Demand For Sustainability Information is Clear, But Its Place in Regulatory Regime is Not

By:
CHRIS GAETANO
Published Date:
Apr 8, 2014

Public companies are increasingly under pressure to produce corporate sustainability reports—disclosures that go beyond the bottom line and paint a picture of an entity’s environmental and social impacts. However, the question of how this data can be accurately conveyed and how it relates to an entity’s legal regulatory filings remains a subject of debate—as evidenced by a recent butting of heads between the Securities and Exchange Commission (SEC) and a new organization that has released its own set of voluntary guidelines for sustainability reporting.

According to a KPMG study released in December 2013, of 250 of the world’s largest companies some 93 percent now publish corporate sustainability reports each year; what’s more, in the United States, the percentage of large companies producing these reports jumped from 74 percent to 86 percent between 2008 and 2013. Renee Mikalopas-Cassidy, chair of the NYSSCPA’s International Accounting and Auditing Committee, said the driving force behind this is investors, who want more information about a company’s practices. For example, she said, California’s pension system is notorious for wanting to know about the “social consciousness” of the businesses it invests in. Still, she noted, there have been difficulties in determining how exactly that should be done.  

The Sustainability Accounting Standards Board (SASB), a nonprofit founded in 2011, recently made an attempt to clarify the issue. In February, the organization released for comment a series of provisional standards applicable to the financial sector, which outline how to disclose sustainability issues, such as environmental risk to mortgaged properties; systemic risk management; and the integration of environmental, social and governance risk factors. The guidelines were constructed specifically for inclusion in Form 10-K, which public entities must file with the SEC on a regular basis.

“Our standards are the only set of nonfinancial standards designed for inclusion in the Form 10-K, so we’re really focused on fitting into mandatory disclosure for publicly listed U.S. companies,” said Amanda Medress, an SASB spokesperson..

Though the Financial Accounting Standards Board (FASB), is an observer on the International Integrated Reporting Council, another body that concerns itself with sustainability standards, the board itself currently does not have sustainability on its agenda, according to spokesperson Christine Klimek. The AICPA, meanwhile, has, as part of its Assurance Services Executive Committee, a sustainability task force that focuses its efforts on communications, targeted advocacy efforts and the development of education and training materials. 

The SASB standards provide methods for sustainability disclosures for commercial banks, investment banking and brokerage, asset management and custody activities, consumer finance, mortgage finance, security and commodity exchanges, and insurance. Medress said that the SASB would like to produce standards for 80 different industries, a process that they are aiming to complete by the end of 2016.

In the legal frequently asked questions (FAQs) on its website, the organization said that its  standards fit in well with SEC guidelines on financial disclosures, noting that several rules and regulations, including Regulation S-K and the Sarbanes-Oxley Act, “implicitly require” the disclosure of material sustainability information on Form 10-K, as well as in other periodic SEC filings. 

The SEC, however, has taken issue with the SASB’s efforts. During a March 27 speech at the 26th Annual Corporate Law Institute, SEC Commissioner Daniel M. Gallagher expressed frustration with third-party standards setters, and explicitly called out the SASB for what he believed to be an entity outside the proper regulatory channels trying to tell companies what they should be including in their reports.

“I don’t mean to single out the SASB, but it’s important to stress that, with the sole exception of financial accounting—where the Commission, as authorized by Congress, has recognized the standards of the Financial Accounting Standards Board as generally accepted, and therefore required under Regulation S‑X—the Commission does not and should not delegate to outside, non-governmental bodies the responsibility for setting disclosure requirements,” he said.  “So while companies are free to make whatever disclosures they choose on their own time, so to speak, it is important to remember that groups like SASB have no role in the establishment of mandated disclosure requirements.”

The SASB, in an April 4 letter to Gallagher, said that it “is a private sector body that does not and cannot mandate disclosure standards and [has] no intention of displacing or undercutting the SEC’s authority to prescribe disclosure standards.” Instead, the letter said, the SASB’s purpose is to develop standards that help companies fulfill their disclosure obligations related to short- and long-term sustainability. The organization went on to say that the SASB supports the SEC’s mission to provide decision-useful information to the investing community, as well as to protect the long-term interests of investors.

At the moment, the SASB is still in its beginning stages, having released its first set of standards only this past July. Understanding the novelty of this guidance, Medress said that the board plans to hold a series of roundtables to instruct companies that are voluntarily planning to use the standards on how to work them into their form 10-K. This process, she admitted, can be a little involved. 

“We recognize this is a longer process that will involve changed management within the organization and offices of the CFO office and corporate sustainability office working together,” she said. “We don’t expect it to happen overnight.”

She was also confident about the SASB’s relationship with the SEC, saying that the organization briefs the commission about its standards development work on a quarterly basis, and that the group’s board of directors includes former SEC Commissioner Aulana l. Peters and a former SEC chair, Elisse B. Walter. “The SEC is well aware of the work we’re doing, and we plan to continue giving them quarterly briefings throughout standards development process,” she said.

Medress also noted that the SASB has been working closely with Big Four firms, whom she said have been “very interested in following the development of our standards—all of them have representatives on our advisory council.”

At the moment, beyond the development of standards, Medress said the SASB is focusing on educating companies about the guidelines so that they will choose to use them—and be able to implement them well.        

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