The Organization for Economic Co-operation and Development (OECD) has published a new report on sustainable development policies and practices in the corporate governance system. It includes a new dataset that compares key trends and characteristics of corporate sustainability at a global level, as well as a comparative analysis of legal frameworks in fourteen jurisdictions (Brazil, India, Japan, Mexico, People’s Republic of China, United States). ). among others), focusing mainly on the Latin American region. The report also presents the results of OECD surveys of 275 Latin American companies with a market capitalization of approximately half that of the region and 521 asset managers investing $1.4 trillion in the region.
It is difficult not to be surprised by the availability of information related to sustainable development and the interest of market participants. Decision makers have also been particularly active in directing and demanding additional information related to corporate responsibility in several jurisdictions. However, market practices have been dynamic and there are still significant differences between jurisdictions.
Corporate Governance Sustainability Practices
In 2013, green, social and sustainable (GSS) corporate bond issuance totaled $3.2 billion worldwide. In 2021 and 2022 (through October), the total was $658 billion and $410 billion, respectively (half of this total was issued by companies offering goods and non-financial services). Although the amount issued in GSS corporate bonds is still only a fraction of the total corporate bond issuance, GSS bonds cannot be ignored. In particular, we have recently seen a growing trend in issuing sustainability-related bonds, which encourage the issuer to improve its overall sustainability rather than investing in a few green projects.
Global GSS corporate bond issuances
There may be complaints about “greenwashing” or that some governments may not take sustainability risks seriously enough, but the fact is that many companies already disclose information related to responsibility. In 2021, almost 8,000 of the world’s
2,000 listed companies published a responsibility report or a comprehensive report containing sustainable development issues. These companies account for 84% of the world’s market value. What is probably even more surprising is that 51% of the market value corporate responsibility information is guaranteed by a third party (while it is important to check the level of certainty and coverage of the assessment).
Listed companies’ sustainability disclosure, by market capitalization
However, a major challenge is the difficulty of comparing companies’ information related to sustainability. One of the main reasons for this difficulty is that companies used different accounting standards and frameworks to disclose information about sustainability. Globally, CDP questionnaires are used by 2,891 companies, representing 55 percent of total market value, and GRI standards are followed by 3,247 companies, representing 45 percent of market value. TCFD recommendations are used by 2,639 companies with a total market value of 44%, and SASB Standards are followed by 1,572 companies with a total market value of 38%. However, regulations vary from jurisdiction to jurisdiction.
In 2021, almost 300 companies (70% of market cap) and 441 companies (51% of market cap) fully or partially complied with TCFD recommendations in the UK and Japan. In the United States, 600 companies used it (55% of the market capitalization). SASB Standards for Disclosure of Information Related to Sustainable Development. In many cases, companies use more than one accounting standard to disclose sustainability information.
Use of sustainability standards by listed companies in 2021, by market capitalization
There is one data point that is of particular concern to companies, investors and civil society organizations alike: greenhouse gas (GHG) emissions. Globally, 5,240 companies representing 72% of the market capitalization disclosed their GHG emissions 1 and 2 in 2021.
In the UK and the European Union, an average of 91% of companies disclosed 1 and 2 greenhouse gas emissions in the same year . It may be noteworthy to some observers that, despite the reported challenges in reliably calculating tertiary greenhouse gas emissions, 3,300 companies (56% of market capitalization) disclosed tertiary greenhouse gas emissions worldwide in 2021.
Disclosure of GHG emissions by listed companies in 2021, by market capitalization
Due to more or less direct pressure from investors and other stakeholders, several companies have done more than reported their past greenhouse emissions. Globally, nearly two-thirds of companies by market capitalization report a goal to reduce greenhouse gas emissions. In the United Kingdom and the European Union, the proportion of companies is higher, 84% and 81% respectively.
How credible these reduction targets are, and whether they will be enough to transition our economies to a low-carbon economy, are still open questions. However, the percentage of companies that have announced such goals would have been unimaginable just a few years ago.
Disclosure of GHG emissions reduction targets by listed companies in 2021, by market capitalization
In addition to disclosure, the importance of environmental and social issues for companies can also be seen in other management practices. For example, companies with a market value of 44 percent in the world and 54 percent in OECD countries have adopted a variable remuneration policy in relation to factors of sustainable development. Similarly, companies representing about half of the world’s market capitalization have a board committee that oversees the management of liability issues. In the United States, 65% of companies by market capitalization have at least such a committee, in the United Kingdom 60%, in the European Union 42%, in Japan 21% and in China 13%.
Executive compensation and board committees, by market capitalization
Regulatory Frameworks for Sustainability Disclosure
Probably in response to the above market trends, regulators in many jurisdictions require or recommend that listed companies disclose sustainability information. However, the nature and scope of these regulatory frameworks differ. Some recommend that companies disclose sustainability information on a “comply or explain” basis (eg Brazil and the UK), meaning that they must disclose the information or explain why they do not. Others, such as China and India, require listed companies to disclose sustainability-related information but do not have to explain if they do not. Other jurisdictions, such as Chile and the European Union, have established specific disclosure requirements. The OECD Corporate Governance Committee is reviewing the G20/OECD Corporate Governance Principles and environmental, social and governance risk management is a focus area of the assessment process (read more about the review here).
In terms of the scope of sustainability issues being discussed, comparing existing frameworks can be difficult. For example, although both the frameworks of Argentina and the European Union cover a wide range of sustainability issues, the latter regulation is considerably more detailed than that of the former. However, there are clear differences between jurisdictions that focus more or less on climate-related issues (such as Brazil, Colombia and the UK) and others that cover a wider range of sustainability issues.
An emerging trend in sustainability regulatory frameworks is to either require or recommend that companies disclose verifiable metrics so that investors can assess credibility and progress toward a set sustainability goal or target (eg, Colombia, the European Union, and Mexico). This policy does not mean that companies must adopt such targets, but if they do, they must provide sufficient information to hold directors and key managers accountable.
Sustainability Reporting Standards and Assurance
For jurisdictions developing a sustainability reporting framework, an important policy question is whether to choose a single accounting standard or allow companies the freedom to report on sustainability in whatever framework they deem most appropriate. Among those jurisdictions that choose a single sustainability accounting standard for all listed companies, there is also the option of following an existing global standard or developing a local standard. Some jurisdictions (e.g. China and the European Union) have chosen to develop a local standard, while others (e.g. Colombia, Japan and the United Kingdom) have adopted SASB standards and/or TCFD recommendations.
Accounting standards only provide a framework for companies to disclose information, but in general, company managers must decide what information to disclose effectively. An indication of who would be the main users of the company’s data is important in such an assessment. Traditionally, accounting standards have considered investors and creditors to be the primary users of corporate information, which typically means that only information relevant to their investment and voting decisions should be presented. In several jurisdictions investors are considered to be the main users of sustainability information (eg Chile, Japan, UK and USA), while in the European Union and India stakeholders are most important besides investors.
Ensuring sustainability disclosures by an independent third party – such as an external audit of financial statements – can increase investor confidence in the information disclosed and increase the comparability of corporate responsibility reports. Only the European Union has established a data viability requirement, and the United States is considering introducing such a requirement at the SEC’s public hearing. They differ only in two respects. First, the level of assurance required: more limited in the European Union and, after a phase-in period, an acceptable level in the United States for greenhouse gases of Zone 1 and 2 (reasonable is the level normally expected for an external audit of financial statements). ). Second, the two jurisdictions differ in whether the insurance provider is required to be a registered auditor (the one in the European Union) or not (the proposal in the United States).
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