Corporations Continue to Increase Their Sustainability Disclosure in Key Areas
Monday, January 25th, 2021
Major corporations notably increased their sustainability disclosures in key areas last year, including climate-risk reporting, human rights, and water stress exposure, according to a new report by The Conference Board.
Sustainability Practices: 2020 Edition examines corporate disclosure and performance data across North America, Europe, and Asia-Pacific. The report shows that even as the COVID-19 pandemic caused a disclosure decline across subject areas reflecting delays in data-gathering and reporting, large increases in certain other areas (especially those included in financial reports) portend a movement toward greater disclosure of ever-evolving sustainability practices.
More companies, for example, are disclosing climate risks in their annual reports, with the number of UK companies doing so more than doubling in 2020. These increases are the result of both mandatory and voluntary climate-focused regulatory initiatives. The EU's new Taxonomy Regulation, for example, requires financial institutions to make climate-related disclosures by the end of 2021. And in the private sector, large institutional investors such as BlackRock have called on companies to address climate change risks in their reporting.
Water-risk exposure is a growing concern for investors and a disclosure topic for companies. Companies in certain industries, particularly in the materials and energy sectors, are making such disclosures, and others should consider doing so as well. Water insecurity can have a significant impact on companies' financial stability, reputation, license to operate, and the security of their supply chains. The share of companies in the materials sector disclosing their water-stress exposure, for example, increased from 7 percent in 2019 to 33 percent in 2020.
"The trend toward greater disclosures reflects a combination of factors: pressure from investors and the impact of regulations and reporting frameworks," said Thomas Singer, Principal Researcher at The Conference Board ESG Center and the report's lead author. "Major investors are explicitly calling on companies to address climate and other risks in their annual reports, and more regulatory efforts, particularly outside the U.S., are having an impact."
The Conference Board analyzed sustainability disclosure data on 92 environmental and social practices for more than 6,000 companies across North America, Europe, and Asia-Pacific as well as for companies in the S&P Global 1200 index. The report analyzes the data, identifying key emerging trends.
The report also identifies these additional insights from the data:
Gender diversity efforts on corporate boards are gaining traction in many countries.
- Among S&P Global 1200 companies, women account for 27 percent of board seats, up from 22 percent last year. The efforts that drove the increase in gender diversity can serve as a model for efforts to achieve greater ethnic diversity on boards.
The COVID-19 pandemic has highlighted the connect between environmental health and public health.
- This has brought greater urgency to efforts aimed at protecting biodiversity at a time when changes in land use, rapid deforestation, and biodiversity loss are driving the emergence of new infectious diseases. Several industry-led initiatives have emerged with the aim of encouraging business action on biodiversity, including a recent effort to standardize a reporting framework for companies to prepare nature-related financial disclosures.
Regulatory activity related to human rights risks is picking up across jurisdictions.
- The EU, India, and Canada have all produced initiatives focused on human rights, encompassing issues such as forced labor, child labor, unfair wages, and labor union restrictions, among other topics. This regulatory activity is leading to more disclosures, and companies must keep abreast of such emerging regulatory trends, preparing to understand their own human-rights related risks.
Companies should consider how they reward and incentivize sustainability performance.
- More are linking executive compensation to sustainability metrics, a practice that is most prevalent among energy companies. The most common sustainability metrics included in these compensation plans are targets related to safety, greenhouse gas emissions, and/or gender diversity.
"In the coming years, companies can expect to see greater consistency, if not uniformity, in sustainability reporting," Singer said. "At the same time, companies are focusing on ensuring that their sustainability disclosures are relevant to their business and not just satisfying reporting frameworks."
The Sustainability Practices Dashboard, a comprehensive database and online benchmarking tool, complements the report. It enables users to segment data by region, country, sector, revenue groups, and index (including the S&P Global 1200, S&P 500 and Russell 3000).
About The Conference Board