Last May I blogged about Materiality Momentum and sustainability reporting, highlighting the movement toward better definition of material environmental, social and governance (ESG) issues and the integration of those issues with financial reporting.
Where are we one year later?
The European Union Directive on ESG Reporting
Update: On April 15, 2014, the European Parliament adopted the Directive on mandatory disclosure of non-financial and diversity information by large companies (more than 500 employees). Affected companies will need to disclose information on policies, risks and results regarding environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on boards of directors. The Directive, which is expected to be ratified by the European Council in May, will affect approximately 6,000 companies within the 28 member states of the EU.
INCR issued a proposed sustainability standard for all stock exchange listings.
The Investor Network on Climate Risk (INCR) proposal is intended to develop clarity and consensus on a unified sustainability disclosure listing standard that could be adopted by all stock exchanges.
While several exchanges have adopted their own sustainability listing requirements and guidance, INCR, NASDAQ OMX, and others are promoting a uniform standard that includes the following elements as a baseline regardless of size, location or familiarity with sustainability issues:
Update: The proposal was submitted to the World Federation of Exchanges (WFE) and its 60+ exchange members in March 2014 for review and comment. The WFE, which represents 46,000 listed companies, formed a Sustainability Workgroup in March to review the proposal feedback from the exchanges.
SASB Materiality Standards.
The Sustainability Accounting Standards Board (SASB) is focusd on establishing an understanding of material sustainability issues facing industries in the U.S., and creating sustainability accounting standards suitable for disclosure in standard filings such as the Form 10-K and 20-F.
Update: Final standards for the Health Care; Financial Services; and Technology & Communications industry sectors have now been published. The final standard publication for the Non-Renewable Resources industry is scheduled for June 5, 2014. The draft standard for the Transportation industry was issued for public comment on April 18, 2014 and will be finalized in September 2014. The Services industry workgroup is underway and workgroups for additional industry workgroups will be forming through the first half of 2015.
IIRC framework on Integrated Reporting.
The International Integrated Reporting Council (IIRC), a coalition of companies, investors, accountants and NGOs, is promoting the concept of an integrated report (IR) designed to provide investors, governments, NGOs and communities with a deeper understanding of how financial data (e.g., revenue, and profits and losses) is helped or hindered by things whose monetary value isn’t immediately obvious, such as annual employee turnover, water efficiency, or community relations.
Update: The IIRC published the final Integrated Reporting standard in December 2013. Companies across industry sectors are now piloting the new integrated standard, and their reports can be viewed in the database maintained by the IIRC.
Expectations from the investment community on strong governance and transparency of ESG risks and opportunities continue to grow and raise the bar for sustainability performance and reporting. We continue to see both mandatory and voluntary initiatives evolve and align. The expectation for organizations is increasingly around balanced and verifiable reporting of material issues; with communication on progress to date, challenges ahead, and efforts to address those challenges over the next 5, 10 or 20 years as part of the core business strategy.