The practice of sustainability reporting—the regular reporting of environmental, social, and governance (ESG) data—is quickly becoming the norm rather than the exception for global companies. In fact, this type of disclosure is now required of companies operating in several countries including, as of 2017, companies operating across the European Union. The European Directive on Nonfinancial Disclosure requires public companies with more than 500 employees operating in Europe to report on a variety of non-financial metrics, including environmental protection, social responsibility and treatment of employees, anticorruption and bribery issues, and diversity on boards of directors (Directive 2014/95/EU). Notably, these requirements also apply to non-European companies operating in Europe. Similar disclosure requirements are in place in other regions, and at least a dozen stock exchanges are beginning to require ESG disclosure as a listing rule, including the leading exchanges in India, South Africa, and Brazil.
The emergence of reporting requirements, coupled with investors’ growing interest in ESG data, has fueled growth in corporate sustainability reporting and the widespread availability of company-level data on a broad range of nonfinancial issues. For example, recent analysis by the Conference Board, a global business research organization, shows that almost half of companies in the S&P Global 1200 release sustainability reports that reference the Global Reporting Initiative (GRI) guidelines (now the GRI Standards), a leading sustainability reporting framework. This is impressive, given the first version of the guidelines were released less than 20 years ago. There is also evidence that investors are increasingly relying on these data; for example, a recent study by EY asked investors how frequently a company’s nonfinancial performance had played a pivotal role in their investment decisions in the previous 12 months. In 2016, 68% responded that nonfinancial information played a pivotal role frequently or occasionally, up from 58% in 2013.
Investors now have instant access to data on hundreds of nonfinancial indicators—everything from greenhouse gas (GHG) emissions to the number of workplace accidents. For many investors, the challenge is how to make sense of this wealth of data. In fact, an important trend in sustainability disclosure is that ESG reporting is rightly transitioning from an exercise in broad disclosure (reporting on as many ESG issues as possible) to a more targeted and strategic mechanism for companies to engage with stakeholders.
Rather than broadening the scope of their disclosure, companies are increasingly choosing to focus their disclosure on issues that are more relevant and material to their specific lines of business. For a bank, for example, this may mean prioritizing ESG reporting on social issues such as diversity over reporting on environmental issues such as water consumption. Materiality is playing an increasingly important role in the choice of indicators companies are reporting on. Rather than drown investors and other stakeholders in a sea of ESG data, a shift towards this more focused reporting can help them make better-informed decisions about companies’ risks and opportunities.
Ensuring Reliability of Nonfinancial Data
The growing interest of investors in ESG data has focused attention on the quality and reliability of nonfinancial data. If investment decisions are being made based on reported ESG data, companies have a responsibility to ensure that the data can be relied on. This has put an emphasis on ensuring the reliability and comparability of ESG data, and the result has been a notable increase in the number of companies choosing to externally assure and verify their nonfinancial data. The Conference Board’s most recent analysis of sustainability reporting, shown in Exhibit 1, found that third-party assurance of ESG data is now used by almost 40% of S&P Global 1200 companies. This represents a 52% increase from 2013, when only one in four companies included assurance statements for their nonfinancial data.
Use of ESG Assurance by S&P Global 1200 Companies (2013–2016)
Exhibit 2 shows that European companies are furthest ahead in adopting ESG assurance, as 61% of European companies in the S&P Global 1200 include assurance statements in their sustainability reports. Companies in the Asia-Pacific region are no strangers to external assurance either, with almost half of the companies in this region choosing to include assurance of their ESG data. Companies in North America lag considerably, with only 16% choosing to include assurance of their nonfinancial data. While this is a relatively low figure, it is worth noting that it is almost double the amount from five years ago.
Current Trends in ESG Assurance
It is clear that the practice of assuring ESG data is growing. But what does ESG assurance look like, and who is doing most of the assuring? A closer look at the sustainability reports of companies in the S&P 500 reveals three interesting points about the state of ESG assurance:
Despite the surge in assurance, the scope of ESG assurance remains quite limited.
While there is no doubt that the use of external assurance has increased, most companies only include assurance for a very limited number of ESG indicators. In a few cases, the scope of assurance is limited only to the data collection process and methodology, and does not include verification of the data itself. For companies that include verification of ESG data, in the vast majority of cases only data related to GHG emissions are within the scope of assurance. When the scope extends beyond GHG emissions, it typically includes indicators related to energy usage and water consumption.
Approximately 10% of companies that include assurance choose to extend assurance to a broader set of indicators.
Some companies choose to extend their assurance to a much wider range of indicators, in some cases including social data. For example, Walgreens Boots Alliance includes indicators related to corporate giving and employee diversity, in addition to more common indicators such as CO2 emissions, energy use, and waste. Another example comes from Xylem, which in addition to energy, CO2, and water, also includes assurance for its data on injury frequency and severity. Lockheed Martin extends assurance to 21 GRI indicators, including indicators related to employee diversity and injury rates.
Despite a wide range of assurance providers, four companies currently dominate this space.
There are currently 29 different assurance providers signing their names on the assurance statements of the sustainability reports of S&P 500 companies; however, more than half of these assurance statements are concentrated among four companies. Bureau Veritas is the most frequently used assurance provider among the S&P 500, used by approximately one-fifth of companies that include ESG assurance. The next three most commonly used providers are ERM Certification and Verification Services, Ernst & Young, and Lloyd’s Register Quality Assurance. The verification standards most commonly used by these four assurance providers are ISAE 3000 and ISO 14064-3:2006 for greenhouse gases. Of the 40 reports assured by the top four assurance providers, almost two-thirds explicitly reference these two standards. Exhibit 3 breaks down the top 10 assurance providers.
The Future of Corporate Sustainability Reporting
The rapid growth of ESG assurance signals the continued development of corporate sustainability reporting from a niche practice to an increasingly expected responsibility of companies. It is also evidence of a growing expectation among stakeholders for access to reliable, consistent, and high-quality nonfinancial data. As companies and investors increasingly begin to make business decisions based on ESG data, the quality of this data will become paramount. For companies, ESG assurance represents an important step in the maturity of their sustainability strategies and a way to instill rigor into their nonfinancial reporting. For assurance providers, the outlook is positive, as there continues to be much room for growth in ESG assurance, both in the number of companies to partner with and in the scope of indicators to cover.