Corporate Sustainability Reporting – New EU Directive Applies to Many of the S&P 500 – Not Just for EU Companies

Posted on June 10, 2014 by Hank Boerner – Chair & Chief Strategist

#Corporate Governance #Corporate Responsibility #ESG Issues #Shareowner Activism #SRI #Sustainability Reporting #Uncategorized 

by Hank Boerner, Chairman, G&A Institute
Last week the G&A team released the results of the analysis of sustainability disclosure and reporting by the US large-cap companies included in the S&P 500 Index — 72% of the companies published reports in 2013.
That was a dramatic increase from the first year of our analysis (for year 2011, with just under 20% of companies reporting) and a fast rise from the 2012 level of 53% reporting (a clear majority of the S&P 500 were by then reporting on their sustainability).
What we see at the end of the year 2013 tally is that 28% of the companies are not reporting. A shrinking minority.  But wait — there is another important consideration for the S&P 500 universe and other U.S. companies. AND – for other companies in other countries.
Tune in to the European Union Directive, adopted recently, mandating that companies in the EU’s 28 states with 500 or more employees, or certain levels of revenue, or condition of the balance sheet, will have to begin publishing CSR reports. And that includes non-EU companies with issues trading on EU stock exchanges, such as the London, Frankfurt, Milan, Paris, Amsterdam, NASDAQ OMX, and others.
In reading the final Directive, we see this phrase: “The Accounting Directives regulate information provided in the financial statements of all limited liability companies which are incorporated under the law of a Member State or European Economic Areas (EEA). As Article 4(5) of the Transparency Directive refers to Article 46 of the Fourth Directive and to Article 36 of the Seventh Directive, the amendments [to the proposed] provision will also cover companies listed on EU regulated markets even if they are registered in a third country.”
We checked with the authoritative Europe Direct Contact Center to see if we understand this correctly — the center verified that the April 15, 2014 text as adopted by the parliament included this language.
So — the U.S. large-cps included in the S&P 500 benchmark not publishing non-financial reports at all will be covered by the Directive.
Note this: 118 S&P 500 companies are not publishing sustainability reports – and – are listed on an EU-regulated exchange. These companies are in various sectors, such as:
Consumer/Discretionary – 26 companies
Consumer/Staples – 5 companies
Energy – 15 companies
HealthCare – 16 companies
Industrials – 18 companies
Information Technology – 20 companies
Materials – 1 company
Telecomm Services – 2 companies
What is holding these companies back? Lack of understanding of the importance of non-financial reporting to stakeholders? Inertia? Resistance to the trend (with 72% of peers clearly setting the pace now)? Reluctance to disclose lagging ESG performance indicators? Belief that sustainability “costs” money? Just being stubborn?
Whatever the reason, at least two important drivers are now pressing in on holdout boards and managements — (1) peer pressure within the S&P 500 universe, and (2) the coming mandate for the 118 companies listed on EU stock exchanges, if we read the Directive correctly.
Add in other drivers — such as supply chain pressure (with major customers asking their prime suppliers for ESG performance information); and, rising investor expectations (many mainstream asset owners and managers are adopting sustainable investing approaches for portfolios).  It probably won’t be long before we see only a slim minority of the 500 large-cap companies holding out on publishing ESG performance information.
And then…we see the trend moving rapidly down the market cap food chain to other large-caps, mid-caps, small-caps, and on and on.  Until sustainability reporting is viewed to be as important (to get it right, and include material content of all kinds) as traditional financial reporting for public companies.  And – privately owned companies…for sure.
We have come so far, so fast in the expansion of corporate and institutional sustainability / responsibility reporting, haven’t we!