Business Case for Disclosure and Transparency

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Corporate disclosure and transparency bring many internal and external benefits, as it provides a comprehensive picture of the company and how it creates financial and sustainability value for all key stakeholders, not just investors. 

Companies integrating material ESG issues and disclosing how they manage those issues within the context of the strategic plans and operations amplify the benefits of disclosure and transparency. 

Investors and society increasingly expect more from companies than just financial profitability. They want to know how the company impacts the environment, employees, and customers. Beyond capital markets, sustainability information is used by rating agencies and lenders to make credit decisions, by employees to determine preferred employers, and by communities to understand how the company's activities may impact their local environment.

Operational Benefits
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  • A company can internally benefit from better ESG performance in many ways:

    • Improved internal management;
    • Enhanced employee and brand loyalty;
    • Resource efficiency;
    • Improved risk governance;
    • Enterprise Innovation and value creation.

    When a company improves disclosure and transparency, it enhances internal data quality, especially for decision-making. It also identifies gaps in ESG practices and improves risk management. Moreover, better disclosure and transparency can help raise awareness, educate board directors about emerging material risks and opportunities, and improve collaboration with the management.

  • Enhance Reputation

    Some companies invest in disclosure to boost their reputation and improve understanding of their value creation approach. Transparency is generally seen as a sign that a company operates a reputable, well-managed business.

    Enhanced disclosure can clarify the links between corporate strategy and ESG risks. To continue to thrive, companies need to build their resilience, enhance their license to operate, and commit to long term, sustainable value creation that embraces the wider demands of society. This involves a shift in reporting, as well as management focus.

  • For investors, sustainability reporting can provide insights into the quality of a company’s management, including its ability to:

    • Understand key stakeholder priorities;
    • Assess risks and opportunities over different time horizons;
    • Create and execute strategies that achieve multiple objectives, both financial and nonfinancial; and
    • Manage different concerns and priorities from a diverse set of stakeholders.

Companies with effective management and disclosure of sustainability issues tend to have stronger financial performance, in the form of lower costs of capital, higher valuations, and better returns to shareholders. 

Learn More: Sustainability Performance and Extra-financial Analysis.

External Benefits
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  • Increases Access to Capital

    High-quality ESG disclosure can help companies access capital provided by the growing number of investors seeking positive societal and environmental impact.

    While all stakeholders are demanding more transparency, investors are seeking and expecting more and more ESG information. ESG issues are of growing interest to institutional investors because of their significance in investment decisions and future portfolio performance. This interest has created major changes in the pattern of investments around the world.

    Learn More: Promoting Sustainable Capital Markets

  • By filling information gaps and providing better insight and data regarding the impacts of products, services and operations, disclosure and transparency can also help assess a company’s contribution to society, and to the realization of the United Nations Sustainable Development Goals (SDGs).

    ESG information is also critical for the growing number of impact investors and mainstream investors seeking positive societal and environmental impact investors to fulfill their dual mandate for impact and financial return and to report their own performance accordingly.

    Learn More: IFC’s Operating Principles for Impact Management.

  • Disclosure and transparency promote more efficient capital markets by ensuring “fair disclosure” to all investors and stakeholders and prevents asymmetry of information. Some of the benefits include:

    • Lower cost of capital;
    • Better access to finance;
    • Increased company valuation;
    • Improved capital allocation; 
    • Enhanced earnings growth; and
    • More liquidity in the market for the securities of the company. 
Growing Demand for Sustainability Disclosure
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  • Attracts Investors and Stakeholders

    Rigorous ESG reporting helps to match responsible investors with sustainable companies. Transparent, accountable disclosure can help increase trust with many different stakeholders, including customers and communities.

    Why do investors value ESG disclosure?

    • Companies with strong sustainability functions perform better in crises;
    • ESG drives better financial performance;
    • ESG investments are rising in emerging markets.

    A growing pool of global financial capital is invested in companies with a sustainability lens. According to 2021 Global Sustainable Investment Alliance estimates, about $35 trillion of institutional investments in corporate bonds and equity were actively managed for sustainability. On the lending side, 67% of global banks report screening their loan portfolios for environmental, social, and governance (ESG) risks, according to Fitch Ratings.

    As investors increasingly consider ESG factors in their investment decisions, they drive the demand for ESG information from companies, focusing on risk management and credit analysis. As a result, ESG integration is generally more advanced in equity investing than fixed income. However, the gap is closing, and all major credit rating agencies now integrate ESG issues into their rating processes.

    Sustainability reporting is fueling the creation of new financial products around sustainability, such as green, social, and sustainability bonds and loans. This includes the fast-growing market for sustainability-linked bonds and loans, with interest rates and other covenants tied to the issuer’s sustainability performance.


    Learn More: Promoting Sustainable Capital Markets

  • Regulatory efforts around the world are also driving pressure on companies for increased sustainability disclosure and transparency, to fill the demand for information from investors, customers, and employees.

    Currently, 71 - more than half of stock exchanges worldwide have guidance on ESG disclosure, while in 2015, it was only 13, as per the UN Sustainable Stock Exchanges Initiative. Mandatory rules are in 27 markets (16 in emerging markets). 

    Considering the urgency to act on a number of environmental issues, including biodiversity loss and climate change, regulators have both an opportunity and responsibility to build a frame for collating decision-useful information. The forthcoming IFRS Sustainability Disclosure Standards and the European Sustainability Reporting Standards will give an additional push in this direction.
     

    Learn More: Understanding Sustainability Disclosure Frameworks and Standards.

    This includes direct regulatory schemes – such as corporate law or banking regulation – or quasi-regulatory schemes such as stock exchange listing requirements or voluntary codes of corporate governance. Regulatory pressure for increased disclosure and transparency applies to companies, financial institutions and investors. 

    Learn More: Stock Exchanges and Regulators.

  • Disclosure and transparency are relevant for all types and sizes of companies beyond large private and publicly listed companies across different industries.

    Smaller companies part of larger supply chains must disclose sustainability information as the multinational companies are pressured to manage and report sustainability and climate risks and opportunities across the value chain, including Scope 3 GHG emissions, working conditions, child and forced labor prevention, and health and safety.

    In many countries – including Sweden, South Africa, Indonesia, and China – state-owned enterprises are required to disclose sustainability information to improve accountability and stakeholder responsiveness and ensure a level playing field with privately-owned companies.

    Transparency and accountability are also increasingly required in the planning and delivering infrastructure projects to reduce waste, mismanagement, and corruption. This can help produce better quality roads, bridges, schools, and hospitals for a lower cost and – in turn – create more opportunities for national and international investment.

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