Accounting & DisclosureESG

SOX-Like Framework Needed for ESG/Sustainability Disclosures

By September 29, 2020 October 2nd, 2020 No Comments

Moving ESG/sustainability information from the web to the 10-K warrants attention.

By Joseph Neu

Members of our group for treasurers at mega-cap companies recently heard a partner from the law firm White & Case share the findings of the firm’s latest annual survey of ESG disclosures in SEC filings by the top 50 companies by revenue in the Fortune 100.

  • The presentation built on a topic raised by the head of ESG at a member company in a NeuGroup session last month. 

From website to 10-K. Maia Gez, partner in the firm’s public company advisory group based in Silicon Valley, said the volume of ESG disclosures is rising to the extent that more of the information normally found on the corporate website is now finding its way into the 10-K. 

  • “The two tracks are merging,” Ms. Gez noted, “and there is not much clarity on how to blend the two.” 
  • Normally, bringing information from the corporate website to SEC reporting automatically elevates the level of governance required on what is disclosed. 

Disclosure debate. Institutional investors seem to be content with having ESG and sustainability information disclosed on the website, where 11 of the surveyed companies said they follow SASB or TCFD.

  • However, other constituents, starting with the Human Capital Management Coalition, have pressed for disclosures to be made in SEC reporting, emphasizing quantitative measures and the need for greater assurance. 
  • The Commission, however, has thus far been reluctant to impose a mandatory ESG framework or other prescriptive sustainability disclosure requirements for SEC filings. It preferers instead to stay with a more principles-based approach. 
  • SEC Chairman Jay Clayton has noted, for example, that E, S and G are “quite different baskets of disclosure matters and that lumping them together diminishes the usefulness, including investor understanding, of such disclosures.” They vary significantly from sector to sector and by country. 

Due diligence. Still, the trend to incorporate the website information directly or by reference in SEC reporting, including with green or sustainability bond issuance, is already increasing the due diligence on it by financial market counsel. 

  • Any section that remains on the website should have every line vetted and properly backed up.
  • Ms. Gez noted the trend is on the radar screen at her firm and that lawyers dealing with SEC reporting and equity or debt offerings (and 10b-5 opinions) are being brought up to speed quickly on this topic. 
  • ESG and sustainability releases should likely be reviewed by counsel now.
  • Eventually, an expansion of SOX or creating a SOX-like governance and control framework to provide assurance for ESG and sustainability controls will be needed.

Control and compliance. The growing use and importance of ESG and sustainability disclosures will force more companies to bring more of a legal or control and compliance mindset to their ESG/sustainability teams.

  • Internal and outside legal counsel and SOX control and audit teams will likely start playing catch-up quickly to establish governance frameworks around ESG-related disclosures. 

Human capital. First on the list is likely to be human capital management statements, where the SEC has offered specific guidance (90% of companies surveyed make disclosures on this and 70% increased them). Also important:

  • Employee welfare, health and safety and BCP, where 76% included such disclosures.
  • Board oversight of E and S risk is a factor (88% disclosed, 44% increased disclosure).

Materiality. Of course, information on websites is also going to be subjected to additional scrutiny. There, as well as in SEC reporting, treasurers should be advising their companies to be consistent and accurate. 

  • The more material that the information is to the financial picture and value of the firm, the more important it is to get right.
  • If the information is less material, then perhaps leave it out of SEC reporting or even off the website. 
  • Also, ask about the controls and procedures you have in place for incorporating ESG/sustainability information into SEC reporting/offering documents. 
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Justin Jones

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