At the SEC, regulators are trying to bring U.S. securities regulation and disclosure into the 21st century. In April, the SEC issued Concept Release 33-10064 (Business and Financial Disclosure Required by Regulation S-K, http://1.usa.gov/24LBKSD) outlining the various measures it is considering as part of an effort to modernize Regulation S-K, which establishes the disclosure requirements for publicly listed corporations in the United States, including the disclosure of sustainability information.
The State of Reporting Today
Contemporary macroeconomic factors such as resource scarcity, climate change, population growth, globalization, and technological innovation can profoundly impact business outcomes. Although corporations have made considerable efforts to create transparency around their management of these issues—by publishing corporate social responsibility (CSR) reports—market participants still struggle to effectively incorporate environmental, social, and governance issues into their decision making. Indeed, while 82% of global institutional investors consider sustainability information in their decisions, only 21% are satisfied with the comparability of reporting (Pricewaterhouse – Coopers, Sustainability Goes Mainstream, May 2014, http://pwc.to/1Wpv2Ab).
Voluntary CSR reports typically contain hundreds of nonstandardized metrics covering myriad sustainability issues, only a handful of which may have any material bearing on the company. Meanwhile, even in SEC filings, sustainability information lacks decision-usefulness. According to research by the Sustainability Accounting Standards Board (SASB), three-quarters of its disclosure topics are currently being addressed in statutory filings, but more than 40% of those consist of boilerplate language, while only 17% use metrics—and even those are not comparable from one company to the next [SASB, Conceptual Framework(Exposure Draft], April 2016, http://bit.ly/23HK7Mx).
This situation is not unlike the state of financial data before standardized financial reporting, when a lack of transparency resulted in information asymmetry, hampering market efficiency. In the absence of complete, standardized disclosures, investors questioned the integrity of earnings, lowering access to capital and raising its cost. Furthermore, unscrupulous business people—with no system in place to hold them accountable—engaged in unethical and risky practices that contributed to the 1929 stock market crash. Many of the questions that arise around sustainability disclosure today are the very same ones that led to standardized financial disclosure: Is the underlying data accurate? Is it complete? Are there controls in place to mitigate risks and improve reliability in data collection processes?
Filling a Need for Standards
In order to make informed decisions, investors need to understand which sustainability issues are likely to have material impacts on companies in a given industry, and they need reliable, standardized metrics by which they can evaluate performance. SASB is an independent 501(c)(3) nonprofit created to fill these needs. SASB’s standards are designed to be integrated into management’s discussion and analysis (MD&A) and other relevant sections of SEC filings, such as Forms 10-K and 20-F, so that all investors have access to material, comparable information without needing to source it from CSR reports or purchase it from commercial vendors.
Sustainability disclosure needs to be decision-useful for investors while remaining cost-effective for issuers. This was the aim of SASB’s standards development process, which involved the participation of more than 2,800 individuals affiliated with companies having $11 trillion market capitalization and investors representing $23.4 trillion assets under management. Among these professionals, 82% agreed that SASB’s proposed disclosure topics are likely to constitute material information.
SASB’s standards include metrics and protocols that allow companies to integrate sustainability reporting objectives into their existing financial management and reporting processes, including the internal control framework. In this way, a company can implement controls over SASB information that mirror internal controls over financial reporting. This can help support the Sarbanes-Oxley Act of 2002 certification requirement regarding information included in SEC filings and also support external assurance of SASB information. Indeed, although an audit of MD&A is not required, SASB’s technical protocols are designed to provide the basis for suitable criteria for companies that elect to obtain such voluntary external assurance.
It is time for the markets to evolve again. Auditors took a leading role in the development of GAAP, and they are uniquely positioned to play a similar part in shaping the future of accounting by establishing a market standard for sustainability information. SASB encourages accountants to weigh in on some of these issues during the SEC public comment period, which runs through July 21.
