The SEC Must Improve Disclosure of Material and Emerging Sustainability Risks
The U.S. Securities and Exchange Commission is starting to take sustainability risks—and corporate reporting of those risks—seriously. The concept is straightforward: climate change, water scarcity, human and workers’ rights, and the ongoing global transition to a low carbon economy pose significant risks and opportunities to companies and the investors who own them. Under long-standing SEC rules, companies must disclose these risks, if material, in their financial filings.
The SEC recently and unexpectedly opened the door to improving sustainability disclosure during a major speech by Chair Mary Jo White, in which she stated, “We are taking a more focused look at such disclosures, particularly related to climate change, in our annual filings reviews...”, adding that, “the issue has our attention.”
In July, the SEC included a panel discussion at an Investor Advisory Committee meeting focused on options for progress on disclosure, and early this year, the agency issued a request for public comments on how to move forward.
Investors responded to that request in a big way. Forty-five investors representing $1.1 trillion in assets under management backed a letter organized by Ceres that called on the SEC to improve sustainability disclosure, arguing that action is needed to provide “a level playing field and give all investors comparable and useful material ESG information.”
Thirty-five members of Ceres’ Investor Network on Climate Risk (INCR) sent their own letters, making it clear that the SEC leadership and staff must start wrestling with these issues to give investors the information they need. They highlighted several key issues for the SEC to consider including:
- Reporting on corporate boards. The California Public Employees’ Retirement System’s (CalPERS) wrote: “[We] have highlighted the need for boards to be independent, competent, and diverse. We regard this as essential to ensuring effective risk oversight, particularly on emerging issues like climate change risk, cyber security, and human capital management.”
- Portfolio level risks. Domini Social Investment wrote: “So-called ‘externalities’ - costs that corporations impose on third parties...are often carried by a fiduciary's clients, by other companies, or by the economy, but are not explicitly captured by current rules, [unless a company believes they are material]. Prudent investors wish to understand and mitigate these risks before they become systemic, or before they become reputational or legal risks to the issuer that created them.”
- Fairer, safer and more equitable workplaces. The AFL-CIO Office of Investment asked the SEC to require disclosure of human capital management metrics, focusing on its significant impact on corporate performance. “Over the last century physical assets played a far greater role in creating value and driving performance and thus received substantial attention in financial reporting,” said the letter. “Today, however, intangible assets drive a much greater share of value creation and accordingly require far greater attention in mandatory corporate disclosures.”
- Industry-based key performance indicators (KPIs). State Street Global Advisors wrote: “Given our need as investors for information on companies’ ESG practices, we request that the SEC consider requiring listed companies to enhance their ESG-related disclosures. We encourage the SEC to consider developing rules that would help companies:
- Identify appropriate KPIs by industry and sub-sectors
- Establish a common standard to measure the KPI
- Introduce standardized reporting of KPIs on an annual basis”
The SEC has many tools at its disposal for making progress on these issues, including boosting the number of staff comment letters to companies and providing clearer guidance on sustainability disclosure. It is time for the agency to use these tools and take stronger action to protect investors and all of us from the financial risks of climate change and other sustainability concerns.
It is equally important that Congress supports the SEC’s mission of protecting investors, maintaining fair, orderly, and efficient markets. Yet just last month the U.S. House of Representatives passed a spending bill that included an amendment that would bar the SEC from enforcing its 2010 climate risk disclosure guidance.
This is common sense SEC guidance on reporting climate risk information that investors called for in their letters to the SEC. We’ll be working over the coming months to ensure that Congress understands that this amendment serves no one and harms investors.
Jim Coburn leads the Corporate Disclosure program at Ceres.