TechTalk Blog - US SEC Chair Indicates that Sustainability Reporting Part of Public Company Disclosure in "Not-Too-Distant" Future

By David Colgren posted 06-29-2016 09:22 AM

  

According to the most recent posting by Broc Romanek of CorporateCounsel.net the US SEC is actively moving forward on public company disclosure of sustainability/ corporate social responsibility reporting – also know as “non-financial” – “integrated reporting” -- including disclosing such topics as board diversity.

Non-financial reporting, such as sustainability and CSR/ESG reporting has expanded over the last twenty years. Many US public companies now produce an annual sustainability report (independent of the annual financial report) and there are a wide array of ratings and standards around. There are a variety of reasons that companies choose to produce these sustainability reports, but at their core they are intended to be efforts to promote more effective transparency and accountability and enhance disclosure of non-financial metrics to provide better measurement of a company’s value to the marketplace. Often they also intended to improve internal processes, engage stakeholders and persuade investors. Since financial information is required by the US SEC to be “tagged” using the XBRL global data format for instant analysis – efforts are underway to include XBRL for non-financial disclosures to also improve transparency and accountability by making the data more discoverable and machine-readable for instant analysis. 

Various countries require non-financial reporting and the EU recently mandated non-financial reporting for its more than 6,000 public companies and countries such as the UK have mandated that public companies disclose this information by yearend.

As Broc points out in his most recent posting…

“SEC Chair White not only indicates that a rule proposal regarding board diversity disclosures is coming soon, it highlights that the US SEC Corp Fin Staff is actively reviewing climate change & sustainability disclosures – and it could conduct rulemaking in this area soon too. Here’s an excerpt:

“Currently, disclosure of sustainability information under SEC rules is being addressed by a combination of our materiality-based approach to disclosure, guidance on certain issues,[55] and shareholder engagement on a range of sustainability topics, whether through direct dialogue with management or our Rule 14a-8 shareholder proposal process. Although we are seeing increased disclosure and engagement on sustainability matters, we are taking a more focused look at such disclosures, particularly related to climate change, in our annual filings reviews.

We understand, however, that there are those who do not believe that our materiality-based approach to sustainability disclosure goes far enough.[56] That is one of the reasons we included a discussion of the topic in our recent Regulation S-K Concept Release and solicited input from investors and others on whether we should consider line-item disclosure on certain issues.[57] I encourage you to share your perspectives and give us your input on whether changes are needed, and if so, what specifically should be changed.[58]”

Speech by US SEC Chair White on this topic.

The IMA is a big supporter of sustainability reporting/ integrated reporting as discussed in this memo on the topic to the The International Integrated Reporting Council (IIRC):

“The international market place is increasingly paying more attention to non-financial information about organizations to better understand their performance, value and reputation – all one need do is look to the trillions in assets under management of the signatories of the UN Principles of Responsible Investing (UNPRI), or for that matter, to the number of private equity, venture capital and hedge funds dedicating significant portfolio allocations to companies that measure and report on their operations as well as their environmental, social and governance (ESG) practices.

It is important for the sustainability of organizations and society that we achieve a better balance between short-term financial performance and longer-term sustainability. Companies that don‟t follow good ESG practices face reputation and financial risks, as evidenced by global brands such as Nestle, Coca Cola and Nike whose shares were dropped from the portfolios of asset managers in the last several years for failing to deliver upon their ESG promises.

Action is needed now to improve how organizations gather and report information, both financial and non-financial (e.g., ESG information). Until the last few years, typical historical, backward- looking financial reports were widely used and relied upon for much of the decision-making among executives, analysts, investors and regulators. However, financial information alone is not the only indicator of a company‟s true performance, as we have come to find out with the increasing reliance on non-financial metrics as well as the advent of interactive data technologies such as XBRL that help us access information more easily and reliably. Current reporting models that focus on a single entity, short time-frames and historical cost accounting do not effectively define, capture or enable linkages to ESG business practices and, ultimately, financial value. Add to this that some of a company‟s value is not reflected in their disclosures and we have a paradigm in which often incomplete information is being provided for stakeholder decision making.

Integrated reporting is an opportunity to modernize corporate reporting and corporate culture, unlock data from corporate silos and restrictive presentation formats, link operational and ESG practices to financial performance, and make information relevant, machine-readable, meaningful and reliable for management and all stakeholders.”

Recently the IMA announced a Memorandum of Understanding with the Sustainability Accounting Standards Board (SASB) forming a partnership focuses on accelerating the uptake of accounting standards to improve non-financial disclosure and advance the management and disclosure of non-financial information in corporate reports.

We will be watching US SEC actions related to this topic very closely as nations around the world begin to focus on non-financial/integrated reporting that includes sustainability/social responsibility disclosures.  

 



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