Concerns about environmental and social risks increasingly drive wall street’s decision making. In 2016, responsible investment accounted for 26 percent, or $22.89 trillion, of all professionally managed assets globally — a 25 percent increase from 2014. As markets fluctuate in response to the unpredictability of water risks, climate change-driven natural disasters and human rights concerns, investors look to corporate disclosures to inform them of how companies are navigating these changes. Investors need decision-useful information on how companies are “walking the talk” on these issues.
Yet, at a time when investors need reliable, financially relevant, material corporate disclosures on sustainability, companies are leaving gaps between what investors demand and what they provide.
Global companies are beginning to provide decision-useful sustainability disclosures, but the maturity of their disclosure systems and the rigor of these disclosures are still evolving. These are the main findings of our report, Disclose What Matters, which analyzes how well the 476 largest companies of the Forbes Global 2000 disclose and perform on five indicators highly valued by today’s investors:
→ Disclosure Standards
→ Board Oversight of Sustainability
→ Materiality Assessment
→ Stakeholder Engagement
→ External Assurance
Based on our analysis of these elements, we found that the sustainability disclosures of large global companies fall into three phases of maturity:
Phase 1 → Comparability
Companies in this phase adopt commonly accepted disclosure frameworks, in response to market demands for comparability. Most of the large global companies we analyzed are in this phase, with most using the Global reporting initiative (GRI) standards, as well as other established reporting standards and mechanisms.
→ 70 percent of major global corporations use the GRI standards in their disclosure, while 58 percent both use GRI indicators and include a GRI content index.
Phase 2 → Integration
Companies in this phase demonstrate how they integrate their approaches to sustainability and business performance, improving the quality of their sustainability disclosures. This integration is shown through key systems such as board oversight of sustainability, materiality assessments and stakeholder engagement. While most global companies have these systems in place, the quality of disclosures and connections back to company strategy is still mediocre.
→ Only 15 percent of businesses provide strong disclosure of the role of the board in overseeing sustainability, including evidence of formal board mandates for sustainability and disclosure of how relevant environmental and social issues are discussed at the board level.
→ Only 23 percent provide detailed disclosure of materiality practices, including evidence of how the results are then used to inform strategic decision-making.
→ Just 17 percent disclose which specific stakeholder constituencies they are engaging, how they engaged with them, what feedback they received, and how that feedback was incorporated into corporate strategy and reporting.
Phase 3 → Reliability
Companies in this phase demonstrate that their sustainability disclosures are as reliable as financial disclosures by acquiring external assurance of their disclosures. Very few of the companies assessed perform well on this indicator. Most large global companies do not externally assure their sustainability disclosures, and the quality of the assurance provided is low.
→ Some 58 percent provide no evidence of formal assurance of sustainability disclosures. Less than 10 percent provide third party verified disclosures with some recommendations for improvements.
Recommendations:
What can global companies do to provide capital markets with useful information that will drive decisions that price sustainability risks appropriately? How can companies evolve through the phases of sustainability disclosure maturity?
Commit to the complete use of sustainability reporting standards. The use of the GRI standards is now the expectation, rather than the exception, among global companies. all companies should use the GRI standards in their sustainability disclosures. The rise of other sustainability disclosure standards has created confusion about which standard to use—along with concern about “disclosure fatigue.” Rather than approaching these other standards as additional disclosures, companies should think of them as a way to hone their disclosures for specific audiences.
Disclose the impacts of governance systems for sustainability. Most large global companies disclose that they have the relevant systems to help them prioritize sustainability issues and make the connections to business performance. But they do not disclose how these systems are being used to drive decision making, including on the financial impacts of these issues. companies should provide disclosure that bridges this gap.
Externally assure material sustainability disclosures. When companies are able to provide robust external assurance prepared with the same level of rigor as financial disclosures, these disclosures will provide the “investor ready” and mature approach that investors look for in sustainability disclosures.