Muhammad Hammad

This report presents an overview of the main trends and issues related to sustainability policies and practices for corporate governance globally. Through an analysis of key policy issues, its objective is to support the adoption of corporate governance policies and practices that are aligned with the G20/OECD Principles of Corporate Governance.

Sustainability-Related Disclosure

In 2022, out of 43,970 listed companies globally with a total market capitalization of USD 98 trillion, almost 9,600 companies representing a total market capitalization of USD 85 trillion disclosed sustainability- related information.

The growing urgency in managing climate- related risks and opportunities has generated greater interest by investors about companies’ greenhouse gas (GHG) emissions.

Globally, 6,308 companies representing 77% of market capitalization disclosed scope 1 and 2 GHG emissions in 2022, ranging from 43% of companies by market capitalization in the People’s Republic of China (hereafter ‘China’) to 92% in Europe.

Extractives and minerals processing is the industry with the highest share of companies disclosing scope 1 and 2 GHG emissions by market capitalization (85%). Nonetheless, companies report scope 3 emissions less often.

In 2022, companies representing 60% of market capitalization reported scope 3 emissions, ranging from 9% in China to 87% in Europe. Globally, an external service provider assures the sustainability disclosure of two-thirds of the companies that disclose sustainability information by market capitalization.

Among the companies that disclose the name of the independent assurance provider, 82% of the sustainability reports were assured by an auditor and the rest by other assurance providers. The share of companies that hire the auditor of the financial statement to assure their sustainability disclosures varies widely across regions: from 17% of companies by market capitalization in Japan to 70% in Europe.

Globally, among the 2,957 sustainability reports subject to an independent assurance, 1,668 (56%) were partially or fully verified under limited assurance, while 405 (14%) were partially or fully verified under reasonable assurance. Globally, 70% of the companies by market capitalization disclosed a GHG emission reduction target and nearly half of them set 2030 as the target year.

Investor Landscape

Climate change is considered to be a financially material risk for listed companies representing 64% of global market capitalization. Companies considered to be facing risks related to climate change, human capital and data security have larger market capitalization than the companies considered to be facing other sustainability-related risks such as ecological impacts or human rights.

These shares of market capitalization can serve as a reference to policy makers identify and justify priorities when supervising and regulating capital markets.

An analysis of the 100 listed companies with the highest disclosed GHG emissions globally shows that institutional investors hold the largest share of the equity (41%) and that the public sector is also an important shareholder, with 18% of the equity.

The ownership distribution is particularly relevant when considering the ability of investors to accelerate the transition to a low-carbon economy through successful engagement strategies. Globally, the largest shareholder in each of these 100 highest emitting companies owns on average 24% of the shares, and the largest 20 shareholders own on average 54% of the shares.

The Boards of Directors

Companies representing more than half of the world’s market capitalization have a committee responsible for overseeing the management of sustainability risks and opportunities that reports directly to the board.

In the United States, 75% of the companies by market capitalization have a committee responsible for sustainability, and in Asia (excluding China and Japan), Europe and other advanced economies, more than 50% have such a committee.

Moreover, in almost 3,000 companies representing 53% of global market capitalization, the boards of directors oversee climate-related issues, with higher shares in Europe, Japan and United States.

Sustainable Bonds

Over the past five years, corporate sustainable bonds (including green, social, sustainability and sustainability- linked bonds) have experienced noteworthy growth as a source of capital market financing. In 2023, the outstanding amount of sustainable bonds issued by the corporate sector totalled USD 2.3 trillion globally. Europe has been the most active region in the sustainable bonds market with 45% of the global amount issued by non-financial companies between 2014 and 2023. In 2022-23, unlisted companies issued about half of the sustainable bonds in the non-financial and financial corporate sectors globally.

Recent Regulatory and Standard-Setting Developments

The International Sustainability Standards Board issued its first two standards IFRS S1 and IFRS S2 in June 2023, which were endorsed by the International Organization of Securities Commissions soon after.

The European Commission adopted the first set of EU Sustainability Reporting Standards in July 2023, and they embarked on a full range of sustainability matters, including climate, pollution, water, biodiversity, workers and business conduct.

The OECD updated in its Guidelines for Multinational Enterprises on Responsible Business Conduct in June 2023, including new recommendations for enterprises to align with internationally agreed goals on climate change and biodiversity, and to ensure that lobbying activities are consistent with the Guidelines.

The International Auditing and Assurance Standards Board published an exposure draft of the proposed International Standard on Sustainability Assurance 5000 in June 2023.

The International Ethics Standards Board for Accountants approved the exposure drafts of new ethics and independence standards for sustainability reporting and assurance in December 2023.

This Report’s Key Policy Messages

Sustainability-related disclosure frameworks may need to be flexible about the existing capacities of companies. Standard-setters should work together to make their standards as interoperable as feasible, reducing the costs for companies that must disclose sustainability-related information according to various standards.

Regulators in regions where voluntary assurance is a common practice may consider requiring large listed companies to obtain assurance of their sustainability- related information.

Wherever high-quality assurance for all sustainability-related information disclosed might not be possible or is too costly, jurisdictions may require companies to obtain assurance of specific sustainability-related disclosures, such as GHG emissions.

Investors and regulators may need to pay special attention to whether or not executives can choose to hire the company’s external auditor to provide sustainability-related assurance without the approval of the board, the audit committee or shareholders.