Leading RI figure proposes framework for prioritizing sustainability disclosure

Set of overarching principles and industry-specific tests

One of the leading voices in responsible investment has put forward a set of principles and industry-specific tests to help prioritise corporate sustainability disclosure.

Domini Social Investments’ partner Steve Lydenberg, in a new white paper, points out the “massive amounts” of ESG data that is being disclosed by some firms. For example car giant Ford’s 2011 CSR report is over 400 pages.

“As the amount of corporate sustainability data disclosed has increased, problems of comprehensiveness, comparability, and prioritization have emerged,” he says. As a result, “disclosure now takes many different forms, covers many different issues, and varies substantially in depth of detail”.

So his paper proposes three principles “derived from sustainability science” and a “fact-based, five-part test” as a method for assuring consistency and relevance in the prioritization of sustainability disclosure (see below).

The 73-page report has been prepared on behalf of the Initiative for Responsible Investment at the Hauser Center for Nonprofit Corporations at Harvard University, for the newly launched Sustainability Accounting Standards Board (SASB).

It is called On Materiality and Sustainability: The Value of Disclosure in the Capital Markets. It builds on the earlier “From Transparency to Performance: Industry-Based Sustainability Reporting on Key Issues” published in June 2010.

Lydenberg has been active in sustainable investments since 1975 and is a former Chief Investment Officer at Domini, where he was a founder of the groundbreaking Domini 400 Social Index. He was the “L” in the pioneering ESG firm KLD Research & Analytics that was eventually absorbed into MSCI.

“Without the systematic availability of industry-level sustainability data, our current financial system will continue to operate in conditions of short-term volatility and investor distrust, and corporations will continue to be viewed as ‘greenwashers’, unaccountable, and lacking commitment to the public interest,” he says in the paper.He argues that the reporting of industry-specific KPIs creates three primary benefits for investors. Firstly, it will reduce costs for gathering and analyzing sustainability data. It will reduce the “asymmetries” in the availability of sustainability information between institutional and retail investors. And it will help investors allocate investments to companies whose business models serve broad social goals and avoid investments in companies that run substantial social, environmental, or governance risks.

“The mandating of disclosure of sustainability data is the next natural step in the evolution of reporting requirements for US corporations,” Lydenberg concludes.

The three principles:

  • Potential for Systemic Impact and Disruption. Industry-specific sustainability KPIs (key performance indicators) that might disrupt the financial, environmental, or social systems within which corporations operate are likely to be among those given highest priority.
  • Degree of Uncertainty. The more substantial the uncertainties around sustainability KPIs, the more likely they are to be a disclosure priority.
  • Long-Term Impacts. The more likely the impacts are to play themselves out over decades or generations, the more likely they will be a high priority.

These principles are followed by a set of five materiality tests: 1. Does the sustainability KPI have substantial financial or risk-based implications? 2. Does it have substantial legal, regulatory, or policy implications? 3. Does it correspond to significant industry-specific social or environmental norms or standards? 4. Does it identify substantial stakeholder concerns or significant emerging social trends? 5. Does it imply substantial industry-specific opportunities for social and environmental innovation?