30 November 2022 ．HONG KONG – In a new report released today, the Global ESG Monitor (GEM) shines a light on the Environmental, Social and Governance reporting of 350 important corporations worldwide. The GEM is the world leader in analyzing the transparency of ESG reporting and publishes a major report annually which analyzes non-financial ESG reporting across Europe, North America, Asia, and Australia.
“2022 has been a year in which the importance of ESG issues has increased dramatically,” said Michael Diegelmann, Co-Founder of the GEM. “Environmental and social crises fill the news daily and corporations need to clearly communicate what they are doing and how they govern their efforts. Progress is being made, but the bottom line is that many large multi-national companies fall short in their ESG reporting which will not go unnoticed by investors and the public.”
In the GEM 2022, 625 ESG reports from 350 companies included in indices from ten major stock markets were analyzed. Comprehensive regional reports will be published subsequently over the coming weeks. Today the GEM global report is being published, covering the four most relevant continental stock market indices from Europe, the USA, Asia, and Australia .
Few corporations approached the top of the scoring scale of 100 as defined by the GEM Assay™, the Global ESG Monitor‘s proprietary analytical model. The world’s highest score for transparency in non-financial reporting was 90, and the lowest was seven. The GEM Assay™ analyzes the ESG reporting of companies on 184 criteria as disclosed in their published ESG reports. Corporate ESG reports are used in a variety of ways, including as a factor in third-party ESG scores used by investors to guide financial decisions.
When comparing the transparency of ESG reporting across continents, the average corporate score was 66 out of 100 in Europe, followed by 56 for Asia and 53 for both the United States and Australia.
“It is no surprise that the GEM found such a wide difference in reporting transparency in different nations and regions. There is still no uniform, internationally recognized standard in ESG reporting and this poses challenges for companies,” said Ariane Hofstetter, the GEM’s Co-Founder and Head of Research and Data Science. “Even though there is the widespread use of important analysis tools such as materiality assessments, there is still a lot of make believe and lack of validity and liability in the results.”
The research clearly shows that European companies set the pace globally on ESG transparency, as 9 of the top 12 companies were from the Eurozone and 3 from Asia. The company with the highest overall score and thus the most transparent company with regards to ESG reporting was the Italian energy company, Enel SpA.
The GEM looks into the following transparency aspects of ESG reports:
Gender Diversity: The world has changed – at least in some regions
Gender diversity is a key part of Sustainable Development Goals (SDGs). The GEM analyzed disclosures on gender diversity by collecting data on “male, female, other”. Because there was such little information disclosed in the “other” category, the GEM analysis focused on male and female.
Worldwide, the most gender diverse management structures and Boards of Directors were found in the United States, with 90% of companies having gender mixed boards and only 10% having a male-only board. In Europe, boards were found to be 12% male and 88% mixed; boards in Australia were 72% mixed gender with 28% all-male; boards in Asia came in last place with 57% male-only boards and only 43% having women members. Going deeper, it is noticeable that the average ratio of women to men is most balanced in Europe with at least 50% for each gender. It was significantly less balanced in the rest of the world with 33% of board members each in Australia and in the USA being women and only 20% in Asia.
What is the impact of no international ESG reporting standards?
In practice, companies know how to help themselves by consulting many different standards and frameworks. According to the 2022 GEM, 96% of the companies in the global sample refer to frameworks and standards in their reports, with an average of 9.1 frameworks being mentioned. In the EuroSTOXX an average of 12.3 frameworks are referenced. Some companies put too much emphasis on frameworks and publish separate reports specifically tailored to individual standards. For investors and stakeholders, orientation is difficult, and the risk exists that companies will pick and choose from the most favorable specifications.
Over all four indices, the Task Force on Climate-related Financial Disclosures (TCFD), created by the Financial Stability Board (FSB), is the most widely used framework or standard, followed by the UN (United Nations) SDGs and the Global Reporting Initiative (GRI).
Carbon Dioxide (CO2) emissions in the spotlight
The scientific community agrees that CO2 is a major contributor to human-induced climate change and that the focus should be on reducing emissions. Accordingly, the companies analyzed in the GEM addressed emissions, but a limited number of these companies have become carbon neutral. But most companies have set carbon neutrality goals and aim to reach net-zero in the future. The highest rate of companies claiming carbon neutrality are among the S&P 50 in Asia, with the lowest in Europe.
Furthermore, 78% of EuroSTOXX companies are aligned with the Paris Climate Agreement goals to limit global warming to a maximum of 2° Celsius. Other regions are lagging with only 54% of Australian companies aligned with the Paris goals, 31% of Asian listed firms and 29% of the American companies.
ESG Reports leave shadows over supply chains
“We are clean – but we are not responsible for our suppliers,” used to be a common refrain from companies seeking to distance themselves from their suppliers. This has changed because companies, especially large companies, have great influence on their vendors and their supply chain and exercise their authority to achieve improvements. But the GEM shows that companies are still failing to provide adequate information on their supply chains. In Europe, a small majority (52%) of companies at least reveal the geographic location of their suppliers, while only 36% of firms in Australia do, followed by 29% of American listed companies and 24% of Asian S&P 50 listed companies. Disclosure of other supplier information is thin at best, with few companies addressing the types of or total number of suppliers engaged or estimating the total amount of payments made to vendors.
Disclosures on child labor and forced labor raises questions
People living in affluent, western democracies often are not focused on child and forced labor. But in many parts of the world, these conditions are a part of everyday life. Globally connected value chains make it necessary for large corporations to take on responsibility for putting an end to this. However, the GEM paints a more than sobering picture in this regard:
While 72% of the EuroSTOXX companies disclose the risk for incidents of child, forced or compulsory labor in their ESG reporting, only 54% from the USA, 51% from Asia and 36% from Australia do so. And it is getting worse: in Europe, 60% of companies are disclosing strategies for preventing forced and child labor as well as other forms of exploitation. It is less than one third in the US (27%), Asia (27%) and Australia (26%). It is to be hoped that companies will take these issues seriously and that the GEM 2023 will be able to show marked improvement.
Auditing – not yet mandatory or common
Auditing is intended to foster trust and reliability. But only 68% of companies provide some voluntary assurance of their disclosures via an audit. An audit with limited assurance is still the most common (88 of the 353 audited reports indicate the audit depth).
European companies are preparing for increased auditing because the European Commission’s (EC) Corporate Sustainability Reporting Directive (CSRD) proposal introduces an EU-wide requirement for limited assurance on sustainability information with the end goal to move to reasonable assurance in the longer term.
The Top 4 Auditors working in ESG are the so-called Big 4. PwC is the largest with ESG mandates in all four GEM analyzed indices (21%), followed by KPMG (15%) and EY (15%), and ending with Deloitte in 4th place (14%). The depth of inspection differs from reasonable (dominant in US and Asia) to limited assurance, which is the dominant procedure in Europe and Asia, and with substantially less companies in Asia mandating an auditor at all.
Click here to get the full version Global ESG Monitor Report 2022
About the Global ESG Monitor
The Global ESG Monitor (GEM) is a unique research initiative to examine transparency in non-financial reporting of the largest companies in the world. The GEM monitors, analyzes and reports on the transparency of non-financial ESG reporting using the GEM ASSAYTM, a proprietary research tool adapted annually in response to evolving conditions and developments.
The operationalization of transparency underlying the GEM ASSAYTM is based on the relevant guidelines of Global Reporting Initiative (GRI), ISO Standard 26000, World Economic Forum (WEF) and Accountability.
The Global ESG Monitor is headquartered in Wiesbaden (Frankfurt), Germany with partner offices in Washington, DC; Melbourne, Australia; Kuala Lumpur, Malaysia; Hong Kong, China; Warsaw, Poland and Bucharest, Romania.
 * The GEM Global Report covers the most relevant stock market indices from Europe (EuroSTOXX), the USA (S&P 50); Asia (S&P 50) and Australia (ASX 50).
Available in English version only