My Say: Improving the disclosure quality of sustainability reports

This article first appeared in Forum, The Edge Malaysia Weekly, on December 11, 2017 - December 17, 2017.
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The recent mega-storms such as Hurricanes Harvey and Irma in the US and the recent unusual rainfall in Penang could signal that climate change is bringing about more severe storms.

Scientists say in July, human-driven climate change caused the global average sea surface temperature to rise 1.24°F above the 20th-century average, making it the third-hottest July in the last three years. The waters where Irma was born were 2°F above normal.

In a nutshell, rising water temperature heats up the air and makes storms wetter. Every uptick in temperature increases the air’s water-holding capacity exponentially. There is 4% more water vapour in the air than a century ago, making conditions ripe for more-intense storms.

The realisation that economic activities contribute adversely to the environment began in 1972 when the United Nations convened a conference in Copenhagen on sustainable development. In 1987, sustainable development was defined as meeting the needs of the present without compromising the ability of future generations to meet their own needs.

In 2015, 195 nations signed the Paris Agreement to combat climate change by limiting global average temperature rise this century to well below 2°C above pre-industrial levels. Greenhouse gases contribute to climate change and global warming. They absorb infrared radiation and radiate heat in all directions. Carbon dioxide (CO2) is an example of a greenhouse gas.

“Sustainable to the common man” refers to the ability to continue for a particular level for a period of time. These days, business enterprises play a key role in the economy and it is comforting to know that they are increasingly embracing sustainability. The media too is playing its role to inform and educate the public that everybody needs to act decisively on climate change, in both their personal and professional capacities.

Some two decades ago, efforts were made to encourage the business sector to voluntarily publish sustainability data along with their financial statements. One body responsible for this is the Global Reporting Initiative (GRI), an independent standards organisation that helps businesses, governments and other organisations understand and communicate their impact on critical sustainability issues such as climate change, human rights and corruption. GRI remains the de facto global standard with 92% of the world’s largest 250 corporations using its standards in their sustainability reports.

What is a sustainability report? In the mid-1990s, world authority on corporate responsibility and sustainable development John Elkington coined the term “triple bottom line” of profit (financial), planet (environment) and people (social) to measure corporate performance. The latter two are major contents in sustainability reports. A variety of names is given to such reports, such as corporate social responsibility, corporate responsibility and sustainability. They are published annually as a standalone report or a section within annual reports.

Is publishing a sustainability report a burden or benefit to the company? In many jurisdictions, coming up with a sustainability report is voluntary but more and more stock exchanges are making it mandatory. The KPMG Survey of Corporate Responsibility Reporting 2017 says 75% of 4,900 companies surveyed in 49 countries had issued a corporate responsibility report compared with 12% in 2013. This means companies are viewing sustainability reporting as beneficial to them.

While this is encouraging, there might be an element of greenwashing. It is equally important to address the need for disclosure quality. In February, researchers at Harvard Business School and Saïd School of Business at Oxford University reported that 40% of 368 global institutional investors found sustainability information to be too general to be useful.

Corporate Knights, which produces corporate sustainability rankings based on corporate sustainability performance, has been tracking the extent to which the world’s publicly traded companies disclose seven key sustainability indicators: employee turnover (people), energy (planet), greenhouse gas emission (planet), injury rate (people), personal cost (people), waste (planet) and water (planet).

For the Measuring Sustainability Disclosures: Ranking the World’s Stock Exchanges 2017 report, Corporate Knights analysed the disclosure quality of 6,441 large companies listed on 55 stock exchanges. The Helsinki Stock Exchange came up tops for the third year, after 2014 and 2015. Eight of the top 10 stock exchanges were in developed economies, which was expected, but what was surprising was the leapfrogging of the Stock Exchange of Thailand (SET) to No 10 from No 40 in 2013.

It is pleasing to see all the major Asean stock exchanges improving in ranking. In 2013, the Singapore Exchange (No 18) was the top-ranked Asean stock exchange, followed by Bursa Malaysia (No 24), Indonesia Stock Exchange (No 37), Philippine Stock Exchange (No 39) and SET (No 40). This year, SET took the top spot, followed by Bursa Malaysia (No 15), SGX (No 16), Indonesia Stock Exchange (No 25) and Philippine Stock Exchange (No 29).

The improvement in ranking points to higher disclosure quality by Asean corporations, which means that the regulators’ policy and support initiatives are gaining traction. The question now is how did the SET achieve such an amazing feat?

Toronto-based Corporate Knights noted that regulations mandating sustainability disclosures were a clear common denominator among the top-ranked stock exchanges.

As far as listing rules are concerned, all the Asean stock exchanges except that of  Indonesia and the Philippines require environmental, social and governance (ESG) reporting from all their listed companies and provide ESG guidance notes and training support. The two stock exchanges need to seriously look at making sustainability reporting mandatory under an Asean harmonised legal framework.

Let us proceed to examine the disclosure scores. The SET’s score of 73.8% is way ahead of its Singapore, Malaysia, Philippines and Indonesia counterparts’ 53.1%, 51.1%, 43.9% and 39.3% respectively.

SET president Kesara Manchusree, in an interview at the sidelines of the Asia Sustainability Reporting Summit in Singapore in September, said she uses the Dow Jones Sustainability Indices (DJSI) to increase the number and quality of sustainability reporting of Thai listed companies.

DJSI is an internationally recognised benchmarking tool that provides a family of indices to support the investor community in investing in stocks to meet their risk/return objectives. Each February, it sends out questionnaires to over 3,000 of the world’s largest listed companies, asking 80 to 120 industry-specific questions on economic, environmental and social factors that are often under-researched by equity analysts. In September, the results are announced and the qualifying companies become components of the DJSI.

According to Kesara, the DJSI methodology of ranking corporations is good for the economy and society as it signals to the investor that the component company is taking a proactive approach in addressing long-term risks and opportunities. She says the DJSI supports her strategic objective of building a stronger and more sustainable stock market. With much pride and satisfaction, she said that 17 Thai companies were featured in the 2017 DJSI compared with only two from Singapore and one in Malaysia. DJSI sent questionnaires to 26 corporations in Singapore, 32 in Malaysia, 37 in Thailand, 22 in the Philippines and 25 in Indonesia. The global response rate was 25.5%. The Thai companies’ response rate was 45.9%.

How did Kesara elicit such a high response rate? She took a direct approach by writing to the CEOs personally, informing them that the SET regards the DJSI as an important guide for investors and that their competitor has joined the index. She then asked whether they would like to follow suit.

This type of communicative channel builds accountability on the part of CEO. He has to respond to the questionnaire and provide top-down leadership to remove his organisation’s lethargic response to external voluntary-type questionnaires.

In conclusion, the job of the CEO is demanding, with multiple streams requesting for his attention. DJSI’s questionnaires have improved disclosure quality, which is crucial in meeting the time-defined Paris Agreement’s climate obligations.

For the SET’s Kesara, finding alignment with CEOs — by expressing mutuality of benefits and clarity on what are deemed important expectations in a personal style — is the key success factor. It deserves to be emulated by the heads of the other stock exchanges.

Francis Xaviour Joe is general manager of new customer acquisition at Accuvio Sustainability Software’s Asian office