What Public Companies Should Be Considering Now for ESG Disclosures
The year 2020 was already predicted to be a year of heightened focus on environmental, social, and governance (ESG) topics for public companies—and that was before the COVID-19 pandemic and widespread protests galvanized by the Black Lives Matter movement increased the call for corporate discussion and action on topics ranging from operational resilience and risk management, to customer and employee safety and welfare, to social responsibility, to diversity and inclusion.
The seismic shifts of 2020 have thrown into sharp relief the need for companies to communicate with investors and stakeholders not only the ESG risks faced by a company, but also its strategies to address those risks and its performance against those strategies. Yet, while reporting on ESG metrics can be an important tool for gauging the long-term health and stability of a company and its preparedness to weather challenges, this space is difficult to navigate, with an overabundance of non-uniform reporting guidelines, systems, and standards. Further, this lack of uniformity and the voluntary nature of disclosures create challenges for investors seeking comparability of information across companies and industries.
SASB and GRI announce collaboration to align respective reporting standards framework
A welcome development is a newly announced collaboration between the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI). On July 12, 2020, SASB and GRI announced an initiative aimed at creating basic ESG reporting standards and clarifying the methodology used to grade companies’ ESG reporting. The goal for SASB and GRI is to provide both guidelines and examples of how to use their respective standards together to achieve a clearer and stronger ESG report.
This coordinated effort between SASB, a U.S. nonprofit that developed a voluntary reporting framework comprised of industry-specific sustainability accounting standards, and GRI, an international nonprofit that created the first international guidelines for sustainability reporting in 2000, is an important step towards the development of a uniform reporting scheme applicable across U.S. and non-U.S. companies.
SASB and GRI have already taken steps to work together to achieve greater consistency in reporting frameworks by taking part in the Corporate Reporting Dialogue (CRD) initiative, organized by the International Integrated Reporting Council. The goal of CRD is to improve coherence, consistency, and comparability between corporate reporting frameworks, standards, and related requirements.
The newly announced collaboration aims to further the work under the CRD initiative by delivering materials to investors, shareholders, and companies that will assist in understanding how the standards of each organization can be utilized together. The plan is to deliver the communication materials prior to the end of 2020, with the goal of these materials being to:
- Illustrate the cohesiveness of the two reporting standards;
- Provide examples from real-world reports; and
- Identify future collaboration efforts and opportunities.
Key considerations for ESG reporting by public companies
Public companies considering providing investors and stakeholders with new or enhanced disclosure around ESG topics must weigh not only what metrics to report, if any, but also how such information should be presented and how ESG topics interact with the company’s financial performance, risks, and strategies. Misrepresentations or misleading disclosure, whether in SEC filings or sustainability reports, can create liability for a company and lead to risk of litigation. To the extent they do decide to report on ESG matters, public companies should be prepared to explain their approach on ESG disclosure and initiatives and to adapt as investors and stakeholders respond to and engage on these topics.
Whether a public company is starting the process of reviewing its ESG profile or is fine-tuning its ESG approach, key questions to consider include:
- How is ESG reporting already included in the U.S. Securities and Exchange Commission (SEC) disclosure framework? To a certain extent, for some companies, ESG matters may already be required under the SEC disclosure rules. At a broad level, public companies are required to disclose material risks to their businesses and known trends or uncertainties that may materially impact their financial results; this materiality standard often picks up, for example, climate, regulatory, or supply chain risks that fall under the broader ESG umbrella. Some rules also pick up required disclosures at a more granular level. For example, Item 101(c)(1)(xii) of Regulation S-K requires the company to disclose any material estimated capital expenditures for environmental control facilities for such periods as the company may deem material. Smaller reporting companies have a similar disclosure obligation under Item 101(h) of Regulation S-K to describe the costs and effects of compliance with environmental laws. For many companies, the significance of money saved, or spent, related to ESG matters, such as greenhouse gas emissions and accompanying tax credits, can quickly turn ESG-related disclosures into material financial information. Disclosure of the ratio of the CEO’s pay compared to that of a median employee, required under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, is another example of human capital-related ESG concerns overlapping with mandatory SEC reporting, and the SEC has indicated that it is considering new disclosure requirements, beyond executive compensation, related to human capital management as part of its ongoing disclosure modernization project.
- What ESG reporting will take place outside of the SEC disclosure framework, and how can that reporting impact the company’s SEC filings? In the absence of comprehensive mandatory ESG reporting requirements from the SEC, practice among public companies has been mixed between providing ESG disclosures and metrics, if at all, in a company’s filings under the Securities Exchange Act of 1934 and providing ESG reporting as part of the investor relations page or through a standalone report. Separate, voluntary ESG reporting provided outside of the SEC reporting framework has the advantage of providing companies with flexibility in determining what information is relevant, how such information should be communicated, and what reporting standards frameworks, if any, to adopt. From the perspective of investors and stakeholders, however, such voluntary reporting can lack the rigor, comparability, and completeness of a public company’s financial and other SEC disclosures and may be skeptically received as “greenwashing” instead of substantive engagement on ESG topics. In addition, voluntary ESG reporting must still be reviewed against the company’s SEC disclosures, as ESG-related trends and uncertainties, risks, and strategies discussed in a report or other investor relations materials may need to be addressed in related sections of a company’s SEC filings.
- What due diligence and controls and procedures will be adopted to vet ESG disclosures and metrics? Adding perfunctory ESG information to the company’s website or SEC disclosures can quickly become a trap for the unwary. ESG reporting is often viewed as part of a company’s investor relations or marketing function. However, to the extent ESG disclosures and metrics are not supervised or vetted by the company’s legal and/or accounting teams, the company is at risk of making statements or providing metrics that lack robust support. Proper due diligence and documentation are important not only for companies adopting a disclosure framework created by a standards-setting organization like SASB or the GRI, but for any company considering adding disclosure about ESG topics to its SEC filings or investor relations materials. Implementing controls and procedures around such information improves the objectivity and quality of ESG disclosures, makes period-to-period comparisons of ESG metrics and disclosures meaningful, and helps protect the company from liability for false or misleading statements. In addition to assuring the quality of the ESG information being reported, companies should consider limiting overly aspirational statements and including forward-looking statement disclaimers and other appropriate cautionary language.
- Who is the audience for the company’s ESG reporting? Often, a company’s initial foray into ESG reporting is primarily reactive to specific investor demands. Some companies may focus on addressing comments from ISS ESG, the ESG consulting arm of the proxy advisory firm Institutional Shareholder Services (ISS), in order to improve their overall “ESG score.” While, in the short term, surgically addressing ISS’s and other proxy advisory firms’ or investor comments can be a reasonable approach, companies should consider the advantages of broadening the scope of whom they are communicating with through ESG reporting. Engagement on ESG matters can expand the investor profile of the company. Well-thought-out ESG reports can become tools for communicating with other important stakeholders, like customers, employees, and regulators, for example, by attracting and retaining customers and employees interested in ESG matters and enhancing reputation or brand image to build loyalty among customers.
- Can the company clearly articulate why ESG matters to the company? Under pressure from multiple sources to address ESG topics, a public company may provide ESG reporting that lacks a coherent vision of why ESG is relevant to the company and what concerns the disclosures are meant to address. Failing to provide a coherent rationale for addressing ESG can expose the company to further risks, such as investor pressure and the attention of activists criticizing the use of company resources and management focus on shaky ESG strategies. Companies should be able to synthesize their ESG disclosures with the company’s business strategies. For some companies, addressing ESG topics may be focused on managing risks and building long-term operational resilience. The related benefits may be better loan and insurance rates, enhanced long-term growth strategies, and preparedness for an evolving landscape, such as indications by Moody’s, a bond credit ratings company, that ESG risks will affect credit ratings over the long term. For others, addressing ESG topics can be a path to driving growth through, for example, business synergies, brand enhancement, and customer engagement.
The year 2020 has illustrated that companies’ resilience is dependent not only on financial factors, but also on preparedness for unseen global risks. As these unforeseen risks have challenged public companies’ liquidity, revenue, supply chains, and labor force, the importance of developing a viewpoint on ESG topics has grown even more apparent. Guidance from the collaboration between SASB and GRI will provide companies currently using or considering adopting an ESG reporting framework with further tools to enhance their disclosures. Whether in conjunction with that guidance or outside of the SASB and GRI framework, companies should consider how to develop and improve ESG reporting in light of the ongoing focus by investors and stakeholders on these topics.
 Available at https://www.sasb.org/blog/promoting-clarity-and-compatibility-in-the-sustainability-landscape-gri-and-sasb-announce-collaboration/.
 Available at https://integratedreporting.org/corporate-reporting-dialogue/.
 In a Section 10(b) action brought against BP in 2012 related to the Deepwater Horizon oil spill, the Southern District of Texas found that the plaintiffs had adequately pled materiality and falsity for statements made by BP highlighting safety reform efforts after previous industrial accidents in, among other documents, its sustainability reports. See, In re BP plc, Sec. Litig., No. 4:12-cv-1256, 2013 WL 6383968 (S.D. Tex., Dec. 5, 2013). See also, In re: Vale SA Securities Litigation, No. 1:15-cv-09539 (U.S. DC SDNY 2020) (where, in a case regarding a dam break in Brazil in 2015 killing several people and destroying hundreds of homes, the Court considered a 2013 sustainability report by Vale that allegedly told investors it “was responsible for the operation and maintenance of the dam” as evidence in whether Vale misrepresented its responsibility for the dam in statements by the CFO days after the dam failure).
 See, e.g., the SEC’s climate change disclosure guidance: https://www.sec.gov/rules/interp/2010/33-9106.pdf.