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Listed companies in emerging markets are catching up with those in developed companies on sustainability reporting, says Corporate Knights’ Doug Morrow

This article was first published in Edition 8 (January 2014) of Accountancy Futures, ACCA's research and insight journal.

The reporting practices of publicly traded companies have evolved dramatically over the past 20 years. While the foundation of the balance sheet, income statement and cashflow statement remains intact, today’s listed companies supplement these core documents with a diverse body of information and data covering corporate policy, strategic plans, business targets and accounting policy, as well as forward-looking information.

The broadening scope of corporate disclosure is being driven to a large extent by tightening regulatory requirements, as well as a result of the growing demand among investors for more comprehensive company-level information.

It is against this backdrop that the recent explosion in corporate sustainability reporting should be viewed. 

Sustainability reporting – loosely defined as the practice of providing information about a company’s environmental, social and governance risks, opportunities and management capabilities – is the latest innovation in this trend towards expanding corporate reporting and transparency. 

Sustainability reporting may not always move the market, but it can provide a fascinating window into corporate strategy and behaviour. How companies perform on such indicators as annual greenhouse gas (GHG) emissions over revenue, CEO compensation over average employee salary or lost-time injury rate can provide rare glimpses into their strategy for managing costs, their approach to motivating employees and their operational effectiveness. 

On a look-ahead basis – with complex systemic challenges such as climate change, resource depletion, urbanisation, population growth and rising fossil-fuel prices on the horizon – it is hard to imagine sustainability reporting becoming less useful to investors. 

It is for these reasons and more that Corporate Knights sought to analyse the general state of corporate sustainability reporting across the world’s equity markets with our recent report, Trends in Sustainability Disclosure: Benchmarking the World’s Stock Exchanges, 2013. The report was the second in the series, following up on our inaugural study released in 2012.

METRICS ANALYSIS

In the most recent study, launched in October 2013, we were interested in figuring out which markets were home to the world’s most advanced sustainability reporters. In order to make some sense of the admittedly wide-ranging nature of sustainability reporting, we focused our analysis on a set of seven specific metrics: employee turnover, energy use, GHG emissions, lost-time injury rate, payroll, waste produced and water consumption. By looking at the proportion of companies on each exchange that discloses these metrics, we effectively ranked the world’s stock exchanges on the sustainability disclosure practices of their listed companies.

BME Spanish Exchanges, based in Spain, received top billing in the 2013 ranking, moving up from fourth position in 2012’s assessment. The top five were rounded out by the stock exchanges in Helsinki, Tokyo, Oslo and Johannesburg. 

Our most noteworthy finding was that stock exchanges based in emerging markets are rapidly closing the ‘disclosure gap’ between themselves and stock exchanges in the developed world. This is a reflection of the surge in sustainability reporting that we are witnessing by listed companies based in emerging markets, including Brazil, India and South Africa. Our analysis indicates that emerging markets-based stock exchanges are on track to overtake their developed-world counterparts in terms of the proportion of their listings that disclose the seven ‘first-generation’ sustainability metrics reviewed in the study. 

While this ‘catch-up’ process is the result of many different factors, one of the primary drivers has been an influx of reporting mechanisms implemented by stock exchanges and other regulatory actors. Celebrated examples include the decision of the Securities and Exchange Board of India to mandate the inclusion of business responsibility reports in the annual reports of India’s 100 largest listed entities based on market capitalisation.

Sustainability reporting can be viewed as the latest manifestation in the more general trend towards expanding corporate disclosure practices. Future milestones on this pathway include integrated reporting and the provision of more granular and standardised non-financial information. 

In addition to facilitating a more complete picture of a company’s social and environmental impacts, sustainability reporting gives investors an additional source of data that can be mined in the context of portfolio management. 

Sustainability disclosure ranking 

1 BME Spanish Exchanges, Spain 

2 Helsinki Stock Exchange, Finland 

3 Tokyo Stock Exchange, Japan 

4 Oslo Stock Exchange, Norway 

5 Johannesburg Stock Exchange, South Africa 

6 Euronext Paris, France 

7 Copenhagen Stock Exchange, Denmark 

8 SIX Swiss Exchange Switzerland 

9 Athens Stock Exchange Greece 

10 Euronext Amsterdam, Netherlands

Steve Waygood   

CONVENER OF THE CSRC AND CHIEF RESPONSIBLE INVESTMENT OFFICER, AVIVA INVESTORS

‘The United Nations’ Sustainable Development Goals (SDGs) – which will replace the Millennium Development Goals (MDGs) in 2015 – should matter to investors. They offer a significant opportunity to enhance corporate sustainability disclosure and to demonstrate clearly to governments, business and civil society the linkages between corporate transparency and sustainable development.

‘Aviva Investors convened the Corporate Sustainability Reporting Coalition (CSRC) in 2011 around the Rio+20 Earth Summit to advocate a global convention on integrated sustainability reporting. It represents investors with assets under management of approximately US$2 trillion and includes organisations as diverse as ACCA, the Global Reporting Initiative and the Carbon Disclosure Project.

‘The last set of MDGs failed to engage the private sector effectively, instead focusing on the role of aid and foreign direct investment, missing out on the potentially transformative effect the sector could have in delivering the goals’ vision.  

‘We were delighted that the reports that have so far fed in to the SDGs’ development process have all recommended the promotion of integrated reporting as part of the goals, including the High-Level Panel chaired by UK prime minister David Cameron. 

‘It is vital that the SDGs recognise the importance of good corporate governance in delivering the goals and in channelling private finance to the most sustainable and productive uses in our economy. The opportunity the SDGs presents now should not be missed.’

 

Last updated: 2 May 2014