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March 23, 2010
Calls for Improved Corporate ESG Reporting Span Globe
    by Robert Kropp

Eurosif states that ESG reporting by European companies should be mandatory, and the Social Investment Forum's Emerging Markets Disclosure Project encourages companies in emerging markets to issue sustainability reports.


In the US, corporate reporting on environmental, social, and governance (ESG) factors has received considerable attention recently, as the Securities and Exchange Commission (SEC) issued interpretive guidance reminding companies to consider climate change and its consequences in their preparation of disclosure documents.

Many of the member organizations of the
Social Investment Forum (SIF) have been encouraging the SEC to go further in its corporate reporting requirements. In a letter sent to the SEC last July, SIF members asked the Commission to require that "issuers…report annually on a comprehensive, uniform set of sustainability indicators comprised of both universally applicable and industry-specific components."

The letter recommended that the SEC define mandatory ESG reporting according to
Global Reporting Initiative (GRI) reporting guidelines. With over 1,000 organizations worldwide issuing sustainability reports based on its guidelines in 2008, the GRI has developed the world's most widely used sustainability reporting framework.

However, only 13% of companies listed in the S&P 500 issue sustainability reports according to GRI guidelines, and in March 2009 the GRI called on governments to introduce "policy requiring companies to report on ESG factors or publicly explain why they have not done so."

In Europe, where since 2003 a "comply or explain" approach to ESG reporting has been in effect, the
European Sustainable Investment Forum (Eurosif) has stated its position that "institutions should mandate disclosure of ESG data by publicly traded, large corporations." Arguing that the "comply or explain" position of the European Union (EU) Modernization Directive "has not been readily enforced nor have companies disclosed substantive ESG information that could help investors," Eurosif "believes that European institutions should make reporting on ESG data no longer an option subject to interpretation but a requirement."

Acknowledging "that the time has come to unite the efforts of the scattered and international European initiatives on ESG disclosure & reporting," Eurosif, along with its partner organizations in the European Combined Reporting Alliance for ESG coalition, recently published a
position paper which argues for a reinforcement of the current principle-based approach to corporate reporting by the inclusion of recommendations regarding guidelines for reporting, and a deadline for agreement among stakeholders on the key performance indicators (KPIs) to be included in sustainability reports.

Furthermore, because there is at present there is no unanimously recognized framework for KPIs, the Alliance states that such a framework must be "formalized through a convergence process of the different existing international and European initiatives." The Alliance calls for the building of consensus among stakeholders in order to arrive at a generally accepted framework by 2012. Ideally, non-financial KPIs and information should be aligned with financial information and reporting, according to the Alliance.

To put its argument in perspective, the Alliance maintains that the need for mandatory ESG reporting is twofold. Such reporting will enable investors and others to assess the value of a company, both now and in the future. Of greater importance, however, is the need to assess a company's contributions to the achievement of a sustainable economy and society.

As for ESG reporting by companies in emerging markets, a
report issued late last year by the Emerging Markets Disclosure Project (EMDP) of SIF's International Working Group found that while most companies in emerging markets did report on at least one ESG factor, less than a third reported environmental information.

The EMDP report also found that few companies made reference to the GRI in their reports, and only 14 declared their reporting to be in accordance with GRI guidelines. However, the report observed, companies in the S&P 500 did no better in reporting according to GRI guidelines.

The report recommended that investors become signatories to the
In vestor Statement on Sustainability Reporting in Emerging Markets, originally issued in June 2008, whose 29 current signatories represent nearly $1 trillion in assets. This month, the EMDP issued a Renewed Call to Action.

Because companies in emerging markets have grown in significance in the global economy, they have become important investment areas, and investor expectations have grown as well. The updated Investor Statement argues, "Investors often do not have enough information on the manner in which companies in emerging markets have assessed and responded to risks and opportunities related to sustainability issues—and how these risks and opportunities might affect future financial performance and valuation."

The updated Statement recommends that companies in emerging markets provide ESG disclosure in financial reports or in sustainability reports, set goals and disclose progress toward meting sustainability targets, use the GRI framework in preparing their reports, and engage with key stakeholders to ensure continuous improvement in their reporting.

 

 
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