability reports or disclosures in 2011. In 2019, G&AI expanded its research to include all companies in the Russell 1000 Index and reported that 60 percent of Russell 1000 companies published sustainability reports in 2018. For a discussion of last year’s G&AI report, see Sustainability Reporting Reaches an All-Time High, But Investors Have Qualms About the Content, November-December 2022 Update.
The press release accompanying the 2023 G&AI report notes that it reflects “substantial increases in sustainability reporting for both large-cap and mid-cap U.S. public companies.” For the S&P 500, almost all companies now engage in sustainability reporting. And the gap between large- and mid-cap company reporting has narrowed. Eighty-two percent of the smallest half of the Russell 1000 published sustainability reports in 2022.
Other key findings of the 2023 report (which covers the 2022 publication year), include:
Sustainability reporting is ubiquitous. Ninety percent of Russell 1000 companies published a sustainability report in 2022, an increase from 81 percent in 2021 and 70 percent in 2020. Companies in the largest half by market cap of the Russell 1000 are nearly all sustainability reporters – 98 percent published a report in 2022, up from 96 percent in 2021 (and 92 percent in 2020). The smallest half of the Russell 1000 (companies with approximately $2 billion to $4 billion in market cap) had the largest increase in reporting, jumping to 82 percent publishing a report in 2022, compared to 68 percent in 2021 and 49 percent in 2020.
Use of ESG disclosure frameworks. For the second year, the sustainability disclosure standards issued by the Sustainability Accounting Standards Board (SASB) were the most-widely used disclosure framework among the Russell 1000. Seventy-eight percent of Russell 1000 reporters utilized SASB standards in 2022, an eleven-point increase from 67 percent last year. Alignment with the recommendations of the Task Force on Climate-Related Financial Disclosure (TCFD) also grew; half of Russell 1000 reporters utilized TCFD in 2022, compared to 34 percent in 2021, 17 percent in 2020, and 4 percent in 2019. Russell 1000 use of Global Reporting Initiative (GRI) disclosures was unchanged at 54 percent.
Industry sectors and sustainability reporting. In two of the eleven Russell 1000 industry sectors – Energy and Utilities -- all companies issued sustainability reports in 2022. The sector with the lowest percentage of sustainability reporters was Communications, with 40 percent of companies failing to issue a sustainability report (17 non-reporters out of the 43 companies in the sector). Communications was also in last place in 2021, although two more companies reported in 2022 than in 2021. Second-from-the-bottom was Financials with 14 percent of the sector not reporting (20 non-reporters in the 142-company sector). Health Care was third lowest with 12 percent of the 117 sector companies not reporting. However, Health Care also had the highest percentage growth in reporting companies – with 24 new reporters in 2022 (21 percent of the sector’s members).
External assurance on sustainability reporting. The number of companies that obtain external assurance from an auditor or other professional on their ESG disclosures is increasing. In 2022, 40 percent of Russell 1000 reporters obtained external assurance on their non-financial ESG disclosures, up 36 percent from 2021. Fifty-seven percent of the companies in the largest half of the index (the S&P 500) obtained assurance, compared to 49 percent in 2021. Twenty-one percent of companies in the smallest half of the Russell 1000 obtained such assurance, an increase from 18 percent in 2021.
External assurance on sustainability reporting varies in scope, level, and provider. For example, for all Russell 1000 companies that obtained external assurance, only three percent obtained assurance over their entire sustainability report, and 58 percent obtained assurance over only GHG emissions data. Further, only five percent of assurance reports provided a reasonable or a high level of assurance; 92 percent provided limited or moderate assurance. Engineering firms were the assurance provider in 68 percent of Russell 1000 assurance engagements, while accountants provided the assurance report in 17 percent of Russell 1000 assurance engagements and consulting firms were the provider in 15 percent.
Comment: ESG disclosure is becoming an important aspect of the audit committee’s work. Audit committees that are not already doing so should focus on what ESG disclosures their company makes, how the company collects ESG information, and how the disclosures impact financial reporting. As investors rely more heavily on ESG disclosures in their decision-making, the reputational and liability risks associated with inaccurate disclosure increase. To address these risks, audit committees should explore with management the controls and procedures to which sustainability disclosures are subject. These controls should be as rigorous as those applicable to traditional financial reporting. Management and the audit committee should also consider obtaining third-party assurance over sustainability disclosures.