Key Takeaways from the Contemporary Issues in Sustainability Reporting Symposium

This month, academic and business leaders from across North America and around the world gathered in-person at the CPA Ontario Centre for Sustainability and Performance Management (CSPM) at the University of Waterloo. Over two days, they explored contemporary issues and recent research findings in sustainability reporting.

Please note that the views and opinions expressed herein are solely those of the respective researchers who presented at the CSPM Symposium held on February 22 and 23, 2024 and do not necessarily represent the views or position of CPA Ontario.

Here are 4 key take-aways for Canadian CPAs:

1) ESG Ratings: Risks and Opportunities

There is a need for regulatory oversight of ESG rating agencies. In fact, the European Securities and Markets Authority (ESMA) has moved to regulate ESG ratings in Europe.

Research shows that 90% of Principles for Responsible Investment (PRI) signatories, who manage $120 trillion of assets, rely on ESG ratings. If those ratings are misstated, it could have significant impacts to financial markets.

This, according to Prof. Zacharias Sautner, Professor of Sustainable Finance at the University of Zurich, presents a real risk related to ESG ratings. He found that ESG ratings: 

• Matter – research has found flows into funds are impacted, and ratings impact both credit and equity markets
• Markets are fragmented with multiple service providers and varying methodologies.
• Have challenges with estimations, are often not forward-looking, lack transparency and comparability

2) Accountability of Corporate Emissions Reduction Targets

As many companies set their emission reduction targets for 2030, 2040 and 2050, the research suggests that the market may be more interested in the targets firms have set, versus how they perform against those targets.

Shirley Lu, Assistant Professor at Harvard Business School presented the results of a study around accountability of corporate emissions reduction targets. The study explored companies’ emission targets for the year 2020, and whether there are consequences for a missed target. The study found:

• Significant positive reactions in media sentiment and environmental scores when firms initially reported their 2020 emission reduction targets. 
• In contrast, the study did not observe significant market reaction, changes in media sentiment, environmental scores or environmental-related shareholder proposals after firms failed to meet their 2020 emission reduction targets.

3) Human Capital Disclosures

There is considerable inconsistency for firms that disclose human capital information and what they disclose.

Ethan Rouen, Associate Professor at Harvard Business School presented the results of a study around human capital disclosures made by U.S. public companies (note, this study was conducted over U.S. headquartered firms, caution should be used in extrapolating the results of this study to other jurisdictions).

The study found that firms’ selection of what to disclose appears to be driven by various economic factors, information collection challenges, uncertainty about what should be disclosed, and underlying performance on human capital metrics. The study found that:

• Companies were more likely to include human capital disclosures in their 10-K filings after the Securities and Exchange Commission (SEC)’s amendment to regulation S-K that required firms to provide additional human capital disclosure.
• Concurrently with the SEC’s development of its Climate Disclosure Rule, the SEC is considering creating a dedicated human capital disclosure rule.

4) Observations On Current Climate Disclosures

The research suggests that climate-related disclosures do not impact a firm’s value, but such disclosure reduces bid-ask spreads, indicating that these disclosures are reducing information asymmetry in the market. 

Jurian Hendrikse, PhD candidate at Tilburg University presented the results of a study on current climate disclosures under the Taskforce for Climate-related Financial Disclosures (TCFD) and how the market has reacted to those disclosures.

With the TCFD framework underpinning many of the new sustainability reporting standards and regulations, including the IFRS Sustainability Standard S2 – Climate-related Disclosures, the SEC’s Climate Disclosure Rule, and Europe’s Corporate Sustainability Reporting Directive (CSRD), this study provides a glimpse into how new disclosure requirements may be received by the market. 

The study examined companies headquartered in advanced economies and provided TCFD disclosures to the Carbon Disclosure Project (CDP). The study found that:

• Responding to the CDP does not appear to impact a firm’s market value.   
• Disclosing to the CDP reduced market bid-ask spreads, indicating the disclosure to the CDP is reducing information asymmetry consistent with the objective of disclosure. 
• In contrast, the disclosure of climate-related opportunities by firms did not appear to impact a firm’s market value. 

To learn more about why business and CPAs should care about sustainability, visit the Foundational Knowledge Hub on CPA Ontario's Sustainability Simplified.

And be sure to regularly check Sustainability Simplified for regular updates on sustainability regulation, reporting and assurance in Canada.