Sustainability Disclosures Need to Be Enhanced
It seems that everywhere we turn these days sustainability reporting is discussed. From individuals to corporations and nonprofits, almost everyone is jumping on board with the idea that we all need to live more sustainable lives including protecting the environment.
Reporting on ESG Issues
Sustainability issues can be related to the environment (E) society (S), and corporate governance (G). In that sustainability and ESG are similar terms, but sustainability is used in a broader sense to include climate change, for example.
Sustainable education is an educational approach aimed at instilling in students, professionals, and communities the values and motivations to act for sustainability now and in the future. It is an ethical responsibility that cuts across various stakeholder groups and affects one’s own life, communities, and worldwide.
ESG refers to the environmental, social, and governance information about a firm. There is growing evidence that companies that take their environmental and social responsibilities seriously perform better financially. This has piqued the interest of investors, many of whom are asking for more information about ESG.
Measuring sustainability is easier said than done. Much of the information used to evaluate a firm’s sustainability is provided by the company itself, and it’s oftentimes not audited. This means the data provided may be inconsistent and lack comparability.
Currently, there are a number of different ways to report ESG information. The most well-known is the Global Reporting Initiative, which uses a multi-stakeholder perspective. That means that information on how a company’s actions affect many different parties—not just shareholders—is reported.
In the U.S., the Sustainability Accounting Standards Board (SASB) was founded in 2011. SASB standards guide the disclosure of financially material sustainability information by companies to their investors. The standards are voluntary and industry-based, identifying the subset of ESG issues most relevant to financial performance in each industry.
As of August 2022, the International Sustainability Standards Board (ISSB) of the International Financial Reporting Standards (IFRS) Foundation assumed responsibility for the SASB Standards. The ISSB encourages preparers and investors to continue to provide full support for and to use the SASB Standards until IFRS Sustainability Disclosure Standards replace SASB Standards.
Given the global interest in ESG standards, companies should identify any mandatory requirements that govern its corporate reporting on sustainability issues. SASB Standards are a useful tool to assist in meeting legal requirements in most jurisdictions, although supplemental disclosures may be required to meet specific regional requirements.
For example, the European Commission recognizes SASB standards as a suitable framework for complying with NFR Directive disclosure obligations. European Union (EU) Non-Financial Reporting (NFR) Directive requires public-interest companies in EU Member states to publish reports on the policies they implement in relation to environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards of directors.
SASB-based disclosures are voluntary, although several regulatory jurisdictions have either recommended or are in the process of recommending the use of these standards for disclosing financially material ESG information. Investors see the value in receiving this information.
Disclosing ESG Information
There are a variety of ways to disclose ESG-type information including:
As the primary go-to resource for investors, mainstream financial reports are a convenient location for disclosing the topics and metrics suggested by SASB standards. However, such reports typically involve stringent requirements for completeness, accuracy, and timing, which may present challenges for companies with less mature sustainability disclosure processes. (Mainstream financial reports vary by region but can include annual reports to shareholders and/or regulatory filings.)
- Incorporating SASB information throughout a sustainability reportcollects all the company’s sustainability information in a single publication but may lack direct linkages to contextual financial information for investors or may overwhelm investors with information intended for other audiences.
- Adding a SASB reference tableto a sustainability report has the benefit of collecting all the company’s sustainability information in a single publication, while making it easy for investors to find the SASB-specific information. However, it can result in the SASB information lacking context.
- Producing astand-alone SASB report provides an easy way for investors to find the SASB information and enables companies to provide significant context for the information. However, the information is reported separately from financial information, requiring investors to access multiple reports.
- Including the SASB information in an integrated report provides a single location for both financial and sustainability information and enables companies to link the SASB information explicitly to long-term value creation.
- Web-based reportingmay provide opportunities for more timely, direct, and extensive communication with investors, but data may lack credibility without excessive “date stamping” or other transparency around how and when updates are made.
What Should the U.S. SEC Do?
A good deal of attention is being paid to requiring more specific ESG disclosures in the U.S. Calls for the SEC to become more involved seem to be having an effect. Currently, the SEC does not require extensive line-item disclosure of ESG matters. All that may soon change, as there is a proposal for ESG reporting that goes well beyond current mandates.
On March 15, 2021, SEC Commissioner Allison Herren Lee asked the staff to evaluate the SEC’s disclosure rules on climate change with the goal of facilitating the disclosure of consistent, comparable, and reliable information on climate change. Fifteen questions were raised in the interests of developing broad-based, informative standards. It is beyond the scope of this blog to look at these issues, although it is worth noting that the thorny problem of quantifying and measuring climate risk information is of concern as it should be.
The time has come for the SEC to establish mandatory reporting requirements for ESG data. The Commission should not wait for the Financial Accounting Standards Board (FASB) to do so or the American Institute of CPAs (AICPA). The public interest demands no less.
To my readers: I will be taking the rest of the month off to celebrate the holidays. I wish you a happy and healthy New Year. Thank you so much for reading my blogs. My success as having one of the highest rated blogs in the philosophy space is due to your loyal readership. See you in 2023.
Blog posted by Dr. Steven Mintz, The Ethics Sage, on December 20, 2022. You can sign up for Steve’s newsletter and learn more about his activities on his website (https://www.stevenmintzethics.com/) and by following him on Facebook at: https://www.facebook.com/StevenMintzEthics and on Twitter at: https://twitter.com/ethicssage.