TechTalk Blog - As Proxy Season Starts US Companies & Banks Begin to Disclosure Non-Financial Data to the Capital Markets as a Best Practice

By David Colgren posted 01-16-2018 11:10 AM

  

Great article written by the global law firm Weil Gotshal & Manges LLP on the need for public companies to be aware of the growing trend of non-financial reporting disclosures (commonly known as "Sustainability Reports", "Corporate, Social Responsibility (CSR)", "Environmental, Social, Governance (ESG)" corporate during the 2018 10-K and proxy season. Some companies are combining financial reporting with non-financial reporting into ONE REPORT or "Integrated Reporting" to external stakeholders that also includes natural resources and human capital -- beyond just financial information. The CFO in most cases is responsible for this additional reporting by the company.


FROM THE ARTICLE:

According to the Governance and Accountability Institute, approximately 82% of S&P 500 companies published some type of corporate sustainability report in 2016, up from 75% in 2015 and 20% in 2011.

Long gone are the days where only a few “socially responsible” investors focused on sustainability issues – today, some of the country’s largest asset managers (e.g., Vanguard, BlackRock Inc., Fidelity Investments, State Street Global Advisors) and public pension funds (CalPERS, CalSTRS, NYS funds) are publicly advocating greater corporate accountability in the ESG realm, perhaps most notably in the area of climate change. BlackRock, the world’s largest asset manager, recently sent “open letters” to 120 companies in the energy, transportation and industrial sectors urging improved disclosure of “’material climate risk inherent in their business operations’” in accordance with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). The CEO of Vanguard published a similar letter in August 2017.

Many of these institutional investors literally are putting their money where their collective mouth is. More than 1,600 investors (together managing more than $70 trillion in assets) have committed to incorporating ESG factors into their portfolio asset management practices, becoming signatories to the United Nation’s Principles for Responsible Investment. Third-party providers of ESG ratings and reports on portfolio companies – both public and private – have sprung up to meet growing investor demand for measurement of corporate ESG performance. 

One of the most common shareholder proposal topics this year involved environmental risk management and/or disclosure— with 144 such proposals, including 69 related to climate change, up slightly from 139 environmental proposals, including 63 climate change related proposals, in 2016. Similarly, shareholder voting support for climate change related proposals averaged 32% of votes cast this year, up approximately 7% from the prior year.3 Notably, shareholder proposals seeking the publication of climate risk-management disclosures by Exxon Mobil, Occidental Petroleum and PPL Corporation garnered majority shareholder votes this year.”

The SEC itself acknowledged widespread investor dissatisfaction with the quality of mandated sustainability disclosures in an April 2016 Concept Release on Disclosure Effectiveness.10 That said, there is no indication that the SEC intends to pursue regulatory changes relating to the so-called “mandatory” sustainability disclosures that must be made in SEC-filed documents, thus leaving the field open for “private ordering” to continue – in the form of voluntary corporate sustainability disclosures posted on company websites or otherwise appearing outside the four corners of SEC filings.”

MY EDITORIAL COMMENT:

It would be most helpful if the US Securities & Exchange Commission would at least create a pilot program so it can begin to look at best practices in the corporate world related to these non-financial information reporting disclosures.

The United Nations-supported initiative, which includes nearly 300 signatories in the U.S. with $33 trillion in assets under management, is one of a number of responsible investment advocates seeking new SEC guidance or requirements to improve corporate sustainability reporting. 

Sustainable, responsible and impact investing has grown to account for more than $1 out of every $6 under professional management in the U.S. in 2014, according to the latest estimates from the U.S. Forum for Sustainable and Responsible Investment.

Clearly, capital market interest is there for non-financial information disclosures and the largest US Companies are disclosing this information -- but yet we don't see the US SEC taking any actions to meet this capital markets demand. A wall exist between financial and non-financial reporting at the US SEC regarding disclosure and currently US CFOs don't see a reason to move into this area without direction or mandates from the US SEC for this disclosure.

Questions are being prompted based on non-financial disclosure requirements coming from the EU (ESMA) and other regulators regarding additional assurance services that  could be provided to support this non-financial disclosure. How will these additional disclosures impact supply chain management and oversight? What role will the management accountant play in this new reporting regime? A paper was published by the IMA recently on the need for internal controls that could be created to support this new reporting regime.  

What new technologies will be created to support non-financial reporting to assist companies with these additional disclosures? What are other major securities regulators doing in this area and is there an opportunity for US regulators like US SEC, PCAOB, FDIC, FINRA, US Federal Reserve and US Treasury do to coordinate reporting frameworks? Already several US Government agencies are reporting non-financial information to external stakeholders. Can the US SEC help to coordinate via best practices in the capital markets?  

As this additional article documents – the need for this type of additional non-financial reporting requires standardization and assurance services to improve the quality of this reporting critical to capital market investment. Without proper disclosures capital can’t flow to meet investor demand – especially in areas where new technologies and infrastructure will be required to deal with issues that impact the wellbeing of our democratic society.

We need to let the capital markets do its magic – but we can’t if we don’t have standardized reporting supported by both government and the accounting/auditing profession to meet a growing public demand.

Other capital markets are moving in this direction with the Non-Financial Reporting EU Directive coming into play this month for this additional reporting to be part of the disclosure reporting process. This directive not only changing corporate disclosure but also supply chain management used by companies.

EU rules on non-financial reporting only apply to large public-interest companies with more than 500 employees. This covers approximately 6,000 large companies and groups across the EU, including

  • listed companies
  • banks
  • insurance companies
  • other companies designated by national authorities as public-interest entities

 

Information to be disclosed

Under Directive 2014/95/EU, large companies have to publish reports on the policies they implement in relation to

  • environmental protection
  • social responsibility and treatment of employees
  • respect for human rights
  • anti-corruption and bribery
  • diversity on company boards (in terms of age, gender, educational and professional background)
Stay tuned as we look to the United States Securities & Exchange Commission for direction in this area. At this point its total silence.


The question – with the US SEC follow other securities regulators in other parts of the world and begin to collaborate? Can the accounting and audit profession play a role in creating this standardization and new assurance services that can be utilized to support this growing capital market demand?

 


  ACCA

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