Wednesday, March 15, 2017

S&P 500 Index Company Boards Need More Oversight of Sustainability Strategies and Execution, plus Disclosures

Results of research and analysis joint project by Ceres and Governance & Accountability Institute reveals: A closer look at the sustainability disclosure of S&P500(r) companies re-affirms the continuing need for greater oversight of sustainability efforts and disclosure of same by the boards of directors of the 500 companies.

Now that the clear majority of S&P 500 companies are publishing "sustainability" or "citizenship,"  "ESG" reports, the vast majority of companies still do not disclose more than the bare minimum on the role that their boards play on sustainability. (Research shows that while only 20 percent of the S&P 500 were publishing such reports in 2011, that number zoomed to 81 percent as of 2015.)

Despite the dramatic growth in corporate disclosure and reporting, the joint research project showed that the majority of companies do not (yet) provide enough insightful information for stakeholders—such as how environmental and social issues ("E" and "S") actually get on the board agenda, how strategy is set, how those decisions are made, and most important, how the senior managers rank and file then follow through on those decisions. What are the outcomes?

Given that boards of directors can play a critical role in driving the long-term performance of the companies which they oversee by carefully assessing both risks and opportunities related to their financial performance and overall strategic direction, disclosure about the role of the board is critical to helping investors and other stakeholders make thoughtful decisions on how well a company is organized and prepared for its long-term performance and viability.

About the S&P 500 Universe of Companies 

Each year since 2011, the G&A Institute team has examined all of the sustainability reports of those S&P 500 companies that are disclosing information about their sustainability performance. In this collaborative study with CERES, G&A further examined a select sub-group of companies using the Global Reporting Initiative (GRI’s) G4 Sustainability Reporting Standard that was published in the 2015 calendar year[1].

The Ceres - G&A Institute Analysis

G&A Institute worked with Ceres, a nonprofit sustainability advocacy organization, in conducting a deeper dive in the data and corporate narrative to determine the extent to which this important universe of U.S. companies were disclosing the role that their boards play in driving corporate sustainability performance.

This analysis could not have been more timely: Institutional and individual investors increasingly want to know more about what actions corporate boards are taking on material environmental and social issues ("E" and "S") that do or could pose risks and ultimately impact the performance of the companies that they invest in.

Shareholders now have more influence in board composition, and are becoming increasingly vocal in expressing concerns about the board members' sustainability expertise and experience, which shareowners deem to be necessary board qualifications today. Investors are increasingly focused on companies' ESG (environmental, social and corporate governance strategies and practices) for their portfolio management.

For example, last year large institutional investors such as California Public Employees Retirement System (CalPERS) were updating their investment criteria. CalPERS updated its Global Governance Principles and now requires their portfolio companies to identify and recruit of directors with expertise and experience in climate change risk management strategies.

Ceres’ analysis was based on practical recommendations from the  report View from the Top – How Corporate Boards can Engage on Sustainability Performance. This Ceres research effort highlighted evolving expectations on the systems and actions that companies and boards need to put in place for “effective” board sustainability oversight from the investor and stakeholder points of view.

Results: So what did the joint G&A Institute and Ceres analysis reveal?
  • While companies acknowledge the role of their board for sustainability, not all of them formalize sustainability in the charter of the board committees. Establishing formal systems, such as board duties in charter incorporation allows sustainability to be raised in board meetings in a systematic and in-depth manner, rather than in an ad hoc way. While 97% of the companies surveyed broadly note that their boards oversee sustainability, only 58% specifically included ESG issues in a board committee charter and area of responsibility.
  • Very few companies formally require expertise in sustainability issues as a board qualification for nominees for election to the board of directors. Ceres’ report underlined the importance of having board members qualified in material sustainability issues would empower directors to engage with management in a thoughtful and robust manner. Yet, only ten percent of companies surveyed included this criterion in their board nomination process.
  • A limited universe of companies do integrate sustainability matters into their board evaluation processes. Ceres’ report noted that continuous evaluation of board performance—including on ESG issues of material importance—is necessary for boards to remain effective in their oversight duties. However, only 15 percent of companies surveyed included environmental and social issues in their board evaluations. If these issues were included in their board performance evaluations, the Ceres staff noted, directors would certainly be more diligent in their oversight duties.
  • Companies do disclose the role of the board in overseeing sustainability risk, yet there is limited disclosure of board decision-making. The Ceres report called on companies to provide more public disclosure, detailing both the role of the corporate board in overseeing sustainability risks, as well as issues that the board prioritized and key decision taken. Only 33 percent of companies surveyed identified that their boards have a critical role to play in overseeing sustainability risk—and yet even for these companies there was limited additional detail provided on the specific issues that the board had prioritized or key decisions made.

Key Conclusions

Overall, the joint G&A Institute and Ceres analysis underlines the thesis that while a growing number of companies are starting to publicly acknowledge that their boards play a role in sustainability, the disclosure largely exists at the high level, and the "30,000-foot high view" approach does not provide the needed details on prioritization and decision making that stakeholders are expecting.

This shortcoming in corporate disclosure and reporting means that stockholders and key stakeholders are not able to see if this apparent corporate focus has been effective—or if the board of directors' oversight has led to improved sustainability related performance impacts (tangible results that can be clearly articulated).

This shortcoming does not necessarily mean that the processes in question do not exist—just that stakeholders don’t yet have enough information to make the decisions on which companies are doing well on this issue, and reward companies with leading practice.

Going forward, Ceres and G&A Institute encourage company boards and managements to offer a clearer line of sight on both the systems in place for board sustainability oversight, and also the actions they are taking related to integrate material sustainability issues into overall company performance evaluation, risk management and the creation of long-term value for shareholders.

[1] These companies have now reached 108 companies (“companies surveyed”) within the index. 



—Louis D. Coppola, co-founder and executive vice president of Governance & Accountability Institute, Inc. (lcoppola@ga-institute.com); and Veena Ramani, program director, capital market systems, Ceres (ramani@ceres.org)

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