Report Card: assessing environmental, social and governance (ESG) content in corporate annual reports

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Credit: Yuichi Shiraishi
Credit: Yuichi Shiraishi



WALMART (2017) [blog posted 20 May 2018]

Gigantic global retailer earning revenues of USD 136.3 billion in 2017

Could be better organised

Walmart has made considerable progress over many years in understanding and modifying its supply chain impacts. The company enjoys major buying power and economies of scale, which it has used to benefit environmentally friendly industries. But very little of that activity is revealed in the company’s 2017 annual report “There’s a lack of integrated reporting. It’s a bit of a missed opportunity. The annual report fails to mainstream Walmart’s work on environmental sustainability or to give it much importance. The reporting needs to be more coherent”, comments Nick Molho, executive director of the Aldersgate Group, a consortium of leaders on a sustainable economy.

Missed opportunity

This major US employer devotes a considerable number of pages and graphics of its annual report to jobs and customer relations. About 18 of the 68 pages contain a descriptive overview and CEO statement. Among them we learn the extraordinary news that Walmart is forecast to create around one million new US jobs. But little is said about governance, environmental impacts and risks.

In a short paragraph, CEO Doug McMillon does make an interesting point about the company’s adoption of “shared value” – a business model shaping a corporate role that extends beyond the shareholders to society generally. “We’re clearly living in a time of transformative change. The world is moving faster and the magnitude of the changes, and their influence on business, seem larger than I can remember”, he says. Is he referring to the new US government? to changes in ICT? climate change? None of this is explained.


By contrast, the Global Responsibility Report (GRR) contains many colourful facts and case studies. For example, it says the company has doubled its sales of locally grown produce in 2010-2015 and is committed to repeat this by 2025. Walmart runs several initiatives to support and train smallholders in developing countries, and is the first retailer to set a science-based emissions reduction target. Walmart is also working with suppliers to reduce CO2 emissions by 1 gigaton in 2015-2030. Several pages are dedicated to solar power, but this isn’t always put in the perspective of overall energy use nor listed with past trends.

“Many of these initiatives mean the company is in a better position on future regulation”, points out Nick Molho, “but all this is in the GRR and omitted from the annual report”. However, Molho indicates the company does demonstrate a clear sense of direction on sustainability and using its commercial importance to influence its supply chain to ensure its business model is more resilient to climate change. “They’ve definitely gone beyond most in terms of their supply chain, a huge endeavour”, says Molho.

Insufficient detail but clarity on goals

There is breadth and clarity on goals. But the GRR is weaker on detail. “There is not that much hard data”, points out Molho. Information is supplied on waste, water, retail space growth and energy use.  “However, what’s missing is granular tables with specifics on waste streams, water and carbon emissions etc in the UK, for instance, versus the US, so an investor can understand which assets and geographical areas are progressing faster than others. In the GRR, it’s all aggregated.” As a consequence, the extent of progress in different countries, some of which are much less regulated than others, is not revealed.

Both reports emphasise people. Given the current US concerns about jobs, perhaps that is to be expected.

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Around 60% of Iberdrola’s capacity derives from renewable energy. The company is based in Bilbao, Spain.

Room for improvement

Iberdrola has been performing well but still shows room for improvement, says analyst Tom Crocker of carbon disclosure non-profit CDP. Among the most positive achievements of the company, ranked second in the 2017 CDP study of utilities, ‘Charged or Static’, is its adoption of integrated annual reporting, in which social and environmental issues are incorporated into the main statements.

Confusing access

But an initial search for the statements is off-putting. A quick look at Iberdrola’s annual report web page for 2016 shows no less than 14 links to various documents, containing information that is either mandatory or voluntary or both. How does the reader know which data are included in which report, whether information overlaps between the reports, and what is voluntary disclosure? That’s the first concern.

Secondly, the reader suffers from information overload – at least for the sustainability report, which runs to 272 pages. “You could argue that it is to its detriment that it is that long. You have to wade through a lot of repeated information to get through to the facts”, comments Crocker. Among the facts that were surprisingly difficult to find was the company’s commitment to carbon neutrality by 2050. “It’s odd because you’d think it would be clearly labelled at the front”, says Crocker.

Good detail

That said, the sustainability report scores high in several areas, providing information omitted from many utility reports. Most annual reports show emissions data but Iberdrola is more granular, publishing installed capacity by energy source. It lists outputs by some installations, reports on direct (own facilities – known as scope 1) indirect (purchased energy – scope 2) and value chain emissions (scope 3) and splits data into regions. “The holy grail for equity analysts is to obtain asset-level data from the company. Breaking it down by scope and region is very helpful and gives an indication of where the companies are operating, allowing you to tie the regional aspects into other factors”, says Crocker.

There’s a sense of reluctance to report on scope 3 – admittedly a contentious issue. The Global Reporting Index (GRI), a campaigning international standards organisation, lists 12 categories for scope 3 reporting. But Iberdrola only opts to report on a few. Why did the company pick these in particular? No explanation is provided.

Obscure remuneration data

Overall, Crocker is positive about Iberdrola’s use of the GRI framework for its 2016 sustainability report because the company has gone through every single criterion and responded to it. Among the company’s more unusual practices is board remuneration linked to climate. However, these details are hard to find: “It’s not very intuitive in getting a summary of how remuneration packages work. You have to dig for it. It’s a lot of words for something you could put at the top of the section”, suggests Crocker.

When publishing their results, corporations have to tread a line between thorough data that’s difficult to access, and concision that oversimplifies. That’s a skill Iberdrola, like many companies, still needs to master. But overall, its style is more open than most companies and less formal.

RWE (2016)

Germany’s largest producer of coal-fired power

Has slipped back and shows reticence

RWE’s statements contrast strongly with those produced six years ago, when it was brimming with optimism and set a 20% target for renewables by 2020. Gone is the promise of smart energy home systems communicated in its 2011 reports. In its place is a rather restrained description of the company’s activities. The tone in 2016 was defensive, but massive changes have happened since then, of course.

RWE’s 2020 renewables target splintered when the company split off its renewables business, Innogy. And it has been at the frontline of political controversy, as well as litigation, due to its coal-based business. The company’s 2011 report is probably closer to Iberdrola style and provides more information than its 2016 statements, describing more about its value chain and responsibility policies, for example.

Structural transition

When company structures and management change, the quality of corporate disclosures may well slip back, especially if they are voluntary. “The 2016 report is traditional and you get the main facts but it has a different feel from Iberdrola. The style is: “we’ve been told to do this and writing it to say we are required to do it”, comments Tom Crocker.

RWE’s announcement this March on its asset swap with E.On partly explain this reticence, of course, since it is now clear the company was in a transitional stage. With its newfound control over E.On’s renewable energy generation, a different tone may be expected in future.