SEC seeks advice on sustainability disclosures from finance execs.
Investors are clamoring for more and better quality information about corporate sustainability. However, the lack of reporting standards not only confounds their ability to measure companies’ efforts but also has resulted in a blizzard of questionnaires burdening corporate finance departments. If that rings familiar, now is the chance to voice concerns and suggest solutions, as the Securities and Exchange Commission seeks input on how potentially to revamp reporting requirements under Regulation S-K.
That was the message conveyed in a recent webinar meant to inform as well as light a fire under financial executives to prompt them to submit comments due July 21, 2016 on an SEC concept release titled, “Business and Financial Disclosure Required by Regulation S-K.” The webinar was sponsored by Financial Executives International (FEI) and the Sustainability Accounting Standards Board, which completed provisional reporting standards for 79 industries around the same time the SEC issued its release in April.
The SASB is seeking to codify voluntary standards that comply with Reg S-K and aim to make sustainability disclosures in financial statements more useful to investors as well as more efficient for issuers to produce. The SEC’s concept release, which may or may not lead to regulatory changes, seeks input on a broad array of reporting issues, extending well beyond sustainability. Nevertheless, corporate sustainability, generally defined as a business approach creating long-term value that considers environmental, social and governance (ESG) issues, is a relatively new issue in terms of investor focus.
Consequently reporting standards have yet to be firmly established. The result has been boilerplate disclosures that may leave companies open to liability, or disclosures that are difficult to compare between competitors or benchmarks because companies tend to use different metrics.
“It’s peer-to-peer comparisons that investors really need and want to enable their investment decisions, with consistent units, the ability to create an industry benchmark, and complete data sets,” said Jean Rogers, PhD, founder and CEO of SASB who was on the webinar’s three-person panel.
Several recent studies have shown that investors are increasingly seeking sustainability information, and nearly 90% said in a PricewaterhouseCoopers study that they’ll request it directly from companies, often through questionnaires.
“That turns out to be extremely burdensome and reflects dysfunction in [regulatory] disclosures,” said Tom Riesenberg, former deputy general counsel for Ernst & Young and director, legal policy, for SASB. “We’re seeing a lot of demand for information in this area, but it’s being satisfied by means other than traditional disclosure mechanisms such as SEC filings.”
Dr. Rogers noted that General Electronic (GE) reportedly fills out over 650 sustainability-related questionnaires annually, and it has more than 75 full time employees responding to these types of requests, despite little discernable impact on value. GE is a massive company, but a recent survey of 700 participants in a webinar by the Institute of Management Accountants found 7.5% of them reported completing more than 250 ESG-related questionnaires annually. A polling of webinar participants found similar results.
“So it’s quite a problem. Companies face a significant burden in the form of reporting fatigue from doing hundreds of questionnaires a year,” Dr. Rogers said.
The SEC’s concept release seeks information about issues that ultimately could have a significant impact on issuers’ regulatory reporting. It asks what a sustainability disclosure framework would look like, whether it could be flexible enough to address evolving issues, whether line-item disclosure requirements would yield immaterial information, and other broad questions.
Mr. Riesenberg said that most companies make boilerplate disclosures in their regulatory filings, pointing to a disclosure by Molson Coors, which notes generally that climate change and water availability “could result in a material adverse effect” on its business. Less common, he said, are disclosures such as Diageo’s, which provides specific numbers to illustrate the company’s improved performance across water and other environmental target areas compared to the year before.
If the SEC proceeds with changes to Reg S-K, it will be a lengthy process. Elisse Walter, former chair of the SEC and now a SASB board member, noted in the webinar that presidential elections typically result in the SEC chairman changing as well as top staffers, and that can sideline the agency’s current projects. However, she said, the Reg S-K initiative is likely to continue forward, since it has support from board members regardless of their views on regulation.
“So I do think there will be some action taken,” she said, adding, “With respect to sustainability, that’s a bigger question.”
In the meantime, SASB’s voluntary disclosures have been designed to provide investors with Reg S-K-compliant disclosures of information that facilitate comparisons between issuers and to benchmarks. That should reduce the need for ESG-related questionnaires or other issuer inquiries, since investors will be able to refer standardized disclosures allowing them to compare and contrast the companies they invest in.
The standards avoid issue-based disclosures applicable across all issuers, which can result in comparing apples to oranges. For example, said Dr. Rogers, climate risk is often suggested as a potential line-item disclosure, but where the risk for a healthcare company may be whether its healthcare delivery facilities are positioned to deal with increased patient loads from more weather events, the impact on agribusinesses would be on crop yields.
The SASB standards are instead industry specific, enabling peer-to-peer comparison. On average, each of the 79 industry standards has five topics and 13 metrics. Dr. Rogers said that central to the SASB process is materiality, so it links topics to their financial drivers and ultimately the financial impact. For example, drug safety and side effects affect demand for a pharmaceutical company’s core products and services, and that ultimately impacts its revenue.
Mr. Riesenberg said the biggest concern voiced by issuers about disclosing the information under SASB standards was liability risk. Noting his 30 years practicing law in this arena, he added that more detailed, non-boilerplate disclosures instead reduce liability, especially given that Reg S-K already requires disclosure of material information, and boilerplate disclosures may be viewed by investors as inadequate. In addition, material disclosures must look ahead.
“I would emphasize that [companies] can be held liable not just for misstatements but also omissions, if those omissions in turn make the disclosures the company is making misleading,” Ms. Walters said. “Some issues for a particular industry and company in that industry may be very material on the downside or upside in terms of future financial results, so I would urge companies to think about this, because they can’t just think about the static conditions they have today but those they may have tomorrow.”