Can Non-Financial ESG Reporting Have an Impact on Stock Price or Profitability?

By Dr. Barry R. Palatnik, CPA, MBA, Stockton University, and Dr. Zlatinka N. Blaber, CPA, Salem State University – September 16, 2021

Can the presence of non-financial information disclosures have a positive effect on profitability or stock price? If companies were to disclose material non-financial environmental, social and governance (ESG) information, such as product recalls, carbon footprint, data breaches or the share of women on boards, would this bolster their legitimacy? How easy is it to navigate the complex waters of non-financial information reporting?

The U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), among other financial accounting regulatory bodies, have set the theoretical foundations for the provision of financial information to investors, creditors and other users of such information. Having a well-established financial accounting framework has helped businesses give an account of the results of their operations and financial position. Yet, in today’s reality of climate change and acute social inequity issues, there has been an urgency coming from various company stakeholders to include non-financial information. Many institutional investors, asset managers, financial institutions, labor unions, environmental groups, employees and consumers insist that a business be environmentally and socially responsible. The planet and human beings have long been in the shadow of financial numbers. It is time to change this.

Sustainability Frameworks

Both public and private companies are increasingly being assessed on their non-financial ESG performance and are expected to also disclose this information. At its core, sustainability disclosure increases a company’s legitimacy in the eyes of stakeholders. Disclosures enhance transparency and provide an opportunity for firms to appear as responsible corporate citizens. To facilitate this, numerous sustainability frameworks have been set in place, according to an International Federation of Accountants 2021 Benchmarking Global Practice report. These include: the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Carbon Disclosure Project (CDP), the United Nations Sustainability Development Goals (U.N. SDGs), the Task Force on Climate-Related Financial Disclosures (TCFD) and the United Nations Global Compact (UNCG), among others.

The GRI, the oldest ESG standard-setter, founded in 1997, focuses on metrics that show businesses’ impact on society and Earth. The TCFD and the CDP are predominantly concerned with climate change. The SASB, via its Materiality Map, pinpoints only those ESG factors that are likely to have a material effect on a company’s financial performance, according to sectors and industries. Both the SASB and the TCFD have become popular in recent years due to support from big asset management firms, including BlackRock and State Street. It is fortunate that the topic of sustainability is beginning to enter the mainstream of accounting discourse, given the intensity of fires, hurricanes, heat waves and other natural disasters that we have witnessed in the last decade. Man-made problems, including systemic inequality and racism, have also attracted attention lately via movements such as Black Lives Matter.

The Reporting Exchange, a website that helps companies disclose their sustainability efforts, tracks a variety of ESG-related guidelines. Internationally, the number of these guidelines (regulations and standards) grew from about 700 in 2009 to more than 1,700 in 2019; this includes more than 360 different ESG accounting standards, according to a 2020 sustainability article in The Economist.

Adoption of Sustainability Reporting

How widely adopted is sustainability reporting? A joint report issued in 2021 by the International Federation of Accountants (IFA), the American Institute of CPAs (AICPA), and the Chartered Institute of Management Accountants (CIMA) surveyed 1,400 companies. This joint report set out to understand current practices for sustainability disclosures of ESG information. From the 1,400 companies surveyed, 57 percent produced a sustainability report, 18 percent reported sustainability information in the annual report, 16 percent used an integrated report, and 9 percent had no reporting. “Today 58% of companies in America’s S&P 500 index publish one, up from 37% in 2011,” according to Datamaran, a software provider, from The Economist article. Clearly, companies feel the urge to join their peers and report on their sustainability practices. But the non-financial information disclosed differs widely from one company to another.

One might hope that companies’ ESG disclosures are always truthful and genuine. However, there have been cases where companies have presented favorable sustainability disclosures, while there has been no evidence to support such claims. To aggravate the problem of truthful reporting, in many countries sustainability reporting is only optional and requires no outside assurance. Talking the talk of sustainability has been labeled as “green washing” or “social washing.” For instance, Exxon Mobil Corp. took to social media to disclose its investment in clean energy; however, after an investigation, there was no support for this claim.

The Road Ahead

On Sept. 22, 2020, the World Economic Forum, with the support of the Big Four accounting firms — Deloitte, EY, KPMG, and PwC — announced a new set of sustainability metrics for firms to report on. The intention was to simplify ESG reporting, not to add to already numerous existing frameworks, according to The Economist 2020 article. The same source also observes that investors may find comparability hindered by myriad ESG standards; environmental activists may notice that multiple ESG standards allow firms to cherry-pick only flattering results; and management may complain that they do not know what exactly to disclose and that the options in front of them are way too numerous. Simplification of the various ESG standards is warranted in the name of inter-company comparability.

Five big sustainability standard-setters, including the GRI and the SASB, announced in September of 2020 that they planned to harmonize their standards. This is something to watch out for. Having a single, high-quality, international set of standards on ESG would put non-financial reporting on a plain-level field for all and greatly facilitate comparability. The road to a single set of ESG standards may be long, but it is worth walking on.

Barry R. Palatnik

Dr. Barry R. Palatnik,Ed.D, CPA, MBA, is an associate professor of accounting at Stockton University. He is a member of the NJCPA and serves as treasurer for the Atlantic/Cape May Chapter.

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