Update on the current board issues: June 2013

June 2013
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To achieve diversity, boards may have to shake things up

At a glance

Many companies provide sustainability disclosure, but few embrace integrated reporting.

Issue in focus

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Many companies provide sustainability disclosure, but few embrace integrated reporting

As more companies feel pressure from investors to disclose their sustainability and corporate responsibility information, their boards are asking management for their plans on integrated financial reporting.

Olivia Kirtley, a director at Papa John’s International and US Bancorp, raised the question of integrated reporting at a recent PwC event as she cited a new reporting model from the Investor Responsibility Research Center Institute (IRRC) and Sustainable Investments Institute (Si2).

She asked Kayla Gillan, leader of PwC’s Investor Resource Institute, if she thought integrated reporting is a priority for some of the larger investors. Gillan, who has previously served as general counsel at CalPERS, a board member of PCAOB, and deputy chief of staff to the SEC chair, responded that certain institutional investors do support integrated reporting but that is not the case throughout the investment community. “I haven’t seen a lot of embracing of integrated reporting,” said Gillan “CalPERS, CalSTRS and BlackRock, who are leaders in the investment community on sustainability issues, do support it. But I haven’t seen a lot of others put significant weight behind it right now.”

Integrated reporting is not required of or commonly done by US companies. Almost all of the S&P 500 have some form of sustainability disclosure, but most of those companies don’t go as far as using integrated reporting, according to the 285-page report from IRRC and Si2.

Integrated Financial and Sustainability Reporting in the United States. which is the first report to benchmark the status of integrated reporting in the United States, analyzes sustainability disclosures on a sector-by-sector basis, and examines 56,000 individual data points across both mandated SEC filings and voluntary sustainability reports. It discovered that:

  • 499 of the S&P 500 companies made at least one sustainability related disclosure, but only 7, or 1.4% integrate financial and sustainability reporting.
  • 74% of the companies placed a dollar figure on at least one sustainability-related initiative, though they frequently also mentioned other initiatives whose benefits/costs were not quantified.
  • 43.4% of the companies linked executive compensation to some type of sustainability criteria.

The study identified trends in the areas of environmental management, employment, climate change, hazardous waste, product formulations, waste management, water use, ethics, and human rights.

Gillan said she has seen a trend where more investors are taking an interest in both social and environmental issues. “The number of investors who see an economic link between environmental issues and financial issues is large,” she said. “And you know, it’s now under the name sustainability.”

“I’m pretty impressed with just the fact that sustainability has become kind of a mainstream issue for investors. And I think they’re trying to seek to go beyond reporting about principles and to really seek greater disclosure in reporting about how those principles are becoming operationalized within each company.”

Over the past three years, integrated reporting has received more attention from the accounting community as the Sustainability Accounting Standards Board (SASB) continues to develop. The San Francisco-based organization, which is close to issuing its first standards, recently signed an agreement with the Carbon Disclosure Project’s Climate Disclosure Standards Board (CDSB) to work together for three years to promote greater understanding, support and development of disclosure standards for climate change and related sustainability issues. SASB is a non-profit organization engaged in the creation and dissemination of sustainability accounting standards to be used by public companies. The organization, which is accredited by the American National Standards Institute, defines sustainability as environmental, social, and governance factors that have the potential to affect long-term value creation.

“Both SASB and CDSB are concerned with providing investors information to assess how climate change affects the strategy, performance, and prospects of companies,” Dr. Jean Rogers, SASB founder and executive director, said. “Our partnership will accelerate our collective work to benefit corporations and investors in understanding material risks and opportunities associated with climate change.”

SASB plans on releasing draft standards for the health care sector in the third quarter of 2013. The standard setter is also working on standards for technology and communications and non-renewable resources sectors.

In addition to the pressure US companies are getting from organizations like SASB to move toward integrated reporting, some are dealing with other stakeholders who want them to divest from certain companies based on social and environmental issues. For example, Brown University students held rallies demanding their school’s Advisory Committee on Corporate Responsibility in Investment Policies divest from 15 coal companies because of harm to the environment. In fact, the students proposed criteria for divestment that sets thresholds based on the tons of coal mined and the amount of electricity generated.

While the committee voted to divest from those coal companies, the university’s board of trustees has yet to vote on the divestment.

Many public companies are also feeling pressure from shareholder activists that are filing proposals that call for climate change-related disclosures. Most of these proposals have not received majority support.

In 2010, the SEC issued interpretive guidance related to how business or legal developments related to climate change may trigger disclosure requirements under existing disclosure rules that address a company's risk factors, business description, legal proceedings, and management discussion and analysis.

Questions directors and audit committee members should consider asking about sustainability

  • How is company management evaluating and mitigating emerging environmental and social risks?
  • How should our board oversee these risks? Which committee should be tasked with this oversight responsibility?
  • Is the company considering sustainability-related opportunities? What do our customers want?
  • Do we have the ability to assess the accuracy of sustainability-related statements, such as, “We reduced our carbon footprint 5% in 2011?”

For more information, directors may want to read PwC’s 10Minutes on environmental and social risk.