The Sustainable Shareholder
The Sustainable Shareholder
The Securities and Exchange Commission is currently preparing a report to Congress from its review of disclosure rules for U.S. public companies as required by the Jumpstart Our Business Startups (JOBS) Act . These rules, also known as Regulation S-K and S-X, detail the requirements for financial statements. The goal of this report, according to the Commission, is “to comprehensively review the requirements and make recommendations on how to update them to facilitate timely, material disclosure by companies and shareholders’ access to that information .”
It is important that sustainable shareholders, who know the proven correlation between social and environmental performance and financial viability, contribute to defining the parameters of disclosure rules. This addresses the very nature of “materiality”, which research has repeatedly shown to be connected to andaffected by environmental, social, and governance (ESG) issues.
While some of the rationale for reviewing disclosure rules is based on company complaints about the costs and so-called burdens on companies to provide material information, companies need to understand that some business-as-usual operational practices and policies pose material risks to both financial performance and share value. It seems obvious that reducing these risks can yield positive financial results, not to mention customer loyalty, and is therefore well worth any human resource costs to report such information to regulators and current and prospective investors. R egulation of corporate practices has largely been inadequate when it comes to social and environmental consequences. Company risk-taking - whether it’s cutting corners oninternational labor standards or damaging communities or environment - has weakened the global economy and increased societal ills. Responsible behavior is the obvioussolution, but if it is not embraced voluntarily by management, it must be required by law to protect the public interest. Disclosure requirements are part of the essential process of mitigating risks to both companies and society, and deserve to be made stronger, not weaker. Doing so is a clear benefit for shareholders, who deserve to understand how the companies in which they invest make and spend their money.
As such, sustainable shareholders believe there are significant gaps in current disclosure practices, including a general lack of ESG reporting. While there have been specific measures undertaken by the SEC regarding executive-employee pay ratio and disclosure of payments by resource extraction issuers, comprehensive ESG disclosure in areas of employee, community, political contribution, and environmental concerns affects share value because of the inherent risks they can pose to financial performance. Shareholders must have all the information they need about such policies and practices to make fully informed decisions as owners, including advocacy for corporate social and environmental responsibility as warranted.
As such, mandatory ESG disclosure must be included in regulatory filings , including for all company subsidiaries that may be located outside the U.S. to skirt their tax responsibility. Issuers should be required to report annually on a comprehensive, uniform set of sustainability indicators comprised of both universally applicable and industry-specific components. Three exchanges, including NASDAQ OMX and the Toronto Stock Exchange , have already supported the March 2014 recommendations by the Ceres-led Investor Network on Climate Risk that companies be required to conduct a “materiality” assessment disclos ure in annual financial filings through which management addresses its approach to determining the company’s material ESG issues and places a hyperlink in itsannual financial filings to an onlineESG disclosure spreadsheet based on the Global Reporting Initiative framework with the following categories :
1. Governance and Ethical Oversight,
2. Environmental Impact,
3. Governmental Relations and Political Involvement,
4. Climate Change,
6. Employee Relations,
7. Human Rights,
8. Product and Service Impact and Integrity,
9. Supply Chain and Contracting, and
10. Communities and Community Relations.
The simple truth is that a more stringent disclosure standard and requirement is necessary due to the lack of adherence to already existing laws. For example, though the SEC issued its Commission Guidance Regarding Disclosure Related to Climate Change four years ago, half of the largest 3000 companies in this country still don’t report on it in their annual filings ( http://www.bloomberg.com/news/print/2014-06-30/is-climate-a-material-risk-here-s-what-companies-are-really-reporting.html .)
In addition, corporate political disclosure continues to be an important issue to investors. Between 2010 and 2014, 274 shareholder proposals were filed calling for increased disclosure of company political spending or lobbying expenditures, and over 1 million public comment letters have been submitted to the SEC demanding such disclosure. Investors understand that transparent markets and elections are essential to a well-functioning society, while investors have a right to know the legal, regulatory, operational, and reputational risks of a company that may be inconsistent with its business plan and public values and that may contribute to systemic risks to the economy. The Supreme Court, in its Citizens United decision, stated that complete real-time disclosure of public company political spending allows shareholders to “ determine whether their corporation’s political speech advances the corporation’s interest in making profits.”
Keep in mind that in Europe,
ESG disclosure requirements were already implemented earlier this year with a Non-Financial Reporting Directive for the EU’s 6000 largest companies with at least 500 employees. These companies must report
policies, risks and outcomes in the areas of human rights, employee relations, corruption and bribery, board diversity, and environmental impact.
This is not just occurring in Europe. In December 2013, KPMG, the United Nations Environment Programme (UNEP), Global Reporting Initiative published
US SIF: The Forum for Sustainable and Responsible Investment
welcomes the opportunity to comment on the ongoing review of disclosure undertaken by your agency following the Commission-issued staff report to
Congress on its disclosure rules for U.S. public companies. The report, mandated by the Jumpstart Our Business Startups (JOBS) Act, offered an overview
of Regulation S-K, which provides requirements for public company disclosure and the staff's preliminary conclusions and recommendations about
disclosure reform. We welcome the chance to build on those preliminary recommendations as the Division of Corporation Finance reviews the disclosure
requirements in Regulation S-K and Regulation S-X, which provides requirements for financial statements.
US SIF, created in 1984, is the U.S. membership association of investors and financial professionals engaged in sustainable and responsible investing
(“SRI”). Our members include 300
investment management and advisory firms, mutual fund companies, research firms, financial planners and advisors, broker-dealers, community investing
institutions, non-profit associations, pension funds, foundations and other asset owners.
For more information, see
One of the key priorities for US SIF and its members is enhanced reporting of corporate environmental, social and governance (ESG) information. There is increasing demand from investors for
corporate sustainability reporting, and many organizations and investment firms strongly support such disclosure. For example, US SIF along with US and
global standard setting organizations, such as the CDP (formerly Carbon Disclosure Project), Ceres, Council of Institutional Investors, Global
Reporting Initiative, Interfaith Center on Corporate Responsibility, Investor Environmental Health Network, Principles for Responsible Investment,
United Nations Environment Programme’s Finance Initiative and others have supported ESG disclosure and reporting, and have underscored that ESG issues
can pose material financial risks and opportunities to companies. However, investor efforts to comprehensively incorporate ESG information into
investment decisions have been hindered by a lack of comprehensive, comparable and reliable data. The primarily voluntary nature of corporate
sustainability reporting means that the information available to investors remains inconsistent and incomplete. In 2009, US SIF and its members
requested that the SEC mandate corporate environmental, social and governance disclosure and that the Commission make ESG or “sustainability” reporting
a top priority (please see attached). US SIF and our members have met with SEC Commissioners and staff on numerous occasions and have stressed
the importance of ESG disclosure, among other issues.
We appreciate the opportunity to weigh in on - and help improve - the effectiveness of the disclosure system -- an important issue for both investors
and the public.
Objective of the Disclosure Effectiveness Review (hereinafter, “the Review”)
The Report on Review of Disclosure Requirements in Regulation S-K submitted by the Corporation Finance staff of the Commission stated that “
The goal is to comprehensively review the requirements and make recommendations on how to update them to facilitate timely, material disclosure by
companies and shareholders’ access to that information
We agree with the approach that a comprehensive approach that includes “reviewing and updating requirements on a wholesale basis, taking into account
the appropriateness of substantive requirements as a whole as well as presentation and delivery issues”, is preferable to a targeted approach.
However, we offer the following five broad comments to the objective of this Review:
: We urge the Commission to undertake a balanced Review and proactively seek input and participation from investors. It is our general impression that
the process appears to be more focused on issuers than investors. The Commission should strive to hear directly from investors, including investors
engaged in sustainable and responsible investment.
Choose appropriate language
: We urge the Commission staff to be mindful and use caution to ensure that language used – or representations made - around the Review process do not
result in a lack of investor confidence in the process. For example, the term “disclosure effectiveness” may imply that current disclosures are
ineffective or useless. Additionally, initial comments by staff to review “…the costs and burdens on companies while continuing to provide material information and eliminate duplicative disclosures”
and references to “disclosure overload” could lead to speculation that current disclosures are ineffective and that the review is focused
solely on cutting back or eliminating disclosure requirements to the benefit of issuers. Investors hope that the Review instead is focused on stronger disclosure, and the needs in this area of both investors and issuers.
Inclusion of ESG and other risk-related issues
: We recommend that the Review result in clear recommendations that take into account the broad-based demands of investors around environmental, social
and governance issues and other risk-related topics. We believe there are significant gaps in current disclosure practices, including a general lack of
ESG reporting. Additional disclosures are needed, not less.
No weakening of existing disclosures
: US SIF strongly cautions against weakening any existing disclosures. While there may be opportunities to eliminate duplication and streamline
reporting and modernize technology to improve the way information is presented and delivered, we hope that the Review is focused on the needs of
investors for better, more uniform disclosure.
No distraction from completing Dodd-Frank rules:
The staff reported that a comprehensive review of disclosure effectiveness would likely be a long-term project involving significant staff resources
across the Commission. We hope that this endeavor can be undertaken without in any way detracting from the ongoing rulemaking duties of the agency. We
call on the Commission to prioritize ongoing rulemaking duties, particularly the long-delayed implementation of rules required under Dodd-Frank
concerning Section 953(b) on pay ratio disclosure and Section 1504 on d
isclosure of payments by resource extraction issuers.
In the Report, the Commission identified several specific areas of Regulation S-K that could benefit from review. The following are areas of particular
interest to US SIF:
If the Commission is conducting a review of risk-related disclosures, we encourage that the review be conducted in order to improve the
disclosures and to identify whether different risk-related disclosures should be required.
- In 2009, US SIF and its members provided comments to the SEC requesting mandatory corporate environmental, social and governance disclosure and
making ESG or “sustainability” reporting a top priority (please see attached). In this letter we proposed two components for such disclosure. The first
requested that the SEC require issuers to report annually on a comprehensive, uniform set of sustainability indicators comprised of both universally
applicable and industry-specific components. The second asked that the SEC issue interpretative guidance to clarify that companies are required to
disclose short- and long-term sustainability risks in the Management Discussion and Analysis (MD&A) section of the 10-K. Since then, US SIF and US
SIF members have met with SEC Commissioners and staff on numerous occasions and have stressed the importance of ESG disclosure, among other issues.
Additionally, there have been several recent important developments related to ESG disclosure:
In March, Ceres, a non-profit organization, published the Investor Listing Standards Proposal: Recommendations for Stock Exchange Requirements on Corporate Sustainability Reporting. Prior to
this release, three exchanges, including NASDAQ OMX, urged members of Ceres’ Investor Network on Climate Risk to reach agreement and provide clarity on
a unified sustainability disclosure standard that could be adopted by all stock exchanges. This Proposal, the result of multi-year dialogues between
institutional investors and stock exchanges around the world, includes a set of investor recommendations focused on corporate sustainability
disclosure. Investors proposed three items of disclosure for all exchanges to consider:
A “materiality” assessment disclosed in annual financial filings for management to discuss its approach to determining the company’s material ESG
Specific ESG disclosure, on a “comply and explain” basis, about 10 key ESG topics, in the format and location of a company’s choosing;
A hyperlink in annual financial filings to an ESG Disclosure Index (a table or spreadsheet), based on the Global Reporting Initiative Content Index or
its equivalent, indicating where existing information can be found.
On April 15, the European Parliament adopted the
Non-Financial Reporting Directive
which requires corporate reporting for certain large companies and groups.
Companies concerned will need to disclose information on policies, risks and outcomes as regards environmental matters, social and employee-related
aspects, respect for human rights, anti-corruption and bribery issues, and diversity in their board of directors. In particular, large public-interest
entities with more than 500 employees will be required to disclose certain non-financial information in their management report. This includes listed
companies as well as some unlisted companies, such as banks, insurance companies, and other companies. The Directive includes approximately 6,000 large
companies and groups across the EU.
On March 5, 2014, the Toronto Stock Exchange and the Chartered Professional Accountants of Canada issued a new publication that provides guidance on
environmental and social disclosure,
A Primer for Environmental & Social Disclosure
. The primer discusses principles for environmental and social business conduct, mandatory disclosure requirements, developments in key performance
indicators and other global initiatives to advance ESG disclosure
Carrots and Sticks: Sustainability reporting policies worldwide – today’s best practice, tomorrow’s trends
covering 45 countries and regions and 180 sustainability reporting policies and initiatives.
Clearly there is increased global interest in regulation and sustainability reporting, with several exchanges requiring it and the observation that corporate reports will increasingly focus on sustainability issues that are material for stakeholders and investors. It’s time for us to embrace our responsibility to make money while adhering to responsible policies and practices, and being held accountable when failing to do so.
 Disclosure Effectiveness at
Report on Review of Disclosure Requirements on Regulation S-K, SEC, December 2013, p. 95-96.
Disclosure Effectiveness: Remarks Before the American bar Association Business Law Section Spring Meeting, by Keith Higgins, Director, Division
of Corporation Finance, SEC, April 11, 2014.
The Proposal recommends that every company should disclose information on the following 10 ESG categories, using a “company or explain”
approach for each category: 1. Governance and Ethical Oversight, 2. Environmental Impact,
3. Governmental Relations and Political Involvement, 4. Climate Change, 5. Diversity, 6. Employee Relations, 7. Human Rights,
8. Product and Service Impact and Integrity, 9. Supply Chain and Contracting, and 10. Communities and Community Relations. See
Investor Listing Standards Proposal
, Ceres, March 2014.