Securities Law Blog

Recent SEC Speech Highlights Sustainability Reporting

Chair White discusses SEC efforts to provide more transparency on environmental, social and governance matters in public company periodic reports.

At a speech earlier this summer, Mary Jo White, Chair of the SEC, confirmed that the SEC is taking a more focused look at sustainability reporting by public companies, particularly related to climate change, in its reviews of companies’ annual filings. SEC rules and guidance are clear that, to the extent issues about sustainability are material to a company’s financial condition or results of operations, they must be disclosed. But deciding whether such disclosures are triggered in a particular context is often easier said than done when trying to calibrate materiality to phenomena that have a longer-term horizon than most other financial metrics do. Measuring whether and how a company will sustain its performance in a changing global physical and legal environment, which is itself uncertain, is not an easy undertaking.

Sustainability encompasses a very broad range of topics that may relate to a company’s risk profile, trends or uncertainties that could affect financial performance.  These could include climate change, resource scarcity, corporate social responsibility and good corporate citizenship. The importance of such issues can also vary significantly by industry and company.

Despite the complexities, according to Chair White, disclosures on certain sustainability issues are increasingly being made, both in reports separate from companies’ financial filings and also in some companies’ annual reports. In 2015, 75% of the S&P 500 companies published a sustainability or corporate responsibility report and over 90% of the world’s 250 largest companies did so.

A number of organizations have also published guidelines or are developing sustainability disclosure frameworks and metrics. The Growth Reporting Initiative’s Sustainability Framework, for example, is now being widely used by companies to prepare their sustainability reports. Another organization, the Sustainability Accounting Standards Board, is developing voluntary sustainability standards for approximately 80 industries in ten sectors. These and other efforts continue to mature sustainability reporting. But many believe, according to Chair White, that current sustainability reporting, even as it continues to evolve, is not adequate. Some advocate for more companies to report and on more comparable sustainability indicia and with more consistency. Others push for “integrated reporting” where traditional financial reporting is combined with what to date has been primarily confined to a company’s social responsibility or sustainability report.

Currently, disclosure of sustainability information under SEC rules is being addressed by a combination of materiality-based disclosure, guidance on certain issues and shareholder engagement on a range of sustainability topics, whether through direct dialogue with management or the Rule 14a-8 shareholder proposal process. This proxy season alone, shareholders filed a record-setting 94 climate-related proposals at shareholder meetings of U.S. companies. Although Chair White said the SEC is seeing increased disclosure and engagement on sustainability matters, it is now taking a more focused look at detailed and standardized industry-specific requirements for such disclosures.

Chair White indicated that the SEC’s materiality-based approach to sustainability disclosure may not go far enough in terms of aiding shareholders and investors in making informed investment and proxy voting decisions. That is one of the reasons the SEC included a discussion of the topic in its Regulation S-K Concept Release in April and solicited input from companies and investors on whether the SEC should consider line-item disclosure on certain issues.

On the other hand, in a letter sent to the SEC on July 20, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness criticized the push for new public company disclosures on environmental, social and corporate governance matters, arguing that mandating more of this information from companies to obtain some social impact or achieve a political goal would exceed the materiality standards for disclosure set by federal securities laws. 

The SEC is now considering whether, when, where and how public companies should provide disclosure and what precisely should be provided. The issue has the SEC’s attention and we expect the SEC to enhance its current rules in this regard in the near term. 

In light of Chair White’s recent speech, it seems clear that companies should begin (if they have not already) to describe any known trends or uncertainties with regard to environmental, social and corporate governance matters that would reasonably be expected to have a materially unfavorable impact on revenues and earnings in the management’s discussion and analysis of financial condition and results of operations (MD&A) section of their periodic reports.