Global Corporate Sustainability Report 2024

4. Key policy issues

Abstract

This chapter evaluates market practices against the G20/OECD Principles of Corporate Governance, examining regulatory tools used in some jurisdictions, and suggests policy, regulatory and market practice adjustments in response to evolving market dynamics.

This chapter analyses whether market practices are aligned with the G20/OECD Principles of Corporate Governance (G20/OECD Principles hereafter) and highlights regulatory tools used in some jurisdictions that implement their recommendations. The chapter also suggests how policy makers, regulators and market participants may need to review some of their practices and policies in light of changes in market practices.

4.1. Sustainability-related disclosure

As presented in Figure ‎2.1, companies representing 86% of global market capitalisation disclose sustainability‑related information. Nevertheless, the number of companies that disclose sustainability‑related information is only 22% of all listed companies, which indicates that larger companies have greater incentives and capacity to collect and report such data. This raises the issue highlighted in the annotations to Subprinciple VI.A of the G20/OECD Principles that sustainability‑related disclosure frameworks may need to be flexible about the existing capacities of companies. Such flexibility is present, for instance, in India’s SEBI regulation mentioned in the previous chapter. The disclosure of sustainability information represents a cost for companies, which may be relatively fixed regardless of their size. In the case of smaller companies, therefore, the costs of accounting and reporting on sustainability information may not be compensated by the benefits a company will have in attracting more funding from sustainability focused investors.

Different sustainability accounting and reporting standards are currently in use globally. As presented in Figure ‎2.12, GRI Standards, TCFD recommendations and SASB Standards are among the most often used, but some other frameworks are also a reference for a non‑negligible number of listed companies. The sustainability standards set by the ISSB, Global Reporting Initiative and other standard-setters may eventually be recognised by policy makers and market participants as international standards capable of facilitating the comparability of sustainability‑related disclosure across companies and markets, as mentioned in Subprinciple VI.A.2 of the G20/OECD Principles. As mentioned in the previous chapter, the standards set by the ISSB have incorporated the TCFD recommendations and they require companies to consider the SASB industry specific standards, all having a common focus on the interests of investors. One advantage of the GRI Standards is their current high level of use in many regions. It is essential, though, that standard‑setters work together to make their standards as interoperable as feasible, reducing the costs for companies that must disclose sustainability-related information according to different standards. Jurisdictions would also be incentivised to carefully assess the costs of creating a new local reporting standard which could potentially reduce the comparability of the disclosure of local companies with foreign ones.

Companies and their service providers, as well as institutions setting reporting standards, may experience a learning path in their understanding of sustainability matters and might need time to develop adequate processes and good practices. This may justify prioritising disclosure requirements of some of the most relevant sustainability matters. As analysed in Figure ‎2.17 and Figure ‎2.18, companies facing risks related to climate change, human capital and data security have larger market capitalisation than the groups of companies facing other sustainability‑related risks such as ecological impacts or human rights. Japan’s January 2023 regulatory reform focusing on climate change and human capital, which was mentioned in the previous chapter, is aligned with these findings. The same may be considered, among other issues, by other standard-setters and regulators when setting their priorities for the future.

As recognised in the annotations to Subprinciple VI.A.5 of the G20/OECD Principles, “[s]ustainability‑related disclosures reviewed by an independent, competent and qualified attestation service provider may enhance investors’ confidence in the information disclosed and the possibility to compare sustainability‑related information between companies”. Globally, external service providers assure the sustainability disclosures of two‑thirds of the companies disclosing sustainability information by market capitalisation (Figure ‎2.7). It is also notable that, as seen in Figure ‎2.8 and Figure ‎2.11, for the year 2022, “limited” assurance is considerably more common than “reasonable” assurance. In some large markets, such as in Europe and India, external assurance over sustainability information is or will become mandatory as mentioned in the previous chapter. Regulators in other regions where voluntary assurance is a common practice, such as in Latin America (Figure ‎2.7), may also consider requiring large listed companies to obtain assurance over their sustainability-related information. The proposed International Standard on Sustainability Assurance (ISSA) 5000 may contribute to consistent, high‑quality assurance engagements that enhance the degree of confidence of intended users about sustainability reporting. Wherever high‑quality assurance for all disclosed sustainability‑related information might not be possible or is too costly, some jurisdictions may require companies to obtain assurance over specific sustainability-related disclosures, such as GHG emissions (Figure ‎2.3 shows that companies representing 77% of market capitalisation disclose scopes 1 and 2 GHG emissions).

The relatively frequent use of executive compensation linked to sustainability-related matters in Europe, Other advanced economies and the United States adds a potential conflict of interest for executives responsible for accounting and reporting sustainability-related information (Figure ‎2.30). Such sustainability-linked remuneration may increase executive incentives to portray the sustainability-related performance of the company as positively as possible and to hire a third-party reviewer who is more likely to provide a favourable opinion. The common practice in some markets (e.g. Europe and Other advanced economies) for companies to engage the same auditor of the financial statements to assure sustainability-related disclosures may give rise to some concerns (Figure ‎2.10). While there may be some economies of scope in such a practice, the fact that an executive may be able to hire the external auditor of the company to provide sustainability‑related assurance services may limit the autonomy of the auditing firm. In these cases, investors and regulators may need to pay special attention to whether, for instance, executives can choose to hire the external auditor to provide sustainability‑related assurance without the approval of the board, the audit committee or shareholders. The new SEBI regulation in India allocating the responsibility to the board for the choice of the external assurance provider may be an effective one (see the previous chapter).

Globally, 70% of companies by market capitalisation disclose a GHG emission reduction target (Figure ‎2.13). Sustainability related goals, such as net‑zero GHG emission targets, can strongly affect an investor’s assessment of the value, timing and certainty of a company’s future cash flows. Both from a market efficiency and investor protection perspective, if a company publicly sets a sustainability‑related goal or target, policy makers may decide to require sufficient disclosure of reliable metrics as recommended by Subprinciple VI.A.4 of the G20/OECD Principles. This would allow investors to assess the credibility of the announced goal and management’s progress toward meeting it. Specifically concerning GHG emission reduction targets, there are two reassuring market practices: (i) 77% of companies by market capitalisation disclose scope 1 and scope 2 GHG emissions (Figure ‎2.3), which is more than the 70% that disclose a GHG emission reduction target; (ii) 75% of the disclosed targets are by 2030 or before, which are reasonably short or medium‑term targets (Figure ‎2.14). There are two less reassuring market practices: (i) companies representing only 60% of market capitalisation disclose their scope 3 GHG emissions as shown in Figure ‎2.5 (a problem would therefore exist if most GHG emission reduction targets included all scopes); (ii) the baseline year – which may often be necessary to assess what GHG emission targets effectively mean – is available only in 37% of the cases in a widely used commercial database (Figure ‎2.15). In line with the recommendations of the G20/OECD Principles, whenever included in a company’s reduction targets, market participants and relevant stakeholders should consider ways to encourage the disclosure of scope 3 GHG emissions and clear reporting of the baseline year of the targets.

The methodological effort to select a sample of companies that develop new green technologies highlighted in Section ‎2.2 has also unveiled a disclosure gap that regulators may – and do already in some cases – consider. In the LSEG commercial database, which is widely used by investors, there is currently information on “environmental R&D costs” only for 267 listed companies globally (Figure ‎2.22). Investors, therefore, may find it difficult to build a portfolio of investments that consider the potential of investee companies to develop new technology that will contribute to the transition to a low‑carbon economy. As mentioned in the previous chapter, the European Union already requires the disclosure of the share of companies’ capital expenditure (as well as operational expenditure for non‑financial companies) that meet the climate related criteria set in the EU Taxonomy. In India, large companies will need to disclose the “percentage of R&D and capital expenditure investments in specific technologies to improve the environmental and social impacts of product and processes to total R&D and capex investments made by the entity” according to SEBI regulation introduced in May 2021.

4.2. The rights of shareholders and institutional investors

An analysis of the group of the 100 listed companies with the highest disclosed GHG emissions offers three insights (see Figure ‎2.19 for the companies’ characteristics). First, institutional investors hold the largest equity portion in these high‑emitting companies with 41% of the shares, with above‑average shares in the United States and Other advanced economies (Figure ‎2.20). This highlights the importance of corporate governance frameworks in facilitating and supporting shareholders’ engagement with their investee companies, as recommended in Subprinciple III.A of the G20/OECD Principles. The second insight is that investors’ engagement activities may be less successful in markets where most (if not all) high‑emitting companies have a well‑defined controlling shareholder (China and Latin America) than in other markets such as Japan and the United States where, while several high‑emitting companies do not seem to have a controlling shareholder, the largest 20 shareholders own around 50% of the shares on average (Figure ‎2.21). The final insight is that the public sector is an important shareholder in the 100 high‑emitting companies holding 18% of the shares globally, and significantly higher shares in China (64%), Latin America (50%), and the “Others” category (41%). This stresses the significance of the governance of state‑owned enterprises in the transition to a low‑carbon economy in some jurisdictions and, concurrently, the relevance of the ongoing review of the OECD Guidelines on Corporate Governance of State‑Owned Enterprises, which aims to include specific recommendations on sustainability.

While the adoption of existing green technologies by high‑emitting companies is essential for the transition to a low‑carbon economy, the development of new technologies will also be necessary to support a successful transition while maintaining high standards of living. An analysis of a group of 100 listed companies with low GHG emissions and high R&D expenditure or stock of patents per industry offers two insights (see Figure ‎2.23 for the companies’ characteristics). First, institutional investors hold the largest equity portion in these highly‑innovative companies with 41% of the shares (identical to their share in the previously mentioned high-emitting companies), but the public sector owns a much smaller equity share in these highly-innovative companies (9%) than they do in the high‑emitting companies. Notably, strategic individuals own 10% of the shares in the highly‑innovative companies (Figure ‎2.24). The second insight is that, while the ownership concentration of high‑emitting and highly-innovative companies is similar, the latter ones have a slightly smaller concentration by the three or five top shareholders (Figure ‎2.25), suggesting a probably higher opportunity for institutional investors to engage with the highly‑innovative companies. This indicates that the initiatives created by institutional investors, such as Climate Action 100+, for their engagement actions with high‑emitting companies can be complemented with new initiatives of institutional investors focusing on highly innovative companies.

The number of companies that incorporate both for-profit and public benefit objectives in Delaware (United States) and France increased from 2021 to 2023 (Figure ‎2.26). In Delaware, the number of private Public Benefit Corporations (PBCs) grew from 207 in 2021 to 332 in 2023, while the number of listed PBCs doubled from 7 to 14. Similarly, private sociétés à mission increased from 502 in 2021 to 1 276 in 2023 in France, while the number of publicly listed sociétés à mission rose from 3 to 8 in the same period. While the current numbers of PBCs and sociétés à mission is still relatively low, the rise in their numbers may raise the attention of policy makers and regulators to the recommendation in Subprinciple VI.B.1 of the G20/OECD Principles that corporate governance frameworks should provide for due consideration of shareholders dissenting from a transformation into such corporate forms.

In 2023, AUM of investment funds that label themselves as sustainable or climate funds totalled USD 1 373 billion against USD 481 billion in 2016 (Figure ‎2.37). This indicates an increasing interest of asset owners in investing in funds that consider sustainability matters in their decision‑making process. The rapid change in the investment funds market also raised suspicion that some asset managers have labelled their funds as sustainable without necessarily integrating sustainability matters as inputs or goals in their portfolio selection. As a response, ESMA in Europe, the SEC in the United States, and CVM in Brazil have launched consultations or enacted new regulation on funds’ names using “ESG” or “sustainability” (see previous chapter for more information). Greater alignment between asset managers’ investment and engagement decisions with the names of their sustainable funds may eventually impact their investee companies.

4.3. The board of directors

Subprinciple VI.C of the G20/OECD Principles recommends that “the corporate governance framework should ensure that boards adequately consider material sustainability risks and opportunities when fulfilling their key functions”. Notably, such consideration should be in the best interest of the company and the shareholders, as recommended by Subprinciple V.A. The assessment of whether boards are fulfilling their functions can be adequately done only on a case‑by‑case basis. However, globally, companies representing 53% of the global market capitalisation indicated that their boards of directors oversee climate‑related issues (Figure ‎2.27). This is less than the companies representing 64% of market capitalisation considered to be facing climate change as a financially material risk (Figure ‎2.17), which may suggest the need for more boards to consider climate‑related risks when reviewing, monitoring, and guiding governance practices, disclosure, strategy, risk management and internal control systems of their respective companies.

The board of directors may play a pivotal role in overseeing the lobbying activities conducted and financed by the company that could influence climate‑related policies, laws or regulations. The fact that, among all the companies that self‑declared lobbying activities, almost one‑third belong to the two industries with the highest emissions possibly raises a red flag (Figure ‎2.29). The executives in these companies may have a short‑term interest in avoiding new climate‑related regulations, even in cases where their companies’ long‑term strategy is to align their businesses with an orderly transition to a low carbon economy. In these circumstances, the recommendation of the Subprinciple VI.C.1 of the G20/OECD Principles is especially relevant: “[b]oards should ensure that companies’ lobbying activities are coherent with their sustainability‑related goals and targets”.

4.4. The interests of stakeholders and engagement

Globally, almost 6 000 companies representing 70% of market capitalisation disclose information on whether they engage with their stakeholders and how they involve them in the company’s decision-making (Figure ‎2.32). Likewise, more than 8 000 companies representing 81% of the market capitalisation disclose policies on shareholder engagement, including, for instance, how shareholders can question the board or the management or table proposals at shareholder meetings (Figure ‎2.31). The mere disclosure of engagement activities and policies does not mean that engagement is effective, but it is a sign that the company may care about engaging with relevant stakeholders and shareholders (especially in cases where such disclosure is not a regulatory requirement). The disclosure of insufficient openness to stakeholders and shareholders may also foster pressure for directors and executives to engage more effectively. The two mentioned market practices are, therefore, a good sign about the implementation of Subprinciple VI.B, which favours the “dialogue between a company, its shareholders and stakeholders to exchange views on sustainability matters as relevant for the company’s business strategy”, and Subprinciple VI.D of the G20/OECD Principles, which encourages the “active co-operation between companies, shareholders and stakeholders in creating value, quality jobs, and sustainable and resilient companies”.

Subprinciple VI.D of the G20/OECD Principles recommends that “the corporate governance framework should consider the rights, roles and interests of stakeholders”. To promote a value‑creating co‑operation specifically with employees, companies may establish mechanisms for employee participation, such as workers councils that consider employee viewpoints in certain key decisions, or employee representation on the board. Companies representing 14% of the world’s market capitalisation include employee representatives on the board of directors (Table ‎2.1). There are notable differences across regions, ranging from 62% in China, 38% in Europe and 11% in Latin America, to negligible amounts in other regions. In China and Europe, therefore, the Subprinciple VI.D.4 of the G20/OECD Principles recommendation that stakeholders participating in the corporate governance process “should have access to relevant, sufficient and reliable information” may be particularly relevant with respect to employee participation in boards.

4.5. Sustainable bonds

The total amount issued through corporate sustainable bonds was six times larger in 2019‑23 than in 2014‑18 (Figure ‎2.33). In 2023, the outstanding amount of sustainable bonds issued by the corporate sector totalled USD 2.3 trillion. Specifically, sustainability-linked bonds (SLBs) accounted for 20% of the amount issued by non‑financial companies in 2023 (Figure ‎2.35). The growth of the sustainable bond market is reason for optimism. If the proceeds of all sustainable bond issuances are invested in projects that deliver positive environmental and social benefits for relatively small costs, investors and society at large will benefit. However, the regulatory frameworks and relevant institutions must promote efficient functioning of markets and the protection of the interests of investors. This is especially relevant because unlisted companies are important issuers of sustainable bonds, having issued about half of the sustainable bonds in both the non‑financial and financial corporate sectors in 2022 and 2023 (Figure ‎2.36). The stewardship codes suggested by Subprinciple III.A of the G20/OECD Principles could provide specific recommendations related to the investment in sustainable bonds including, for instance, the importance of analysing whether SLBs’ performance targets are ambitious. SLBs are a promising tool for aligning investors’ sustainability‑related preferences with investee companies’ impact on the environment and society. However, an SLB with an unambitious target functions de facto as a conventional bond because it does not change the decision‑making process of the issuer’s leadership.