As pointed out in an Enterprising Investor blog comment by Will Ortel, about 44% of the respondents to a CFA Institute Survey include sustainability issues in their investment analysis while only about 15% of investors responding to the survey indicated they do not include sustainability factors in their analysis. The latter group indicated that they ignore such information because it’s non-financial rather than financial.
Mr. Ortel’s observations are consistent with growing information that investors and other corporate stakeholders want corporate reports to increase reporting on a broad range of factors that might influence their long-term performance.
Such reports have a variety of names/descriptions, such as:
- Integrated reporting, as proposed by the International Integrated Reporting Council (“IIRC”);
- Sustainability reporting, as proposed by the Global Reporting Initiative internationally (“GRI”) and the Sustainability Accounting Standards Board (“SASB”) in the United States;
- Environmental and Climate Impact Disclosures, as proposed by the Climate Disclosure Accounting Standards Board (“CDSB”); and
- Many other regional and local reports and disclosures as proposed by related local and regional standard-setting organizations and, in a few cases, local and regional governmental regulatory institutions.
When it comes to these “sustainability” related disclosures, investors demand a broad range of non-financial and key performance indicators focusing on environmental, sustainability, and governance factors (called “ESG”) that management identifies as having an influence on their current and future operating performance.
Of course, investors have not expressed agreement about the specific disclosures needed. However, as pointed out in Mr. Ortel’s blog, when companies provide information about their ESG risks and strategies for mitigating those risks, academic research suggests that there is a link between good sustainability practices and strong financial performance.
Unfortunately, at present, investment professionals do not have access to timely ESG reports prepared in accordance with a specific recognized and accepted reporting framework that results in consistent and comparable information both from period-to-period and across companies in similar organizations. Instead, as shown above, a laundry list of international, regional, and local standard-setters have established their own separate reporting and disclosure guidance.
At present, the standards issued by GRI seems to be most commonly used by companies voluntarily providing periodic sustainability reports.
Regulatory authorities must now enter the fray and work with the various constituencies to provide a single standardize ESG reporting framework and standards of reporting for inclusion with a company’s periodic financial reports, such as the 10K and 10Q reports to the U.S. Securities and Exchange Commission.