The Securities and Exchange Commission (SEC) is seeking comment on its disclosure requirements, including potential changes to its reporting framework, frequency, and other standards. The changes would impact business and financial disclosure requirements of Regulation S-K, which were established when Franklin D. Roosevelt was president.
One section open for comment caught our eye: public policy and sustainability matters.
The request for comments from the SEC is a monumental opportunity to voice your opinion and influence how sustainability measures are communicated publicly.
Why does sustainability reporting matter?
It’s never been more important to update sustainability regulations. Technologies have changed, climate change is a burning issue, and businesses need to be recognized for their advancements in corporate resilience and social responsibility.
Modernizing and specifying CSR disclosures is especially important for stakeholders and investors because it’s been proven that businesses that report their socially responsible activities are more profitable and better run. CSR reports inform investment decisions, and it doesn’t make sense for modern businesses to be evaluated by antiquated metrics.
According to the SEC concept release, “Some investors and interest groups also have expressed a desire for greater disclosure of a variety of public policy and sustainability matters, stating that these matters are of increasing significance to voting and investment decisions.”
What’s the problem with sustainability reporting now?
- The range of topics is too broad. It includes climate change, resource scarcity, corporate social responsibility, and corporate citizenship.
- Information made available to investors is inconsistent and incomplete.
- Reporting of corporate sustainability is primarily voluntary.
- The disclosures that are required do not adequately address climate change.
What do we have to say about all this?
The SEC wants input on which sustainability disclosures to include in public corporate SEC filings, characterized as environmental, social, and governance (ESG) concerns. Specifically:
- The importance of sustainability and public policy matters to support informed investment and voting decisions;
- Which, if any, sustainability and public policy disclosures are important to an understanding of a registrant’s business and financial condition;
- Considerations that make these disclosures important to investment and voting decisions;
- And the potential challenges and costs associated with compiling and disclosing this information.
Here’s what Paladino’s team has to say:
In order to promote fair, orderly, and efficient capital markets that are free of fraud, the SEC must provide a mechanism for investors to have timely, accurate, and comprehensive information enabling them to make sound investment decisions. ESG issues are not only a potential material risk to an investment; how a company engages in ESG efforts is also a strong diagnostic for corporate strength and longevity in the market. Sustainability disclosures are a critical addition to the SEC filings in order to provide a more comprehensive view of the financial strength of an investment.
Determining which key sustainability information should be included across so many diverse industries is a more complex question. Identifying key material risk related to sustainability is the low hanging fruit. Sustainability Accounting Standards Board (SASB) has many industry specific guidance documents that are driving this path forward, and is a good starting point. You can read SASB’s formal response to the SEC comment call here.
There is more work to be done, though. Transparency in sustainability is more than just mitigating the risk to an organization related to climate change and resource availability. In markets where a short term view often dominates decision making, how can the disclosure of key sustainability metrics help play a role in investors having a comprehensive, long term vision of a potential investment decision? Think of it as how to identify the value-add of sustainability to a valuation. Could this information drive our markets to a more stable position and further facilitate capital formation? I believe the answer to this is, absolutely!
A “one size fits all” solution for reporting sustainability performance won’t work. Standardizing sustainability disclosure will improve the material information that investors can use to make decisions, but every industry is different. For example, a real estate company may find its risk around climate change because rising sea levels devalue its coastal assets; but an airline’s highest risk might be around volatility in fuel prices or technology costs from shifting to a new propulsion system. Sustainability disclosure will be complicated but worth the effort for investors to understand an apples to apples comparison of performance.
Investors deserve a material and transparent way to compare the sustainability attributes of companies.
A program worth modeling is the International Living Future Institute’s Just program, which requires companies to disclose information related to issues such as diversity, gender pay gap, and investments. Social justice considerations are sometimes neglected in the context of sustainability.
While investors haven’t always had information about whether a company being considered for investment was socially just, that’s no longer the case. I wouldn’t knowingly choose to invest in, or work for, a company that had a gender pay gap or discriminatory practices that weren’t being actively addressed and I’m not alone – many Millennials echo these sentiments. As Millennials continue to be an increasingly large portion of the labor market and increase their investments accordingly, companies that don’t address these issues could be at serious disadvantage in attracting top talent and investments.
What do you think?
The SEC welcomes comments by July 21, and you can submit through the following ways:
- Commission’s online comment form: http://www.sec.gov/rules/concept.shtml
- Email: firstname.lastname@example.org and include File Number S7-06-16 on the subject line
- Use the Federal eRulemaking Portal. Follow the instructions for submitting comments.