Increasing standardization in sustainability reporting

ESG, GRI, UNGC, SASB, TCFD, CDP, SBTi: The meaning of all these abbreviations and the technical requirements of the associated standards initially overwhelm many newcomers to sustainability reporting. This study provides an overview of the most important international standards for ESG or sustainability reporting and uses the examples of the SMI Expanded Index to show the use of the standards among the largest listed companies in Switzerland. Large multinational companies are considered pioneers in ESG reporting, and they are increasingly demanding reporting from their customers and suppliers. 45 of the 50 companies surveyed apply at least one international standard in their sustainability reporting. Well established are the Global Reporting Initiative (GRI), the UN Global Compact and the Climate Disclosure Project (CDP). The UN's Sustainable Development Goals (SDGs) are also widely used, and the standards of the still young Sustainability Accounting Standards Board (SASB) are spreading rapidly. This study is designed to be a source of information and guidance for ESG decision-makers. The data collection on the choice of standards of SMI Expanded companies provides information and hopefully motivation for small and mid-caps to also embark on the path of standardized ESG reporting. The study additionally takes a look into the political context of the legal regulations on ESG reporting, which are currently also taking shape in Switzerland.

It was only fifteen years ago that Kofi Annan, then Secretary-General of the UN, asked the chairmen of the boards of 50 global corporations to commit to sustainability. This writes the renowned business journalist Gillian Tett in the Financial Times at the beginning of 2021, pointing out the great development that has taken place in the field since then (Tett, 2021).

Although there is often talk of a lack of standards, the fact is that over the last twenty years a number of international standards for reporting on non-financial topics have proven themselves and gained acceptance. In the exchange between the private sector, industry organizations and the UN, two central concepts developed. One is materiality - the idea that issues such as ecology, social justice and good governance have material impacts on companies and vice versa. The concept of materiality then evolved into the second concept for measuring these material impacts by a set of ESG metrics or KPIs (Tett, 2021).

The standards' databases serve as directories in which companies make their reports accessible and publicly commit to specific targets. Reporting includes verifiable and transparent statements on where the company is on the path to achieving these goals. Reporting according to standards serves many stakeholder groups, not only ESG rating agencies and investors, but also stakeholders such as partners along the supply chain and customers. Employees are interested in their company’s ESG-reporting to an increasing extent as well.

Among the best-in-class in reporting in the index studied are Clariant, Givaudan, LafargeHolcim, Nestle, Novartis, SGS and Sig Combibloc. They all apply several other standards in addition to GRI. In particular, with the Science Based Target Initiative (SBTi), they have set clear and public targets on how they will achieve the transformation to net zero emissions. SBTi is the most far-reaching commitment to the fight against climate change.

Governments' plans and businesses commitments to sustainability still do not go far enough for environmental and human rights activists. They point out that despite all efforts, emitted climate gases, human rights violations and poverty all increased worldwide in the past year of crisis. Nevertheless, it is now safe to say that the issue of "sustainable economy" is firmly anchored on global political agendas far into the conservative camps. Because of the pandemic, the social aspects of corporate governance in particular, but also of economic aid programs, have gained in importance. Today it is clear that the major stimulus programs of the EU and the USA will at least partly be linked to the imperative of sustainable development. China's new five-year plan also places an important emphasis on sustainability. The global financial world as well is increasingly aligned with ESG criteria, reaching an extent in which individual experts even diagnose a forming bubble (see for example Naumann, 2021).

As more and more financial service providers are aligning their products with ESG ratings, the power and influence of ESG rating agencies such as MSCI, Sustainalytics, S&P (RobecoSam) or ISS are growing. Companies can position themselves more precisely in the ratings and defend themselves better against unjustified classifications by publishing their own reports according to independently defined standards. It is thereby important that the reports are also uploaded to the respective online platforms.

With the European Green Deal, the EU has set itself the goal of reducing net greenhouse gas emissions to zero by 2050. Important parts of this master plan are the emerging EU taxonomy and the Non-Financial Reporting Directive (NFRD), both part of the set of rules for sustainability reporting. Since 10 March, the EU's Sustainable Finance Disclosure Regulation (SFDR) for financial service providers has additionally come into force. It equally applies to financial products domiciled in the EU and managed from Switzerland. First, financial service providers must show how they integrate sustainability risks at the company level and in the investment process, and what impact these risks can have on the returns of the individual products. From 2023 onwards, the extended set of regulations will require reporting according to key figures, so-called Principal Adverse Impacts on Sustainability (PAI).

In June 2021, Switzerland will vote on a new carbon emissions law that aims to halve Switzerland's greenhouse gas emissions by 2030 compared to 1990. The bill does not contain any direct regulations for companies to report or to reduce carbon emissions, but works with incentive taxes on heating oil and gas and new benchmarks for buildings and new cars, as well as an airline ticket tax. More important is the counter-proposal to the Corporate Responsibility Initiative. The bill contains new regulations very similar to the EU's directive on non-financial reporting. The consultation phase on the counter-proposal to the Corporate Responsibility Initiative will last until mid-July 2021. With the counter-proposal coming into force, listed companies and other larger companies are to be legally obliged to publish an annual report on non-financial matters. These reports shall contain information that contributes to a better understanding of the course of business, the business results, the situation of the company, and the effects of the company's activities on various stakeholders. In addition, due diligence procedures regarding child labor and conflict minerals will be required in the future.

We examined the sustainability reports of the SMI Expanded companies published up until the 30 April 2021. Of the 50 companies examined, only three have not published any sustainability report. The other 47 companies either devote an extensive chapter to the topic in the annual report or publish one or even several separate sustainability reports. For seven companies, the 2019 report was taken into account as their reports for 2020 had not yet been published by the end of April. In the following section, we present the most common standards and initiatives and their prevalence in the SMI Expanded.

Two of the companies have a sustainability report, but do not align them with any international standards. Credit Suisse and Novartis are at the other end of the spectrum and fully apply all six of the standards examined. Most companies apply either one (5), two (5), three (9) or four (8) of the standards examined. 14 of the companies apply five of the six standards examined. This shows that the sustainability reporting of most companies is continuously growing. Once the foundations and structures are in place and the data is available, it is easy to integrate further standards and thus serve wider circles of stakeholders.

The full study is available to download as a PDF.