Corporate Disclosure: Can We See Clearly Now?

By Dawn McGregor 16 November, 2016

With COP 22 underway CWR's McGregor reflects on the status of corporate disclosure & obstacles in our way

Global climate targets are connected to day-to-day decisions & ops by companies; yet ESG disclosure is limited
Good news is that finance sector & exchanges are moving towards greater disclosure; should speed up adoption
'Disclosure delirium' & country specs add complexity

The G20 summit in China took place in September and COP22 is currently underway.  Environmental aspects decided at these mega-events will be measured and monitored as part of the ultimate aim of achieving our climate targets. After all, as we’ve all heard, “you can’t manage what you don’t monitor”. It is important to realise here that these grand global targets are connected to day-to-day decisions and operations as essentially these will either be met or not through what gets funnelled up from companies mainly. Some companies are already looking at how they fit into the Sustainable Development Goals and at science-based climate targets. Therefore it is absolutely key that companies know what to manage, i.e. monitor.  Whilst thinking about this the song “I Can See Clearly Now” came to mind and the lyrics fit so going with that, are we seeing clearly on corporate disclosure?

“…grand global [climate] targets are connected to day-to-day decisions…these will either be met or not through what gets funnelled up from companies mainly.”
Yet, sustainability reporting is still limited

My answer, I think a few are some a bit but the lion’s share still isn’t… This needs to change as the ‘rain isn’t gone’, especially if you interchange “rain” with “pollution”, and it isn’t going away anytime soon.
Financial corporate reporting isn’t an issue, all companies do it to some extent. However, it’s a very different picture for sustainability reporting, yet this shouldn’t be the case with the environment rising on global agendas. And as I wrote previously, company actions aren’t matching the risks. Moreover, sustainability reporting not only highlights business and reputational risk but can mean opportunity, especially given changing business models and markets. New research from Harvard Business School professors and Calvert Investments has shown that companies investing in related sustainability metrics to their business had higher profits.

Gone (going) are the dark clouds

Some good news is that the finance sector is moving towards greater Environment, Social & Governance (ESG) disclosure, which should speed up the adoption of sustainability reporting.

Good news is that the finance sector is moving towards greater ESG disclosure

We saw this in our survey of 70+ investors as part of our report “Toward Water Risk Valuation”. It found that “…over 90% of Investors want facility level disclosure of water use for instance. Yet none of the 10 analysed ListCo’s disclose such numbers.” Similar trends are being seen at CLSA, as shown by its publication in September 2016, “Beyond the choir: ESG enters the Asian mainstream”.
The CFA Institute is planning to update its curriculum in 2017 to include more focus on ESG issues, according to Bloomberg.  CFAs are “telling us loud and clear that investors are demanding ESG, and there’s increasing academic evidence that sustainable companies are better-managed companies and have higher risk-adjusted returns,” said Steve Horan, managing director of credentialing for the institute. Also, more corporate sustainability issues are heading to a vote more often.

Stock Exchanges are also moving forward on sustainability

Then there are the stock exchanges. Hong Kong Stock Exchange (HKEx) in December 2015 announced that it will strengthen its ESG reporting guide in its listing rules to “comply or explain”. It’s a step forward. The Singapore Stock Exchange in June 2016 introduced new rules on sustainability reporting, as well as introducing new Sustainability Indices.
Our survey also showed that investors felt that exchanges can do more, 86% would like to see water use levels as part of “mandatory disclosure required by exchanges.”
All of this is good but obstacles remain.

Obstacles in my way

With our increasingly online and real-time world, astronomical amounts of information are available at our fingertips.  We expect to be able to Google anything.  Company sustainability reports are no different.  This brings me to what I call the “disclosure delirium”.
The delirium has four causes.

  1. The first is the overarching lack of ESG reports globally across company size.  The majority of companies with an ESG report are MNCs.
  2. The second cause is information asymmetry.  Sustainability reports that I’ve read have ranged from 5 to over 200+ pages plus accompanying podcasts and videos.  Obviously to fully read the latter requires a lot of time, a precious commodity in our modern lives.
  3. The third cause looks to the actual information and data disclosed. The issues here range from incomparable data to unverified and inconsistent data, the list goes on.  How productive is it to compare apples with oranges? This point has been highlighted by leading experts in the area, more on this here.
  4. And the forth, are the various but non-interlinking sustainability frameworks, ratings & listing requirements. These mean that companies need to complete similar but slightly different and time consuming assessments throughout the year. This is beginning to be addressed with linkage documents like the HKEx-GRI G4.

“disclosure delirium” plus different global & country standards add complexity

On top of the above there are global & country obstacles. For instance, the Global Reporting Initiative (the primary disclosure framework) and Carbon Disclosure Project (CDP) are not commonly used in China, where there are government and industry specific disclosure guidelines. This adds complexity. So what about CDP’s Corporate Water Reporting in China report? How accurately can one judge Chinese corporate disclosure with a framework they don’t use?  We are currently looking into these issues so stay tuned.

It’s going to be a bright, bright, bright, sunshiny day…someday

Coming back to my question, I am bullish that one day we will clearly see corporate disclosure but like much in life there will be some rain (buckets loads given extreme weather events) and pain before we get there.
The solve here isn’t as simple as to conduct a sustainability report though that it a good start, as ultimately to develop our economies and balance the environment financial and ESG considerations need to be seen in parallel, in an integrated report. Few reports currently are fully integrated.

Further Reading

  • Financing Water Resilience: Climate Bonds for China – Green or “climate” bonds is a rapidly growing market but there are verification concerns plus gaps for water-related investments. AGWA’s John Matthews & Climate Bond Initiative’s Anna Creed & Lily Dai introduce the new water climate bond standard that addresses these issues
  • Treating Landfill Black Water – Landfill leachate, a highly polluting effluent, is now under new China EPA standards. Regular treatment has limitations but EWS:AOx™ by OriginClear is versatile alternative as its Jean-Loui Kindler, Nicholas Eckelberry and Stephen Jan show
  • Water PPPs To Lead In China – All new water & wastewater projects in China need to follow the Public-Private-Partnership (PPP) model. Will this mean big change and how have other water-related projects been funded in China? China Water Risk’s Yuanchao Xu takes a look
  • Financing Innovation from Indonesia – Green finance is high on agendas. The Tropical Landscape Finance Facility is a new model for just such. How does this unique mix of capital work? China Water Risk sat down with Lisa Genasci, CEO of ADM Capital Foundation, to find out
  • Managing the World’s Liquid Asset – Water – Savvy investors now recognise water as a business risk yet there is still no agreed global standard & framework for sustainability reporting. Biswas, Tortajada & Chandler on why corporates & governments must do more to change the culture & mindset over the use of water
  • Water Risk Valuation – What Investors Say – See what 70+ investors have to say on different valuation approaches we applied to 10 energy stocks listed across 4 exchanges. Is there consensus? What are they most worried about?
  • Investors Can No Longer Ignore Water Risks – Ceres warns that water – or lack of it – is becoming a bigger financial issue for investors. Monika Freyman shares key points from their report on how to integrate water analysis into investment decisions
  • Water: Can’t Always Buy What You Need – With competition for water intensifying, paying more for water may not get you what you need. Deloitte Consulting’s Will Sarni on strategies that can help corporates secure water for growth
  • Water Stewardship: Actions Must Match Risk – Despite acknowledgement of water risks, 58% of companies in CDP’s 2014 Global Water report do not have a public commitment to water. We expand on actions needed in China & globally to match the risk
  • Corporate Water Reporting in China – CDP’s report shows potentially inadequate water risk assessment by Chinese companies & those with HQ’s in China. CDP’s Gillespy on their latest report and why it’s time to report on water risks
  • Corporate Conscience: Beyond Charity – Why are so few companies effectively mitigating water risk? Is it time for the conscientious corporate to transition water from purely charity and compliance to a core business activity?
Dawn McGregor
Author: Dawn McGregor
Dawn leads CWR’s work to help corporates navigate increasingly disruptive & material risks from water & climate threats, as well as transitional risks in the supply chain arising from new regulations in China. Here, Dawn engages extensively with the global fashion industry delivering on-ground workshops in China to keynotes and strategic input at European HQs. She has written at length on the end of dirty and thirsty fast fashion and her report to overcome gaps between brands and manufacturers for a clean and circular future inspired the industry to create a new wastewater tool. Dawn also works closely with the property and tourism sectors where she not only conducts strategic assessments of their exposure but builds collective action toward resilience via closed door working groups and invite-only events. Having helped build CWR, Dawn is a frequent keynote, panellist & moderator at events, including being twice selected as the lead-rapporteur at World Water Week. Her articles are cited in various industry publications including the UN’s ‘World Without Water’. Dawn previously worked in a global investment bank assessing geo-political risk, crisis management and business resiliency. She was born and bred in Hong Kong and has lived in France, England, Singapore and Beijing.
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