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RECAP OF APRIL 24, 2018 EVENT

Posted By CBSACNY Sustainable Business Committee, Monday, May 14, 2018

What is the Future for Sustainability Reporting in the US?



Panelists:

(Moderator) Bruce Kahn, Portfolio Manager, Sustainable Insight Capital Management
Daniel L. Goelzer, Senior Counsel/Retired Partner, Baker & McKenzie, LLP
William G. Russell, Principal, Transitioning to Green
Judy Sandford, Sr. Strategist and Managing Director, Sustainability and CSR, Addison

 

Moderator Bruce Kahn kicked off the seminar on “The Future of Sustainability Reporting: Trends to Watch” by highlighting BlackRock, Inc. CEO Larry Fink’s January Annual Letter to CEOS, which called upon corporates to embrace a new era of corporate responsibility and benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” However, Bruce noted the increasing flow of capital out of active and into passive management, which effectively removes both the carrot and stick for institutional investors’ influence on corporate actions.

Bruce challenged the speakers and audience to consider where we are in the cycle of impact investing, corporate social responsibility and governance, and what that means for sustainability reporting. Who is making disclosures through sustainability reporting? Why? For who?

For those who missed the April 24, 2018 meeting or want to refresh their memories, you can download the speaker presentations at the end of this blog. Here's a brief recap:

What the Experts Say:

Addison is a corporate strategy consulting firm where Judy Sandford helps lead the Sustainability and CSR practice. With clients across industries and sectors, Judy’s work must address a multitude of stakeholder perspectives. She offered insight into the evolution of sustainability reporting over the last 10 years, and highlighted the benefits that lead corporations to undertake voluntary reporting activities – to identify risks and opportunities, provide a basis for measuring progress, enable better long-term decision-making, and allow better comparison to other companies.

Judy emphasized the importance of sustainability reporting in enhancing intangible value. Studies show that good ESG performance results in lowering cost of capital, better operational performance, and better stock price performance. Companies should get ahead of the curve and take credit for what they’re doing right – if they don’t tell their story, others will. The details disclosed and stories told must be tailored to the needs of different target audiences, including customers, employees, investors, media, rankers and raters.

Four Trends

1. Reporting vs. Reports – Reports typically are annual disclosures made 6+ months after the activities have concluded, while reporting is an ongoing, year-round process that can happen in every channel a companies has access to. Not all constituents will want to read a big report, but more relevant pieces can be pushed out through appropriate channels designed for specific target audiences.

2. Proliferation of Reporting Frameworks – The most important established and emergent reporting frameworks include the Global Reporting Initiative (GRI), CDP, UN Global Compact, SASB, Integrated Reporting, and the EU Non-Financial Reporting Directive.

3. Alignment with the UN Sustainable Development Goals (SDGs) – Smart companies and investors are looking carefully at the SDGs, in order to identify which issues are the most relevant to their business, and partner with other businesses and NGOs to advance shared goals.

4. Increased Integration with Financial Reporting – Institutional and mainstream investors, governments, and stock exchanges are demanding more ESG information; while companies are responding by creating “investor hubs” where ESG data is presented along with financial information.

Daniel Goelzer is a securities law expert, Senior Counsel at Baker & McKenzie, a member of the Sustainability Accounting Standards Board (SASB), and has held senior positions at the Securities and Exchange Commission (SEC). Dan addressed the legal requirements, risks, and opportunities to enhance the utility of sustainability reporting.

While the SEC has an 85 year-old regime regulating financial disclosures, the SEC has few disclosure requirements that apply to sustainability. Most sustainability disclosure are voluntary and happen outside SEC filings, which can be ironic given the importance and need for sustainability information that investors claim to want when surveyed.While there has been a dramatic uptick in reporting activity (among S & P 500 companies, 20% engaged in sustainability reporting in 2011, and 85% in 2017), the information does not sufficiently meet investor needs – when surveyed, investors report a lack of confidence in the quality of information received.

Currently, the SEC takes a principles-based approach that primarily relies on the concept of “materiality.” What is material and significant can vary to reasonable investors, and disclosures tend to include general and boilerplate language while lacking comparable, quantitative information about ESG risks and opportunities. While many companies assume that sustainability reports that are not part of required SEC filing don’t involve much legal risk, there can still be some securities law and other liability from poor quality reporting - if disclosures are materially inaccurate, inconsistent, incomplete, or unsubstantiated.

SEC Requirements

· Requires disclosure of “material” issues, but has offered limited guidance on what ESG factors may be material to a particular business, industry, or sector.
· Congress has directed to the SEC to require specific disclosures regardless of materiality, specifically: 1) Conflict minerals, 2) mine safely, 3) resource extraction payments, 4) CEO pay ratio disclosure, and 5) the Iran Sanctions Act.

· The SEC has issued limited guidance regarding climate change disclosures, but has brought few enforcement actions, to date.

· While Congress is unlikely to require the SEC to adopt broad ESG disclosure requirements, the SEC did raise such possibility in a small portion of its 2015 Concept Release. Although it was not the main focus of the release, two-thirds of the public comments letters received addressed sustainability, and 80% of these supported improved disclosures in SEC filing.

SASB May Fill the Gap

In the absence of more detailed regulatory disclosure requirements, SASB aims to fill the gap and develop voluntary sustainability accounting standards that help SEC reporting companies disclose material, decision-useful information in a cost-effective way. Because what is material varies depending on the nature of a business, SASB has issued industry-specific standards that include topics and metrics to assess company performance or exposure that are the most relevant, or “material,” to that industry. These standards can help companies comply with SEC rules, and also improve the consistency, comparability, and quality of disclosures that investors are looking for.

Global Trends

Sustainability reporting is increasing worldwide, and American companies with a significant employee base and presence outside the US should take note of global trends. Disclosure requirements in other jurisdictions, or those required by certain stock exchanges, can apply to some US companies, and may influence the attitudes of US companies and regulators. For example, the EU Non-Financial Reporting Directive requires EU Member States to promulgate sustainability reporting requirements. While details vary by country, they apply to large EU-based public companies, “public interest entities” (PIEs) with more than 500 employees. PIEs are required to report on environmental, social and employee-related, human rights, anti-corruption, and bribery matters; they also must describe their business model, policies pursued by the company related to non-financial matters, as well as the principal risks and risk management of non-financial matters.

William Russell challenged us to consider a paradigm shift towards “integrated thinking” – the central thesis of Bill’s new book, The Sustainable Enterprise Fieldbook: Building New Bridges. Bill urged all practitioners to build sustainability into all activities, adopting systems thinking multi-capital accounting, so businesses and communities can thrive. Systems that take into account financial, natural, and human capital must be managed so that there is enough (systems thinking), for all (socio-economic justice), forever (intergenerational responsibility).

Business depends on nested interdependencies; a business can thrive only within a healthy society, and which in turn depends on a healthy natural environment. Thus, businesses should integrate finance, risk, and sustainability efforts. According to the World Economic Forum, the last ten years have seen a shift away from traditional business risks (e.g.political risks, asset bubbles) toward sustainability risks (e.g. extreme weather events, water crises, human migration) as being the most likely and most impactful risks to manage.

Taking empirical evidence of business risks into account, Bill argued that we have hit critical limits to what our global economic, environmental, and social systems can tolerate without collapse – we cannot grow our way out of sustainability problems. While studies show that businesses can “do well” while “doing good,” this is not enough. Businesses must take both carrot and stick approaches to implement a science-based sustainability strategy. Bill suggested that the Six Capitals of the Integrated Reporting (IR) framework - financial, manufactured, intellectual, human, social and relationship, natural – provide a useful process for enterprise systems and sustainability performance management. In addition, both Judy and Bill highlighted the importance of using shared macro goals, and pointed to the UN Sustainable Development Goals as the best guide for determining strategic alignment and goal-setting. While there are a number of different reporting frameworks, most are in the process of aligning with the common principles of the UN SDGs.

 

This recap was posted by the CBSACNY Sustainable Business Committee

Event Co-Chairs: Leila Goldmark & Anthony Mak

A special thank you to our panelists, who led a thoughtful, practical discussion on the risks and opportunities involved in corporate sustainability reporting. Also, thanks to our gracious host, Joanne Chiu and Marks Paneth.

 

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