Are Companies Connecting the Sustainability and Financial Disclosure Dots?

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday May 19, 2013 at 9:28 am
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Editor’s Note: The following post comes to us from Peter DeSimone, deputy director and co-founder of Si2, and Jon Lukomnik, executive director of the IRRC Institute.

All U.S. S&P 500 companies except one report some form of sustainability disclosure. This widespread reporting indeed is good news. But, isolated sustainability disclosures have proven to be of limited value to corporate management trying to improve the bottom line, and for investors seeking to gauge risk and opportunity.

New research from the Investor Responsibility Research Center Institute (IRRCi) and the Sustainable Investments Institute (Si2) – the first to benchmark the status of integrated reporting in the U.S. – finds that nearly all S&P 500 companies are failing to connect the disclosure dots. A mere seven companies are integrating financial and sustainability reporting. These trendsetters include American Electric Power, Clorox, Dow Chemical, Eaton, Ingersoll Rand, Pfizer and Southwest Airlines.

The study also finds companies typically are beginning to place a dollar figure on sustainability – about 74 percent of corporations. But, these disclosures frequently mention other initiatives without quantification of the benefits and costs. Also interesting is that some 44 percent of companies link executive compensation to sustainability criteria.

What’s driving increased disclosure is a combination of factors – rules, regulations, fines, and even the increased volume on the climate change debate. What’s problematic, however, is that the rules are disjointed. As a result, companies and investors don’t have a clear vision so they can factor sustainability into corporate planning and financials.

But this disorderly backdrop doesn’t mean companies lack the capability to quantify the impact of sustainability.

We found numerous examples of companies offering anecdotal evidence of the links between sustainability and financial performance. The report data indicate that companies are not aggressively ramping up sustainability initiatives. And, they are not coordinating sustainability via a unified corporate strategy. This means that companies may be missing opportunities to improve financial results.

Integrated Financial and Sustainability Reporting in the United States offers a comprehensive, deep analysis of sustainability disclosures on a sector-by-sector basis. It examines some 56,000 individual data points across both mandated filings and voluntary sustainability reports to reveal the following trends:

  • Environmental management (disclosed by 68 percent of companies)—Disclosures of capital expenditures on environmental controls were the most common. Many companies wrote about reducing overall operational risks—especially those related to employee health and safety and associated losses tied to productivity, settlements and lawsuits—as well as environmental spills and related cleanup and remediation costs, potential fines and lawsuits.
  • Employment (67 percent)—Most companies noted the importance of attracting and retaining talent. Many described programs to engage employees about business topics, workplace issues and job satisfaction, as well as benefits to attract and retain them, including health plans, retirement accounts, job training and continuing education. Diversity also was mentioned as a key driver of business success. Health and safety risks were common notes too, as were risks related to poor employee relations, strikes and other work stoppages.
  • Climate change (66 percent)—Climate change frequently was discussed in the context of potential regulation in the United States, as well as being a chief concern among key stakeholders. Many companies identified the energy efficiency of their operations and products as “low hanging fruit,” since they found investments in these areas produced returns competitive with other competing demands for capital.
  • Hazardous waste (63 percent)—Most companies described risks related to hazardous waste in their annual Form 10-K filings; this was the only sustainability topic discussed by a majority of companies in any one specific reporting format. Many of these disclosures related to pending litigation. Risk mitigation efforts, including environmental, health and safety management systems, also factored into disclosures for some of the companies, as did legal requirements on reporting government fines. Hazardous waste also was the area where companies were most likely to place a dollar amount on their activities.
  • Product formulations (54 percent)—These disclosures included product lifecycle assessments as well as the marketing of green, fair trade or other types of sustainable products. Most disclosures happened in sustainability reports.
  • Waste management (49 percent)—Companies primarily addressed efforts to reduce packaging and to move manufacturing operations toward producing zero landfill waste.
  • Water use (39 percent)—Companies viewed water principally as a cost or as a potential risk due to scarcity. Several companies with water-intensive manufacturing or other operational needs had completed or had begun to undertake assessments to review current and future demand, availability and associated operational risks.
  • Ethics (21 percent)—Fraud and related ethics topics were often discussed in a context of compliance with legal requirements, primarily the U.S. Foreign Corrupt Practices Act (FCPA).
  • Human rights (15 percent)—The issue rarest to be talked about as a business opportunity, human rights most frequently was described as a reputational risk, specifically with regard to suppliers’ use of child or forced labor or operations in conflict zones.

A full copy of the report is available at http://irrcinstitute.org/projects.php.

 

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