By Soyoung Ho
Investor demand for sustainability information from companies has been exponentially increasing recently, but the SEC has left it up to each public company to decide whether environmental, social, and governance (ESG) information is material to investors to warrant disclosure.
This means that companies should disclose information that a reasonable person would find important in the total mix of information in making a decision to buy or sell a particular company’s stock. But this also means that there is inconsistency of corporate sustainability reporting and confusion in the capital marketplace, and there may be a way for the SEC to promote reporting consistency for the benefit of investors without imposing a prescriptive disclosure requirement.
In a recent interview, Jeffrey Hales, chair of the Sustainability Accounting Standards Board (SASB), said the board “is supportive” of the SEC’s principles-based approach to disclosure.
“But we also acknowledge that it can be helpful even with a principles-based approach for the SEC to refer to frameworks or standards that are suitable,” said Hales, an accounting professor at the University of Texas at Austin. “They have a history of having done that.”
In particular, he pointed to Section 404 of the Sarbanes-Oxley Act of 2002, which requires a public company’s management to set up and evaluate its internal control over financial reporting (ICFR). The company’s external auditor then must attest to the management’s assessment of financial controls. Congress passed Sarbanes-Oxley in response to accounting frauds at Enron, WorldCom, and others that cost investors some $85 billion.
“The SEC does not say ‘here are internal controls that will be required,’ but they did point to a private sector body—COSO—and said they have a framework that has been developed that would be suitable,” Hales said. “In the end, that became sort of de facto standard.”
COSO is short for the Committee of Sponsoring Organizations of the Treadway Commission, a joint initiative of five private sector organizations that develop frameworks and guidance on enterprise risk management, internal control, and fraud deterrence.
For example, COSO’s Internal Control—Integrated Framework is widely used, and market regulators have said that companies that have adopted the framework are more likely to simplify their financial reporting and their efforts to comply with the SEC and PCAOB control requirements.
“One thing we believe is that companies can talk about things that are material, and that’s super important. But to the extent that they can do so with disclosures that are comparable…it makes [the information] much more decision useful for the capital market,” Hales said. “I think that’s really an important role that standard-setters can play in helping to translate things that are material into information that is decision useful.”
Should SEC Point to SASB for Sustainability Reporting?
There are currently different organizations that set ESG framework or standards. They are broader or narrower than SASB’s standards and with different purposes. But Hales believes the SASB could be the standard-setter that the SEC can point to for ESG reporting.
“Our mission is very similar and very consistent with the SEC’s mission,” he said. “I have worked a lot with the financial accounting standards setters—the IASB and FASB—and to me, I have always felt like there is a very similar focus on what we are trying to accomplish—to improve the quality of information that is available for the capital market participants…. I could see [the SEC] pointing to SASB because they wouldn’t have to say ‘we are going to shift what we value.’”
In the meantime, Hales’s view comes as the SASB’s star power in the ESG reporting world has been rising.
The SASB writes standards that are industry-specific which identify the subset of sustainability related risks and opportunities most likely to affect a company’s financial condition. And the world’s largest asset manager BlackRock, Inc. in January 2020 urged companies to use standards set by the SASB and the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD).
Then a week later, State Street Corp. Global Advisors issued an ESG metric that leverages SASB’s work to assign an ESG score for public companies.
This comes as companies have already been increasingly using SASB’s 77 industry-specific standards which were issued in November 2018.
According to the board, as of mid-September this year, there were 341 companies, 198 U.S. and 143 foreign, that adopted SASB standards in 2020. Of those, 196 are in the Standard & Poor’s Global 1200 index. This compares to 112 companies that used SASB standards in 2019.
Separately, to reduce complexity, confusion, and inconsistency in sustainability reporting, five ESG standard-setters—the SASB, Carbon Disclosure Project (CDP), Climate Disclosure Standards Board (CDSB), International Integrated Reporting Council (IIRC), and Global Reporting Initiative (GRI)—recently issued a joint statement of their intent to work together towards a comprehensive corporate reporting.
This article originally appeared in the September 29, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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