Paul Hodgson: Reporting Sustainability: The Investor Advisory Committee at the SEC

At its 14 July meeting, the Investor Advisory Committee of the SEC discussed the issue of sustainability reporting. The discussion was part of the work the IAC is doing in relation to the SEC’s Business and Financial Disclosure Required by Regulation S-K Concept Release which has been in comment period since 13 April. This is part of the SEC’s Disclosure Effectiveness Project (DEP). The review began its examination into the business and financial disclosures required in forms 10-K, 10-Q, and 8-K. Later phases will examine compensation and governance information included in proxy statements. The DEP is supposed to find “cost-effective ways to not only eliminate redundant and useless disclosure but also to increase the disclosure of areas critical to investor understanding of the financial risks associated with the companies in which they invest”. This includes material ESG disclosures.
Of course, back in January 2010, the SEC already asked companies to make climate risk disclosures. Among the factors companies should address, the S.E.C. said, were legislation and regulation related to climate change, international treaties on the issue, and the physical impacts of climate change, like flood or drought. Unfortunately this has not been enforced.
The IAC was set up by Section 911 of the Dodd-Frank Act to advise the SEC on, among other things, “the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace”. With this in mind, the IAC wrote a letter to the SEC’s Corporate Finance office on 15 June about the issue. The letter deals with some of the principles in the concept release, and the manner of information delivery, discusses layered or summary approaches, as well as new ways to properly identify the entity about which disclosure is being made, as well as other yet more technical disclosure issues. Then it goes on to discuss specific disclosure issues, including public policy and sustainability matters, stating that: “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.”

These standards are that issues should be reported on if they have a quantitative effect on expenditures or earnings or both, as well as qualitative effects, such as on reputation, customer purchasing decisions and voting decisions by shareholders. The Committee recommends the Commission “develop an analytical framework that more clearly sets out the qualitative factors” that should be included and that are material.IAC Vice Chair Anne Sheehan, Director of Corporate Governance at CalSTRS, was not able to attend the 14 July meeting as it conflicted with a CalSTRS investment committee meeting, but she did listen to the webcast and was pleased with the Committee’s dialogue and discussion. CalSTRS is supportive of additional guidance from the SEC and will be filing a response letter to the Concept Release. Sheehan is a founding member of SASB, the Sustainability Accounting Standards Board, whose current board now includes Jack Ehnes, CalSTRS’ CEO, and the fund is very supportive of a market based approach such as one developed by SASB using industry classes (see below). In addition, CalSTRS’ staff were also involved in the working groups which led to the development of SASB’s standards. CalSTRS believes the SASB approach fits well with the SEC model as to what is material. While she recognises that some investors may want a broader definition of materiality as regards ESG issues, Sheehan thinks it is important to move the SEC forward in small steps rather than giant leaps. “I thought it was significant that SEC Chair Mary Jo White stayed for the entire panel discussion and listened to all the presentations,” said Sheehan.
She told RI: “It’s important to connect the broader information contained in sustainability reports with information required under SEC filings. Most sustainability reports provide good information but many are just marketing pieces with none of the rigor of SEC filings themselves. New standards for reporting will need to be developed. GE is one of the leaders in this reporting and presents a solid integrated report,” added Sheehan, “most companies are not as progressive.”
Sheehan said there is a growing demand for this type of information that may be moving too fast for some companies and not fast enough for some investors. “The SEC’s interest has spurred the discussion and the Concept Release is generating the important debate among investors about the need for this information. The task of the SEC will be to develop guidance that meets the needs of a broad array of investors.
Adam Kanzer, Domini Social Investments’ Managing Director, whose term on the IAC has just expired, also listened in to the meeting. “I was pleased with how it went,” he said, “and thought it elicited a thoughtful conversation. I hope that this will only be the beginning of the IAC’s exploration of these issues and look forward to providing our input.”

At the meeting, remarks were presented by a number of interested parties. For example, remarks were presented by Christianna Wood, Chair of the Global Reporting Initiative (GRI), in which, for a start, she encouraged the SEC to have companies file sustainability or CSR reports as exhibits with other SEC filings. Wood also recommended that the SEC adopt GRI’s standards, because so many of its registrants [the companies] and international companies had already done so. In addition, as GRI’s standards are global, adoption would improve comparability, said Wood. CalSTRS’ sustainability reporting is based on GRI’s standards.
Dr. Jean Rogers, CEO of SASB, also presented to the committee. Her remarks echoed much of what was included in a letter to the SEC on 1 July as part of the comment process. The letter noted that in a 2015 CFA Institute survey, 73 per cent of institutional investors indicated that they take environmental, social and governance (ESG) issues into account in their investment analysis and decisions, to help manage investment risks. It also pointed out that more than 40 per cent of all 10-K disclosure on sustainability topics consists of “boilerplate language”. The letter also noted that not only are disclosures in SEC filings generic, sustainability reports are glossy and don’t meet investor needs. For this reason, investors often seek ESG data directly from companies.
SASB contends that for sustainability disclosure to be effective, industry-specific measures are needed as well as topic-specific measures that should be disclosed using a market standard. The SEC should adopt SASB’s standards, it continues, as this would reduce the cost burden because, rather than requiring the disclosure of hundreds of key performance indicators for each company, only those that are relevant to the particular industry will be disclosed. SASB’s own standards are described in detail in the letter, and they have been developed “in accordance with the definition of materiality defined by federal securities law.”Its standards “provide investors with material, comparable, industry-specific, and reliable data that support investment decisions, including understanding and pricing risk, and inform typical investment activities such as portfolio construction, security selection, fundamental analysis, and valuation.” However, SASB does not believe that requiring additional line-item sustainability-related disclosures “would be a good idea”.
There has been a lot of comment letters submitted to the SEC in addition to the SASB’s. The Council of Institutional Investors’ letter, for example, concurred with most of the IAC’s current views, but made several other suggestions such as incorporating narrative on risk into the management discussion and analysis.

Like SASB, the CII said that ESG risk disclosure is boilerplate and it needs to become more structured, and this should indicate “the scope of the risks or the likelihood of their coming to fruition”. The CII also indicates that it is fully supportive of complete disclosure of corporate political spending.
The International Corporate Accountability Roundtable (“ICAR”), a coalition of human rights,
environment, labor, and development organizations, has also written to the SEC. The letter focuses on the disclosure of human rights policies, practices and impacts, which it believes are material for corporate reporting purposes because of: heightened public interest; international endorsement of UN Guiding Principles and the fact that most EU governments require such disclosure; US state legislation requiring disclosure; and voluntary disclosures according to the Global Reporting Initiative GRI’s G4 standards. The letter specifically asks for human rights disclosures to be added to each disclosure requirement under discussion. The submission was endorsed by the Interfaith Center on Corporate Responsibility (ICCR).

At the same time as all this is going on, the SEC released proposed amendments to update and simplify disclosure requirements as part of the DEP, noting that comments on the S-K Concept Release input will further inform this process.