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EXECUTIVE SUMMARY

Sustainability Practices 2020

This year’s analysis of corporate sustainability disclosure highlights both the disruption to annual reporting by the COVID-19 pandemic and the movement toward greater disclosure of ever-evolving sustainability practices. 

Compared to 2019, disclosure has declined across many of the environmental and social practices examined in this analysis. The drop in disclosure is primarily due to reporting delays caused by the pandemic, with many companies reporting their sustainability data later than usual.1 For this reason, readers are urged to use caution when comparing year-over-year data and resist attributing significant decreases in disclosure to a broader trend. 

At the same time, the analysis reveals notable increases compared to the previous year in certain key areas such as the disclosure of climate-risk reporting, human rights, and water stress exposure. Worldwide, the representation of women on company boards is increasing, as is the number of companies that link executive compensation to sustainability metrics. These areas stood out this year and provide an indication of what is to come. 

Insights for What’s Ahead

The trend toward disclosing climate risks in financial reports is accelerating as regulatory and investor attention on the impact of climate change continues to mount. Overall, more companies are including climate risks in their SEC 10-Ks or equivalent annual reports. In the UK, the number of companies doing so more than doubled compared to last year. These increases likely follow the sustained focus of mandatory and voluntary regulatory initiatives on the topic of climate change. Large institutional investors, such as BlackRock, have explicitly called on companies to address climate risks in their reporting.2 And the EU’s Taxonomy Regulation, signed into law in 2020, requires financial institutions to make climate-related disclosures by the end of 2021.3 Given the regulatory and investor attention to this topic, we see this trend accelerating.

Companies should be prepared to assess their exposure to water risks, which is a growing concern to investors as water insecurity can have a significant impact on companies’ financial stability, reputation, license to operate, and the security of their supply chains.4 Disclosure related to water stress exposure is becoming more widespread among companies in certain sectors, particularly in the materials and energy sectors. For example, one-third of materials companies now report their water stress exposure, up from 7 percent last year. This increase reflects investors’ recognition of water risks as a significant and growing issue of concern, and acknowledges that action aimed at addressing water-related risks has been relatively limited. Nonetheless, water usage is still not high on many companies’ lists of risks, but we expect that it will increase and not only in water-intensive industries. Indeed, an estimated USD 425 billion in business value may be at risk—and this is likely an underestimate.5 Going forward, companies can expect more investor focus on the disclosure and management of water risks, particularly as some investors are labeling water stress “an understated risk.”6 

Efforts to increase gender diversity on boards in many countries are gaining traction, which can serve as a model for increasing ethnic diversity as well—albeit on a more accelerated basis than we’ve seen with gender diversity. The case for embracing demographic and cognitive diversity, at all organization levels, including the board, is clear.7 Gender diversity is increasing: Among S&P Global 1200 companies, women account for 27 percent of board seats, up from 22 percent last year. But this has been a slow process, as this figure stood at 20 percent three years ago.8  With companies and investors, especially in the US, now focused on increasing the ethnic diversity of corporate boards, they can look to efforts to increase gender diversity as a model. But companies will feel pressure to move even faster on ethnic diversity than they have on gender diversity.9

The COVID-19 pandemic has highlighted the interconnection between environmental health and public health and will bring greater urgency to efforts aimed at protecting biodiversity. The majority of emerging infectious diseases in humans come from other animals, and biodiversity loss—including land-use change, rapid deforestation, and wildlife exploitation—increases infectious disease risk by bringing people and domestic animals in close proximity to pathogen-carrying wildlife.10 As evidenced by the COVID-19 pandemic, the risks associated with biodiversity loss are significant for companies across sectors, yet few companies have policies aimed at protecting biodiversity. Signs point to a growing spotlight on biodiversity issues, as several industry-led initiatives have emerged with the aim of encouraging business action on biodiversity. One notable development is the recent launch of a market-led initiative to standardize a reporting framework for companies to prepare nature-related financial disclosure. This framework, the Task Force on Nature-related Financial Disclosure (TNFD) recommendations, will be based on the Task Force on Climate-related Financial Disclosures (TCFD) principles and will operate alongside it.11 

Regulatory activity related to human rights risks is picking up across jurisdictions.12 Several regulatory initiatives have emerged in the EU, India, and Canada focused on human rights, which encompasses issues such as forced labor, child labor, unfair wages, restrictions on trade union rights, etc. This regulatory activity appears to be having an impact on disclosures. For example, compared to last year, the biggest increases in the number of companies with policies seeking to prevent or mitigate potential adverse human rights issues were among companies in India and Canada. Companies should keep abreast of emerging regulatory trends in this area and actively prepare to understand the human-rights-related risks associated with their upstream and downstream value chain.

Because we expect sustainability issues to be increasingly integrated into the business, companies should consider how they reward and incentivize sustainability performance. Continuing a trend observed over the last few years, more companies are linking executive compensation to sustainability metrics. This practice is most prevalent among energy companies. Overall, the most common sustainability metrics included in these compensation plans are targets related to safety, greenhouse gas (GHG) emissions, and/or diversity.13 In light of the focus on employee health as a result of the pandemic, ethnic diversity in light of the wordwide protests of racial inequality, and the ongoing focus on environmental issues (see above), companies should explore how they can incorporate material environmental, social and governance (ESG) factors into their remuneration design.  

In the next few years companies can expect to see greater consistency, but not uniformity, in sustainability reporting. A number of companies have made high-profile announcements recently relating to harmonizing sustainability reporting.14 These developments come on top of major institutional investors advocating earlier this year that companies adopt specific reporting frameworks.15 

At the same time, however, companies are focusing on making sure their sustainability disclosures are relevant to their business—and not just satisfying reporting frameworks.16 Moreover, as a recent report observed in the context of human capital-related disclosures, the reporting frameworks are not yet harmonized—with a wide disparity in the topics, the types of disclosures (quantitative vs. qualitative), and the specific metrics they endorse. Thus, any “convergence” is likely to take some time. 

Nonetheless, we do see the basis for increased consistency in reporting. In many cases, frameworks agree on a core set of topics that companies should consider addressing.17 And companies do look at their competitors and other peers to help them determine what to disclose in the area of ESG, thereby creating a dynamic that can reinforce consistency.18 Thus, we expect to see a trend toward increased consistency in the topics, if not the specific metrics, that companies disclose, particularly within the same industry. Boards should, therefore, ensure that management has a process in place to evaluate ESG disclosure topics on at least an annual basis. 



[1]     As a result of the pandemic, many jurisdictions have extended the deadlines for companies to disclose financial and nonfinancial information, as have several ESG reporting and rating frameworks (e.g., CDP, DJSI). For example, CDP extended its 2020 reporting deadline from July 29 to August 26, and accepted submissions (without scoring) through September 30. Similarly, the deadline for the Corporate Sustainability Assessment (CSA), used as the selection process for membership in the Dow Jones Sustainability Index (DJSI), was extended by two months to July 30. 

[2]     For example, see: “Sustainability as BlackRock’s New Standard for Investing,” BlackRock, 2020. 

[5]     Cleaning Up Their Act, CDP Global Water Report, 2019. 

[6]     Andre Bertolotti and Yuxi Suo, Troubled Waters, BlackRock Investment Institute, July 2020. 

[7]     See: Jared Landaw, Maximizing the Benefits of Board Diversity, The Conference Board, June 2020; Sundiatu Dixon-Fyle, Kevin Dolan, Vivian Hunt, and Sara Prince, Diversity Wins: How Inclusion MattersMcKinsey & Company, May 19, 2020. 

[8]     Thomas Singer, Sustainability Practices 2017 Key Findings, The Conference Board, December 2017, p. 20. 

[9]     See: Matteo Tonello, Corporate Board Practices in the Russell 3000 and S&P 500: 2020 Edition, October 2020, p. 5.; Paul Washington and Merel Spierings, Insights for Investors and Companies in Addressing Today’s Social Issues, The Conference Board, October 28, 2020. 

[12]    This refers to internationally recognized human rights, understood, at a minimum, as those set out in the International Bill of Human Rights and the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work.

[13]    Paul Hodgson, Matteo Tonello, and James Reda, CEO and Executive Compensation Practices: 2019 Edition, The Conference Board, p. 10.

[14]    For example, in September 2020, five leading sustainability reporting organizations issued a statement detailing an intent to work together toward comprehensive corporate reporting. The following week, the Big Four accounting firms, in collaboration with the World Economic Forum, announced a common set of ESG metrics for all companies to report on, across sectors and geographies. In October the Financial Reporting Council, the UK’s reporting supervisory body, proposed developing a new framework for corporate reporting that accommodates the interests of a wider group of stakeholders (beyond investors) and puts nonfinancial reporting on a par with financial reporting. And in 2020 the International Federation of Accountants (IFAC) called for the creation of a new sustainability accounting standards board that would exist alongside the International Accounting Standards Board (IASB). 

[15]    See: “A Fundamental Reshaping of Finance,” BlackRock, January 14, 2020; and “CEO’s Letter on our 2020 Proxy Voting Agenda,” State Street Global Advisors, January 28, 2020. 

[16]    See: Thomas Singer, Anuj Saush, and Anke Schrader, Sustainability Practices 2019 Edition: Trends in Corporate Sustainability Reporting in North America, Europe, and Asia-Pacific, The Conference Board, February 2020, p. 3; Telling Your Sustainability Story Authentically, Reliably, and Effectively (working group report), The Conference Board, forthcoming 2021. 

[17]    See: Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation, World Economic Forum, September 22, 2020, p. 6. See: Brave New World: Creating Long-term Value through Human Capital Management and Disclosure, The Conference Board, forthcoming, which finds that 10 out of 23 topics related to human capital management issues are covered by at least half of the eight reporting frameworks that were examined. 

[18]    Telling Your Sustainability Story Authentically, Reliably, and Effectively (working group report), The Conference Board, forthcoming 2021.

 

AUTHORS

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Thomas Singer

Principal Researcher
The Conference Board

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Anke Schrader

Research Director, the China Center for Economics and Business
The Conference Board

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Anuj Saush

Senior Researcher, Governance & Sustainability; Council Director, Environment Strategy Council
The Conference Board


Our Experts

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Anke Schrader

Research Director, the China Center for Economics and Business

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Thomas Singer

Principal Researcher

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Anuj Saush

Senior Researcher, Governance & Sustainability; Council Director, Environment Strategy Council

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