Canadian Investment Review

How Useful is Corporate Sustainability Disclosure?

Written by Caroline Cakebread on Tuesday, May 23rd, 2017 at 1:56 pm

story_images_oil-spillBack in the early 1990s, few if any companies thought about reporting on sustainable practices – at that time, fewer than 20 companies offered up any data on activities related to environmental, social, and governance factors. Since then, that number has grown exponentially, fueled by regulatory changes to accounting rules and corporate reporting aimed at encouraging sustainable management in the private sector.

The question for many investors, however — how useful is the information? And does it lead to better financial performance down the road?

Two researchers at the Harvard Business School offer a new contribution to the discussion by scrutinizing a major analytical framework created by Norges Bank Investment Management that’s used to measure the quality and scope of reporting relating to climate change, water, and children’s rights.

In their paper, George Serafeim and Jody Grewal, seek to determine the “value relevance” of the dataset and whether the disclosures firms provide are in fact predictive of future performance.

The results are mixed.

The authors find that larger, higher growth firms with higher analyst coverage disclose more – and that climate change performance scores tend to be idiosyncratic rather than tied to observable firm characteristics. To cut through this and find the most useful data, the authors tested for “residual” scores – those not correlated with observable firm characteristics like industry and country.

The key finding: that these residual disclosure scores were not correlated with any metric of future financial performance. However, in the case of climate change, the residual score is significantly related to financial performance – even more so for firms with above average exposure to climate related risks.

But, there’s a catch – the media matters. Researchers found some firms choose to disclose more because they are facing more problems, including the effects of negative media attention.

In such cases, then, better disclosure might not be indicative of better performance but a sign of future bad news. However where the relationship between climate change performance score and negative media attention is positive, then the performance measure could be a meaningful sign of how a company is managing climate-related risks.

Download the full paper here.

 

 

 

 

Copyright 2017. Canadian Investment Review. All Rights Reserved.