According to BNA, at a recent conference, Corp Fin Director Keith Higgins reported that the highest proportions of comments so far received on the Reg S-K Concept Release related to better environmental and social responsibility disclosure. As SEC  Chair Mary Jo White indicated a few months ago: the “issue has our attention.”  (See this PubCo post.) The problem is, Higgins recognized, those types of sustainability disclosures are not necessarily amenable to one-size-fits-all rulemaking.  

Higgins spoke at the Pacesetters in Financial Reporting conference, noting that, of the 360 “unique” comment letters (i.e., non-form letters) received on the Concept Release, about 80% “were looking for improved sustainability disclosure.”  According to Higgins, “[c]limate change tops the list of issues….” However, he acknowledged, the issues involved in sustainability “cut across 79 different industries and aren’t suited to a constant set of rules….‘Everyone recognizes that one-size-fits-all disclosure is likely not to be so effective in the sustainability area—others recognize the enormity of that task.’” Nevertheless, many commenters wanted the SEC to at least come up with “a framework for sustainability disclosure.”

SideBar: Why do so many care about sustainability disclosure?  Well, for one, they may be interested as good global citizens.  However, 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.”  Moreover, according to this study of more than 2,000 companies over five years in six different sectors performed by academics at the Harvard Business School, companies that made investments in material environmental, social responsibility and governance issues outperformed peers with poor ratings on these issues. (See this PubCo post.)  In its comment letter on the concept release, the SEC’s Investor Advisory Committee indicated in that it “is clear that a significant, and growing number, of investors utilize sustainability and other public policy disclosures to better understand a company’s long-term risk profile. The Committee believes that environmental, social and governance issues should be subject to the same materiality standards as other sources of risk and return under the Commission’s rules.” The Committee then urged the SEC to “develop an analytical framework that more clearly sets out the qualitative factors that can affect the analysis in this area and other per se disclosure.”

The SEC first addressed disclosure of material environmental issues in the early 1970s, and specific environmental disclosure requirements haven’t been revisited by the SEC for decades. In 2010, however, the SEC did issue guidance on climate change disclosure, examining the application of existing rules in the context of climate change.  (You might recall the interpretive release was approved on a split vote at the SEC, with two commissioners voting against it for a variety of reasons, one of which was that the science was “unsettled.”) For example, Item 101(c)(1)(xii)  requires disclosure as to the material effects that compliance with environmental regulation may have upon the capital expenditures, earnings and competitive position of the company. Instruction 5 to Item 103 provides some specific requirements that apply to disclosure of  certain environmental litigation. However, even Chair White has acknowledged that 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 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.

According to BNA, risk related to climate change was “the most ubiquitous sustainability issue affecting U.S. companies, with 93 percent of the U.S. equity market affected by it, according to the SASB. But only 12 percent of companies report metrics on climate change in their SEC filings, while 26 percent of companies don’t mention it at all, according to a review by SASB.”  In addition, BNA reported that only 30 percent provide industry-specific disclosures. Nevertheless,  companies are increasingly providing sustainability disclosure, if not in SEC filings, then in separate reports. Chair 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.” However, the concern remains that the reporting is not comparable or consistent within or across industries, and some investors have indicated a desire for reports that are better integrated into financial reporting.

SideBar: Given that Corp Fin seems to view one-size-fits-all rules as no more than a pipedream, it’s possible that Corp Fin will instead look to the industry-specific standards for corporate sustainability disclosure established by SASB, the Sustainability Accounting Standards Board.  In 2013, SASB released a set of voluntary sector-specific standards for disclosure in periodic reports on environmental, social and governance issues — such as energy, climate change, drug safety and corruption and bribery — for the health care sector, including biotechnology, pharmaceuticals, medical supplies and equipment, health care delivery, health care distributors and managed care. (See this News Brief.) The health care standards were designed to provide comparative information within the industry, as well as information about risk and risk mitigation that could be important to investors.  SASB has now developed industry standards for 79 industries in 10 sectors: in addition to health care, its standards now cover financials, technology & communication, non-renewable resources, transportation, services, resource transformation, consumption, renewable resources & alternative energy, and infrastructure. According to the SASB Implementation Guide for Companies, companies can use the Guide and the applicable SASB standards to “[i]dentify the sustainability topics most likely to be material to an investor, [u]nderstand the current state of disclosure and performance on those topics, and [e]nhance existing reporting processes to more effectively disclose material information on sustainability topics.” SASB even provides some “mock” MD&As  to serve as examples of effective disclosure of the SASB standards in MD&A.

Although climate change tops the list of issues, Higgins indicated that the Concept Release has elicited comments in a number of other areas: “‘there’s tax disclosure, there‘s political contributions, there’s water, food, indigenous rights, social issues, community relations, board diversity—it runs the gamut,’ Higgins said.”

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