Episode 13: Sustainability Disclosure with Roger Martella (Sidley Austin)

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Today's episode relates to that old adage "secrets secrets are no fun unless you share with everyone." Some sustainability information companies choose to keep secret but other information, by law, they are required to disclose. We'll explain. We're also starting to see lawsuits for information previously not disclosed. Our latest sustainability celebrity, Roger Martella, former top lawyer at the U.S. Environmental Protection Agency, will help us delve into the wide world of sustainability disclosure.

Learn more about environmental law and policy here!

Episode Intro Notes

what we’ll cover

Extent of risk to companies
What is required to disclose?
What do most companies currently disclose?
Why disclose?

Extent of Risk to companies

Sustainability Accounting Standards Board reported in December 2015 that 93 percent of American public companies face some degree of climate risk but only 12 percent have disclosed it (1). Those 93 percent of companies could face “transition risks” as the world shifts to a low-carbon economy including declining revenues, stranded assets (an asset that has become non-performing or obsolete well ahead of its useful life and must be recorded on a balance sheet as a loss of profit), impairment charges (reduction in the company’s goodwill on the balance sheet), and changes in cash flows.

Some have also called on companies to perform “carbon-stress tests” where they model revenues and cash flows under different emission limits and carbon prices (1).

A recent Barclay’s analysis found that over the next 25 years, if the world is limited to a 2 degree Celsius rise in global temperature, the global fossil fuel industry would lose $33 trillion compared to a business-as-usual approach (1).

What Required to Disclose

SEC filings. Certain sustainability information is required under existing SEC rules. SEC Regulation S-K requires the disclosure of material information that is necessary to [form] an understanding of the company’s financial condition and operating performance, as well as its prospects for the future.” It also says companies are required to disclose risk factors—factors that may affect a company’s business, operations, industry or financial position, or its future financial performance (9). So think material information and risk factors.

While companies make disclosures in their SEC filings, they are not created equally. Only about 15 percent of such disclosures use metrics. And those metrics that are used vary by company, making it very hard for investors and analysts to compare companies (8).

History (9). As the Concept Release notes, disclosure of sustainability information has not been examined in detail by the SEC since the mid-1970s, At that time, the percentage of holdings of “ethical investors” was estimated at “two thirds of one percent” of all U.S. stock and bond holdings. The SEC says interest in this area “may be evolving.” That’s probably the understatement of the century. According to the Forum for Sustainable and Responsible Investment, more than one out of every six dollars (more than $6.5 trillion) is managed according to socially responsible investment strategies.

What Most Companies Currently Disclose

Eighty one percent (81%) of the companies included in the S&P 500 Index® were found to have published a sustainability or corporate responsibility report (11).

A KPMG survey of 4,500 companies in 45 countries found that the rate of CR reporting is higher in Asia Pacific than it is in Europe or the Americas (12). CSR reporting is often highest among emerging economies.

The kind of information included in these reports varies. A 2015 KPMG report that reviewed the disclosed carbon information of the world’s largest 250 companies, only half (53 percent) state carbon reduction targets in their company reports and, of these, two-thirds provide no rationale to explain why those targets were selected (12).

So that’s setting the targets. In terms of how many disclose GHG emissions, one study that analyzed 4469 large companies, found only 47 percent disclosed GHGs.

Disclosure Tools

A lot of companies use the Global Reporting Initiative (GRI) indicators, the Sustainability Accounting Standard Board’s (SASB) standards, or the CDP (formerly Carbon Disclosure Project) questionnaire to guide their disclosure. Let’s discuss each of these.

GRI pioneered sustainability reporting in the late 1990s and is now in its fourth version of its indicators. Has indicators on climate change, human rights, corruption, and many others. As of 2015, 7,500 organizations used GRI Guidelines for the sustainability reports. If you’re curious, you can download the G4 guidelines for free on their website.

A 2013 study of A and A+ GRI reports showed that 90% of known negative events were not included in them. That A and A+ rating is based on the quantity of indicators in the report. That’s one knock against GRI--that it’s more focused on quantity rather than quality of reporting.

SASB was formed in 2011 as an alternative to GRI. SASB has developed indicators that are industry-specific and designed to work with the U.S. security laws that we discussed. They currently have standards for 79 industries, and these metrics go beyond the environment to include things like leadership and governance. The standards are designed to work within U.S. securities laws (i.e., help companies determine what is “material”). They have a nifty “standards navigator” on their website that can use to explore the different industries and their metrics. Just create a free account and good to go.

CDP. Nearly ⅕ of global emissions are managed through CDP. In 2015, over 5,500 companies responded to its annual climate change questionnaire. You can download the questionnaire on their website (7). It has questions on management, risk and opportunities, and emissions.

Why disclose

A number of reasons

Might be able to attract lower cost of capital and more investors by disclosing risk. CDP claims companies save $1.2 million in lower interest payments due to reporting via CDP (5). A 2015 CFA Institute survey found that 73 percent of institutional investors indicated that they take environmental, social and governance (ESG) issues into account in their investment analysis and decisions, to help manage investment risks. Also, in a 2015 Ernst & Young survey of more than 200 institutional investors around the world, almost two-thirds said companies do not adequately disclose information about ESG risks (10, Page 204). So investors care about ESG issues and companies are not adequately disclosing information on it.
Studies have shown that companies that are transparent about their carbon risks experience a positive impact on their evaluation (5).
New revenue streams. The global market for low carbon goods and services is $5.5 trillion and is set to grow.
Helps cut costs by finding areas using resources unnecessarily and also helps find ways to make the supply chain more stable.
Attract talent. 62% of 20-30 year olds said they want to work for a company that makes a positive impact.