Even as the SEC moves to re-shape disclosure requirements, many companies… with IR taking the lead... are making changes to their reporting formats at their own initiative. We asked five leading experts to weigh in.
Vintage question > Many in the accounting community are hoping to add a disclosure framework for sustainability. Do you think there should be such a framework/requirement? Why/why not and if yes, what do you think such a framework should look like?
Broc Romanek > Yes – I think sustainability information requirements are long overdue. I am strongly in the camp that thinks climate change is a huge issue and we’re behind the eight-ball on this. I think the Sustainability Accounting Standards Board (SASB) is doing great work creating voluntary standards industry-by-industry– it is a ton of work – but I wish they were mandatory. Fifty years ago is when weneeded the real change
If they remain voluntary, it means they aren’t going to happen for many companies. That’s just the way of human nature, right? Big companies have fiduciary duties to their shareholders to maximize profit, and so if it’s not mandatory, then they won’t all comply. Some companies will – they’ll be pressed because they have shareholders demanding it. But it would happen much more slowly.
Robert Herz > I’m on the board of directors of the SASB, and we see that investors and financial analysts are asking for more disclosure in this area. One survey conducted by the CFA institute last year said that sustainability information is an increasingly important area for them to consider in their analysis of valuation and investment recommendations. And the current information they get is not adequate or reliable.
Many companies now produce separate sustainability or corporate social responsibility reports, and I applaud them for doing that. But sometimes they are selective and basically say, “Here are all the nice things we did last year” – community activities, reducing their carbon footprint, and various other things. They don’t necessarily focus on the issues that really matter in the context of their industry.
The SASB was created to figure out and develop a set of standards industry-by- industry, and it covers 10 sectors and 79 industries, with standards that get to the most important issues in an industry context. And then we had to determine which metrics could be produced to address those issues so that you get comparable reporting. I believe that’s the right approach. Some people would say, “No, you need more standardized disclosure on climate risks,” for example. My response to that is, “Well, yes, climate risk is a fairly pervasive issue, but how it affects different companies tends to be different by industry.”
If you’re a real estate developer, climate change will obviously affect where you decide to put your developments, and gets into energy efficiency, LEED standards, and things like that. If you’re in the apparel industry, it may focus on your ability to adequately source cotton. If you’re in the automobile industry, it involves fuel efficiency and electric cars.
Financial services firms do not have much of a carbon footprint at all, while on the other hand a petroleum and chemical company may have a lot more.
Materiality of information is very important as well. There was a research study last year by Harvard Business School called “Corporate Sustainability: First Evidence on Materiality,” that used the SASB lens to look at what matters and what doesn’t when it comes to sustainability. They looked over a 20-year period at over 2,000 companies and showed that both the financial performance and stockholder returns of the companies that focused on the more material issues greatly outpaced the companies that focused on a broader range of sustainability issues.
So material issues as defined in the SASB approach do much better. We obviously think that this is the right approach to take in order to really get the usable, comparable, investor-grade data.
Erik Bradbury > As Bob pointed out, the innovations are happening, such as the work being done by the SASB. And in our view, we will see more innovation the more the SEC and other regulators get out of the way and allow companies to present nformation in the most meaningful way to investors. The SEC asked a lot of questions about sustainability disclosures, and we recognize the importance of sustainability issues to certain investors, including non-governmental organizations, local communities, and many others. But our view is that the commission shouldn’t pursue an approach where all issues that are important to a particular subset of stakeholders are required to be disclosed.
In other words, our view is that the SEC should focus on material items and avoid calls to expand disclosure requirements intended to address societal issues unrelated to its core mission of investor protection. Many of these issues don’t appropriately consider materiality. They don’t consider whether the information is useful to reasonably knowledgeable investors. There is a lot of information that certain investors want to know about companies – but is it important for making an investment decision? We don’t think that the threshold for including this information within the 10-K has been reached.
On a voluntary basis, most of our member companies have sustainability reports. But including these issues within a 10-K is a whole different story.
Dan Hanson > A principles-based framework for sustainability disclosures would be a positive. However, a requirement could have unintended consequences, and so I would advise to take one step at a time. The uniformity and materiality lens that the SASB standards bring is very helpful. I was one of the founding members of the SASB board of directors in 2011 and I took the view as a bottom-up investor that the SASB was something whose time had come. There needed to be an initiative to drive some degree of consistency for disclosure of sustainability information for investors.
You see literally thousands of corporate social responsibility reports being issued, in addition to securities filings, as well as third-party metrics and rankings being published, and it’s become a booming cottage industry of different methods and approaches. Without regulation, the market is responding to issuer and investor interest in sustainability data. So the SASB is encouraging reporting of this data in a more standardized way. As an investor, uniformity can make it much easier to interpret those reports and metrics and have some understanding of what’s meaningful in the business, because you can create benchmarks and provide context to understand metrics in comparison to competitors and peers. That is the benefit that SASB brings to the conversation.
It focuses on the most vital issues that are fundamentally, financially, and operationally relevant. Issuers could be provided with a principles-based framework of disclosure related to sustainability, but it would be best left to management to determine what the most material issues are to their particular businesses and how they want to disclose that information. I support the market-based approach that SASB brings. Companies are disclosing this information in any event, and having a more unified approach to disclosure can create more efficiency for both the issuers and users.
Ultimately, I think this discussion is about the concept of integrated reporting. Different people may use that term to mean different things, but the GE example cited by Erik and Bob is a great case of an issuer responding to a market need for better communication. That’s the market working, not a regulatory- driven approach.
Likewise, Broc’s earlier comment on Buffett’s “straight talk” in his CEO letter as a model for good disclosure is spot-on. And guess what – like all annual report CEO letters, those letters are not even part of the 10-k regulatory filing. So while there is an important role for regulation, some of the best examples of effective disclosure and communication to shareholders come from management teams that go beyond the scope of a regulatory “check the box” approach of minimum compliance, and treat their shareholders as true owners and partners in the business.