United States: Sustainability Disclosures – In Some Places, It's The Law

Last Updated: April 1 2015
Article by Bernice I. Corman

SASB (the Sustainability Accounting Standards Board) wishes to bring sustainability considerations in SEC-required disclosures to a whole new level. SASB intends to have sustainability standards achieve the same stature with regard to required reporting as have FASB's (the Financial Accounting Standards Board). The SEC gave FASB the power to establish generally accepted accounting standards; however, the SEC has not revealed whether it will adopt the SASB standards. Nevertheless, companies should take seriously the potential that it could, given that the SASB Board boasts heavy-hitters including former SEC chairs Mary Schapiro and Elisse Walter, and former FASB chair Robert Herz.

On March 26, 2015, the SASB released a set of five provisional standards for industries in what SASB calls the Resource Transformation sector. These industries are:

  • aerospace and defense;
  • chemicals;
  • containers and packing;
  • electrical/electronic equipment; and
  • industrial machinery and goods.

SASB previously issued standards for additional industries, such as healthcare, transportation, and services (including professional services). The SASB standards – which are voluntary – address energy and water management, hazardous waste generation, product safety, lifecycle concerns, business ethics, and materials sourcing. They call largely for quantitative reports, such as the percent of eligible products that meet ENERGY STAR® criteria; as well as narrative responses, such as descriptions of management systems for preventing corruption throughout a company's supply chain.

SASB's goal is to encourage corporate sustainability by crafting "sustainability standards" that publicly traded companies can use when preparing SEC-required disclosures, such as Form 10-Ks for U.S. companies, or 20-F for foreign filers. While the Supreme Court has instructed companies to disclose information that would be "material" to a reasonable investor, there is no bright-line test as to what constitutes materiality. The SASB standards are intended to respond to growing investor interest in a company's long-term value creation, which may be a function of how a company uses natural resources, and how it affects society. For example, investors want to know now whether to invest in upgrades to a production facility that in fifty years, because of rising sea levels, may be under water. The SASB Standards seek to answer these questions by focusing on environmental, social, and governance (ESG) factors that may materially affect a company's long-term financial condition or operating performance.

Disclosures touching on sustainability are not new to SEC filings. In February of 2010, the SEC issued guidelines counseling that climate change may trigger disclosure obligations. The Guidelines address whether a company's statements as to its financial health (such as the costs of compliance with environmental laws, the costs of operating, legal proceedings, and risk factors) might materially mislead an investor if they do not describe what the SEC regards as non-financial – the impacts of climate change. Because of Dodd-Frank, the SEC issued rules in 2012 requiring companies to disclose the use of conflict minerals in their supply chains.

Whether or not the SEC ultimately mandates integration of sustainability and financial reporting, there are several arguments in favor of companies including sustainability disclosures in their filings, or in voluntarily making these disclosures, whether or not they are publicly traded. First, socially responsible investors want this information. In 2012, an estimated one out of every nine dollars was invested according to strategies of sustainable and responsible investing. An EY survey found that in 2014, 90% of investors reported that ESG issues "played a pivotal role in their investment decision-making process."

Further, companies are facing unprecedented numbers of shareholder resolutions seeking to push companies towards more sustainable corporate behavior. The Manhattan Institute's Center for Legal Policy reported that in 2013, sustainability proposals constituted 42% of shareholder resolutions filed with Fortune 250 companies. These addressed political contributions and lobbying, climate and the environment, sustainability oversight and reporting, human rights, board diversity, workplace oversight, and a range of social issues such as animal testing, net neutrality and public health.

Thus, sustainability disclosures may assist companies in deflecting, or resolving, shareholder actions. For example, in January, 2014, FirstEnergy agreed to take steps to mitigate its long-term coal-related costs and risks in exchange for its shareowners, which include As You Sow, the State of New York Office of the State Comptroller, and the State of Connecticut Treasurer, agreeing to withdraw their joint climate change resolution. Finally, other countries mandate ESG disclosure. Accordingly, whether or not sustainability reporting is required here, it is required elsewhere. For example, the European Commission has directed Member States to pass laws by 2016 requiring the largest European public companies and public interest entities – such as banks and insurers – to report on policies, risks and outcomes as regards environmental matters, social and employee aspects, respect for human rights, anticorruption and bribery issues, and diversity in their boards of directors.

Whether or not sustainability disclosures can enhance a company's defensive posture, they often comprise an essential component in a company's affirmative business strategy. A whopping 84% of millenials consider a company's involvement in social causes, in deciding what they will buy or where they will shop. And a booming industry in ESG information analysis (such as that performed by UBS) gives customers the information they demand as a condition of their purchases. Organizations such as the Sustainable Purchasing Leadership Council are devising systems that will rate institutional purchasers on their use of their purses to pressure their vendors into becoming more sustainable.

That said, sustainability disclosures can sometimes have unintended consequences. For example, shareholders' claims of securities fraud have survived motions to dismiss where statements in ESG reports mislead the market as to a company's financial health. In the case of In re Massey, the Commonwealth of Massachusetts Pension Reserves Investment Trust and a class of purchasers alleged that the company's stock was artificially inflated where the company's SEC filings and ESG reports contained material misstatements as to the company's safety and compliance records.

Additionally, companies can face regulatory scrutiny with regard to their marketing communications. Last month, although it elected not to conduct a claim-by-claim analysis, and found no violations of law, the Federal Trade Commission (FTC) urged Green Mountain Power (GMP), a Vermont utility, to be cautious when communicating to customers the renewable attributes of their electricity. GMP provides Vermonters with electricity from green energy sources such as wind and solar. However, the FTC noted that GMP's out-of-state sales of renewable energy credits can mean that legally, Vermonters' electricity comes also from "brown" energy sources such as fossil fuel and nuclear. The FTC noted that its revised "Green Guides" address ways that marketers may non-deceptively communicate a renewable energy generation claim even where they sell the renewable attributes of their energy.

Companies at all levels are now routinely making sustainability disclosures, whether because they elect to do so, or because they must do so. Venable attorneys are able to assist companies in obtaining the advantages sustainability can provide, while avoiding the dangers of improvident disclosures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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