Is Sustainability Fading from Board Agendas?

If news events in 2017 swayed directors to more highly value sustainability disclosures, the effect has apparently worn off in 2018, a study suggests.
David McCannOctober 1, 2018
Is Sustainability Fading from Board Agendas?

In 2016, BDO asked corporate directors whether they believed that disclosures regarding sustainability matters — like corporate social responsibility and the impact of climate change — were important to understanding a company’s business and provided meaningful information to investors.

Three quarters of the respondents (76%) said “no.”

When the auditing and consulting firm asked the same question last year, more than half (54%) of directors said “yes.”

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This year, among the 140 directors who participated in BDO’s annual survey, responses to the question flopped back to the 2016 level, with 74% saying “no.”

What the heck is going on?

Judging by BDO’s comments in its report on the new survey, it appears directors were swayed by headlines in 2017.

“Last year, our survey corresponded with the significant spotlight on President Trump’s decision to pull the U.S. out of the Paris Climate Accord,” BDO noted in the report.

Last year also brought a notable proposal approved by Exxon Mobil shareholders requiring the company to measure and disclose how regulations to reduce greenhouse gases and new energy technologies could impact the value of its assets, BDO further commented.

But the heightened sensitivity to sustainability in 2017 may not prove to be an anomaly, BDO suggested.

“As the pace of change and availability of instant data continues to drive toward a more globally conscious economy,” the firm wrote, “companies of all sizes may feel more intense pressures to publicly address what they are doing to promote good environmental, social, and governance practices.”

In its 2018 shareholder-meeting alert, BDO noted that disclosure reporting on sustainability “has traditionally been thought of as a ‘large’ organization affair.”

However, the firm added, “greater attention in this area is trending in the media as well as in the individual investor and institutional investor communities. As a result, more and more progressive mid-cap and small-cap companies are seeing the potential need to share more with the public about what they are doing to address ESG concerns.”

BDO also noted in the shareholder alert that global sustainability regulations, such as the European Union’s Non-Financial Reporting Directive — effective in 2018 for companies with more than 500 employees — continue to proliferate.

So does the assortment of sustainability reporting frameworks and standards, such as the Global Reporting Initiative (GRI) Standards, that companies can consider.

In the United States, the Sustainability Accounting Standards Board has established itself as a private-sector organization that sets industry-specific standards for corporate sustainability disclosure. SASB’s aim is to ensure that disclosure is material, comparable, and decision-useful for investors.

However, BDO wrote, “Sustainability measures are non-financial measures that do not fall under the same financial system of controls and thus, do not lend themselves to the traditional scope of financial statement audits.”

So, as a counterbalance to market demands for disclosure of nonfinancial data, in 2017 the American Institute of Certified Public Accountants issued an attestation guide providing guidance to auditors that companies engage to provide market assurance on these metrics.

“It’s safe to predict there will be much more to come on the ESG reporting front,” BDO said.

Meanwhile, here are some other findings of BDO’s recent corporate directors survey:

  • Four in 10 (39%) of respondents said the Tax Cuts and Jobs Act has had no impact on their business. The rest said the impact has been favorable (44%) or highly favorable (17%). No participants said the law has had a negative impact on business.
  • Presented a list of potential actions businesses may have taken in response to the TCJA — increasing capital investment, boosting wages, pursuing acquisitions, and increasing dividends, among others — two-thirds (64%) of participants said they have “taken none of these actions.”
  • A quarter (24%) of participants said they believe additional guidance from regulators is necessary with respect to companies’ usage of non-GAAP measures and key performance indicators.