4.3.2 What are the main drivers?

Looking at the developments of sustainability reporting and integrated reporting in Brazil, the Netherlands, Sweden and in the US, outlined in chapter 3, regulation has been driving the uptake of sustainability reporting in Europe, contributing to placing the Netherlands and Sweden amongst the leaders of sustainability reporting developments.1 Despite operating in very diverse markets, the largest American, Brazilian, Dutch and Swedish companies, which are also some of the largest companies in the world, seem to have understood the benefits of long term value creation and of enhanced ESG transparency in financial markets. All 4 countries are moving in the same direction of developing sustainability reporting yet at different speeds. Generally, the Netherlands and Sweden, besides their own progressive national initiatives in sustainability reporting, they also benefit from the EU’s progressive sustainability reporting disclosure requirements.

Swedish companies have been early adopters of international sustainability reporting standards, e.g. the Organisation for Economic Cooperation and Development (OECD) Guidelines on Corporate Governance of State-Owned Enterprises. Environmental, social and governance concerns are imbedded in the Swedish social and corporate culture, e.g the largest Swedish companies have been recognized, among others, in the Dow Jones Sustainability Index and the Stockholm Stock Exchange Index OMX30, indicating their high quality sustainability reporting. Looking at the state of the art of sustainability and integrated reporting in Sweden we could learn how the Government can be an important driver for practicing sustainability reporting by endorsing a specific sustainability reporting framework, the GRI guidelines. The examples of Sweden, as the Netherlands and also of South Africa show how Governmental intervention can be influential in the uptake of sustainability reporting and integrated reporting (KPMG, 2011).2

At this point, most of the US companies report on their ESG risks on a voluntary basis, as there is no specific regulatory framework mandating sustainability reporting in the US. According to the sustainable stock exchanges 2016 ranking, the NASDAQ reached the 25th position (2014: 39th and 2015: 32nd) and the New York Stock Exchange is at the 26th position (2014: 34th and 2015: 29th).3 These two exchanges show a relatively slow but continuous rise over the period 2010–2014, showing a growing influence on US listed companies.4 The SEC is the legitimate institution to require financial and sustainability corporate disclosures in the US. Under the SEC reporting requirements, US companies do have to report the risks that might affect their businesses, which among others, includes risks related to climate change and conflict minerals. The growth of investors and shareholders’ interest and demand for non-financial information, has triggered the SEC’s initiative to propose amendments to the current disclosures requirements in the US.5

If the SEC adopts its proposal on extending the disclosure requirements to non- financial information, the US will move from a voluntary approach to a mandatory approach to sustainability reporting. On a global scale, having the largest economy on board tackling climate change and extending its sustainability reporting requirements to all US listed companies, would mean that the trend of growth in the uptake of sustainability reporting would have become the reality. Considering that the current Trump’s Administration denies climate change and is against supporting any policy developments on this topic, further developments seem unlikely on a short-term. However, positives steps have been taken by thirteen US states, which have individually made their own commitments to tackle climate change.6 We have seen that in other regions, including the European Union and South Africa, regional and national regulation, and also stock exchange listing requirements, as in Brazil and Singapore, have triggered higher sustainability reporting.

The mandatory requirements existent in the EU since 2014 may affect US companies operating in the EU. The EU Directive on non-financial information requires large companies, with more than 500 employees to disclose ESG risks in their annual reports. Globally mandatory sustainability reporting (regional, national and by stock exchanges), allied to an increase of the interest and demand of sustainability information among investors and shareholders is responsible for the higher number of reporting companies and also triggers the interest of national regulators, as the SEC in the US.7 The recent developments and amendment proposals to the SEC current corporate disclosures requirements show the clear trend of mandatory sustainability reporting also in the US.

The US companies mostly use the GRI in their sustainability reports, however, other frameworks used are the CDP (former Carbon Disclosure Project), IIRC and the Sustainability Accounting Standards Board (SASB). The SASB has developed sustainability accounting standards solely focusing on the US market, for 79 industries, compatible with US securities law, to guide companies in the disclosure of material information in the SEC’s 10K form and regulation S-K, in the same way the US GAAP is used for financial reporting.8 The SASB aims to become the sustainability accounting standard used by US companies in the SEC’s filings side- by-side with the US-GAAP, the current mandatory financial reporting standard. Although SASB is in the early stages of adoption by US companies, if in the future, there is a large uptake from companies using these accounting standards, triggered by a strong investor’s demand, the SEC may consider to address the possibility of mandating the SASB at a later stage when there is enough market demand. Certainly this will be a positive sign for the development of sustainability reporting in the US and also globally. As already explained in chapter 3 (section 4.3) the combination of using the SASB and the US GAAP by US listed companies in their SEC’s fillings is also a step towards integrated reporting, although not through the IIRC’s framework. However, it will not contribute to developing an international sustainability reporting standard suitable to be used in different regions.

In Brazil, the stock exchange B3, former BM&FBOVESPA, with a “report or explain” approach from 2012 until 2015,9 on a voluntary basis, has been the main driver of sustainability reporting disclosure for listed companies in Brazil.1011 The B3, former BM&FBOVESPA, is in the 12th position in the 2016 sustainable stock exchange ranking.12 In the ranking large Brazilian companies registered high disclosure of environmental metrics energy, greenhouse gas, water and waste.13 B3, former BM&F BOVESPA, has invited their listed companies to publish a sustainability or integrated report, or explain why they had chosen not to do so. More specifically, in 2015, 311 companies representing 71.65% of the total number of companies listed on the B3, former BM&FBOVESPA, participated in the initiative (against 71.17% in 2014), 160 publishing reports and 151 explaining why not.14 The survey also revealed that 81 companies are already preparing their reports using GRI’s G4 Guidelines.15

The B3, former BM&FBOVESPA, has disclosed that one of the lessons of the “report or explain” experience is the effectiveness of voluntary self-regulation sustainability reporting tools and policies in the Brazilian capital market. Another lesson is, that these voluntary initiatives must have a “deadline”, this is a restricted practice period, to avoid hindering the transformation effect within the reporting organization. According to the stock exchange’s experience a few adhering companies have explained that they did not see major changes within their organization and therefore, stopped adhering. The stock exchange saw a lower growth of adhering companies in the past two years (2014 and 2015), one of the possible reasons appointed was the lack of penalties for non-adhering companies.16

On a final note, as discussed above in section 1.2.1, the misperception of shareholder primacy as a legal requirement has led directors to concentrate on the interests of the shareholders in detriment of the interests of other stakeholders. Leading law firms in all the G20 countries together with 14 other countries have clarified that the primary duty of the board is to the long-term interests of the corporation as a separate legal entity and there are no legal obstacles for the board to identify significant audiences that go beyond shareholders. Moreover, legally it is in the interest of the directors to consider other significant audiences if the board believes these audiences will affect the company’s long-term ability to survive and prosper.17 This clarification opens way to higher ESG disclosure.