Analysis of mandatory corporate sustainability reports shows deficits
Certain large enterprises in the European Union are required to publicly disclose sustainability information. In this way, especially financial market participants shall obtain a more comprehensive picture of the sustainability risks enterprises are exposed to and of the impacts they have on environment and society. A recent study on behalf of the German Environment Agency (UBA) shows that even though German companies increasingly report on climate, water, resources and waste, significant gaps remain. Only about 20 percent disclose information on air pollution and biodiversity. Apparently, the identified gaps in corporate reporting are often due to insufficient legal provisions. UBA suggests, among others, to require more detailed reporting on individual environmental topics at EU level.
Dirk Messner, UBA-President: „We urgently need meaningful and standardized sustainability information from European companies. Only with a significant increase in transparency, the financial market can use its leverage and make its necessary contributions to the transformation of our economy. This is what the amendment of the Non-Financial Reporting Directive, recently initiated by the European Commission, needs to accomplish. Currently, the legal requirements are too vague , which is why the reporting obligation draws an incomplete picture of business reality.”
Climate change is the main environmental topic German companies disclose information on in their mandatory non-financial statements. For 2019, approximately 80 percent of the companies report on climate, more than half of those also on climate targets. 32 of the 228 companies studied report on plans to achieve carbon neutrality. However, only one third provides information on climate targets in connection with climate actions and key performance indicators. Only this triad allows a good understanding of the company’s climate ambition.
Compared to climate change, German companies report by far less on water, resources, waste, air and biodiversity and the policies they pursue in these areas. Less than 60 percent provide information on resources and waste, slightly more than half on water and even less than 20 percent on air and biodiversity. Companies in the DAX 30 performance index consistently perform better in this regard.
Gaps can also be identified in the reporting practice on supply chains. Nearly half of the companies disclose at least basic information on their supply chain structures. However, only about 25 percent report on high-risk supply chains and less than every tenth company provides information beyond tier-one suppliers. Environmental issues in supply chains are only mentioned in a fourth of the company reports assessed.
However, the study also shows that there are already many examples of good reporting practice. The respective companies are often characterized by the fact that they assign accountability for sustainability at the highest management level, implement an environmental management system or adhere to standards such as those of the Global Reporting Initiative (GRI) or the German Sustainability Code (DNK).
The identified gaps in mandatory sustainability reports are often not due to a lack of ambition in companies, but can regularly be explained by the unclear requirements of the German implementing law for the Non-Financial Reporting Directive. Currently, information on the environment, climate and other sustainability topics only needs to be reported if it is also material from a financial perspective. About 60 percent of German companies follow this understanding in their mandatory reports. Specific requirements on strategies, targets and actions are currently missing. These constraints lead to a situation where companies partly disclose more and better information in voluntary sustainability reports.
For the current revision of the European Non-Financial Reporting Directive the authors of the study make ten central recommendations. In the future, the Directive should require reporting on individual environmental topics, include all material information from an environmental perspective, and require disclosure of strategies, targets, actions and key performance indicators, among others. The proposal of the European Commission presented on April 21th is an important step in this direction. With its recently presented Sustainable Finance Strategy, also the German Federal Government aims for an ambitious amendment of the Non-Financial Reporting Directive.
The results of the study are based on an empirical analysis of the non-financial statements and separate non-financial reports from all German capital market-oriented companies that fall under the provisions of the German implementing act of the Non-Financial Reporting Directive (“CSR-RUG”). The focus of the study was on companies from the “real economy”. Hence, reportable banks and insurances that are not capital market-oriented were not included in the study. The authors systematically analyzed 249 corporate reports for the year 2018 and 228 reports for 2019. The study only considered information that was explicitly disclosed as to fulfill the reporting obligations. In addition, the authors conducted 22 interviews with selected experts from finance, corporates and civil society. A group of three experts accompanied the preparation of the study.
The study was carried out on behalf of the German Environment Agency by the Institute for Ecological Economy Research in cooperation with the consulting firm Arqum and the Fair Finance Institute.
Download the Summary of the study here.
Source: The German Environment Agency