Sustainability

Sustainability is still far from the top priority for most investors, but environmental factors can have material impacts on the health and longevity of a company. By increasing energy efficiency, for example, companies can bring down operational costs. Effectively managing resources, in another example, can help companies avoid supply chain disruptions and price volatility. But how much material information on a company’s sustainability risks and opportunities is really available to the average investor?

The inaugural State of Disclosure report published by the Sustainability Accounting Standards Board finds that sustainability reporting is increasingly becoming a norm in SEC filings, but the environmentally minded investor shouldn’t hold his breath. There’s a long way to go before such reporting becomes as robust as other kinds of disclosures.

Eighty-one percent of the hundreds of companies analyzed by SASB worldwide divulged some kind of information about sustainability. The board identified a handful of sustainability topics included in the SASB provisional standards for each industry. Sixty-nine percent of the companies reported on at least three-quarters of those topics.

The lists included concerns like overall operational footprints and end-of-life product management for telecommunications companies, and customer privacy and data security for commercial bankers. Almost four in ten (38%) companies reported on every topic in their industry standards list.

“In today’s rapidly changing business landscape, investors often look beyond financial statements to understand how companies create long-term value,” said SASB board member Alan Beller.

The report analyzed 713 annual SEC filings, mostly from fiscal year 2015, and found that while the quantity of disclosures increased, the majority of reporting was seriously flawed. The board categorized the quality of the disclosures into four groups from the least to the most informative: no disclosure, boilerplate, company-tailored narrative, and metrics.

Fifty-three percent of company disclosures used nonspecific language to describe sustainability topics, such as, “We believe our energy consumption is the lowest in the industry.” SASB says such “boilerplate” language pays only lip service to sustainability reporting and is inadequate for responsible decision-making.

Other companies crafted company-tailored narratives that can only be understood in the context of past performance, future targets, and individual risk and opportunity management strategies. Those disclosures provide significant information about the company, but without metrics, they may not allow investors to compare and contrast the company with others in its industry. In fact, only 24% of the reports included metrics.

“These findings serve as both a reason for optimism and a reminder that much work remains to be done,” Beller said.

Another major problem was inconsistency. Even when companies included metrics, non-standardized data in the reports made it difficult or even impossible for investors to benchmark metrics between companies in the same industry.

For example, Royal Caribbean and Carnival both submitted extensive disclosures related to the sustainability topic “fuel use & air emissions” for the cruise lines industry in fiscal year 2015. Royal Caribbean reported a 21.4% improvement in energy efficiency from 2005 to 2014, while Carnival reported achieving its goal of a 20% reduction in emissions over the same period. Carnival also pledged to reach a 25% reduction by 2020. While both companies submitted metrics and a lengthy report on energy efficiency, the reporting failed to provide investors with comparable data for a like-to-like evaluation.

“Although companies appear to have increasingly recognized the risks and opportunities involved in managing material sustainability issues,” Beller said, “they have also struggled to communicate them effectively to their investors.”

European headquartered companies performed the best in the report. Thirty-three percent of European companies provided sustainability metrics, possibly a reflection of strengthening environmental regulations in the region. Europe also ranked second overall in the total number of companies that submitted sustainability disclosures (87%), behind only emerging markets in the Americas (89%).

Companies in the developed regions of the Americas, mostly in the U.S., performed better than only Asian companies in terms of the number of companies that submitted reports (80%) and also ranked among the worst performers in terms of the number of companies that submitted metrics (17%).

Sustainability reporting tended to be of a higher quality in business-to-consumer companies. The most highly regulated industries, like non-renewable resources, tended to provide fewer but more tailored disclosures.

“Sustainability factors are increasingly exposed to the sunlight of transparency,” the report said, “but much less so to the electric light of accountability.”

The report analyzed disclosures from the top 10 companies in each of 79 Sustainable Industry Classification System industries. The companies represent about 12% of the total companies listed on the NYSE and Nasdaq exchanges.

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