Investors Push SEC for More ESG Disclosures

Yet again, institutional investors have asked the Securities and Exchange Commission to force companies to do a better job disclosing environmental risks in their periodic filings.

Cox

The latest push by investors springs from the SEC’s “21st Century Disclosure Initiative,” which Chairman Christopher Cox launched in June to enhance the usefulness of disclosure to investors. In an Oct. 22 letter addressing the initiative, 14 large institutional investors called on the SEC to include environmental, social, and governance risk factors as part of those new disclosure efforts. The request builds on a similar petition in 2007 when the group asked for better corporate disclosure of climate-related risks in securities filings.

“This is exciting, because this is the first time these big investors have asked the SEC to improve disclosure of those issues,” says Jim Coburn, senior manager of investment programs at CERES, which coordinated the letter to the SEC.

While the focus of the SEC’s initiative is mainly to leverage XBRL technology—which ostensibly will give investors new tools to peer into the depths of corporate financial data and other disclosures—the activists’ letter says the Disclosure Initiative “provides a unique opportunity for the integration of ESG data into the business reporting system.”

The group also asked that the SEC appoint an investment professional as a member of an advisory committee the SEC plans to appoint in early 2009 as part of its initiative. The Advisory Committee would be responsible for reviewing the SEC’s plan and making recommendations to the SEC for its implementation. In addition, investors called for the creation of a sub-committee of the advisory committee to consider how material ESG data can be integrated into registrants’ SEC filings.

The 14 signatories of the letter include public pension funds such as the California Public Employees Retirement System and the California State Teachers’ Retirement System, and treasurers and comptrollers from several states, including California, New York, and New Jersey.

CLIMATE COMMENTS

The following comments from the Investor Network on Climate Risk to the SEC are in regard to modernizing the SEC’s disclosure system:

Full ESG Disclosure

While the case for climate risk as an investment issue has received considerable attention, there is a rapidly growing trend in the U.S. and internationally for companies to disclose—and investors to ask for—information on a broader range of environmental, social and corporate governance (ESG) issues. Corporations measure and manage a significant amount of information beyond strict financial data that is essential to their businesses. Such ESG information can pose material risks that must be disclosed to investors. Examples include but are not limited to environmental issues such as water-related risks and social issues such as labor and supply chain risks. Because ESG information is increasingly of interest to investors and other stakeholders, companies are already disclosing it in their annual reports, in sustainability reports and on their

websites.

Just as companies have been modernizing their reporting to include ESG issues, it is incumbent upon the SEC to catch up with these trends in order to provide timely, relevant disclosure and to ensure the competitive position of U.S. investors.

A recent study by the Sustainable Investment Research Analyst Network (SIRAN) showed a marked increase since 2005 in the use of voluntary codes for ESG reporting by S&P 100 companies: more than 80% provide information through sustainability websites; almost half produce a sustainability report; and more than one-third make use of the Global Reporting Initiative (GRI) Guidelines, the international standard for ESG reporting. Globally, 77% of the world’s 250 largest companies report using the GRI.

Other countries are modernizing their corporate reporting systems to include ESG factors. A number of regulatory bodies and stock exchanges throughout the world have begun to encourage or require standardized reporting of corporate ESG data. For example:

The French government requires that corporations report non-financial information.

The Malaysian stock exchange mandates corporate disclosure of socially responsible activities in annual financial reports.

The London Stock Exchange requires companies to disclose relevant environmental, social, workplace and community information.

The Swedish government requires state-owned companies to report annually according to the GRI Guidelines.

China’s Assets Supervision and Administration Commission encourages state-owned businesses to report on corporate responsibility.

For the U.S. disclosure system to remain competitive—and for U.S. investors to be as well informed as investors in other markets—the SEC should integrate reporting of material ESG risks into its new disclosure system. The Commission should note that the GRI Guidelines provide a uniform and comparable system which is essential to operationalize the reporting of ESG data and should thus serve as a model for any future disclosure framework. The SEC’s proposed rule introducing an XBRL-based reporting system provides a unique opportunity for the integration of ESG data into the business reporting system. Such integration would re-affirm the SEC’s role as the central authority for all business reporting and would discourage the development of yet another parallel reporting system which could be confusing for investors and

companies alike.

As mentioned above, we hope that a deeper engagement with investors will help the Commission create a disclosure system to meet our needs for improved disclosure of climate risks and other material ESG issues. Therefore, we encourage the Commission to:

(1) Include the goal of improving climate risk disclosure in SEC filings as part of the Federal Advisory Committee’s charter;

(2) Appoint an investment professional as a member of the committee in order to ensure that investor views on these issues are represented; and

(3) Create a subcommittee of the Advisory Committee to consider how material

environmental, social and governance (ESG) data can be integrated into registrants’ SEC filings.

Source

Investor Network Letter to SEC (Oct. 22, 2008).

Whether the investors’ effort will actually succeed, however, is very much an open question. The SEC has shown little interest in boosting ESG disclosure over the years, and shareholder proposals forcing companies to make such disclosures themselves usually don’t get much support at the annual meeting.

Companies currently have no specific regulatory obligation to report ESG issues beyond a narrow range of environmental matters expressly addressed by SEC regulations. In particular, U.S. securities laws do not require companies to report on their corporate governance practices relating to ESG issues, as some institutional investors now want.

Schapiro

Now that President-elect Barack Obama has named Mary Schapiro as his next SEC chairwoman, that may change—but Schapiro, currently CEO of the Financial Industry Regulatory Authority, has a long history of policing against market practices rather than addressing more theoretical policy questions like ESG disclosure. And given Wall Street’s collapse and the failures of the SEC under current Chairman Christopher Cox, Schapiro will have plenty of other pressing problems to worry about.

How successful the activists will be depends “largely on how aware SEC management and staff are and how much they appreciate the importance of framing these issues in those terms for the investment community,” says Ira Feldman, president of Greentrack Strategies, a consulting firm that focuses on strategic environmental management and sustainable business practices. “[It] is not yet clear whether SEC staff will adopt ESG as the framework for enhanced disclosure.”

“Of course, this is not the time to put big burdens on companies to spend a lot of money tracking and disclosing more information,” Coburn says. “But the investors also feel like better protection for investors, and better protection for how the market operates, could have prevented some of the financial crisis that’s affecting us now.”

Because the SEC has many other pressing governance issues to address in 2009, such as majority voting and the rating of sub-prime assets, even Coburn says, “I can’t predict which one will be addressed first and when.” Still, he adds, “I think, over time, the ESG issues will become more important.”

Cuomo

At least one influential regulator is pushing companies on ESG disclosure: Andrew Cuomo, attorney general for the state of New York. In recent months, Cuomo has investigated two energy companies (Xcel Energy and Dynegy) for the adequacy of their disclosure of financial risks related to emissions of greenhouse gases. Both reached settlements with Cuomo where they agreed to disclose more such information. Similar probes of AES Corp., Dominion Resources, and Peabody Energy are all ongoing.

Those settlements are similar to investor activists’ 2007 petition to the SEC. “Voluntary disclosure under the Global Reporting Initiative has blazed this trail, so it really wouldn’t be a stretch for the SEC to adopt an ESG version of sustainability reporting,” Feldman says.

ENERGY PROPOSALS

SRI Shareholder Proposals at Energy Companies: 2008

Proposal

Voted

Implement Equality Principles

1

Report on Reduce Greenhouse Gas Emissions

1

Report on Market Specific Environmental Laws

1

Report on Environmental Impact of Oil Sands Operations in Canada

2

Adopt Quantitative GHG Goals for Products and Operations

2

Adopt Human Rights Policy

2

Adopt Guidelines for Country Selection

1

Report on Energy Technologies Development

1

Report on Environmental Damage From Drilling in the National

Petroleum Reserve

1

Report on Global Warming

1

Report on Indigenous Peoples Rights Policies

1

Report on Political Contributions

5

Adopt Principles for Health Care Reform

1

Declare Royalty Payments to Host Governments

1

Amend Bylaws to Prohibit Precatory Proposals

1

Review Anti-discrimination Policy on Corporate Sponsorships and Executive Perks

1

Report on Carbon Dioxide Emissions Information at Gas Stations

1

Report on Climate Change Impacts on Emerging Countries

1

Report on Ties to State Sponsors of Terror

1

Adopt Policy to Increase Renewable Energy

1

Compare CEO Compensation to Company’s Lowest Paid U.S. Workers

1

Amend Bylaws to Establish a Board Committee on Human Rights

1

Publish a Scientific Global Warming Report

1

Source

Energy Industry Report From RiskMetrics (2008).

Disclosure Anyway

Regardless of any SEC action (or lack thereof) more companies are disclosing at least some ESG data voluntarily. According to a recent study by the Sustainable Investment Research Analyst Network, more than 80 percent of S&P 100 companies provide information through sustainability Websites; almost half produce a sustainability report; and more than one-third make use of the Global Reporting Initiative guidelines, the international standard for ESG reporting. Worldwide, 77 percent of the world’s 250 largest companies report using the GRI.

Regulatory bodies and stock exchanges throughout the world have already begun to require standardized reporting of corporate ESG data. Among them:

Sweden requires state-owned companies to report annually according to the GRI Guidelines.

The London Stock Exchange requires companies to disclose relevant environmental, social, workplace, and community information.

Public companies listed in Malaysia must disclose socially responsible activities in annual financial reports.

Still, while many U.S. companies disclose ESG information in their sustainability reports and on their Websites, the activists contend that these reports don’t go far enough, given the financial risks ESG factors can create. For example, ESG information can disclose problems such as water-related risks from growing water scarcity, or failure of suppliers to follow environmental regulations.

Further, Coburn says, while companies often include important issues in their sustainability reports—such as their greenhouse gas emissions and reduction target—“there’s also a mix of public relations in those reports, and some of that information is not very useful.” And some companies still don’t provide voluntary disclosure of climate-related and ESG risks at all, investors say.

The energy sector has been most hard hit by ESG-related shareholder proposals. According to a survey by proxy advisory firm RiskMetrics, 21 energy companies received 50 such proposals in 2008. Of that number, 15 were somehow settled or withdrawn, while 35 went to a vote. None of those 35 passed, but they received an average of 19.4 percent shareholder support.

Because better disclosure is necessary, investors say, the SEC should require companies to disclose such risks in their 10-K filings. “The 10-K report is, and will remain, the gold standard for reporting information to investors. Investors need to know that material information relating to companies’ performance and operations will be in those required reports,” the Oct. 22 letter says.

Rogers

“The type of information that so-called ‘reasonable investors’ need in order to support their investment decisions is changing,” says Greg Rogers, head of the consulting firm Advanced Environmental Dimensions. “Over time, disclosure rules must evolve to produce the types of information that investors demand.”