November 11, 2021

Advisor Teneo surveys 2021 sustainability reports

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While the global powers are occupied at the COP26 climate summit with negotiating and pledging (or, is it more “blah, blah, blah,” as teenage activist Greta Thunberg contends in some, uh, straight talk?), and we await the SEC’s expected climate disclosure framework, it might be worthwhile to get a handle on what companies are doing about sustainability reporting in the meantime. To help companies understand the current state of the art, CEO advisory firm Teneo surveyed 200 sustainability reports from S&P 500 companies in eleven industries published in the period between January 1 to June 30, 2021. Teneo’s report, The-State-of-U.S.-Sustainability-Reporting, provides useful samples, market statistics for various aspects of the content and design of these reports, as well as some practical considerations.

Practical considerations. The report begins with ten practical considerations (summarized below):

Assemble a cross-functional team with representation from key business units to help ensure all stakeholder views on ESG issues are being represented.
Learn from your peers by benchmarking recent sustainability reports from peers and others considered “best-in-class.”
Review your primary ESG ratings reports to understand identified deficiencies and “help inform your sustainability strategy and potentially enhance your company’s ESG rating.”
Build stakeholder trust with consistency and transparency.
Engage with shareholders, employees and other stakeholders to obtain feedback on your sustainability report.
Help investors by providing “a downloadable ESG table that includes all relevant ESG data and multi-year trends to show progress.”
Begin with disclosure consistent with the Task Force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) frameworks “even if you are not ready to disclose all elements of those frameworks. Investors and other stakeholders are likely to give companies latitude if they are making continued and meaningful progress on their sustainability disclosures.”
Consider obtaining third-party independent attestation to provide some assurance about the reliability of your data.
Learn the nuances of different frameworks, ratings and initiatives.
Include a “materiality matrix” to help stakeholders understand which ESG issues are priorities.

Format and process. The report identifies 18 varieties of titles used for sustainability reports—“Corporate Citizenship Report,” “Social Impact and Sustainability Report”—take your pick. Of 2021 reports surveyed, 43% used “sustainability” in the title, 23% used “ESG” and 24% used “CSR” or “Social Responsibility.” But the main message here is to be consistent with your references to your sustainability initiatives in all your corporate communications. The report found that the average length of a sustainability report was 70 pages, with a range of 12 pages to a high of 243 pages.. Almost all (95%) reports were available to be downloaded in PDF format, which Teneo believes is easier to search. About three quarters (76%) of companies issued press releases with their reports with highlights and, sometimes, announcements about “setting or achievement of sustainability goals, such as those relating to climate or diversity.” The most popular month for release of reports was June (32%), followed by April (27%) and May (22%), with some companies beginning to align the release with their filing of proxy statements and annual reports.

Contents. Almost all (over 96%) reports included a letter from the CEO typically designed to communicate the importance of ESG to the top executives. Some companies (under 15%) also included a board letter or a combined CEO/board letter, signaling “to stakeholders that directors are engaged and actively working with management to oversee the company’s sustainability strategy.” Slightly over a quarter of reports included a summary or “highlights” section. About 75% of reports included some form of table with the most important sustainability data.

Governance. Teneo found that most companies discussed governance, typically internal oversight by management and the board. On the management side, the disclosure was typically about a “form of cross-functional sustainability or ESG committees led by senior executives” with representatives from key business units and periodic reporting to senior management and/or the board. The board discussion was typically about board oversight of sustainability risks, sometimes through board committees. Teneo advises that “it is imperative to describe the formal mechanisms the board utilizes in order to provide investors and other stakeholders with the appropriate level of transparency.”

SideBar

One of the four core elements of the TCFD disclosure framework—a framework that has spent a lot of time in the spotlight recently—is the organization’s governance around climate-related risks and opportunities. The TCFD’s recommended disclosures in the context of governance are:

a) The board’s oversight of climate-related risks and opportunities, including processes related to, and frequency of, advising the board regarding climate issues, whether the board considers climate change when reviewing strategy, plans and objectives, and the nature of board oversight of progress toward goals; and

b) The management’s role in assessing and managing climate-related risks and opportunities, including whether a management-level employee has responsibility for climate issues, reporting to the board, and monitoring by management. (See this PubCo post.)

Matrix. To delineate which are the most critical sustainability issues, most companies provided some version of a materiality matrix of key or priority ESG issues. Stakeholder engagement is important to confirm that the company is focusing on the right sustainability issues; 90% of reports surveyed described the company’s stakeholder engagement.

Social issues/DEI. “Social” issues can run the gamut from labor and human rights to community impact. Focusing on diversity and inclusion, Teneo found that 93% of sustainability reports in 2021 disclosed employee demographic data, including both gender and racial/ethnic data. In Teneo’s view, “disclosing employee demographic data, particularly female and racial/ethnic minority representation, is no longer viewed as optional.” However, the manner of presentation in surveyed sustainability reports was inconsistent. For example, “classifications of job functions, executives and even ethnicities can vary greatly, making it challenging for stakeholders to track and compare data across companies. As a result, many institutional investors and other stakeholders have called for U.S. public companies to disclose their complete EEO-1 Report as filed with the Equal Employment Opportunity Commission.” And 33% of companies surveyed did so in 2021. To the extent that companies are concerned that their EEO-1s are not accurate reflections, Teneo suggests that they supplement “with additional narrative and data using company-specific job categories. They can also enhance disclosure by reporting recruiting, promotion and retention rates of diverse employees.”

In addition, 38% disclosed the company’s pay gap data (gender or racial); Teneo advises that demonstrating “progress against pay inequity can help signal the company’s overall commitment to DEI.” Teneo reports that more than half of sustainability reports in 2021 disclosed “at least one demographic target, with 42% of companies including both gender and racial/ethnicity goals. Some goals disclosed were applicable to the employee population generally and some focused on groups such as management or client-facing roles.

Frameworks. According to Teneo, pressure from institutions led an increasing number of companies to use ESG disclosure frameworks, with a vast majority relying on SASB and TCFD. More specifically, Teneo found that 88% of 2021 reports surveyed referred to SASB, 73% to the Global Reporting Initiative (GRI), 65% to the United Nations Sustainable Development Goals (UN SDGs), 61% to the TCFD, 7% to the World Economic Forum and 2.5% to the International Integrated Reporting Council (IIRC). But, since the disclosure is voluntary and some companies are still at the early stages of reporting, not all companies disclosed every component of these frameworks. In addition, many companies cross-referenced to applicable frameworks in other company disclosures, making it more difficult for readers to find the appropriate material. Teneo advises that “companies that have not yet disclosed to the TCFD and/or SASB disclosure framework should begin to do so next year.”

Assurance. Teneo found that 53% of 2021 sustainability reports included at least some degree of independent assurance, with 38% providing limited external assurance and 15% providing some degree of “reasonable” assurance. At this point, however, there is no “universally agreed framework or methodology for the external assurance of sustainability information.” Given interest from investors in assurance, Teneo believes that this is likely to change.

SideBar

The SEC’s request for public comment on climate disclosure (see this PubCo post) requested views on how climate disclosures should be enforced or assessed and, if there were an audit or assurance process or requirement, which organizations should perform those tasks. In remarks this year to the Center for American Progress, then-Acting SEC Chair Allison Herren Lee indicated that verification of climate and other ESG disclosures, including potentially auditor attestation of sustainability reporting, was under consideration. In her view, symmetry around ESG and financial reporting, such as through attestation, should be the “ultimate goal.” (See this PubCo post.) SEC Commissioner Elad Roisman, on the other hand, contended that companies may not be in a position to make some types of climate disclosure with much precision. He cited as an example the difficulty of obtaining reliable information about Scope 3 GHG emissions, which depends on the company’s “gathering information from sources wholly outside the company’s control, both upstream and downstream from its organizational activities.” Companies may not be in a position to disclose that type of information with much precision. As a result, he expressed concern about requiring verification through an audit or an attestation. (See this PubCo post.)

According to a report from the Center for Audit Quality, just over half of the companies (264) in the S&P 500 had some type of independent verification of their climate data. However, the CAQ reported that the levels of assurance were, for the most part, not comparable to the levels provided in a financial statement audit. Among audit firms, 25 provided “limited assurance,” that is, they typically involved limited procedures and included reports that were framed in the negative—e.g., nothing has come to our attention to cause us to believe that the sustainability report has not been prepared, in all material aspects, in accordance with XYZ standards, or we are not aware of any material modifications that should be made to the schedule of sustainability metrics for it to be in accordance with XYZ criteria. Only two provided “reasonable” assurance (a positive opinion) and three were mixed. Similarly, among consultants and engineers, 174 provided “limited” assurance, 17 “reasonable” assurance, 17 “moderate” assurance and 15 were a mix. Nevertheless, limited assurances are sought and provided in other contexts, and, in this context, investors may well find that even limited assurances provide basic comfort. Moreover, climate reporting is still developing. As the dynamic changes and the control environment becomes more mature, will higher levels of assurance become more available? (See this PubCo post.)

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.