by Cydney Posner
With the SEC asking proactively in its concept release (see this PubCo post) whether to mandate sustainability disclosure, the question of the relevance to investors of sustainability issues has assumed a new prominence. According to the SEC, some investors have requested more disclosure of a variety of public policy and sustainability matters, including climate change, resource scarcity, corporate social responsibility and good corporate citizenship, contending that this information is significant to their voting and investment decisions. Others, however, have expressed concern “that adopting sustainability or policy-driven disclosure requirements may have the goal of altering corporate behavior, rather than producing information that is important to voting and investment decisions.” So the question becomes whether this disclosure is important to the general population of “reasonable investors” or is only “of interest” to a narrow segment of investors? In that context, this study, performed by academics at the Harvard Business School, is of particular interest: it showed that companies that made investments in material environmental, social responsibility and governance issues outperformed peers with poor ratings on these issues.
SideBar: In its comment letter on the concept release, the SEC’s Investor Advisory Committee indicated in that it “is clear that a significant, and growing number, of investors utilize sustainability and other public policy disclosures to better understand a company’s long-term risk profile. The Committee believes that environmental, social and governance issues should be subject to the same materiality standards as other sources of risk and return under the Commission’s rules.” The Committee then urged the SEC to “develop an analytical framework that more clearly sets out the qualitative factors that can affect the analysis in this area and other per se disclosure.”
According to this article in Bloomberg BNA Accounting, the researchers studied more than 2,000 companies over five years in six different sectors. Using industry-specific guidance on materiality from the Sustainability Accounting Standards Board (SASB) to construct materiality /immateriality frameworks, the researchers analyzed how “companies in each sector were investing in their industry’s most and least relevant sustainability issues.” (SASB considers sustainability issues to be material if there is “evidence of wide interest from a variety of user groups and evidence of financial impact.”) For example, BNA reported, “while greenhouse gas emissions are important for transportation companies, systemic risk management is more material for financial services firms, according to the SASB’s framework.”
The results of the study indicated that companies with high ratings on material sustainability issues in their respective business sectors outperformed companies with poor ratings on these topics, including specifically higher growth in profitability and better stock price performance. In contrast, firms with strong ratings on immaterial sustainability topics did not outperform firms with poor ratings on the same topics. Finally, firms with strong ratings on material issues and concurrently poor ratings on immaterial issues had the best future performance.
SideBar: Interestingly, according to BNA, the SASB reports that risk related to climate change was “the most ubiquitous sustainability issue affecting U.S. companies, with 93 percent of the U.S. equity market affected by it, according to the SASB. But only 12 percent of companies report metrics on climate change in their SEC filings, while 26 percent of companies don’t mention it at all, according to a review by SASB.” In addition, BNA reported that only 30 percent provide industry-specific disclosures.