Can non-traditional (sustainability) data be material under U.S. securities laws?

Transcription

1 Can non-traditional (sustainability) data be material under U.S. securities laws? Sustainability Accounting Standards Board: Standards for Effective Disclosure of Material Sustainability Factors to the Capital Markets Himani Phadke Director of Research July 20, 2016

2 A Growing Demand for Effective Sustainability Disclosure Global megatrends, economic evolution create challenges for companies, investors LEGISLATIVE PRESSURE Mandates in multiple markets (E.U., China, India, etc.) Exchange listing requirements Financial Stability Board (FSB) Task Force SEC Concept Release ECONOMIC PRESSURE Resource constraints and volatility Financial impacts of climate related risk Changing valuations and the rise of intangibles INVESTOR PRESSURE Shareholder resolutions Questionnaire fatigue Calls for divestment Increasing engagement STATE OF DISCLOSURE Proliferation of boilerplate disclosures Inability to discern material information or benchmark performance Inconsistent data quality Selective disclosure risk 2 July 2016

3 Why Does It Matter? Financial statements don t efficiently account for non-financial value drivers 100% Components of S&P 500 Market Value 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Intangible Assets Tangible Assets Source: Ocean Tomo 7/28/2016

4 Investors Care about Sustainability A rapidly increasing share of global assets are managed with ESG issues in mind Key sustainability-related investor initiatives: U.S. Sustainable & Responsible Investing (in billions) Initiative Carbon Disclosure Project AUM (US $) $95 trillion $8,000 $7,000 $6,000 $5,000 $4,000 9% 11% 12% 11% 18% UN Principles for Responsible Investment International Corporate Governance Network Investor Network on Climate Risk $59 trillion $26 trillion $13 trillion $3,000 $2,000 $1,000 $ Source: Forum for Sustainable and Responsible Investment One out of every six dollars under professional management in the U.S. July 2016

5 The Pain Point for Investors Investors lack the tools needed to integrate sustainability into investment decisions 100 Investor satisfaction with information provided by US-listed companies How risks and opportunities are identified and quantified in financial terms Comparability of sustainability reporting between companies in the same industry Relevance and implications of sustainability risks/issues Key performance Process used to indicators related to identify material each identified sustainability issues material issue Source: PwC Sustainability Goes Mainstream, May 2014 Satisfied Dissatisfied 5 July 2016

6 The SASB Mission Improved sustainability disclosure enhances market efficiency The mission of SASB is to develop and disseminate sustainability accounting standards that help companies disclose material, decision-useful information to investors in a cost-effective way. That mission is accomplished through a rigorous, transparent process that includes evidence-based research and broad, balanced stakeholder participation. Facts about SASB Independent 501(c)(3) non-profit Industry-specific standards for 79 industries in 10 sectors for use in mandatory filings such as the Form 10-K and 20-F 6 7/28/2016

7 The SASB Difference SASB standards are created for the market, by the market Material Decision-Useful Cost-Effective Industry-Specific Evidence-Based Market-Informed 7 July 2016

8 Definition of Materiality from an Investor s Perspective SASB is guided by the U.S. Supreme Court definition in identifying disclosure topics Material information is defined by the U.S. Supreme Court as presenting a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976) Other sustainability disclosure frameworks use definitions of materiality that are broader and inclusive of the interests of additional stakeholders 8 July 2016

9 Designed for Integration into Mandatory Public Filings An integrated reporting environment without regulation US GAAP governs presentation of financials True and fair representation of performance on material factors SASB Disclosure Topics and Metrics designed for integration into MD&A, risk factors, other sections as appropriate 9 July 2016

10 Materiality in Practice as a Basis for Standards Setting Disclosure topics with evidence of impact on financial condition and operating performance Disclosure Topic Examples Drug safety and side effects Energy-efficient chemicals production Operational safety of gas pipelines Diverse technology workforce Drivers of Impact Customer demand, regulations affecting end use Regulations, externalities & resource scarcity Unanticipated operational disruptions, resource volatility Reputation, innovation, physical/ direct market value impacts Financial Impact REVENUE COST COST OF CAPITAL ASSETS & LIABILITIES 10 3/14/2016

11 Early Indication of Materiality of SASB Topics Harvard research correlates sustainability and financial performance Corporate Sustainability: First Evidence on Materiality Working Paper, Harvard Business School, 2015 Findings: Using SASB s framework, Harvard researchers found that firms with good performance on material sustainability issues and concurrently poor performance on immaterial sustainability issues enjoy the strongest financial returns. These results speak to the efficiency of firms sustainability investments, and also have implications for asset managers. 11 July 2016

12 SEC s Regulation S-K Concept Release Seeks comments on disclosure of public policy and sustainability matters Section F; pages What ESG issues are important to investment decisions? What would an ESG disclosure framework look like? Could it be flexible enough to address evolving issues? Would line-item disclosure requirements be consistent with The Commission s rule-making authority? Would they yield immaterial information? Does information on ESG factors reported outside Commission filings address investor needs? Responses due July 21, /28/2016

13 APPENDIX 13 7/28/2016

14 Investor Interest Shareholder interest is translating into more proposals and engagement SHAREHOLDER PROPOSALS Percent of total proposals filed that are related to social and environmental issues 40% 40% 45% 55% 63% Sources: EY, , As You Sow, 2015 GLOBAL INSTITUTIONAL INVESTORS 89% Will request sustainability information directly from the company Source: PwC, % More likely to consider ESG information if common standards used 50% Very likely to sponsor or cosponsor a shareholder proposal 14 7/28/2016

15 Benefits of Integration Integrating sustainability and finance has internal value for companies Operational benefits reported by Integrated Reporting pilot companies 92% 79% 84% 96% Better understanding of value creation Improved decision making processes Data quality and reporting benefits Positive impact on internal engagement Source: Black Sun / IIRC, /28/ SASB

16 A True and Fair Representation of Performance? Voluntary sustainability reports are not decision-useful for investors A 2013 study of GRI A and A+ reports in the Accounting, Auditing & Accountability Journal found that: 90 per cent of the significant negative corporate (social or environmental) events were not reported. 16 7/28/2016

17 Current State of Disclosure in the 10-K on SASB topics Reporting is widespread but lacks consistency, comparability, industry-specificity Infrastructure (80 companies) Renewable Resources & Alternative Energy (47 companies) Consumption II (79 companies) Consumption I (68 companies) Resource Transformation (50 companies) Services Sector (93 companies) Transportation Sector (63 companies) Non-Renewable Resources Sector (81 companies) Technology & Communications Sector (59 companies) Financials Sector (63 companies) Health Care Sector (58 companies) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% No Disclosure Boilerplate Industry Specific Metrics 75% of the disclosure topics in SASB standards are already acknowledged as material and being disclosed in the 10-K but not effectively 17 7/28/2016

18 Better Data, Better Decisions SASB metrics will power a variety of investor activities Data-driven corporate engagement leading to improved sustainability outcomes Improve quality of fundamental equity and credit analysis by incorporating a broader information set Construct alternative indexes consisting of companies with top performance on SASB s metrics Expand risk reporting to Boards to encompass sustainability risks in addition to traditional risk measures like volatility Develop a better understanding of systematic risks at the total fund level to inform risk allocation and/or policy advocacy July 2016

19 Regulation S-K Concept Release Provides opportunity for the Commission to address key challenges Investor demand for material sustainability information Corporate cost burden of CSR reports, questionnaires and shareholder resolutions Biased disclosure (i.e. cherry picking ) in voluntary sustainability reports Proliferation of boilerplate information on material factors in mandatory filings Inability to distinguish immaterial from material information; unreliable data Selective disclosure of material information through questionnaires The need for investors to purchase ESG information from commercial services Inability of regulators to enforce disclosure against a market standard A market standard on ESG disclosure is needed to meet investor needs, guide companies on materiality, and serve as the basis for compliance with Regulation S-K. 19 7/28/2016

20 Robust Standards Designed to Provide Decision-Useful Information SASB standards contain industry-specific disclosure topics, metrics, and guidance SASB Standard Accounting metrics for each disclosure topic Industryspecific disclosure topics Technical protocol for compiling data; activity metrics for normalization 20 July 2016

21 Proprietary The SASB Difference SASB standards focus on financially impactful sustainability issues Material to investors GAAP/IFRS DJSI TruCost CSRHub MSCI Bloomberg CDP SASB IIRC Transparent GRI Important to stakeholders Accounting standards Reporting frameworks Data providers/indexes Degree of ESG coverage 21 3/11/2016