Two recent reports highlight the widespread acceptance of public company sustainability reporting and the increasing role that the risks and opportunities associated with environmental, social, and governance (ESG) issues play in the boardroom.

G&A Annual Survey

On March 20, the Governance & Accountability Institute (G&A), a sustainability consulting firm, released the results of its seventh annual analysis of sustainability reporting by S&P 500 Index® companies. G&A found that 85 percent of the companies in the index published a sustainability or corporate responsibility report in 2017. The popularity of voluntary sustainability reporting has increased dramatically during the past seven years. According to G&A, in 2011, only 20 percent of S&P companies released such reports; 53 percent did so in 2012, 72 percent in 2013, and 75 percent in 2014.

G&A also reported that, by industry sector, the highest percentage of nonreporting companies were in real estate (7 non-reporters/24.2 percent of the sector), health care (13 non-reporters/21.3 percent of the sector), and financials (14 non-reporters/20.9 percent of the sector). In contrast, the sectors with the lowest non-reporting rates were utilities and telecommunications services (no non-reporting companies in either sector), materials (1 non-reporter/4 percent of the sector), and consumer staples (2 non-reporters/5.9 percent of the sector).

In the “flash report” announcing the survey results, Louis Coppola, G&A’s Executive Vice President and Co-Founder, attributed the surge in sustainability reporting to investor demand:

"One of the most powerful driving forces behind the rise in reporting is an increasing demand from all categories of investors for material, relevant, comparable, accurate and actionable ESG disclosure from companies they invest in. Mainstream investors constantly searching for larger returns have come to the conclusion that a company that considers their material Environmental, Social, and Governance opportunities and risks in their long-term strategies will outperform and outcompete those firms that do not.”

Ceres Turning Point Report

A report issued at the end of February by Ceres, a nonprofit organization that works with investors and companies to address sustainability challenges, provides another perspective on the sustainability reporting and performance of large U.S. companies. In Turning Point: Corporate Progress on the Ceres Roadmap for Sustainability, Ceres analyses the practices of “more than 600 of the largest publicly traded companies in the U.S.” with respect to twenty governance, disclosure, stakeholder engagement, and environmental and social performance expectations in The Ceres Roadmap for Sustainability. Ceres’s findings related to disclosure and board oversight include:

  • Sustainability disclosure is improving, but has a long way to go. “While more companies disclose sustainability risks in annual financial disclosures, most stick to boilerplate language, failing to provide investors decision-useful information.” Specifically, Ceres found that 51 percent of companies discuss climate change risks in annual SEC filings, compared to 42 percent in 2014. However, 32 percent of companies only address this issue from the perspective of regulatory risk.
  • Materiality. As a result of investor pressure to disclose material sustainability risks, “more companies are taking steps to prioritize the environmental and social issues of greatest importance.” Thirty-two percent of companies “conduct sustainability materiality assessments,” compared to only 7 percent in 2014. However, only six percent “publicly disclose how their assessment guides strategic planning and decision-making.”
  • Executive accountability for sustainability issues is increasing. Sixty-five percent of the surveyed companies hold senior-level executives accountable for sustainability performance, an increase from 42 percent in 2014. Eight percent link executive compensation to sustainability issues beyond compliance, compared to three percent in 2014.
  • Board responsibility is becoming more explicit. Thirty-one percent of companies have integrated sustainability into board committee charters. (Ceres states that this indicates that, “[a]lthough accountability for these material issues has increased among senior executives, oversight among corporate boards has not kept pace.” 

The Ceres report also discuses progress with respect to a variety of specific sustainability issues, such as greenhouse gas emissions, water, diversity, human rights, and supply chain integrity management. The bulk of the report analyzes progress against Ceres expectations in various industries, and includes company-specific examples.

Comment: As noted in prior Updates, sustainability reporting is rapidly becoming the norm for large public (and many smaller and private) companies. Most companies face some level of investor, customer, and/or supplier demand for more transparency concerning a variety of ESG issues, particularly those related to its supply chain integrity and climate change response. Over time, sustainability disclosures of various types may become mandatory, either as a result of the application of traditional securities law materiality to ESG issues or through direct regulatory or statutory disclosure mandates. For audit committees, these types of disclosures will pose oversight challenges involving compliance with new reporting requirements and controls and procedures to assure the accuracy and reliability of non-traditional disclosures.

The Ceres report also foreshadows a trend that goes beyond disclosure: The explicit incorporation of ESG issues into the responsibilities of directors. This could occur through change in board committee charters, as Ceres notes, or through litigation applying traditional concepts of director fiduciary duty to a broad range of non-financial risks and opportunities.