53 percent of S&P 500 companies are publishing sustainability or CSR reports with 63 percent of them following the GRI framework.
By Hank Boerner
Companies that are measuring and managing their sustainability issues appear to perform better over the long-term in the capital markets. This is one of the important takeaways from a recent analysis conducted by the Governance & Accountability Institute [G&A], of the possible positive associations of increased corporate disclosure and reporting on ESG performance.
Senior corporate managers are interested in gaining advantage in the capital markets and leaders in sustainability management and reporting appear to enjoy increases in share price, lower cost of capital, better risk management profile, inclusion in favorable opinions and popular equity indexes, and more competitive advantages and opportunities.
Who Does ESG Performance Matter To?
So the critical questions: does clear focus on a company's ESG strategies and performance, and structured reporting on sustainability performance matter to investors? To reputational list creators? To creators of important corporate ratings and rankings?
The answers we found to all three stakeholder groups was a resounding yes across the board – there is positive association with each of these, at least for large companies included in a key stock market index. The team at G&A Institute also found clear differentiation between S&P 500 sustainability reporters and companies that do not report. Why the S&P 500 as a critical test?
Analyzing the Impact of ESG Performance: The S&P 500
Because the S&P 500 Index is widely used as a benchmark by asset owners and managers to track their performance. Wall Street managers like to say "The market is the market," indicating that it is a challenge for investors to beat the market in stock picking and to achieve outperformance of the assets they manage for themselves and others. Rewards can go to those managers that can beat their benchmarks, which for many, is the S&P 500 Index.
The S&P 500 Equal Weight Index is comprised of the 500 leading companies in various industries of the U.S. economy, representing about 80 percent of coverage of all U.S. equities. Company boards and executives know that inclusion in the index (or being dropped from it) can mean very good news or very bad news on the day when the index components are announced.
That's because the index is widely regarded as the best single gauge of the large-cap U.S. equities market, and about $5 trillion in asset holdings are benchmarked against the index. Sectors in the index include energy, materials, industrials, construction, healthcare, financials, information technology, telecom, and utilities.
Because of the preeminent position that the index holds, G&A Institute researchers Lindsey Clark and David Master, working with partner and SVP Louis Coppola, analyzed the index universe to separate companies that publish sustainability reports and those that do not, and then to explore positive associations and benefits enjoyed by corporate reporters with those companies that are not reporting.
Majority of S&P 500 Companies Publishing CSR Reports
The first determination was that 53 percent of S&P 500 companies are publishing sustainability or CSR reports (the titles of the reports vary) -- this is a dramatic increase from the 20 percent level determined only a year earlier. S&P 500 companies that do not report are in the minority today. Further, a majority of reporters (63 percent) follow the GRI framework, 5 percent reference the GRI and 32 percent do not following GRI guidelines.
Having built a database of reporters and non-reporters, what did the research team look for?
1. Financial Performance
Large companies reporting on sustainability strategies and performance appear to be managing their sustainability issues and tend to perform better in the capital market over the longer term. Of course, there are many determinants of success of the capital markets, but the analysis showed that in several years between 2007 and 2011, companies that reported on their sustainability efforts outperformed the broad index.
Remember, the market is the market -- it is difficult for an investor to outpace the broad market. Sustainability measuring, managing, developing strategies, third party engagements and all the reporting seems to give public companies an edge. A longer-term perspective will help quantify this in greater detail.
2. Equity Indexes
There were positive associations between companies reporting using the GRI framework and their inclusion in sought-after indexes such as the Dow Jones Sustainability Index-North America, DJSI-World and NASDAQ's OMX CRD Global Sustainability Index.
3. Reputational Lists
There were positive associations with inclusion in rankings including Newsweek's Greenest Companies rankings, CR magazine's CR 100 Best Corporate Citizens, and Ethisphere's World's Most Ethical Companies.
4. Ratings & Rankings
Companies enjoyed higher CDP Disclosure Scores and Performance Scores, they had more favorable Glassdoor ratings, more favorable CSRHub ratings, higher Bloomberg ESG Disclosure scores, and, had preferred placement in Brandlogic and CRD Analytics' Corporate Sustainability IQ Matrix.
The overriding lesson for management and boards?
If you are not reporting on your sustainability performance, now your competitors and peers almost surely are. With the task of catching up growing larger by the month, this is the time to get started.
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