How do companies tackle the assignment of conveying to their shareholders and other stakeholders how they approach sustainability—in a way that is accurate, clear and genuine and that does not sound like a confected facsimile of every other peer company?  That sounds like a challenging task.  To address that challenge, The Conference Board convened a working group of over 300 executives from more than 150 companies who met five times between July 2020 and May 2021 to share ideas about how companies can effectively "tell their sustainability stories." The Board captured some of those ideas in this  report.

The report begins by identifying some of the key hurdles, each of which is addressed in the report in one of the four "practical guides." 

"1) deciding what issues are truly important to disclose to convey a clear, cohesive, authentic, and distinctive story about the company;

2) maintaining consistency, ensuring that their story effectively addresses the interests of multiple stakeholders;

3) providing information that's not only accurate and reliable, but genuinely trusted (including during crises); and

4) managing the ever-evolving—and often frustrating—landscape of sustainability regulations, reporting frameworks, and ESG rating firms—as well as the growing demands by business partners who have their own requests for sustainability-related information."

Below are some of the insights in the report gleaned from the working group:

What to include? Notably, 60% of respondents to a survey by the Board said that their companies did not have strong internal agreement on the meaning of "sustainability"; only 32% responded that their companies had strong agreement on the definition across the business.

  • Phone book-size sustainability reports are passé. The report suggests that "companies and stakeholders alike are finding that these phone book–style reports don't meet their needs. Instead, companies are looking to focus on the handful of issues that truly matter to their long-term future and have the greatest impact on stakeholders, society, and the environment."  In the Board's polling, "most companies identify up to 20 issues as significant. Of these, a handful of issues 'truly move the needle.'"
  • What do you mean by "material"?   Although many focus on providing information that is "material," the term has different meanings to different people. Some believe that it refers only to "financial materiality," while others take a much broader view, looking instead to the type of information that reasonable investors consider important in making investment decisions.  The report suggests that whether or not to even use the term "material" should be a "threshold question." A Board survey showed that many companies don't use the term at all and that "only a small minority" use a "financial materiality" standard in determining what to report. Whatever term companies do decide to use, the report advises that companies should "agree upon the standard you're using and be explicit about that in your disclosures."

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What's the difference between these two materiality standards? During SEC Chair Gary Gensler's confirmation hearing, Senator Pat Toomey, an advocate of "financial materiality," asked Gensler how he would apply the concept of "materiality" in practice?  For example, if a big public company spent an insignificant amount on, say, electricity, is it material whether that electricity came from renewable sources? Gensler replied that, according to SCOTUS, the test is whether it's material to a reasonable investor in the context of the total mix of information. So, in the hypothetical, the information about renewable sources may or may not be material, depending on the total mix of information.  Often a financially insignificant amount may be immaterial, but it must be viewed in the broader context of the mix of information. Toomey responded that, if the amount was financially insignificant, he did not see how it could be material.

Similarly, Toomey asked, if a large public company reported revenues of hundreds of billions of dollars, and it spent a million dollars on political issue ads, should disclosure be required? Gensler responded that the question is what information reasonable investors are seeking to make voting or investment decisions, and last year, based on their proxy votes on shareholder proposals, about 40% of shareholders said that political spending information would be material.  So, even though the amount of spending is completely insignificant, Toomey asked, did he think it could be appropriate to mandate that disclosure?  Gensler replied that he would be grounded in economic analysis and the courts' views of materiality as the information reasonable investors want to see as part of the total mix of information. Why not leave it up to the companies to decide, Toomey asked? Gensler repeated that it's a really a question of investors making the choice about the information they want. (See,  this PubCo post.) 

  • Determining which issues to disclose.   The report suggests that companies look at "a variety of frameworks, including the framework and 'heat map' traditionally used in risk management." In addition, external reporting frameworks, such as SASB or TCFD, "can be useful guides for determining or confirming material issues," but the report advocates that companies "avoid using these frameworks as your primary input. Instead, take a company-first approach to determining material issues."

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SASB, the Sustainability Accounting Standards Board, has   published a series of sustainability accounting standards specifically tailored for 77 industries. According to the SASB Chair, these standards provide "codified, market-based standards for measuring, managing, and reporting on sustainability factors that drive value and affect financial performance." The SASB standards were published after six years of study and market consultation (see  this News Brief from 2013 describing the release of the SASB standards for the health care sector). By focusing on development of standards and associated metrics specific to particular industries, SASB sought to identify a "subset of sustainability factors most likely to have financially material impacts on the typical company in an industry." The objective is to provide investors and companies "decision-useful" information, information that can help them make more informed decisions. The SASB framework is organized into five categories (which SASB refers to as "dimensions"):

  1. "Environment. This dimension includes environmental impacts, either through the use of nonrenewable, natural resources as inputs to the factors of production or through harmful releases into the environment that may result in impacts to the company's financial condition or operating performance.
  2. Social Capital. This dimension relates to the expectation that a business will contribute to society in return for a social license to operate. It addresses the management of relationships with key outside parties, such as customers, local communities, the public, and the government. It includes issues related to human rights, protection of vulnerable groups, local economic development, access to and quality of products and services, affordability, responsible business practices in marketing, and customer privacy.
  3. Human Capital. This dimension addresses the management of a company's human resources (employees and individual contractors) as key assets to delivering long-term value. It includes issues that affect the productivity of employees, management of labor relations, and management of the health and safety of employees and the ability to create a safety culture.
  4. Business Model and Innovation. This dimension addresses the integration of environmental, human, and social issues in a company's value-creation process, including resource recovery and other innovations in the production process; as well as in product innovation, including efficiency and responsibility in the design, use phase, and disposal of products.
  5. Leadership and Governance. This dimension involves the management of issues that are inherent to the business model or common practice in the industry and that are in potential conflict with the interest of broader stakeholder groups, and therefore create a potential liability or a limitation or removal of a license to operate. This includes regulatory compliance, risk management, safety management, supply-chain and materials sourcing, conflicts of interest, anticompetitive behavior, and corruption and bribery."

See  this PubCo post.  SASB has also issued a  Human Capital Bulletin that summarizes the elements of the SASB Standards that relate to human capital and provides an overview of selected human capital-related topics and metrics that apply across all 77 SASB industry standards. (See  this PubCo post.)

In its June  2017 report, the TCFD included a standardized framework and detailed guidance for "voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders." The 11 disclosure recommendations were organized around four core elements—governance (disclosing the company's governance regarding climate-related risks and opportunities), strategy (disclosing the actual and potential impact of climate-related risks and opportunities on the company's businesses, strategy and financial planning where material), risk management (disclosing how the company identifies, assesses and manages climate-related risks), and metrics and targets (disclosing the metrics and targets used to assess and manage relevant climate-related risks and opportunities where material).  The TCFD also developed supplemental guidance for financial industries as well as for companies in energy, transportation, materials, building, agriculture, food and forest products.  This type of information was expected to enable markets to better "price risk" and allow investors to make more informed decisions.  The task force urged companies to include this information as part of their annual SEC or comparable filings to ensure the application of adequate governance processes. (See  this PubCo post and  this PubCo post.)

  • Stakeholder input is vital. The report advises companies to seek input from a variety of stakeholders, including from stakeholders outside the U.S. Because companies are "dynamic" and "stakeholder expectations are constantly evolving," the report also recommends that companies take into account "what's likely to be important in the future." 

How can you make your sustainability story authentic?

  • Align with business strategy. The report advises that, to achieve authenticity, sustainability reporting should be "anchored in your company's business strategy, ambition, and culture." This effort should involve examining "how the company makes business decisions, runs its operations, and approaches risk management and product development/innovation." However, the working group found that aligning with business strategy was the "biggest challenge for companies."
  • Employees can do a "gut check." Employees are key stakeholders who can identify the  issues that "move the needle" for the company, provide stories and images and  do a "reality check" to verify  authenticity.
  • Use a tiered approach.  The report suggests that companies provide a "main narrative focused on the highest priorities" that incorporates supporting data and is adaptable for different audiences.  The next tier of issues can be discussed supplementally or in stand-alone documents focused on specific areas of stakeholder interest.  These supplemental communications can "offer narrative context but are data heavy and provide a deeper dive on specific topics (e.g., greenhouse gas emissions; worker health and safety; diversity, equity & inclusion; supply chain resilience)."
  • Dialogue with business partners and suppliers.   The report suggests that "accommodating" business partners can be a huge challenge because every company is "pursuing its own sustainability story, so businesses expect their suppliers and partners to help them meet their own goals." Some may not even be interesting in addressing sustainability. The report advocates "dialogue with your business partners to set reasonable expectations."

How can you make your sustainability story reliable?

  • Balanced disclosures. The report suggests that "neglecting or downplaying negative sustainability information risks your credibility with stakeholders and may make you susceptible to investor accusations of greenwashing. Your reporting should be balanced and transparent. It's generally better for the company to put negative information in context than to leave it to others to build their own narrative based on it." Not to mention potential liability in some circumstances if disclosures are materially misleading.
  • Dialogue and transparency.  In the event of a sustainability-related crisis, the report advises companies to know who is responsible, be "transparent with your employees, and rely on your community relationships. Doing so can help your company build trust and prepare for the long haul, since these crises can last a long time."
  • Consider use of independent assurance services. Interestingly, in a working group survey, 75% of respondents indicated that they planned to "obtain assurance or expand the scope of what they currently assure." Not only can assurance provide confidence to investors and improve ratings, the report suggests that it can also improve internal functions, such as "internal controls and reporting systems, and drive better decision-making based on higher-quality sustainability information." However, the report notes, obtaining assurance can be expensive and time consuming.

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The SEC's solicitation of public comment on climate disclosure requested views on how climate disclosures should be enforced or assessed and, if there were an audit or assurance process or requirement, what organizations should perform those tasks. In remarks this year to the Center for American Progress, then-Acting SEC Chair Allison Herren Lee indicated that verification of climate and other ESG disclosures, including potentially auditor attestation of sustainability reporting, was under consideration.  In her view, symmetry around ESG and financial reporting, such as through attestation, should be the "ultimate goal."  (See  this PubCo post.)   SEC Commissioner Elad Roisman, on the other hand, contended that companies may not be in a position to make some types of climate disclosure with much precision.  He cited as an example the difficulty of obtaining reliable information about Scope 3 GHG emissions, which depends on the company's "gathering information from sources wholly outside the company's control, both upstream and downstream from its organizational activities." Companies may not be in a position to disclose that type of information with much precision. As a result, he expressed concern about requiring verification through an audit or an attestation. (See  this PubCo post.)

A report from the Center for Audit Quality said that just over half of the companies (264) in the S&P 500 had some type of independent verification of their climate data. Around 235 used an engineering or consulting firm; only 31 used an accounting firm. Notably, regardless of the provider, the CAQ reported that the levels of assurance were, for the most part, not comparable to the levels provided in a financial statement audit. Among audit firms, 25 provided "limited assurance," that is, they typically involved limited procedures and included reports that were framed in the negative—e.g., nothing has come to our attention to cause us to believe that the sustainability report has not been prepared, in all material aspects, in accordance with XYZ standards, or we are not aware of any material modifications that should be made to the schedule of sustainability metrics for it be in accordance with XYZ criteria. Only two provided "reasonable" assurance (a positive opinion) and three were mixed. Similarly, among consultants and engineers, 174 provided "limited" assurance, 17 "reasonable" assurance, 17 "moderate" assurance and 15 were a mix. (See  this PubCo post.)

How should we deal with all of the regulations, reporting frameworks and rating agencies?

  • Expect more requirements for ESG disclosure. In the case of ESG, the report points out, companies and funds and other institutional investors will both likely be subject to increased ESG disclosure regulation, which means that both may have some goals in common. Building coalitions could be helpful.  Interestingly, 79% of working group survey respondents expected regulation to be "at least somewhat beneficial,...especially if it combines some mandatory elements with substantial flexibility for companies to tell their own story."
  • Consider reporting frameworks to be just reference points.  The report suggests that frameworks are best viewed as "reference points," and advocates that companies focus "on reporting the most relevant issues. But have a plan for commenting on why you aren't reporting on certain metrics."
  • Be strategic in engaging with ESG rating firms. To respond to ESG rating firms requires substantial time and resources, so the report advocates that companies "[f]ocus on a few, comply with a few others, and don't worry about the rest.... Consider industry-based discussions with investors to reduce your reliance on intermediaries."

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Of course, some are not especially enamored of ESG ratings firms. According to the  WSJ,   many companies already provide volumes of environmental data that are used by rating firms to give companies ESG grades used by investors.  However, those ratings are "inconsistent and incomplete." The WSJ  analyzed ESG ratings from three ratings agencies for 1,469 companies and found that 942 companies were graded differently by different raters: "Nearly a third of the companies were deemed ESG leaders by one or more rating firms, but labeled ESG laggards by one or another rater. Credit ratings, by contrast, are broadly consistent."  Only about a third of the companies had consistent scores.  Why? Because the agencies use different methodologies and attribute different weights to issues, such as environmental or social. (See  this PubCo post.)

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