by Cydney Posner
As reported in this article in the WSJ, the World Federation of Exchanges, a group of 64 of the world’s largest stock exchanges (including the NYSE and Nasdaq), have released guidance for the types of environmental, social and governance-related metrics the Federation believes are important for companies to provide investors. The guidance covers 34 metrics, including energy consumption, water management, CEO pay ratio, gender diversity, human rights, child and forced labor, temporary worker rate, corruption and anti-bribery, and tax transparency in addition to other corporate policies. Each member exchange can voluntarily choose to adopt some, if any, of these standards for their listed companies. Apparently, exchanges in South Africa and Australia already require companies to report some of these measures under their own listing standards. Will the NYSE or Nasdaq choose to add reporting on any of these sustainability metrics to its listing standards?
Currently, the article reports, about “75% of the S&P 500 produced sustainability reports in 2015, up from 20% in 2011, according to the Governance & Accountability Institute.” However, investors complain that the information provided is not directly comparable among companies. The guidelines provide standardized reporting frameworks for various metrics. The guidance recommends the collection and transparent dissemination of ESG data on an annual basis, but leaves that determination to the individual exchanges.
Why engage in sustainability reporting? According to the article, one big reason is that “[s]ome large investors have been clamoring for companies to make better and more comparable disclosures on sustainability metrics saying it will help them understand more about corporate managers and their focus on long-term business risks.” And as reported in this WSJ article, former SEC Chair Mary Schapiro has commented that investors want to see more sustainability reporting: “’We know investors care about this information,’ said Mary Schapiro,… Yet she added investors are ‘highly dissatisfied with the information they are getting today’ and ‘can’t really use it effectively for their allocation decisions.’” In addition, she argued that investors “want ‘to hold businesses accountable to the promises’ they make….”and require a mechanism to assess whether goals have been achieved. Schapiro is vice chair of the nonprofit Sustainability Accounting Standards Board, which is writing industry standards for corporate sustainability reporting, with the goal of standardizing reporting of sustainability measures to make them more useful to investors and allow inclusion in SEC filings. She contends that, because companies are not providing information on their own, “many institutional investors send companies lengthy sustainability questionnaires leading to ‘questionnaire fatigue’ in corporate investor relations departments….'” A portfolio manager remarked in the article that institutions are trying to determine if sustainability information has any forecasting power that would allow institutions to act on it. A key issue in that context is “whether they can trust the accuracy of company data and whether they can find recurring sets of sustainability data that would be useful to forecasting.”
These are among the other reasons to engage in sustainability reporting cited by the guidance:
- enhancing the company’s ability to attract long-term investors and other capital by demonstrating transparency and effective management;
- generating financial value for the company by identifying opportunities for cost savings, revenue generation and risk mitigation;
- enhancing compliance and risk management through proactive measurement, disclosure and reporting;
- building corporate reputation and branding through adherence to corporate commitments, responsible ESG management, adherence to industry ethical standards and national and international frameworks;
- enhancing stakeholder relationships through accountability, fostering collaboration, reporting-related stakeholder engagement and relevant information flow;
- boosting employee relationships by improving perception of the company and helping to increase motivation; and
- measuring progress in key strategies and practices.