Halfway through President Biden’s first 100 days, the administration has prioritized a mandatory, comprehensive framework for company disclosure of environmental, social, and governance matters (ESG). Companies and investors have been inundated with a wave of proposals from D.C., which in turn follows years of “voluntary” ESG disclosure standards from the private sector (see sidebar). Faced with this uncertainty, some companies may decide to wait for the SEC to definitively act, thinking that they can avoid the cost of building reporting structures that do not perfectly match the final SEC rules.
-RECENT DEVELOPMENTS-
New enforcement: Last week, the SEC announced the creation of a Climate and ESG Task Force tasked with proactively identifying and bringing enforcement actions against ESG-related misconduct. The Task Force will also evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues.
New legislation: The Democrat-controlled Congress has begun the process of re-introducing a series of ESG-related bills that had languished during the previous administration, including bills that would require companies to disclose: the gender, race, ethnicity and veteran status of their directors and executive officers; corporate political spending activities; and measures to monitor and audit their supply chain (see here and here and here).
Ongoing “alphabet soup” of voluntary ESG disclosure standards: The number and lack of consistency among existing ESG disclosure standards – including those from the Sustainability Accounting Standards Board (SASB), International Integrated Reporting Council (IIRC), CDP (formerly the Carbon Disclosure Project), Climate Disclosure Standards Board (CDSB), and the Global Reporting Initiative (GRI) – has complicated companies’ efforts to craft their own disclosures. There has been some progress toward aligning the various standards,[3] but new ESG standard setters continue to emerge[4] and a single, unitary ESG disclosure standard remains elusive.t goes here
We disagree with this approach. While the timing and content of the SEC’s ultimate rules remain somewhat uncertain, companies that fail to act now will find it difficult to ramp up their disclosure – as well as their Board-level governance – once they are compelled to do so. Moreover, company shareholders aren’t waiting for the final rules and are demanding ESG transparency now. In fact, in our view, a hit-the-brakes approach is the more expensive option, and companies should push forward with several key points in mind.
1. Leverage existing disclosure standards, because the SEC will also do so.
During his confirmation hearing last week, SEC Chairman-nominee Gensler emphasized that the investor community gets to decide what is material, and the SEC will be guided by investor views in setting ESG disclosure standards. Companies should likewise look now to which standards have the strongest investor backing, beginning with the $58T in assets under management that expressly supports the Sustainability Accounting Standards Board (SASB).[1]
2. Now is the time to have influence.
In addition to its normal notice-and-comment process, the SEC is already engaging with companies and trade associations, and looking to existing corporate disclosure, as it contemplates the final rules. Companies are well-advised to join this conversation, directly or through their trade associations, in addition to influencing market practice through their 2021 disclosure.[2] Moreover, voluntary standard setters such as SASB have established clear channels to receive and incorporate company feedback.
3. Establish, and refine, disclosure controls now.
The SEC’s recent emphasis on enforcement, coupled with increasing attention to ESG disclosure from both state attorneys general and the plaintiffs’ bar, makes clear that companies should ensure the same accuracy in their ESG disclosure as they do with respect to other financial reporting. To do so requires rigorous internal controls and, potentially, third-party assurance; as any CFO can attest, that is not built quickly.
4. Keep your Board up-to-speed.
Regardless of the swirl around ESG rule-making, well-positioned companies will ensure that their directors understand the linkage between relevant ESG issues and business performance, and are closely scrutinizing their ESG strategy, positioning among peers, and disclosure. Today, directors are also expected to be able to fluently engage with top shareholders on the ESG issues that can impact the business.
No one can predict with absolute certainty the when or the what of the SEC’s final rules. However, it is a safe bet that these rules are coming, and that companies which act now will be best positioned to keep up with the expectations of both regulators and investors.
ON MATTERS OF ESG STRATEGY AND DISCLOSURE, WE ARE HERE TO HELP. PLEASE DON’T HESITATE TO REACH OUT TO DISCUSS A BESPOKE ESG GAME PLAN FOR YOUR COMPANY.
To learn more about SGP, please contact us at contact@sgpgovernance.com.
[1] Perhaps most notably, BlackRock, the world’s largest asset manager, made clear in January 2020 that it expected every public company to publish a disclosure in line with industry-specific SASB guidelines by year-end, and more recently announced its growing tendency to vote against directors, and for shareholder proposals, where companies are not acting with sufficient speed and urgency.
[2] In addition, many companies are collaborating with their trade associations to create appropriate industry-standard reporting “templates”. For example, the Edison Electric Institute and the American Gas Association developed an ESG and sustainability reporting template that is now widely used in the utilities sector.
[3] For example, SASB IIRC have announced plans to merge, and SASB, IIRC, CDP, CDSB, and the Global GRI recently co-authored an illustration of how their current platforms, along with the elements set out by the Task Force on Climate-related Financial Disclosures (TCFD), can be used together to provide a ‘running start’ for development of global climate-related standards.
[4] For example, a new set of ESG metrics and disclosure was announced by the World Economic Forum with the “Big Four” accounting firms in September 2020, and the International Financial Reporting Standards Foundation, which oversees the International Accounting Standards Board, is undergoing work that may lead to a proposal to the United Nations (UN) in November 2021 to establish a global sustainability standards board.
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