TechTalk Blog - US House and Senate Hold Hearings on US SEC Mandating Corporate Non-Financial Reporting to Support Growing $30 Trillion Sustainability Investing Marketplace

By David Colgren posted 04-03-2019 12:04 PM

  

Interesting debate yesterday before the US Senate Banking Committee on the topic of expanding disclosures of US companies to include environmental, social and governance data besides just financial disclosures. The US House Committee on Financial Services held a hearing on the same topic last week.

From testimony before the US Senate Banking Committee:

US Senator Sherrod Brown: “SEC should act to require uniform disclosure of corporate ESG factors, said ranking committee member Sherrod Brown, D-Ohio. "Investors know there are many environmental, social, or political risks that could reduce long-term value, but companies are not providing that information," Mr. Brown said. "Enhancing and standardizing these disclosure requirements will merely bring the SEC up-to-date with other rules around the world."

The EU has mandated the disclosure of this data by the more than 6,000 public companies based in the EU to support a thriving and actively growing $30 trillion sustainability investing marketplace.

The debate yesterday closely followed the US Securities and Exchange’s Investor Advisory Committee vote on March 29, 2019 to consider imposing human capital management disclosure requirements as a part of its Disclosure Effectiveness Review and disclosure modernization project. Human capital disclosure is an important part of environmental, social and governance disclosures or what the accounting and auditing profession is calling “Integrated Reporting” which the IMA is an important member.

The capitals identified by the IIRC are: financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital, and natural capital.

Now that the recommendation moves to the SEC, the question is: whose views will prevail? And if mandated – what standards will be used?  Will legislation come out of Congress mandating the US SEC to move forward with ESG/Integrated Reporting by public companies? Can assurance be provided on this disclosed data? Will the disclosed data be distributed in a machine-readable data format like XBRL for instant analysis and comparison like the XBRL data that is being used for financial disclosure by the US SEC.

Deloitte put this video together on how XBRL can be used for ESG/ IIRC data disclosed by corporations. The IMA is a founding member of the XBRL Consortium to support greater transparency and accountability for both companies and governments using better evidenced-based data to make decisions. Management accountants will play an more increasing important role as a consultant to the C-Suite of companies as automation becomes more standardized in the profession and data analytics becomes a more critical function. 

In his opening remarks, SEC Chair Jay Clayton stressed once again his framework for analyzing disclosure rules, which is “rooted in the principles of: (1) materiality; (2) comparability; (3) flexibility; (4) efficiency; and (5) responsibility.”  He also emphasized that, consistent with that framework, disclosure requirements must evolve over time to reflect changes in markets and industry, which is especially apparent with regard to human capital.  Increasingly, he said, human capital is the source of economic strength and, for some companies, human capital is a mission-critical asset. 

US SEC Commissioner Robert Jackson also noted that the economy is changing to be more of a “human-centric model,” and that the role of workers is likewise changing, as more companies look to “contingent workers.”  Disclosure should reflect these changes.

Requiring a uniform disclosure of corporate ESG factors created by the US Securities and Exchange Commission can help US companies stay internationally competitive as more and more securities regulators mandate this additional disclosure.

As Senator Brown stated in his testimony before the Senate Banking Committee:
“Most of the SEC’s disclosure requirements were adopted almost 40 years ago, when more than 80 percent of S&P 500 companies’ assets were fixed, like buildings and factories. Today, the numbers are flipped – more than 80 percent of S&P 500 assets are intangible—we’re talking about brand names, patents, and investments to enhance worker skills and effectiveness.” 

Strategic Finance Magazine has published several articles on the new opportunities opening-up to management accountants as these new data sets come under the review of the finance team as they prepare an integrated report to investors and the global capital markets. 

https://sfmagazine.com/post-entry/may-2018-building-confidence-in-nonfinancial-reporting/

https://sfmagazine.com/post-entry/october-2017-sustainability-reporting-increases/

The IMA has partnered with Sustainability Accounting Standards Board as the global ESG standards organization works closely with the US SEC in moving forward with the standardizing of these new disclosure requirements to keep US companies competitive.

Stay tuned as the debate continues over modernizing financial reporting to include these other important capitals that link companies and governments to the public interest through shared goals. 

 


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