ESG reporting is key to full disclosure for shareholder decision-making

The Securities and Exchange Commission is currently reviewing disclosure rules for U.S. public companies, and will make recommendations to Congress about ways to “update them to facilitate timely, material disclosure by companies and shareholders’ access to that information.”

This provides an opportunity for sustainable shareholders, who recognize the proven correlation between social and environmental performance and financial viability, to  advocate for an expansion of the current parameters of disclosure rules. It is time for the SEC to acknowledge that environmental, social and governance (ESG) practices can and do belong on the table alongside financial records as information of material value to investors.  In this context, material means “important, essential, or relevant,” and indeed, research has repeatedly shown that company performance is connected to and affected by ESG issues.

In addition, there is a public interest case to be made for ESG reporting. Companies that cut corners on international labor standards or damage communities or environment weaken the global economy and increase societal ills. If responsible behavior is not embraced voluntarily by management, it must be required by law. 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 are still lacking. Shareholders must have all the information they need about such policies and practices, both because the inherent risks they pose to financial performance, and to make fully informed decisions as owners, including advocacy for greater corporate social and environmental responsibility as warranted. We believe that the current SEC review should recommend the requirement for annual reporting on a comprehensive, uniform set of sustainability indicators comprised of both universally applicable and industry-specific components. The simple truth is that a more stringent disclosure requirement is necessary due to the lack of adherence to existing SEC standards. 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 (see Bloomberg article on this issue) .

Requiring ESG reporting is far from unprecedented.  In Europe, ESG disclosure requirements were 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.  Looking beyond Europe, in December 2013, KPMG, the United Nations Environment Programme (UNEP), Global Reporting Initiative published 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. And earlier this year, three exchanges, including NASDAQ OMX and the Toronto Stock Exchange, affirmed their support for  a proposal by the Ceres-led Investor Network on Climate Risk that companies be required to conduct a “materiality” assessment disclosure in annual financial filings, in which management would outline its approach to determining the company’s material ESG issues and provide a hyperlink in its annual financial filings to an online ESG disclosure spreadsheet based on UNEP’s Global Reporting Initiative framework.  This supplemental material would address the following categories:

  • Governance and Ethical Oversight,
  • Environmental Impact,
  • Governmental Relations and Political Involvement,
  • Climate Change,
  • Diversity,
  • Employee Relations,
  • Human Rights,
  • Product and Service Impact and Integrity,
  • Supply Chain and Contracting, and
  • Communities and Community Relations.

Clearly there is increased global interest in regulation of sustainability reporting, with several exchanges requiring it and the growing embrace of including sustainability issues that are material for stakeholders and investors as part of corporate reports. It’s time for us to embrace our responsibility to make money while adhering to socially and environmentally aware policies and practices, and to be held accountable when we fail to do so.

This article appeared in the Fall 2014 edition of the Natural Investment News and in slightly different form on GreenBiz.com

 

 

 

Michael Kramer

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