Will We See Mandated Corporate Reporting on ESG / Sustainability Issues in the USA?

by Hank Boerner – Chairman – G&A Institute

Maybe…U.S. Companies Will Be Required…or Strongly Advised… to Disclose ESG Data & Related Business Information

Big changes in mandated US corporate disclosure and reporting on ESG factors may be just over the horizon — perhaps later this year? Or perhaps not…

Sustainable & responsible investing advocates have long called for greater disclosure on environmental and social issues that affect corporate financial performance (near and long-term). Their sustained campaigning may soon result in dramatic changes in the information investors and stakeholders will have available from mandated corporate filings.

We are in countdown mode — in mid-April the Securities & Exchange Commission (SEC), the agency that regulates many parts of the capital market operations and especially corporate disclosure and reporting for investors issued a Concept Release with a call for public comments.

Among the issues In focus are potential adjustments, expansions and updating of mandated corporate financial reporting. One of these involves corporate ESG disclosure. The issue of “materiality” is weaved throughout the release.

Among the many considerations put forth by SEC: expanding corporate disclosure requirements for corporate financial and business information to include ESG factors, and to further define “materiality.” Especially the materiality of ESG factors.

The comment period is open for you to weigh in with your opinion on corporate ESG disclosure and reporting rules — or at least strong SEC guidance on the matter.

SEC has been conducting a “Disclosure Effectiveness Initiative,” which includes looking at corporate disclosure and reporting requirements, as well as the forms of presentation and methods of delivery of corporate information made available to investors. (Such as corporate web site content, which most feel needs to be updated as to SEC guidance.)

The umbrella regulatory framework — “Regulation S-K” — has been the dominant approach for corporate reporting since 1977 has been the principal repository (in SEC lingo) for filing corporate financial and business information (such as the familiar 10-K, 10-Q, 8-K, etc.).

Investors Want More Corporate ESG Information

For a number of years now, investment community players have urged SEC to look at mandating or offering strong guidance to public company managements to expand disclosure and reporting to substantially address what some opponents conveniently call “non-financial,” or “intangible” information. An expanding base of investors feel just the opposite — ESG information is quite tangible and has definite financial implications and results for the investor. The key question is but how to do this?

Reforming and Updating Reg S-K

In December 2013 when the JOBS Act (“Jumpstart Our Business Startups”) was passed by Congress, SEC was charged with issuing a report [to Congress] on the state of corporate disclosure rules. The goal of the initiative is to improve corporate disclosure and shareholders’ access to that information.

The Spring 2016 Concept Release is part of that effort. The SEC wants to “comprehensively review” and “facilitate” timely, material disclosure by registrants and improve distribution of that information to investors. Initially, the focus is on Reg S-K requirements. Future efforts will focus on disclosure related to disclosure of compensation and governance information in proxy statements.

Asset managers utilizing ESG analytics and portfolio management tools cheered the SEC move. In the very long Concept Release – Business and Financial Disclosure Required by Regulation S-K, at 341 pages — there is an important section devoted to “public policy and sustainability” topics. (Pages 204-215).

ESG / Sustainability in Focus For Review and Action

In the Concept Release  SEC states: In seeking public input on sustainability and public policy disclosures (such as related to climate change) we recognize that some registrants (public companies) have not considered this information material.

Some observers continue to share this view.

The Concept Release poses these questions as part of the consideration of balancing those views with those of proponents of greater disclosure including ESG information:

• Are there specific public policy issues important to informed voting and investment decisions?

• If the SEC adopted rules for sustainability and public policy disclosure, how could the rules result in meaningful disclosures (for investors)?

• Would line items about sustainability or public policy issues cause registrations to disclose information that is not material to investors?

• There is already sustainability and ESG information available outside of Commission (S-K) filings — why do some companies publish sustainability, citizenship, CSR reports…and is the information sufficient to address investor needs? What are the advantages and disadvantages of these types of reports (such as being available on corporate web sites)?

• What challenges would corporate reporters face if ESG / sustaianbility / public policy reporting were mandated — what would the additional costs be? (Federal rule making agencies must balance cost-benefit.)

• Third party organizations — such as GRI and SASB for U.S. company reporting — offer frameworks for this type of reporting. If ESG reporting is mandated, should existing standards or frameworks be considered? Which standards?

The Commission has received numerous comments about the inadequacy of current disclosure regarding climate change matters. And so the Concept Release asks: Are existing disclosure requirements adequate to elicit the information that would permit investors to evaluate material climate change risk? Why — or why not? What additional disclosure requirements– or SEC guidance — would be appropriate?

Influential Voices Added to the Debate

The subject of expanded disclosure of corporate ESG, sustainability, responsibility, citizenship, and related information has a number of voices weighing in. Among those organizations contributing information and commentary to the SEC are these: GRI; SASB; Ceres; IEHN; ICCR; PRI; CFA Institute; PWC; E&Y; ISS; IIRC; BlackRock Institute; Bloomberg; World Federation of Exchanges; US SIF.

The overwhelming view on record now with SEC is that investor consideration of ESG matters is important and that change is needed in the existing corporate reporting and disclosure requirements. You can add your voice to the debate.

For Your Action:

I urge your reading of the Concept Release, particularly the pages 204 through 215, to get a better understanding of what is being considered, especially as proposed by proponents; and, I encourage you to weigh in during the open public comment period with your views.

You can help to ensure the SEC commissioners, staff and related stakeholders understand the issues involved in expanding corporate disclosure on ESG matters and how to change the rules — or offer strong SEC guidance. Let the SEC know that ESG information is needed to help investors better understand the risks and opportunities inherent in the ESG profiles of companies they do or might invest in.

SEC rules or strong guidance on ESG disclosure would be a huge step forward in advancing sustainability and ESG consideration by mainstream capital market players.

Information sources:

The SEC release was on 13 April 2016; this means the comment period is open for 90 days, to mid-July.

Helpful Background For You

Back in 1975 as the public focus on environmental matters continued to increase (all kinds of federal “E” laws were being passed, such as the Clean Air Act and Clean Water Act), stakeholders asked SEC to address the disclosure aspects of corporate environmental matters.

The initial proposal was deemed to have exceeded the commission’s statutory authority.

In 1974 the ERISA legislation had been passed by Congress, and pension funds, foundations and other fiduciaries were dramatically changing the makeup of the investor community, dwarfing the influence of one once-dominant individual investor. After ERISA and the easing of “prudent man” guidelines for fiduciaries, institutional investors rapidly expanded their asset holdings to include many more corporate equities.

And the institutions were increasingly focused on the “E,” “S” and :”G” aspects of corporate operations — and the real or potential influence of ESG performance on the financials. Over time, asset owners began to view the company’s ESG factors as a proxy for (effective or not) management.

While the 1975 draft requirements for companies to expand “E” and “S” information was eventually shelved by SEC, over the years there was a steady series of advances in accounting rules that did address especially “E” and some “S” matters.

FAS 5 issued by FASB in March 1975 addressed the “Accounting for Contingency” costs of corporate environmental liability FASB Interpretation FIN 14 regarding FAS 5 a year later (September 1976) addressed interpretations of “reasonable estimations of losses.” SEC Staff Bulletins helped to move the needle in the direction of what sustainable & responsible investors were demanding. Passage of Sarbanes-Oxley statutes in July 2002 with emphasis on greater transparency moved the needle some more.

But there was always a lag in the regulatory structure that enables SEC to keep up with the changes in investment expectations that public companies would be more forthcoming with ESG data and other information. And there was of course organized corporate opposition.

(SEC must derive its authority from landmark 1933 and 1934 legislation, expansions and updates in 1940, 2002, 2010 legislation, and so on. Rules must reflect what is intended in the statutes passed by Congress and signed into law by the President. And opponents of proposals can leverage what is/is not in the laws to push back on SEC proposals.)

There is an informative CFO magazine article on the subject of corporate environmental disclosure, published September 9, 2004, after the Enron collapse, two years after Sarbanes-Oxley became the law of the land, and 15+ years after the SEC focused on environmental disclosure enhancements. Author Marie Leone set out to answer the question, “are companies being forthright about their environmental liabilities?” Check out “The Greening of GAAP” at: http://ww2.cfo.com/accounting-tax/2004/09/the-greening-of-gaap/

And we add this important aspect to corporate ESG disclosure: Beginning in 1990 and in the years that followed, the G1 through G4 frameworks provided to corporate reporters by the Global Reporting Initiative (GRI) helped to address the investor-side demand for more ESG information and the corporate side challenge of providing material information related to their ESG strategies, programs, actions and achievements.

The G&A Institute team sees the significant progress made by public companies in the volume of data and narratives related to corporate ESG performance and achievements in the 1,500 and more reports that we analyze each year as the exclusive data partner for The GRI in the United States, United Kingdom, and The Republic of Ireland.

We have come a very long way since the 1970s and the SEC Concept Release provides a very comprehensive foundation for dialogue and action — soon!

Please remember to take action and leave your comments here:
http://www.sec.gov/rules/concept.shtml

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The GRI global organization is conducting a series of interviews with thought leaders to gain their perspectives on what they expect the main issues to be on corporate agendas and their public reports in 2025.  These are produced monthly and G&A Institute will share these through our websites, newsletters, blog, social media, and various other channels to raise awareness of this important initiative.

Hot Topics and the Role of Companies 
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Reporting 2025 – Perspectives: Interview with Martha Herrera Gonzalez, Global Director of Corporate Social Responsibility, CEMEX

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Interview with Martha Herrera Gonzalez, Global Director of Corporate Social Responsibility, CEMEX

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Reporting 2025 – Perspectives: Interview with Aldo Cristiano, Director of Cocoa Procurement, Ferrero

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Interview with Aldo Cristiano, Director of Cocoa Procurement, Ferrero

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Reporting 2025 – Perspectives: Interview with Mario di Loreto, People Value Director, Telecom Italia

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Interview with Mario di Loreto, People Value Director, Telecom Italia

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Reporting 2025 – Perspectives: Interview with Jeanne Ng, Director of Group Sustainability, CLP

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Interview with Jeanne Ng, Director of Group Sustainability, CLP

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U.S. Industry & Trade Associations Encourage Corporate Sustainability — Today, the American Cleaning Institute is in Focus

by Hank Boerner – Chairman, G&A Institute

As more and more U.S. companies begin or expand their disclosure and reporting on their sustainability journey, and their widening range of corporate responsibility activities, the choice of reporting frameworks both narrows and expands.

Narrows in the sense that the Global Reporting Initiative (GRI) framework — now in its fourth generation (“G4”) since the introduction of the GRI approach in 1999-2000 — is considered the de facto global standard by thousands of company managements. There are now 30,000 sustainability reports in the GRI database — 21,000-plus of those published GRI Reports.

And the number of reporting frameworks and generally accepted standard steadily expands — there are many more standards, frameworks, codes of conduct, guidelines, third party requests for information, that now take sustainability / responsibility / citizenship / environmental performance reporting far beyond where these activities were a decade or so ago. Many corporate managements recognize the importance of such reporting and devote the necessary [human and financial] resources to the task.

Examples of available standards include corporate responding to the annual CDP CSA request for information (the voluntary Corporate Sustainability Assessment). CDP began operations in 2000 as the Carbon Disclosure Project with focus on collecting, organizing and providing information on corporate Greenhouse Gas Emissions (GhGs) to investors; today the CDP focus include water issues, forestry issues, supply chain issues, and sector-by-sector research and analysis (the first sectors included chemicals and automotive). The client base is almost 500 institutional investors with more than US$55 trillion in AUM — they accept the CDP approach as an important standard in reporting on corporate environmental performance (or lack of).

There are also global and U.S. industry associations and trade groups that help their corporate members to understand key issues, map materiality; understand stakeholder expectations; align corporate strategies, activities and programs, third party engagement, and disclosure and reporting with the ever-expanding stakeholder and shareholder expectations. Among these are such well-known organizations as Automotive Industry Action Group (AIAG) and the Electronics Industry Citizenship Coalition (EICC).

Industry Effort:
The American Cleaning Institute and Sustainability

One large industry-focused effort we focus on today organized resources to develop a charter to provide a common, voluntary approach to promote and demonstrate continual improvement in the industry’s sustainability profile is that of the cleaning (products & services) industry — the American Cleaning Institute (ACI).

The Charter for Sustainable Cleaning is one of ACI’ major initiatives to fulfill the mission, and provide a framework for corporate members to go beyond basic legal and regulatory requirements.

You know many of the member company names and their brands, which are ubiquitous in American and global business-to-business and consumer marketing; a sampling includes Amway, BASF, Church & Dwight, Clorox, Colgate-Palmolive, Dow, DuPont, Huntsman, and International Flavors & Fragrances (IFF).

The American Cleaning Institute’s sustainability mission is to “benefit society and improve the quality of life through hygiene and cleanliness by driving sustainability improvements across the industry and throughout the supply chain.” The ACI Charter for Sustainable Cleaning was launched in January 2014 at the group’s annual meeting & industry convention. The charter was in part based on the A.I.S.E. Charter for Sustainable Cleaning, a voluntary initiative of the sister trade association in Europe (AISE). The bulk of ACI’s U.S. member companies are cleaning product manufacturers and chemical suppliers.

To date, 25 ACI member companies are signing on to the charter; they are required to have systems in place to continual assessment; review; and improvement of sustainability performance. This includes product life cycle; raw materials; resource use; product specs; manufacturing; end use and disposal of products and packaging; and occupational health and safety.


Discussion:
Brian Sansoni, VP, Sustainability Initiatives

We spoke with ACI’s Brian Sansoni, the VP, Sustainability Initiatives, based in Washington, D.C. Brian described the ACI’s sustainability efforts with the Charter as “an ongoing roll-out, beginning with speaker presentations and participant discussion at the 2014 annual conference. We are now two years into the effort.” The effort is to develop and demonstrate the sustainability efforts of a major industry sector in the United States, the cleaning products and services manufacturing and marketing industry and the industry’s supply chain.

Brian, who joined ACI in 2000, was named VP, Sustainability Initiatives in 2012 (he also has the title of VP, Communication & Membership). Brian works closely with the association’s communications team, the government affairs team, research & science team, and with a sustainability committee whose members come from member companies. He’s a radio news reporter and Congressional press secretary by background and past experience, and applies those skills to the communication about the industry association and member companies’ commitments to greater sustainability.

Brian’s teammate is Melissa Grande, Senior Manager, Sustainability Initiatives, who joined us in the conversation. Brian and Melissa oversee the production of the ACI Sustainability Report, which Brian describes as being thorough, distinct and relevant with metrics that clearly provide a hallmark of what the association and its member companies are doing in their collective sustainability journeys. The report summarizes data from 33 member companies participating in the 2014 Sustainability Metrics Program (the metrics relate to energy use, GhG emissions, water use and solid waste generation). The report features an updated summary of ACI’s social and environmental sustainability programs, and details for ACI’s scientific and research programs. They also conduct the “Sustainability Academy” for the education of ACI’s member companies.

The report is available at: www.cleaninginstitute.org/sustainability2015

Melissa Grande explained that as part of the association’s ongoing collaboration with other standard setters, ACI is a member organization of the Sustainability Consortium (Melissa was previously a member of the consortium staff).  ACI participated in the Sustainable Accounting Standards Board (SASB) development of suggested (voluntary) materiality disclosures for the Consumption Products Sector (including household and personal products).

Brian Sansoni stressed that the ACI effort is intended to create an industry-wide, discrete approach that member companies can benefit from, and contribute to as the initiatives move forward.

Important:  ACI’s Critical Issue Assessment

For the first time, the Institute staff and participating companies conducted a comprehensive materiality assessment to map risks and opportunities facing the U.S. cleaning product value chain, including key energy and environmental metrics. The mapping identified and characterized the key issues that affect ACI’s membership and the industry-at-large.

The top issues identified in the materiality process by internal and external stakeholders:

1 – Materials (safety of chemical ingredients; raw material sourcing, scarcity).
2 – Disclosure & Transparency (public disclosure related to sustainability, governance, products).
3 – Climate Change / GhGs (climate risk & opportunities; GhG emissions).
4 – Ecological Impacts (biodiversity, deforestation, environmental management, responsible agricultural practices).
5 – Water (use, waste water treatment, recycling).
6 – Workplace Health and Safety (health & safety management; health & wellness training programs).
7 – Waste (hazardous, non-hazardous waste; management of product end-of-life).
8 – Energy (energy use, renewable energy).
9 – Supply Chain Management (screening business partners on ethics & sustainability issues).
10 – Compliance (with EHS regulations).

The American Cleaning Institute’s Materiality Assessment, Brian notes, is an important way of guiding the association’s and member companies’ reporting on industry priorities. It’s also useful for the dialogue between companies and their stakeholders. ACI CEO Ernie Rosenberg notes that the association will be more strategic about tracking industry performance [on the issues] and the ACI sustainability reporting will evolve as a result.

In our view, the American Cleaning Institute’s sustainability program is an excellent example of the preferred method of the American business community in addressing ESG performance issues: adopting of voluntary, industry-wide standards, approaches, guidelines, codes of conduct, and other non-regulated approaches.

As we said up top, this approach is represented by what we see in the automotive, electronics, chemicals, apparel and other industries and sectors. This is important to keep in mind as the public dialogue on sustainability reporting includes expectations that the Federal government will at some point issue mandates for greater sustainability disclosure and structured reporting (similar, some advocates say, to mandated financial reporting).

# # #

For Reference

 

Company participants in the 2014 American Cleaning Institute Metrics Program:

AkzoNobel Chemicals LLC; Amway; Arylessence, Inc; BASF Corporation; Brenntag North America; Celeste Industries Corporation; Chemia Corporations; Church & Dwight Company, Inc; The Clorox Company; Colgate-Palmolive Company; Corbion; Croda, Inc; The Dow Chemical Company; DuPont Industrial Biosciences; Ecolab, Inc; Evonik Corporation; Farabi Petrochemicals; Firmenich Incorporated; Givaudan Fragrances Corporation; GOJO Industries, Inc; Henkel Consumer Goods, Inc; Huntsman Corporation; International Flavors & Fragrances, Inc; Novozymes PQ Corporation; Procter & Gamble; SC Johnson; Sasol; Seventh Generation; Shell Chemical LP; Stepan Company; The Sun Products Corporation; Vantage Oleochemicals.

These companies are key members of the US$30 billion U.S. cleaning products marketplace. ACI members formulate soaps, detergents and general cleaning products used in household, commercial, industrial and institutional settings. They also supply ingredients and finished packaging for these products; and, ACI members include oleochemical producers.

Reporting 2025 – Perspectives: Interview with Kumi Naidoo, International Executive Director, Greenpeace

The GRI global organization is conducting a series of interviews with thought leaders to gain their perspectives on what they expect the main issues to be on corporate agendas and their public reports in 2025.  These are produced monthly and G&A Institute will share these through our websites, newsletters, blog, social media, and various other channels to raise awareness of this important initiative.

Interview with Kumi Naidoo, International Executive Director, Greenpeace
See also the interview summary
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Reporting 2025 – Perspectives: Interview with Elena Valderrábano Vázquez, Global Director for Corporate Ethic and Sustainability, Telefónica

The GRI global organization is conducting a series of interviews with thought leaders to gain their perspectives on what they expect the main issues to be on corporate agendas and their public reports in 2025.  These are produced monthly and G&A Institute will share these through our websites, newsletters, blog, social media, and various other channels to raise awareness of this important initiative.

Interview with Elena Valderrábano Vázquez, Global Director for Corporate Ethic and Sustainability, Telefónica

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