Friday, July 15, 2016

SEC’s Investor Advisory Committee considers current state of sustainability reporting

By Jacquelyn Lumb

The SEC’s Investor Advisory Committee heard presentations on sustainability reporting from former SEC general counsel and former PCAOB member Daniel Goelzer, and representatives of the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), and General Electric Company. SEC Chair Mary Jo White noted that she recently addressed sustainability in remarks to the International Corporate Governance Network, and repeated her message that the issue has the agency’s attention.

Evolution of sustainability reporting. Goelzer presented a historical overview of the issue dating back to the 1970s when he joined the Commission. At that time the SEC concluded that the disclosure of social responsibilities was based on whether it was necessary or appropriate to influence investment decisions or proxy voting and that it should be economically significant to investors. The MD&A requirements have sharpened up a bit since then, he said, with the disclosure of known trends, events and uncertainties likely to have a material effect on the issuer’s operations and as part of the risk factors. Still, he noted that the current level of disclosure is fairly limited and pretty general.

GRI standards. Christianna Wood reported that GRI is the mostly widely used sustainability reporting network which is referenced in the regulations of 41 countries. GRI urges the SEC to encourage companies to expand their sustainability reporting and to take action to ensure a consistent approach, preferably based on GRI standards, she said.

SASB standards. Jean Rogers, the founder and CEO of SASB, cited boilerplate language as the current problem with the disclosure in companies’ Forms 10-K, and said there is no way to benchmark or compare performance based on current disclosure or to understand the magnitude of a company’s risk. The problem with current sustainability reports is that the information is largely immaterial, it is not comparable, and it is biased. Some shareholders seek information directly from companies through questionnaires, but Rogers said this process imposes a cost burden and results in selective disclosure. In addition, the questionnaire process favors large investors and poses a danger of running afoul of Regulation FD. In SASB’s view, industry-specific standards are required, but not line item disclosures given the differences among industries.

IIRC framework. Lisa French, on behalf of the IIRC, noted that her organization is looking at a somewhat broader bandwidth than GRI or SASB, but encourages companies to look at those frameworks. IIRC sees a disproportionate focus on past performance in current reporting and believes there is a greater need for information about a company’s strategy, outlook and the long-term viability of its business model. The volume and complexity of disclosure has increased, but so too has the use of boilerplate and legalese, she explained. IIRC has developed principles-based guidance to promote integrated reports that provide better decision-useful information to the capital markets.

White asked how the work of SASB, GRI and IIRC fit together. Wood noted that first you need to have something to integrate, such as GRI’s standards. Rogers said, if information is material, it belongs in the Form 10-K. She said SASB’s standards relate to information that is relevant to decision-making. She added that consistency in reporting material information is critical. Companies currently do not know how much to report and do not want to be the first to report, according to Rogers, which is why market standards would be useful.

Caution about third party standards. IAC member Joseph Carcello, a professor at the University of Tennessee, agreed that sustainability reporting is important, investors are using it, and there currently are at least two sets of standards on which they could rely. There is precedent for the SEC relying on standards from outside groups, such as FASB and the PCAOB, he said. However, before the SEC recommends the standards developed by SASB or GRI, he reminded that there have also been notable failures in relying on third parties.

One of the concerns with international financial reporting standards, for example, was the source of funding, so he said that area should be examined. In addition, he noted that SASB’s comment letter to the SEC in response to its concept on Regulation S-K disclosure reported that the organization has a staff of 30. Of that group, issuers and those who serve issuers make up over 50 percent of the staff. Carcello said he is adamantly opposed to giving such a majority the power to set industry-specific standards.

General Electric’s counsel, when asked if GE uses either GRI or SASB standards in its reports, said it uses more of a custom approach based on materiality. The materiality standard works and it is self-adjusting, he explained. Now it is up to the SEC, he said.

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