Way back in 2016, the SEC issued a Concept Release requesting comment on an enormous variety of potential changes to Reg S-K, including sustainability. (See this PubCo post.) As reported by BNA, then-Director of Corp Fin, Keith Higgins, advised that the highest proportion of comments received on the Reg S-K Concept Release related to better environmental and social responsibility disclosure. He observed that, of the 360 "unique" comment letters (i.e., non-form letters) received, about 80% "were looking for improved sustainability disclosure." The problem, he recognized, was that those types of sustainability disclosures were not necessarily amenable to one-size-fits-all rulemaking. According to Higgins, "[c]limate change tops the list of issues...." However, he acknowledged, the issues involved in sustainability "cut across 79 different industries and aren't suited to a constant set of rules....'Everyone recognizes that one-size-fits-all disclosure is likely not to be so effective in the sustainability area—others recognize the enormity of that task.'" (See this PubCo post.) Now, independent standard-setting organization SASB, the Sustainability Accounting Standards Board, seems to have come to the rescue, announcing that it has published a series of sustainability accounting standards specifically tailored for 77 industries. According to the SASB Chair, the publication of these standards represents an "important milestone" because they provide "codified, market-based standards for measuring, managing, and reporting on sustainability factors that drive value and affect financial performance." Will the SEC now take up the challenge of sustainability disclosure?
As discussed in this News Brief, in 2010, the SEC issued an interpretive release discussing the application of existing SEC disclosure requirements to climate change, including, if material, direct and indirect effects of current and pending legislation, regulation and treaties, as well as vulnerability to material effects of climate change. Then-Commissioners Casey and Paredes voted against the release, arguing, among other things, that the science was "unsettled." Most recently, a rulemaking petition advocating that the SEC mandate environmental, social and governance disclosure under a standardized comprehensive framework was submitted by two academics and multiple institutional investors, representing over $5 trillion in assets. Not only is ESG disclosure material and relevant to understanding long-term risks, the petition contended, but the variety of approaches currently employed highlight the need for a more coherent standard that will provide clarity, completeness and comparability. The petition argued that requiring ESG disclosure will "promote market efficiency, protect the competitive position of American public companies and the U.S. capital markets, and enhance capital formation." Further, the petition indicated, recent investment industry analyses confirm that much ESG information is financially material. In addition, companies often provide ESG information on a voluntary basis, but struggle to provide information that is adequate and useful for investors, often providing information that is "episodic, incomplete, incomparable, and inconsistent," even when included in SEC filings. In addition, the petition contended, many stakeholders request ESG information, including large asset managers such as BlackRock, which, they contended, also militates in favor of action from the SEC. (See this PubCo post.)
With "sustainability" issues climbing higher on the corporate and institutional shareholder agenda, many companies are trying to better understand and convey to investors how they are assessing and managing the risks and opportunities associated with sustainability—even in the absence of a specific SEC mandate for sustainability disclosure. Certainly, companies need to consider whether any issues related to sustainability (also referred to as ESG, or environmental, social and governance, or CSR, corporate social responsibility) should be discussed in their SEC filings under existing requirements—be they as part of the business description, risk factors, MD&A, board risk oversight, legal proceedings or elsewhere. However, many companies are also providing sustainability reports entirely outside of their SEC filings. Accordingly, the question arises: just what information should go into that report and how should it be measured and presented?
The SASB standards—according to SASB, "the world's first set of industry-specific sustainability accounting standards covering financially material issues"— were published after six years of study and market consultation (see this News Brief from 2013 describing the release of the SASB standards for the health care sector). By focusing on development of standards and associated metrics specific to particular industries, SASB seeks to identify a "subset of sustainability factors most likely to have financially material impacts on the typical company in an industry." The objective is to provide investors and companies "decision-useful" information, information that can help them make more informed decisions.
What is "sustainability accounting"? According to SASB, "[s]ustainability accounting reflects the management of a corporation's environmental and social impacts arising from production of goods and services, as well as its management of the environmental and social capitals necessary to create long-term value. It also includes the impacts that sustainability challenges have on innovation, business models, and corporate governance and vice versa." The SASB framework is organized into five categories (which SASB refers to as "dimensions"):
- "Environment. This dimension includes environmental impacts, either through the use of nonrenewable, natural resources as inputs to the factors of production or through harmful releases into the environment that may result in impacts to the company's financial condition or operating performance.
- Social Capital. This dimension relates to the expectation that a business will contribute to society in return for a social license to operate. It addresses the management of relationships with key outside parties, such as customers, local communities, the public, and the government. It includes issues related to human rights, protection of vulnerable groups, local economic development, access to and quality of products and services, affordability, responsible business practices in marketing, and customer privacy.
- Human Capital. This dimension addresses the management of a company's human resources (employees and individual contractors) as key assets to delivering long-term value. It includes issues that affect the productivity of employees, management of labor relations, and management of the health and safety of employees and the ability to create a safety culture.
- Business Model and Innovation. This dimension addresses the integration of environmental, human, and social issues in a company's value-creation process, including resource recovery and other innovations in the production process; as well as in product innovation, including efficiency and responsibility in the design, use phase, and disposal of products.
- Leadership and Governance. This dimension involves the management of issues that are inherent to the business model or common practice in the industry and that are in potential conflict with the interest of broader stakeholder groups, and therefore create a potential liability or a limitation or removal of a license to operate. This includes regulatory compliance, risk management, safety management, supply-chain and materials sourcing, conflicts of interest, anticompetitive behavior, and corruption and bribery."
For example, the "environment" category includes as issues GHG emissions, air quality, energy management, water and wastewater management, waste and hazardous materials management and ecological impacts. The "social capital" category covers issues such as human rights and community relations, customer privacy, data security, access and affordability, product quality and safety, customer welfare and selling practices and product labeling. As displayed graphically in the SASB materiality map, each of the industry standards has been refined to reflect the issues that are reasonably likely to have a material financial impact in that industry.
Each standard provides accounting metrics for disclosure topics, technical protocols for compiling data and activity metrics for normalization. As an example, the biotech and pharmaceuticals industry standard in the health care sector, identifies as one of the disclosure topics "safety of clinical trial participants," which specifies as the accounting metrics:
- a discussion of the management process for ensuring quality and patient safety during clinical trials,
- number of FDA inspections related to clinical trial management and "pharmacovigilance" that resulted in voluntary action or official action, and
- total monetary losses resulting from legal proceedings associated with clinical trials in developing countries
SASB then elaborates on each metric with detailed directions as to the precise information that should be disclosed. Other disclosure topics include access to medicines, affordability and pricing, drug safety, counterfeit drugs, ethical marketing, employee recruitment, development and retention, supply chain management and business ethics. Activity metrics include the number of patients treated and the number of drugs in portfolio and in clinical trials.
By contrast, the electronic manufacturing services and original design manufacturing standard in the technology and communications sector identifies as one of the disclosure topics "water management," which specifies as accounting metrics the total water withdrawn and the total water consumed, including the percentages of each in regions with high water stress. Another topic is "product lifecycle management," which includes as accounting metrics the weight of end-of-life products, e-waste recovered and percentage recycled. Other disclosure topics include waste management, labor practices, labor conditions and materials sourcing. The activity metrics include the number and size of manufacturing facilities and the number of employees.
The growing interest of investors in ESG issues is reflected in their increasing support for shareholder proposals addressing environmental and social topics. BNA reports that large asset managers, such as BlackRock, Vanguard and State Street, are "now twice as likely as individual investors to back shareholder advocacy on environmental and social issues," according to new data from Broadridge and PwC. Overall, in 2018, votes in favor of social and environmental proposals have increased to 27% from 18% in 2014, reflecting perhaps the risk that some institutions have identified in issues like climate change. You may recall that a number of climate disclosure proposals even received majority votes in favor in the last couple of years, supported by several large institutions. (See this PubCo post and this PubCo post.) In 2018, almost 29% of shares held by institutional investors were voted in favor of environmental and social shareholder proposals, up from 19% in 2014. By comparison, retail shareholder support also increased, but not as dramatically, rising from 12% in 2014 to 16% in 2018. Notably, overall support for corporate political spending disclosure proposals increased from 20% in 2014 to 28% in 2018. According to the article, political spending, climate change and board gender diversity "accounted for the majority of shareholder proposals put forward at Russell 3000 Index companies this year," according to data from ISS. It is also noteworthy in this context that proxy advisor Glass Lewis has announced that SASB guidance on material ESG will be integrated into GL's research reports and vote management application.
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