Sustainability Disclosures – Is Your Company Meeting Investor Expectations?

From PwC’s Sustainable Business Solutions practice

Demand for Sustainability Disclosures Continues to Rise

Customers, investors, and other stakeholders are increasingly demanding more transparency from companies on environmental, social, and governance (ESG) factors and other non-financial risks. As a result, there has been an increase in the number of companies voluntarily providing this information. However, while 75 percent of companies in the S&P 500 published sustainability reports in 2014 [1], investors have expressed a high level of dissatisfaction with the sustainability-related information being provided [2].

Investor Dissatisfaction with Sustainability-Related Information

• 82% of investors are dissatisfied with how risks and opportunities are identified and quantified in financial terms

• 79% of investors are dissatisfied with the comparability of sustainability reporting between companies in the same industry

• 74% of investors are dissatisfied with the relevance and implication of sustainability risk

• 69% of investors are dissatisfied with how companies identify social and environmental impacts in its supply chain.

Enhancing Sustainability Disclosure

A number of organizations have provided frameworks for sustainability reporting. The Sustainability Accounting Standards Board (SASB) is a relatively new organization, with a focus on investor information needs. The SASB is a U.S.-based, independent non-profit organization whose goal is to develop and disseminate industry based guidance to help companies disclose decision-useful information to stakeholders. SASB standards are designed for the voluntary disclosure of material sustainability information and metrics in SEC filings, such as Form 10-K. As such, companies may use SASB standards as part of their existing disclosure controls and procedures when evaluating known trends and uncertainties. Alternatively, a company might consider the SASB guidance when providing voluntary disclosure in sustainability reports or other disclosure vehicles. Beyond disclosure, SASB standards might also help companies identify potential enhancements to corporate strategy and supporting initiatives (e.g., increasing the use of environmentally preferred materials).

What You Need to Know

• The majority of investors we surveyed who use sustainability-related information in investment decisions are dissatisfied with the information available.

• In the U.S., the SASB is responding to investor demand by developing disclosure guidance and metrics on an industry basis.

• More than 2,300 people, including investors with an aggregate of more than $23T in assets under management, have participated in SASB\’s industry working groups.

• The SASB has issued standards for 45 industries in 6 sectors to date, and expects to have standards for more than 80 industries in 10 sectors available by 2016.

Possible Actions Companies Can Take Now

If the SASB has published an industry standard relevant to your company, we recommend considering the following approach:

1 – Understand whether the topics are relevant for disclosure
— Will the item impact the business in the short, medium or long-term?

— Could the impact become material to the business now or in the future, considering both likelihood and magnitude?

2 – Assess the current state of disclosure and management of the topics
— Review current disclosures and underlying processes for completeness, accuracy, and decision usefulness

— Evaluate current knowledge and management of each disclosure topic to identify gaps in strategy (e.g., does a topic relate to current business strategy and your ability to deliver shareholder value?)

What to Keep in Mind

• Investors are not the only audience for sustainability disclosures — your customers, employees, suppliers and others are important stakeholders.

•Your company’s risk exposure may rise, as third-parties, including investors and other stakeholders, increasingly rely on sustainability disclosures to make economic decisions.

•SASB standards are voluntary, so you may decide not to provide sustainability disclosures, but your company may gain other benefits from using the standards (e.g., improve focus on sustainability issues that are most important to long-term value creation).

Reference Notes

[1] Governance & Accountability Institute, June 10, 2015

[2] PwC, Sustainability goes mainstream: Insights into investor views