Expanding Public Debates About the “What” & “How” of Corporate ESG Disclosure

by Hank Boerner – Chair & Chief Strategist – G&A Institute

March 2, 2021

Corporate sustainability / ESG reporting — What to disclose? How to frame the disclosures (context matters!)? What frameworks or standards to use?  Questions, questions, and more questions for corporate managers to consider as ESG disclosures steadily expand.

We are tuning in now to many more lively discussions going on about corporate ESG / sustainability et al public disclosures and structured reporting practices — and the growing complexity of all this disclosure effort, resulting often in disclosure fatigue for corporate practitioners!

Corporate managers ponder the important question:  which of the growing number of ESG frameworks or standards to use for disclosures? (The World Economic Forum (WEF) describes some 600 ESG guidelines, 600 reporting frameworks and 360 accounting standards that companies could use for reporting.  These do vary in scope, quantity, and quality of metrics.)

In deciding the what and how for their reporting, public companies consider then the specifics of relevant metrics and the all-important accompanying narrative to be shared to meet users’ rising information needs…in this era of emergent “stakeholder capitalism”.

Of course, there is the question for most companies of which or what existing or anticipated public sector reporting mandates will have to be met in various geographies, for various sectors and industries, for which stakeholders.

We here questions such as — how to get ahead of anticipated mandates in the United States if the Securities & Exchange Commission (SEC) does move ahead with adoption of new rules or at least strong guidance for corporate (and investor) sustainability reporting.

The European Union is today ahead in this area, but we can reasonably expect the USA to make important moves in the “Biden Climate Administration” era.  (The accounting standards boards are important players here as well as regulatory agencies in the sovereign states.)

Company boards, executive committees, professional staff, sustainability team managers wrestle with this complex environmental (for ESG disclosure) as their enterprises develop strategies, organize data flows, set in place data measurement protocols, and assemble the ESG-related content for public disclosure. (And, for expanded “private sharing” with ESG ratings agencies, credit risk agencies, benchmark/index managers, to meet customer ESG data requests, and more).

The list of issues and topics of “what” to disclose is constantly expanding, especially as institutional investors (asset owners and their managers) develop their “asks” of companies.

Climate change topics disclosure is at the top of most investor lists for 2021. Human Capital Management issues have been steadily rising in importance as the COVID-19 pandemic (and spread of variants) affects many business enterprises around the globe.

In the USA, SEC has new guidance for corporate HCM disclosures.  Political unrest is an issue for companies.  Anti-corruption measures are being closely examined.

Diversity & Inclusion (including in the board room and C-suite) is growing in importance to investors.

Also, physical risk to corporate assets in the era of superstorms and changing weather patterns – what are companies examining and then reporting on?  Exec compensation with metrics tied to performance in ESG issues is an area of growing interest.

We are monitoring and/or involved in multiple discussions and organized initiatives in the quest to develop more global, uniform, comparable, reliable, timely, complete, and assured corporate sustainability metrics, and accompanying narrative.  And, to provide the all-important context (of reported data) – what does the data mean?  It’s a complicated journey for all involved!

This week we devote the content of this week’s Highlights newsletter to various elements of the public discussions about the many aspects of the journey.

Here at G&A Institute, our team’s recommended best practice:  use multiple frameworks & standards that are relevant to the business and meet user needs; these are typically then disclosed in hybridized report where multiple standards are harmonized and customized for the relevant industries and sectors of the specific company’s operations and reflect the progress (or even lack of) of the enterprise toward leadership in sustainability matters.

This approach helps to reduce disclosure fatigue for internal corporate teams challenged to choose “which” framework or standard and the gathering of data and other content for this year’s and next year’s ESG disclosures.

We shared our thoughts in a special issue of NIRI IR Update, published by the National Investor Relations Institute, the important organization for corporate investor relations officers:


Here are our top selections in the content silos for this week that reflect the complexity of even the public debates about corporate ESG disclosure and where we are in early-2021.

TOP STORIES

The ever-evolving world of ESG investing from a few different points of view. What are the providers of capital examining today for their portfolio or investable product decision-making?  Here are some shared perspectives:

Corporate ESG Stakeholders – Supply Chain Management – What’s in Your Supply Chain Mix?

By Pam StylesG&A Institute Fellow

The current COVID-19 pandemic has exposed countless concerns, including (global) supply chain management issues near the top of the list.

Public and private-sector professionals and officials are soon to be attempting to get economies back up and running. Following Herculean and likely imperfect restart efforts, it will be important to debrief supply chain systemic failures and risks that have been exposed during the pandemic crisis.

ESG/Sustainability practitioners may be able to offer unique vantage to assist the debrief in collaboration with company supply chain experts and management teams.

Well-established ESG tracking practices and voluntary reporting frameworks, such as GRI (est. 1997) and CDP (est. 2000), could possibly be used to expand internal information sharing and analysis to augment internal supply chain risk assessments, monitoring and oversight capabilities.

ESG reporting frameworks are not necessarily a perfect fit or infallible, however they could potentially provide existing information platforms from which to add and/or improve accessible reporting, analysis and assessment, and executive leadership observation in a multitude of strategic (multi) sourcing risk assessments and repositioning exercises to come.

As we all try to learn and make important changes going forward, important questions to ask:

What do you know about your company’s suppliers’ supply chain, their suppliers, and so on?

The Business Continuity Institute, Zurich Insurance Company and others have been raising the red flag for years that too many companies do not have full visibility of their supply chain, nor the ability to fully track components through the full vertical supply chain.

Just a few recent examples of how reality has suddenly struck some pharmaceutical, consumer products and electronics companies (the list of other sector impacts can go on):

  • U.S. Pharmaceutical supply chain dependencies on China were well known at high levels prior to COVID-19, but effectively nothing was done about it and consumers were unaware of the looming risk.
  • Consumer Products giant Procter & Gamble indicated 17,600 products could be affected by Coronavirus in China.
  • Apple is dealing with pandemic-driven supply chain and sourcing woes.

Back in 2008 PwC published a fascinating paper about German companies supply chain sourcing practices in China, in which it suggested companies take a closer look at their KPI’s.

Who should raise warning flags and influence corrective supply chain action?

Supply chains can be very complicated with many layers or tiers, all the way down to original raw materials source. Aggregate supply chain geographic risk management is surely challenging.

As a specialist at well-known Gartner Supply Chain observed, “COVID-19 should be a wake-up call to boards of directors, CEOs and supply chain leaders that being well prepared for disruptions, regardless of their cause, is not an optional extra. It is a business necessity.

Companies are learning painful lessons in the shortcomings of legal boilerplate risk disclaimer language in situations like today’s. These lessons should compel executive leadership and Boards to step-up their efforts and investment in overseeing supply chain strategy and active risk management mitigation.

Does your company regularly review and remediate identifiable aggregate risks across the company’s supply chain and associated third-party relationships?

As recently pointed out in a COVID-19 related article by another G&A Institute Fellow, Daniel Goelzer, “Internal auditors are missing key risks.” He went on to observe,

“The Institute of Internal Auditors (IIA) has released its annual survey of Chief Audit Executives. The 2020 North American Pulse of Internal Audit “reveals serious gaps in internal audit’s coverage, with audit plans deficient in key risk areas.”

“For example, the IAA found that almost one-third of respondents did not include cybersecurity/information technology in their audit plans. In addition, more than half did not include governance/culture or third-party relationships, and 90 percent did not include sustainability.”

Postulating that the professional supply chain management tools kit is loaded with granularity to boggle the mind, it is fair to suggest the possibility that the many different tools may inadvertently complicate aggregate risk assessments.

Thus, we should think about whether there might be an opportunity for ESG/Sustainability professionals to constructively share their inherently top-down vantage and tools kit to assist companies with additional angles for risk assessment and oversight.

Brainstorming how the growing mainstream ESG/Sustainability field can help:

One gets a strong sense that professional supply chain experts across the board are now committed to re-engineer their collective body of knowledge and management resources to truly understand–down to the last pharmaceutical raw ingredient source, medical gear and equipment–the geographic and geo-political risks of their companies’ product vertical manufacturing and supplies.

First, let’s acknowledge that professional supply chain experts have a lot of knowledge, skills and complex management tools at their disposal that those outside their discipline know little about.

Second, kudos to the U.S. Army Corps of Engineers for their brilliance and ingenuity. Their recent reminder to all of us that, when a problem is large and complex and a fast solution is needed, it’s worth remembering the “keep it simple” concept.

Their challenge: emergency need to rapidly expand hospital bed and critical care capacity in multiple locations across the country.

Their solution: work with the infrastructure already there – large convention centers, empty hotels, and the like – and quickly retrofit them to meet the hopefully short-term surge capacity needs.

So now let’s apply the “keep it simple” concept, to think about what infrastructure we already have that can be efficiently and effectively adapted to immediate re-purpose, constructive to supply chain risk management.

Pre-dating the world’s awareness of the coronavirus COVID-19 crisis, the Global Reporting Initiative (GRI) stated in an article published November 15, 2019, that it “recognizes that joining the dots between corporate reporting and the practical changes needed to promote transparent supply chains can be challenging.”

In that same article, GRI announced its new two-year business leadership forum to help businesses work through challenges to bridge the gap between supply chain management and reporting. Your company may already use or be familiar with the GRI reporting framework.

Specific to supply chain, you might take another look at three GRI KPI sub-series: 204 – Procurement Practices, 308 – Supplier Environmental Assessment, and 414 – Supplier Social Assessment.

GRI is the oldest and most widely recognized voluntary ESG/Sustainability reporting framework and provides a wide range of supply chain related leadership interaction. It has alliances and synergies with the ISO certification standards and CDP, among other organizations.

Hence, GRI could be a robust resource to turn to for facilitating internal supply chain risk discussion, brainstorming and improvement.

CDP, originally known as the Carbon Disclosure Project, has grown beyond carbon to include a host of other key sustainability topics including supply chain. Several germane excerpts from the CDP Supply Chain Report 2018-2019:

  • Companies’ supply chains create, on average, 5.5 times as many greenhouse gas emissions as their own operations. (This hints at the veritable iceberg of suppliers beyond the companies’ direct control.)
  • Having a single, common disclosure platform is also proving to be beneficial. Amongst program members, 63% are currently using, or considering using, data from CDP disclosures to influence whether to contract with suppliers or not.
  • Managing supply chain risks, impacts, and capturing opportunities for sustainable value creation is complex. However, the fundamental steps are common across all organizations: understanding, planning and implementing. Learning from outcomes is essential in order to deepen and broaden the value of a Supply Chain strategy.
  • This year a record number of companies submitted disclosures on climate change. CDP supply chain members made requests to 11,692 suppliers, with 5,545 responses received from businesses headquartered across 90 different countries. This is a 14% increase on the 4,858 responses received in 2017.

Taking inspiration from the U.S. Army Corp of Engineers, a serious question to ask is whether either or both the existing GRI and CDP reporting and data analysis infrastructures could be used (1) ingeniously for a foundation from which to build or expand distance and country concentration inputs to provide additional foundation for sourcing risk analysis and oversight capabilities for companies, as well as (2) to facilitate improved global commerce and public stakeholders supply chain risk awareness?

Concluding Encouragement

To ESG/Sustainability practitioners:

Your reporting frameworks, databases and analytical tools may be well-positioned for collaborative solutions to help companies identify and address deep-tier supply-chain risks — both immediate (public health/safety) and longer-term (climate change) — that can and should now rise to a higher level of scrutiny.

When it comes to Sustainability – climate change is important, but supply chain is urgent.

Pamela Styles – Fellow G&A Institute – is principal of Next Level Investor Relations LLC, a strategic consultancy with dual Investor Relations and ESG / Sustainability specialties.