Sustainability Disclosure: Highlighting Environmental and Social Issues

At the same time that the Securities and Exchange Commission (SEC) is planning to reduce “disclosure overload,” it’s contemplating whether a clear set of sustainability rules are needed. Some investors want more information about environmental and social issues that could have a material impact on a company’s long-term financial viability and value. During the past decade, an increasing number of companies have responded by voluntarily issuing sustainability reports. 

What is sustainability?

The term “sustainability” encompasses a broad range of nonfinancial issues that may affect a company’s financial condition and performance. It may include environmental issues, such as the size of the company’s carbon footprint, efforts to replace fossil fuels with renewable energy sources and overall use of natural resources. Or it may cover social issues, such as workplace, health and safety, and consumer product safety risks.  

Media attention on these external threats has increased public awareness and prompted concerns about how sustainability issues could impact value or increase a company’s risk of litigation. Investors believe that companies that improve their sustainability performance foster long-term viability in the global value chain.

What are the current requirements?

The SEC addressed climate change disclosures in 2010 with Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change, a piece of interpretive guidance that advises public companies to address any disclosure requirements related to climate change that may be triggered by lawsuits, business risks, legislation and regulation, or international treaties. (See “A closer look at SEC guidance on climate change.”) But the guidance stops short of specifically requiring companies to provide investors with information about environmental issues.

To satisfy investor demands, an increasing number of companies voluntarily issue sustainability reports that cover a broad range of nonfinancial issues. Without uniform sustainability reporting standards, these reports can be very inconsistent from company to company. 

In the absence of a regulatory regime, nongovernmental organizations such as the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), and the Global Reporting Initiative (GRI) have stepped in and promoted reporting of environmental and social issues in financial statements. Last fall, these organizations met at the Sustainable Stock Exchanges Global Dialogue in Geneva to discuss the convergence of their sustainability initiatives.

Who’s opposed to uniform sustainability disclosure rules?

Some critics argue that sustainability disclosures that have a material impact on a company’s performance are already implicitly required by existing SEC rules and regulations. They say that including sustainability information in quarterly and annual reports could open the door to a never-ending list of immaterial disclosures that don’t serve investor needs. In some cases, potential losses are simply too speculative or remote to matter to the ordinary investor.

What’s in store for 2015?

Financial statements by themselves don’t tell the whole story of a company’s long-term financial viability and value. Information about nonfinancial issues is also relevant to help investors decide whether to buy, hold or sell a security. 

The SEC is currently evaluating whether the market truly wants more information about environmental and social issues. If so, the SEC may push for a systematic, standardized way to communicate sustainability information to investors. The convergence efforts of the SASB, IIRC and GRI may prove a useful starting point. In the meantime, many companies will continue to voluntarily issue sustainability reports to demonstrate cooperation and transparency to the public. 

© 2014