SEC Chair White discusses potential SEC coming attractions: sustainability reporting

by Cydney Posner

In a speech last week to the International Corporate Governance Network Annual Conference, the last agenda item discussed by SEC Chair Mary Jo White was the current state of  sustainability reporting.  The bottom line: the “issue has our attention.” 

Currently, SEC disclosure is addressed through the concept of materiality along with specific guidance on issues such as climate change. However, White acknowledged, disclosure regarding sustainability can be tricky under current rules and guidance: “to the extent issues about sustainability are material to a company’s financial condition or results of operations, they must be disclosed. But deciding whether such disclosures are triggered in a particular context is often easier said than done when trying to calibrate materiality to phenomena that have a longer term horizon than most other financial metrics do.  And measuring whether and how a company will sustain its performance in a changing global physical and legal environment, which is itself uncertain, is not an easy undertaking.”  Moreover, the concept itself is so broad, encompassing topics such as climate change, resource scarcity, corporate social responsibility and good corporate citizenship, any of which have the potential to impact financial performance, depending on the industry and the company.

Nevertheless,  companies are increasingly providing sustainability disclosure in SEC filings or in separate reports. White  observed that, in 2015, “75% of the S&P 500 companies published a sustainability or corporate responsibility report and over 90% of the world’s 250 largest companies did so.” In addition, both the Global Reporting Initiative and the Sustainability Accounting Standards Board have published reporting frameworks or are developing sustainability standards. (See this Cooley News Brief.) But some investors have expressed concern that the reporting is not comparable or consistent within or across industries, and other have indicated a desire for reports that are better integrated into financial reporting.

SideBar: According to this article from The Economist, investors’ “main concern is that climate change—or policies to avert it—will damage the firms they invest in, whether they be energy companies with stranded assets, food companies exposed to droughts in Africa or chemicals producers suffering regulatory risk in Europe.” According to the article, “a study published by Harvard Business School in 2011 looked at 180 firms over 18 years and found that those which paid the most attention to environmental matters also did best when measured by share prices and earnings. This does not prove that greenery causes good performance—more likely, well-run firms pay attention to both—but at least they are not in conflict. The implications are that there ought to be generally accepted accounting principles for the environment, and that policymakers should pay more attention to efforts under way to create them.”

Among these efforts, in addition to those by GRI and SASB, is the guidance developed by the World Federation of Exchanges, a group of 64 of the world’s largest stock exchanges (including the NYSE and Nasdaq), for the types of environmental, social and governance-related metrics the Federation believes are important for companies to provide investors. The guidance covers 34 metrics, including energy consumption, water management, CEO pay ratio, gender diversity, human rights, child and forced labor, temporary worker rate, corruption and anti-bribery, and tax transparency in addition to other corporate policies. Each member exchange can voluntarily choose to adopt some, if any, of these standards for their listed companies. The guidelines provide standardized reporting frameworks for various metrics in response to investor complaints regarding the absence of comparability and their inability to use information they receive effectively. (See this PubCo post.)

At the end of the day, White maintains, sustainability disclosure is still in the development stage. In addition to SEC concepts of materiality and staff guidance,  disclosure also develops on an individual basis, as companies engage with their shareholders on “a range of sustainability topics, whether through direct dialogue with management or our Rule 14a-8 shareholder proposal process.”  

SideBar:  This article from The Economist suggests that, given that the SEC gives companies a wide berth on principles-based disclosure, “by far the biggest influence on firms comes from investors.” CDP,  a group that collects environmental data on behalf of investors with $92 trillion in assets, regularly distributes “questionnaires to 5,000 firms asking things such as, ‘Does your company have emissions-reduction targets?’ and ‘If you do not have any emissions-reduction initiatives, please explain why not.’”

According to Proxy Monitor, for 2015, the number of shareholder proposals to the Fortune 250 related to environmental concerns exceeded all other topics, although that number fell somewhat in 2016. And these proposals have apparently had some effect.  In this article,the WSJ suggests that shareholder pressure on corporate policies and disclosures have been driving companies to make disclosures that were “unthinkable a decade ago, on issues ranging from protecting rain forests to human rights.” Environmental and social resolutions  are not generally binding and are rarely successful when submitted to a vote.  According to EY, the typical environmental and social proposal receives favorable votes from holders of about 21% of the shares, compared with 33% for shareholder proposals overall.  However, “even failures can have an impact, especially if investors target an issue that resonates with a company’s customers.” And, at times, even the threat of a proxy vote can be enough to bring company executives to the negotiating table.

And while some are skeptical about the usefulness of proxy access, see this PubCo post discussing efforts by a network of institutional investors called the 50/50 Climate Project and CalPERS to encourage boards (primarily of energy companies – at least initially) to start to tackle climate change. According to this article in BNA Accounting Policy and Practice, they see the efforts made in 2015 “to press for expanded proxy-access rights to nominate directors as part of the effort to push for boards’ climate competency.”  The article reports that, although prior attempts to require board climate change expertise have largely failed, the “unprecedented campaign for proxy access” may present an opportunity to rectify that.

In addition, White notes, in their reviews of periodic reports, the Corp Fin staff are taking a “more focused look” at sustainability disclosures, particularly those related to climate change. To address concerns that the SEC’s rules and staff guidance do not suffice, White reminds us that the SEC’s recent Concept Release on Reg S-K raises questions regarding the advisability of mandatory sustainability disclosure.

SideBar: In its Reg S-K Concept Release, the SEC requested comment on whether to require disclosure on sustainability matters such as climate change, resource scarcity, corporate social responsibility and good corporate citizenship. The release asks which disclosures, if any, are important to informed voting and investment decisions. The question is whether this disclosure is important to the general population of “reasonable investors” or only to a narrow segment of investors.  The release cites one study showing that “investors are more likely to engage registrants on sustainability issues than on financial results or transactions and corporate strategy.”  However, some commenters  have expressed concern “that adopting sustainability or policy-driven disclosure requirements may have the goal of altering corporate behavior, rather than producing information that is important to voting and investment decisions.” (See this PubCo post.) At the SEC open meeting to vote on issuance of the concept release (see this PubCo post), Commissioner Stein contended that  “[s]ustainability disclosure differentiates companies and it may foster investor confidence, trust, and employee loyalty.  More importantly for investors, companies that adopt certain environmental, social, and corporate governance or ESG measures may perform better than those that do not.”  She expressed concern, however, that the release did not specifically address many of these ESG topics, such as diversity and inclusion measures. Commissioner Piwowar had quite a different view. He emphasized that both the JOBS Act and FAST Act required the SEC to study Reg S-K to simplify reporting and reduce costs to companies. In that light, he took issue with any effort to expand the nature of disclosure to cover items that were not strictly “material,” as opposed to merely useful or interesting to some shareholders, or, as he put it, allowing these shareholders to “hijack corporate resources to serve their own agendas.”  Presumably, he was taking direct aim at this aspect of the release regarding sustainability and ESG disclosures. 

While there is “more work and thinking to be done” by the SEC, White contends that interested  investors must also fulfill their roles. White urges “investors who are seeking to alter corporate behavior on sustainability to continue to use your stewardship and influence to bring about the strategic, supply chain and business model changes you think need to be made by companies to address the underlying risks and priorities. Encourage and prod companies to acknowledge sustainability objectives that are in line with what makes the most sense for their businesses, demand that they describe what they are doing to achieve those objectives and how they are doing against your expectations.”

In the same speech, White also discussed board diversity disclosure and non-GAAP reporting.  (See this PubCo post.)

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