The Importance of Corporate Sustainability Reporting
Corporate sustainability reporting, also referred to as Environmental, Social, and Governance (ESG) reporting, has grown in importance every year in the last decade.
As the number of stakeholders who dispute its value dwindles each year, the investor base has led the charge to institutionalize sustainability reporting. With the likes of BlackRock and State Street taking bold stances in supporting sustainability disclosures in their public holdings, nearly every public company has to reckon with their sustainability performance.
As CEO of BlackRock, Larry Fink said: “Given … the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
An increasing trend is that now not only are investors clamoring for sustainability data, but customers are also becoming increasingly concerned about the sustainability performance of the companies that they receive goods and services from because they are held accountable for their entire value chain.
By The Numbers
Sustainability disclosure frameworks have become a crucial centerpiece in non-financial reporting. Over 14,000 organizations have filed sustainability reports to the Global Reporting Initiative (GRI), which has been around for over twenty years. More recently, the Sustainability Accounting Standards Board (SASB), who released standards only a few years ago, have emerged as a leader in sustainability standards with over 500,000 downloads to date.
With these standards providing the framework to disclose, the number of publicly traded companies producing reports has increased dramatically. While in 2011, only 40 companies in the S&P 500 provided sustainability reports, today that number has ballooned to 450 in 2019.
In line with increased disclosure of sustainability information is a steady increase in assets under management that are committed to socially responsible investing.
Put simply, a focus on corporate sustainability is here to stay.
Aside from doing the right thing for society, by collecting and reporting sustainability data, companies will be better equipped to direct internal strategy for improved sustainability performance and, in turn, drive investor interest. The benefit of strong sustainability performance emanates across the DNA of a business, but oftentimes most directly manifests itself in brand image, risk mitigation, and employee retention.
Sentiment towards the brands we love and trust already began to shift well before COVID-19 brought upon a more fundamental shift in spending habits and behavior. A 2017 survey of 1,000 Americans provided the following insights into consumer beliefs:
- 63% of Americans responded that they were hopeful businesses will take the lead to drive social and environmental change moving forward, in the absence of government regulation.
- 78% wanted companies to address important social justice issues.
- 87% said they would purchase a product because a company advocated for an issue they cared about.
- 76% would refuse to purchase a company’s products or services upon learning it supported an issue contrary to their beliefs.
This growing sentiment that companies should represent society’s best interest in sustainability matters has only been exacerbated by the current pandemic we are living in now. We see that in a variety of forms, but particularly with brands aligning their mission and beliefs this year around COVID-19 or the movements for racial equality and justice. Further, individuals are making adjustments to the brands that they engage with to align with their personal sustainability interests. In a recent survey by McKinsey, 57% of respondents said they have made changes to their lifestyle to reduce their environmental impact since the beginning of the COVID-19 crisis.
Companies’ ability to weather unforeseen catastrophes are being tested now more than ever, and in the recent past there are a number of examples where failure to properly safeguard against ESG risk led to significant value destruction. Across the ESG categories respectively, a few prime examples of unforeseen catastrophes are:
- BP with the environmental devastation caused by their catastrophic oil spill in 2010 that destroyed entire habitats and thriving communities.
- Equifax with their lack of security procedures and processes that led to stolen personal information and lack of internal governance to properly disclose that information.
- General Electric with a lack of internal governance to safeguard against short-termism that nearly bankrupt the company which came to a head in 2016.
Billions of dollars (and in BP’s case 100 billion) of value were lost due to oversight and poor sustainability practices at these firms.
Ingraining a heightened focus on ESG into company culture through policies, programs, and incentives can lead to meaningful impact on companies ability to continue to serve customers best and also create and preserve value for all stakeholders.
Having a robust sustainability strategy is a tantamount to a robust risk management strategy, and it starts with being able to collect, manage, and report on sustainability performance through corporate sustainability reporting.
Employee turnover can be painful for a company. Companies thrive through their ability to attract, train, and retain top talent that is the lifeblood of a company. In today’s age where employees have easy access to recruiting platforms, employees are switching jobs at a higher rate than ever before. As employees are more empowered to use their voice to speak up about their company, they have also put more value in employers representing their beliefs.
In a 2019 global survey by HP of thousands of office workers, 40% said they would look for new jobs if their current employers did not engage in sustainable business practices, and 39% even said they would warn others of their company’s poor sustainability practices. What’s more is that of the respondents who feel their employer is ahead of others in sustainability, there was a 46% increase in those that feel happy and a 29% increase in those that feel they can be productive in the workplace.
Further, a Glassdoor survey from 2017 found that 75% of Millennials expect their employers to take a stand on social issues. With this generation of the population now fully immersed in the workforce and ascending to leadership positions, these trends will continue to increase.
Whether it is companies standing alongside and supporting the movement for racial equality and justice in the US, or providing essential workers with the resources they need in the response to COVID-19, many companies are stepping up to support social causes because their employees demand it.
Start By Measuring
“If you can’t measure it, you can’t improve it.” — Peter Drucker
Corporate sustainability reporting is still in its infancy. There are many frameworks and guidelines, and each serve a purpose in disseminating sustainability data. However, an unfortunate consequence of the sheer number of ways that companies disclose information is a process of collecting and managing data that is confusing and burdensome. Yet with all of the competing frameworks that make the reporting landscape more complex, the companies that find a way to measure their sustainability performance are able to create a more defensible business by their ability to track, and therefore, improve upon those metrics.
In response to the increasing complexities, Caesar Sustainability is building a platform for companies to simplify the data collection process and remove the inefficiencies that accompany them.