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A Critical Juncture in Capital Markets History

Words by 3p Contributor
Investment & Markets
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By Clara Miller

The CEOs of many of the country’s leading foundations are spreading the word that it’s time for the Securities and Exchange Commission to formalize corporate sustainability disclosure in the regulatory framework. We share the vision that society will benefit from the improved environmental, social and governance (ESG) performance of companies, as driven by investors’ ability to compare sustainability performance. Directing capital to address the critical sustainability challenges of our time and to anticipating and preparing for the challenges of the future is also increasingly understood to go hand-in-hand with maximizing financial returns.

Formal SEC guidance for the use of industry-specific sustainability accounting standards, such as those issued by the Sustainability Accounting Standards Board (SASB), will help public corporations disclose material, decision-useful information to investors. This will ultimately improve sustainability disclosure, thus resulting in heightened transparency, more accurate valuation of ESG risks and performance, and increased capital to improved sustainability outcomes.

In April of this year, the SEC issued a concept release on the Business and Financial Disclosure Required by Regulation S-K. What this means for companies and investors is that the regulations which govern how and what publicly-listed companies must disclose in their filings with the SEC could undergo the first substantive changes since 1982, with potentially transformative ramifications.

Embedded in the document are 11 pages discussing disclosure of sustainability-related information. Thus far, the SEC’s engagement on sustainability issues has been limited - and no coincidence - disclosure remains poor with lack of standardized, comparable, decision-useful information on ESG performance. When the Commission first examined investor interest in environmental and civil rights issues in the 1970s, they concluded that an “insignificant percentage of American shareholders” were interested in these matters. Fast forward to 2010. The Commission’s Interpretive Guidance on climate change disclosure was issued as a result of immense pressure from the investment community, with over 100 institutional investors representing $7 trillion petitioning the SEC to issue guidance on this important issue. In 2016, investor interest in these matters is even greater.

For decades now, concrete examples of financial impacts arising from sustainability issues have been mounting. From Peabody Energy’s bankruptcy and Chipotle’s E. coli outbreak, to the Rana Plaza building collapse and Takata’s airbag recalls, the landscape is littered with corporate mishaps and subsequent investor losses. Looking beyond the headlines, time and time again, research (such as that of Harvard Business School) has confirmed the financial impacts that sustainability issues can have on corporations.

This is important to foundations who are increasingly interested in assessing “what’s inside” their endowment portfolios and mobilizing their assets to support their missions. Mission-aligned investment within a diversified portfolio is challenging without comparable data and better insight into how public companies are managing environmental, social and governance issues.

Disclosure on sustainability issues is inconsistent and by and large ineffective. Some companies don’t report at all, many report using boilerplate language, and few report using metrics. While some companies disclose sustainability information in SEC filings, many only publish standalone sustainability reports, which are not an effective format for investors. As an example, climate change impacts all of society. Nevertheless, few companies effectively disclose information on the topic to investors. Two-thirds of companies in key sectors have either no disclosure or use only vague, boilerplate language for climate change disclosure in Form 10-K. When sustainability disclosure is subject to the same stringent rules as financial disclosure, investors will be able to more fully integrate sustainability information in investment decision-making.

Corporate sustainability reports and the proliferation of ESG-related questionnaires don’t do the job. They lack the rigor and standardization of SEC filings. Shareholder proposals -- two-thirds of which are now about ESG matters -- are burdensome for both issuers and investors. This is symptomatic of the market dysfunction around sustainability information - there is extraordinary frustration on the part of issuers with questionnaires and shareholder resolutions, and the same frustrations are shared by investors without access to material, investor-grade data sets that are a true and fair representation of performance. We have a window of opportunity to make the call for a market standard for sustainability disclosure.

This is why we are excited about the SEC’s recent concept release. This is a critical juncture in capital markets history. It’s time for the SEC to formalize corporate sustainability disclosure in the regulatory framework.

The SEC’s public comment period has closed. We joined investors, asset managers, corporations, and the public at large who sent an unmistakable signal to the SEC that sustainability-related information is of utmost importance. Sustainability issues are financial issues and the fact that they do reflect material information is much better understood since the last time the Commission looked carefully at these issues. Without sustainability issues reflected in the regulatory filings of public companies, investors have an incomplete picture of the full breadth of risk and opportunity that exists in their portfolio companies. It’s time to change that.

Image credit: Pixabay

Clara Miller is Heron Foundation president. Heron’s mission is to help people and communities help themselves out of poverty. The foundation works with a diverse set of investment strategies focused on fostering economic innovations and practices that lead to long-term economic opportunity and prosperity for all.

3p Contributor

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