Shareholders request A.O. Smith Corporation (AOS) issue an annual report describing the company’s environmental, social, and governance (ESG) policies, quantitative performance metrics, and improvement targets, including a discussion of greenhouse gas (GHG) emissions management strategies and metrics. This report should be prepared at reasonable cost and omit proprietary information.
AOS should consider the resources and recommendations made by the widely accepted Global Reporting Initiative, Sustainability Accounting Standards Board, CDP, and the Financial Stability Board’s Taskforce on Climate Related Financial Disclosures (TCFD) when identifying ESG topics to be included in this report.
Tracking and reporting on ESG practices strengthens a company’s ability to compete and adapt in today’s global business environment that is characterized by heightened public expectations for corporate accountability, changing regulations, and finite natural resources.
Transparent, substantive reporting allows companies to better integrate and capture value from existing sustainability efforts, identify gaps and opportunities in policies and practices, strengthen risk management programs, stimulate innovation, enhance company-wide communications, and recruit and retain employees.
AOS’s Corporate Responsibility and Sustainability webpage includes brief descriptions of select environmental stewardship efforts. However, these disclosures do not include a comprehensive overview of company-wide policies or strategies to manage ESG risks and opportunities, metrics conveying the ESG performance of AOS’s operations, or goals to reduce its environmental impacts. Without these disclosures, investors are unable to evaluate whether AOS is adequately prepared to adapt and respond to key ESG risks and opportunities.
In contrast, Assa Abloy, Barnes Group, Donaldson Company, Masco Corporation, Flowserve Corporation, Lennox International, and Lincoln Electric are examples of the numerous small industrial companies publishing sustainability metrics alongside qualitative supporting details.
Corporate sustainability reporting is widespread and interest is growing:
• In 2015, KPMG found that of 4,500 global companies, 73% had ESG reports.
• The Governance & Accountability Institute reports 82% of the S&P 500 published corporate sustainability reports in 2016.
• CDP, representing 827 institutional investors globally with approximately $100 trillion in assets, calls for company disclosure on GHG emissions and climate change management programs.
• The core recommendations of the TCFD are for companies to disclose climate-related Governance, Strategy, Risk management, and Metrics and Targets in mainstream financial filings.
The link between strong sustainability management and value creation is increasingly evident. The University of Oxford and Arabesque Partners reviewed 200 studies on sustainability and corporate performance and concluded 90 percent of studies show “sound sustainability standards lower the cost of capital of companies” and 80 percent show “stock price performance of companies is positively influenced by good sustainability practices.”
Developing and communicating strong sustainability programs further enables AOS to attract and retain the talented workforce it needs to innovate and bring products to market. The Society for Human Resource Management has found employee morale 55% better, loyalty 38% better and workforce productivity 21% better in firms with strong sustainability programs.