This chapter is from the book
This chapter is from the book
This chapter is from the book
ESG Metrics and Disclosure
The absence of reliable reporting metrics is a considerable obstacle to assessing the degree to which companies invest in stakeholder initiatives and to measuring their effectiveness. A 2023 survey by the National Association of Corporate Directors (NACD) found that the lack of uniform disclosure standards was the single greatest challenge directors face in providing oversight of ESG matters.41 If directors, who have access to nonpublic information, struggle with this challenge, then external observers no doubt find it even more difficult.
To increase transparency, some companies are disclosing information about their stakeholder-related initiatives through supplemental reports to their required financial disclosure. Examples include the following types of documents:
Sustainability report: Describes the economic, environmental, and social impact of a company’s activities, and describes the link between corporate strategy and sustainable outcomes.
Human capital report: Includes qualitative and quantitative information about a company’s workforce, critical skills and expertise requirements, workforce development initiatives, diversity initiatives, training, human resources policies and practices, and trends within the company.
Climate change impact report: Enumerates the potential impact of climate change on a company’s governance, strategy, and risk management, including metrics and targets to assess and manage climate-change risk. These reports are often developed in accordance with the recommended guidelines of the Financial Stability Board Task Force Recommendations (TCFD).
In addition, many companies voluntarily disclose ESG-related initiatives in the annual proxy, including those focused on environmental matters (climate, sustainability, recycling, and renewable energy use), human capital management (diversity and employee turnover), safety, and culture.42 Some companies disclose their progress toward ESG objectives when justifying the annual bonus awarded through executive compensation programs (see the following sidebar).
A lack of rigorous, quantitative, and uniform metrics makes it difficult to assess the quality of stakeholder-related efforts across large samples of companies. Without uniform metrics, companies cannot effectively choose which variables to report and how to calculate them.
To address this challenge, a nonprofit organization called the Sustainability Accounting Standards Board (SASB) developed a set of standards for companies to make consistent and comparable disclosures about ESG-related issues. These standards are organized into five dimensions: environment, social capital, human capital, business model and innovation, and leadership and governance. Each dimension is further organized into three to seven general-issue categories. Additionally, SASB provides a materiality map to identify the dimensions and general-issue categories that are relevant to each industry. For example, the general-issue category “greenhouse gas emissions” is considered material to the transportation industry but the category “water and wastewater management” is not.47
SASB standards are tailored to each industry. As a result, a sustainability report compiled by a company in the commercial banking industry would include different metrics from one compiled by a company in the casinos and gaming industry. The commercial bank’s SASB report would include metrics and disclosure language on financial inclusion through the availability of lending and savings products in underserved communities.48 By contrast, the casino’s SASB report would include metrics on responsible gaming.49
Despite the similarity of this organization’s name to those of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), which develop the accounting standards used to prepare public financial statements, the standards developed by SASB are not officially endorsed by the SEC. As a result, few companies include SASB metrics in their Form 10-K disclosure. Instead, companies that report SASB metrics do so through separate sustainability reports on their website.50
Furthermore, sustainability metrics are generally not audited by a public accounting firm. In some instances, companies will engage independent third-party organizations to certify their report, although the verification procedures of these organizations are not overseen by the Public Company Accounting Oversight Board (PBAOC).51 As a result, many shareholder groups are skeptical of the quality of the ESG-related information they receive from companies. Ernst & Young found that most investors (73 percent) are unsatisfied with the ESG disclosure that organizations provide.52
The research on sustainability reporting is mixed. Christensen, Hail, and Luez (2021) provided a literature review on corporate social responsibility (CSR) reporting. They found that CSR information can benefit capital markets through greater liquidity, lower cost of capital, and better capital allocation. At the same time, CSR disclosure might be associated with higher litigation risk. These authors found large variations in disclosure (length and quality) across firms, which likely reflect heterogeneity in firms’ business activities, the materiality of CSR to firms’ activities, and the perceived costs and benefits of disclosure. Because most CSR initiatives and disclosure are voluntary, it is difficult to measure their impact on performance and valuation. The authors concluded that mandatory CSR reporting standards have the “potential to mitigate negative externalities from firms’ business activities,” but “it is not a priori obvious that they would necessarily achieve better outcomes or be cheaper than a market solution.”53
In 2024, the SEC adopted rules to require standardized disclosure about carbon emissions and the financial effects of climate-related risk.54 These rules have been challenged in the courts and their ultimate form is unclear.
