Should Corporate ESG Disclosures Be Mandatory?

sustainability reporting

by | Aug 10, 2016

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sustainability reportingCorporate environmental, social and governance (ESG) disclosure is mostly voluntary — and rarely enforced in the cases even where it is mandatory — in the US.

The Dodd-Frank Act requires public companies to disclose whether their products contain conflict minerals. But less than a third of companies affected by this rule filed the required forms with the US Securities and Exchange Commission (SEC).

Additionally, the SEC’s 2010 guidance on climate change disclosures requires companies to inform investors about climate-related business risks. But these climate disclosure requirements are largely ignored by companies and also unenforced by federal regulators.

This may soon change as the SEC considers mandating corporate disclosures of ESG issues.

As Anthesis’ Emma Armstrong writes in a blog, the SEC is currently reviewing its disclosure requirements for public companies, including public policy and sustainability matters — in other words, ESG disclosures. The SEC has asked for feedback “on range of questions (pages 204-213), including the importance of ESG disclosures to investors’ decisions, what a disclosure framework for ESG matters might look like, and the costs and challenges related to providing these disclosures,” Armstrong writes.

The US move follows a European Union 2014 directive that, when implemented, will require EU companies to disclose some ESG information.

Armstrong writes that other jurisdictions including the UK, France, South Africa and China are also moving to mandate such ESG disclosures.

This puts companies already managing and disclosing their ESG performance ahead of the game, says Lauren Kelley Koopman, a director in PwC’s US Sustainable Business Solutions practice. In the US, 81 percent of S&P 500 companies issued standalone corporate sustainability reports in 2015, up from 20 percent in 2011, according to a Governance & Accountability Institute report published in June.

It also turns up the heat on companies considering going public.

“Preparing to go public is a challenging process and early preparation is key,” Koopman told Environmental Leader. “One area that can be overlooked when preparing an SEC filing is environmental, social and governance risks and opportunities. Public companies are already managing and disclosing their ESG performance — and that’s setting the bar high for new entrants to the public market.”

PwC is seeing increasing investor demand for additional disclosures on non-financial details like environmental liabilities and sustainability issues, Koopman says.

As investors and regulators demand greater ESG disclosures, a growing number of sustainability reporting frameworks, rankings, metrics, and indices have followed suit, according to a new PwC report. “We see a benefit to greater global harmonization as a means of enhancing the consistency and comparability of sustainability reporting,” the report says.

Luckily for corporate reporters, global harmonization of sustainability reporting methods seems to be the trend. The PwC report points to the Corporate Reporting Dialogue as an example of this. The Corporate Reporting Dialogue includes eight organizations — essentially a who’s who of corporate reporting organizations — and aims to provide greater coherence and consistency between corporate reporting frameworks and standards.

The eight organizations are CDP (formerly Carbon Disclosure Project), Global Reporting Initiative, Climate Disclosure Standards Board, Financial Accounting Standards Board, International Accounting Standards Board, International Integrated Reporting Council, International Organization for Standardization and Sustainability Accounting Standards Board (SASB).

Armstrong writes that CDP and SASB are advocating for mandatory ESG disclosure by the SEC at least in part because it will further harmonize such reporting. “CDP and SASB strongly advocate for a sector-based approach by SEC that focuses reporting around standardized metrics relevant to ESG factors that are identified as material for individual sectors.”

The bottom line is that stakeholders have come to expect ESG disclosures. This means companies can voluntarily report on such topics now — and proactively communicate their progress on ESG-related issues — or scramble to catch up with those already reporting if and when such issues become mandatory in the future.

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