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.