Investors Want Sustainability Disclosures in SEC Overhaul

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By Che Odom

July 20 — Investor advocates are making a strong push for the SEC to require annual, uniform sustainability reporting from public companies as part of the overhaul of the agency's disclosure regime.

Such disclosures should be mandatory because they are material, said Alya Kayal, director of policy and programs for US SIF: Forum for Sustainable and Responsible Investment.

“Investor efforts to comprehensively incorporate ESG [environmental, social and corporate governance] information into investment decisions are hindered by a lack of comprehensive, comparable and reliable data,” Kayal told Bloomberg BNA in a July 19 e-mail.

US SIF is one of dozens of commenters that demanded ESG disclosures in response to the Securities and Exchange Commission's concept release on Regulation S-K .

Reg S-K governs disclosures such as annual reports, registration statements and tender offers. In the concept release, the commission asked the public to weigh in on ways to make the financial filings more user-friendly for investors. The release's comment period closes July 21.

However, corporate attorneys told Bloomberg BNA that investors already have too much to digest in filings like the Form 10-K annual report, which can be hundreds of pages long for large, complex organizations.

Importance of Sustainability Issues

ESG issues are factors that many investors take into account when measuring a company's sustainability. Recent studies show that the C-suite and corporate boards are beginning to realize the importance of incorporating sustainability in their business strategies.

The issue was discussed at a recent SEC investor advisory committee meeting, during which a committee member urged the commission not to give sustainability “second class” treatment (136 SLD, 7/15/16).

However, SEC Chairman Mary Jo White has urged investors to do more to drive corporate sustainability efforts, saying that SEC-mandated disclosure by itself can’t provide what they seek (125 SLD, 6/29/16).

Concept Release

The SEC issued its concept release for Reg S-K April 13 as part of an ongoing plan to review and update its disclosure regime (72 SLD, 4/14/16).

The commission specifically asked for feedback on the importance of ESG matters in making informed investment and voting decisions.

As of July 20, the SEC had received at least 120 comment letters from investors, corporate attorneys, directors and officers, auditors and others.

Commenters had a range of suggestions for making corporate disclosures more timely and clearer, including taking advantage of electronic formats that allow investors to more easily compare annual data.

A large percentage of investors that commented on the concept release want sustainability reporting. They include the Council of Institutional Investors, Investor Environmental Health Network, Clean Yield and individual shareholders.

US SIF, a nonprofit focused on ESG issues, has advocated for disclosure rule changes for several years, Kayal said. She is optimistic that the SEC will mandate sustainability reporting this time around.

“There is much more awareness today among investors about the materiality of environmental, social and governance information,” she said.

All registrants, regardless of size, should be required to report annually on a comprehensive, uniform set of sustainability indicators comprising both universally applicable and industry-specific standards, she said.

Overdisclose

Attorneys told Bloomberg BNA that many companies already disclose ESG information, with some using dedicated sections on their websites.

Many companies and investors don't consider annual reports on Form 10-K and quarterly reports to be an effective means of communicating, said David L. Silk, a partner at Wachtell, Lipton, Rosen & Katz.

Companies believe that investors don't want to wade through too much information to get to what's relevant to them, Silk said.

Another problem with requiring too many disclosures is that the risk of liability for failure to report leads companies to overdisclose, he said. As a result, companies feel “compelled to sacrifice usefulness and accessibility in favor of protection from legal risk.”

Voluntary Reporting

Disclosures on issues such as ESG should remain voluntary, said Frederick D. Lipman, a partner at Blank Rome LLP and president of the Association of Audit Committee Members Inc.

Lipman told Bloomberg BNA that institutional investors already exert considerable influence over public corporations and, through investments and divestments, can persuade the companies to issue whatever disclosures they want.

“There should be no change whatsoever in the prescriptive disclosure currently required,” he said.

Smaller reporting companies shouldn't be required to file quarterly or even semi-annual reports, Lipman said. Instead, they should only have to make voluntary disclosures. The personnel needed to comply with such requirements—including auditors, attorneys and others—imposes an onerous financial burden on small companies, he said.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

For More Information

The SEC's concept release is available at http://bit.ly/1Y52Baz.

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