reporting audit

Does the SEC Require ESG disclosure?

The SEC, or Securities and Exchange Commission is a financial regulatory agency that oversees publicly traded companies and their disclosure requirements. The reason why the SEC does not require this disclosure is because it would increase the complexity of reporting which could lead to increased costs for smaller businesses or create confusion among investors. It also takes away from other areas such as earnings-per-share, revenues, net income, total assets and more. More importantly, there are already disclosure rules in place that address many environmental issues such as climate change with annual reports filed under 10Ks or quarterly reports filed under 10Qs. If a company is filing under 10K, they must also file accompanying MD&A (Management Discussion and Analysis) which provides additional information regarding the financial statements that include material changes from management expectations or prior company performance. The SEC does not require ESG disclosure at this time.

Few companies are required to disclose ESG performance. Except in two instances, no company is required by law to disclose ESG performance, despite its importance. The first instance occurs when a company has material holdings in another corporation or in any other entity meeting the definition of an “investment company,” which includes corporations whose shares trade on national securities exchanges and mutual funds with at least $100 million under management. To meet the second requirement, a company must have more than $10 million in assets for U.S.-based operations or more than $40 million total worldwide assets for non-U.S.-based operations if it wants to be subject to its provisions without petitioning for exemption. Even then, the required ESG disclosure would only involve company’s finances and not necessarily how it is involved with these issues. But that is going to change.

What is SEC disclosure?

SEC disclosure means that all publicly traded companies and organizations must report their financial information to the Securities Exchange Commission or SEC. The SEC is a government agency that regulates investment security laws including the securities, exchanges, employees and professional services associated with them. In this case “disclosure” refers to what investors need to know about a particular company.

What is SEC ESG disclosure regulation?

ESG disclosure regulation is a new form of regulation that is a public statement regarding a company’s environmental, social and governance factors. These factors include topics such as climate change, human rights, diversity and more. It also includes policies and programs the company has in place to address these issues.

How is sustainability measured and reported?

Sustainability for companies is measured by the Triple Bottom Line (TBL). There are three categories used to measure corporations, they are financials, people and planet. Each of these is a separate section that then has more specific metrics that can be tracked and reported on.

  1. Financials includes revenue/profit/GDP, waste production and consumption, debt and interest payments.
  2. People includes labor and work conditions, discrimination, safety and employee satisfaction.
  3. Planet includes environmental impacts such as greenhouse gases, pollution, deforestation and waste production.

There are standards for measuring each area of the TBL including ISO 26000 (financials), SA 8000 (people) and ISPO 4500 (planet). The organization that issues all of the standards is the Global Reporting Initiative (GRI) which gives guidelines for each area.

Can companies choose to report on other areas, such as governance?

Yes they can, there are so many factors that go into environmental, social and governance reporting that G4 encourages companies to “go beyond compliance” because it’s important that companies take that extra step to be transparent and accountable for their statements.

How is ESG performance measured?

Companies are increasingly conscious of the effects their decisions have on the environment, society and even politics so it’s important they’re transparent about those efforts. It’s often difficult to measure how sustainable a company is because there are so many different factors to consider.

  • Is a company acting out of a sense of responsibility or to improve their image?
  • Does the company have policies in place that are sustainable, but they aren’t necessarily being utilized?
  • Can the company accurately measure all steps it takes towards sustainability and report those findings to the public?

The best way for companies to track their environmental, social and governance performance is by using an external third party that follows the guidelines of the Global Reporting Initiative. This ensures accuracy and transparency for all parties involved.

What are ESG metrics?

ESG metrics include anything that can be measured regarding sustainability, both internally and externally. It could be events, policies or the company’s environmental footprint among many other things. These metrics are reported to shareholders on either an annual or bi-annual basis depending on what is agreed upon by both the company and its auditors.

What is a sustainability metric or indicator?

Common sustainability metrics include greenhouse gas emissions, water use and waste generation. They can also include a company’s carbon footprint, which includes the greenhouse gases emitted throughout the life cycle of its products – from production to transportation – as well as how it manages these emissions.

On the social side, metrics can include diversity, human rights and supply chain labor standards. Or, in the case of professional services firms, they might include measurements like diversity among professional staff or how much money is spent per client on public interest work (such as pro bono).

Governance related metrics would be how boards are set up, board independence and the number of women on boards.

The Securities and Exchange Commission (SEC) is responsible for regulating the financial reporting standards required for publicly traded companies in the U.S., including how they disclose sustainability performance to their investors. However, it only requires companies to disclose their financial performance, not non-financial performance. In other words, the SEC does not require companies to disclose their ESG performance.

Who is required to report ESG to the securities and exchange commission?

In fact, there is no requirement from any regulatory agency in the U.S., or globally, that asks companies to disclose their non-financial performance – including both professional and professional services firms and consulting/accounting/legal firms as well as other professional firms.

That being said, professional services firms are starting to recognize this as a best practice and are creating their own guidelines for what should be disclosed – again, not required to do so by law. However, professional service providers often look at the Global Reporting Initiative (GRI), which is one of the leading sustainability reporting frameworks in the world today. Or, professional services firms may look to the professional service-specific Global Business Standards (GBS).

How are sustainability metrics reported?

Sustainability metrics are typically reported at a global level rather than by country; however, some organizations will aggregate their disclosures by country, for example by reporting on the number of complaints received and how they were resolved in each region.

What is KPI in sustainability?

KPI refers to Key Performance Indicators, which are measurements or statistics used to monitor the progress toward specific goals. When it comes to sustainability and ESG, these measurements can focus on anything from energy efficiency and greenhouse gas emissions to diversity hiring and pollution levels. These indicators are used in many areas of business including financial reporting, marketing, operations management and Sustainability.

Can the SEC make ESG rules that are sustainable?

The SEC has made its stance clear on the matter. This can be seen in their “Statement of Investor Education and Advocacy” where they state, “SEC staff continue to study issues related to environmental, social and governance (ESG) matters… However, until Congress or other regulatory agencies prescribe new disclosure obligations with respect to ESG practices, SEC staff does not plan to recommend any mandatory portfolio-wide disclosures in this area.” In short, the SEC will not be making rules on ESG disclosure. This means that if a company does have an Environmental Social or Governance practice, they are under no obligation to disclose it to investors of the company.

What is a sustainability disclosure?

A sustainability disclosure is defined as “a voluntary communication of an entity’s objectives, policies, goals or other actions towards promoting sustainable development.” For example, if a company has goals to reduce its carbon footprint by 5% over the next 3 years, this would be considered a sustainability disclosure.

What is SEC guidance?

SEC guidance is a set of professional opinions written by the SEC with the goal of providing direction to publicly traded companies. In this guidance, they state that “disclosure about non-financial issues, such as environmental, social and corporate governance matters, which are not required by the federal securities laws or regulations.”

Does the SEC issue accounting guidance?

The SEC does not issue accounting guidance to publicly traded companies.

What is a socially responsible investment?

A socially responsible investment is any investment made with consideration of environmental, social and governance factors. These investments can be in the form of stocks, bonds or other types of assets such as real estate or private equity.

The professional investment community uses a variety of terms to describe socially responsible investing including: Sustainable Investing, Socially Responsible Investing (SRI), Impact Investing, and Green Investing.

Socially responsible investing as an industry continues to grow as awareness of the impact companies have on society increases. Globally, investors poured $8.72 trillion into sustainable investments in 2018 according to a report by Arabesque Asset Management and the Global Sustainable Investment Alliance (GSIA). The report predicts that number will increase to $11.4 trillion by 2023.

What role does the Securities Exchange Commission play in ESG disclosure?

The objective of the SEC is to protect investors, maintain fair dealing and regulate professional practices in securities trading. According to their 2016-2017 performance report on their website the agency saw approximately 8,000 enforcement actions resulting in $4.48 billion in financial penalties over the course of the fiscal year.

This report also outlines their mission statement which can be found on page 5 under Section (f). The SEC’s goal is to “maintain fair, orderly, and efficient markets; facilitate capital formation; and promote investor protection.”

Many professional organizations such as the SRI Conference Series believe that the SEC should require companies to disclose more information on their environmental, social and governance practices.

Pros of ESG disclosure

  • Promotes transparency 
  • Investors are able to make better informed decisions  

Cons of ESG disclosure

  • Companies will have higher costs due to additional reporting  
  • Disclosure may not lead to better practices by companies.

While some professional investors believe the SEC should require more ESG disclosure many professional organizations including the CEO of Blackrock, Larry Fink, believe that more regulation is unnecessary and can actually hinder growth in certain sectors of the economy. Sadly, there has been no consensus on the issue.

Are there ESG climate related financial disclosures?

There are currently no regulations or laws requiring companies to disclose ESG practices at this time. However, some professional investors have created their own guidelines which are listed below:

  • The United Nations’ Principles for Responsible Investment  (PRI)
  • Institutional Shareholder Services (ISS) – rankings of each company’s ESG practices
  • The Interfaith Center on Corporate Responsibility (ICCR) – largest group of shareholder advocates focused exclusively on corporate responsibility and faith-based investing.  

While professional investors may require companies to disclose more information there is no consensus on how to achieve this goal or who should be responsible for the regulation.

What are SEC reporting requirements?

SEC reporting requirements are the rules and regulations that determine what companies must tell their investors about their financials. These disclosures can include things like audited reports, annual reports, press releases and more.

Are there any SEC reporting requirements for ESG disclosure?

No, as of now the SEC does not require companies to disclose ESG performance. But this will be changing soon. There is an SEC requirement that will mandate companies to disclose “whether and how [they] address environmental and social issues”.

What does the SEC prohibit?

The SEC prohibits false or misleading statements made by companies. The agency is responsible for enforcing the Securities Act of 1933, the Securities Exchange Act of 1934, and other numerous federal securities laws that govern disclosure requirements for publicly traded companies in the United States. According to its website, “The SEC promotes full public disclosure to prevent fraud and to help investors make informed investment decisions.”

How long does it take for SEC to review a registration statement?

According to “SEC Speeds Up Process for Smaller Capitalization Issuers”, which was published on June 13, 2013 by the SEC Office of Compliance, Inspections and Examinations (OCIE) in New York City, it takes about five months or less. The amount of time required to review a registration statement depends on the size of the company. Smaller companies have an easier time passing the review process most of the time because they are not as big, complex or mature as large companies.

How does this affect ESG disclosure?

ESG performance is not currently required to be disclosed by law; however, it should be recognized and considered by investors during their investment decisions.

What are SEC disclosure requirements?

The U.S. Securities and Exchange Commission (SEC) is a federal agency that administers disclosure requirements for publicly traded companies in the United States.  Companies listed on a US stock exchange, whether a NASDAQ or NYSE, must adhere to SEC guidelines when disclosing information about the business to shareholders and potential investors.

What are financial disclosures?

Financial disclosures are where companies provide investors with information about the company’s financial health.  This includes sales revenue, net income, salaries, assets and liabilities.  These are referred to as filings or SEC filings.

Are ESG factors required in SEC disclosure forms?

No, environmental, social and governance (ESG) factors are not currently required to be disclosed in SEC filings.  This means that companies such as Exxon Mobil, Facebook and Microsoft do not have to disclose information about their ESG activities on financial disclosure forms.

Does the SEC require public companies to report material events?

The law requires public companies to disclose material events within four days (and up to seven days in some cases) of their occurrence.  Material events include everything from bankruptcy filings, mergers, acquisitions and liquidation announcements.  This is not the same thing as ESG disclosure, which has no legal requirements for companies to report on at this time.

What is a material event?

A material event is an event or development that can have a significant impact on the company’s shareholders, either positive or negative.  For example, an oil company attaining a new fuel source would be considered material to investors. However, changing your Facebook privacy policies is not considered material since the effects are related to how much money you spend to comply with government laws or demands.

What are the reasons why ESG factors are not being reported?

Some companies have claimed that reporting on their environmental, social and governance practices would be time-consuming, burdensome and duplicative of other information they already disclose.

Does this affect stock prices?

When it comes to stock prices, ESG issues are not the only thing that drive stock prices up or down.  However, professional investors can see which companies successfully manage their environmental and social policies along with shareholder value. This is one of the reasons why professional investors are interested in investing in green technology growth stocks. Institutional investors also look to invest in companies that consistently do well in their industry. This means that professional investors are not concerned with whether or not a company has good ESG policies but how well the company performs overall.

How often does the SEC review filings?

The SEC reviews filings about once a year for each disclosure.

How can I get an idea of what to disclose in my filing?

For the most part, you should follow the guidelines provided by your industry and jurisdiction’s rules and regulations. For example, if you are following the UK Modern Slavery Act law, it will provide detailed outlines on what to disclose.

What is the UK Modern Slavery Act law?

The UK Modern Slavery Act law requires companies with annual revenues of £36 million or more to publish an annual statement detailing their efforts to eradicate modern slavery in their supply chains.

What is the difference between professional investors and retail investors?

Professional investors are institutional sources that typically have access to analysts, research reports and other information that retail investors do not.  This means professional investors are more informed about companies’ ESG practices, policies and the surrounding issues. This is one of the reasons professional investors are interested in investing in green technology growth stock. Retail investors are just that—retailers that buy stocks for themselves or on behalf of another person.  They may not be as aware of what factors affect a company’s value and performance.

What is the difference between Regulation S-K and Regulation F-D?

Regulation S-K contains 8 parts, which contain all of the filing requirements for most public companies. Regulations F-D only pertains to the rules of disclosure for Bank Holding Companies.

I’m planning on disclosing information about my CSR and ESG impacts. Do I have to file anything?

No, you do not currently need to disclose any information about your CSR and ESG impact.

What if we just want to voluntarily include information that might be helpful for investors?

There is no set way of doing this under SEC guidelines. It would take a statement in the filing saying that you are voluntarily including ESG information for investors. But there are other options for this including – hosting an investor presentation or providing a breakdown of information on website that you can link to in your filing.

Is there any organization that I can get advice from?

There are professional organizations who can help you decide if reporting on ESG is something that may be of interest for your organization. The Global Reporting Initiative offers standards and guidance on reporting environmental, social and governance issues, but the specifics. can be quite rigorous the first time around.

Is there any formal guidance published by the SEC about this?

No, but professional sources recommend disclosing information regarding your company’s policies towards its environmental impact or social contributions. This can include how it is reducing costs, complying with laws and more. Disclosure of these activities can help professional investors find trends that may be affecting your company’s operations or policies.

Who is primarily responsible for reporting ESG issues?

It depends on the organization, but it can include various members of staff including board members to management teams..

Is there any reason for companies not to disclose information about their ESG impact?

No, professional sources report that the benefits of disclosure outweighs the cost.

How do professional investors use this information?

Professional investors can use ESG information to help guide their decisions about your company and make better-informed choices about where to invest their money. ESG disclosures also allow professional investors to potentially spot problems at a company long before the news has been reported.

Which division of the SEC is responsible for reviewing and commenting on the contents of a registration statement for the sale of securities in a public offering?

The Division of Corporation Finance is responsible for reviewing and commenting on the contents of a registration statement for the sale of securities in a public offering.

If an investor is concerned about ESG issues, which division of the SEC should they contact?

The Division of Investment Management would be the appropriate team to contact if an investor is concerned about ESG issues.

Do companies need to disclose ESG information?

Companies are not required by law to disclose environmental, social, and governance (ESG) performance. While some professional investors may take this into consideration when making investment decisions (and companies may choose to voluntarily disclose such information), the Securities and Exchange Commission (SEC) does not require compliance with any specific framework or set of standards.

The Division of Corporation Finance reviews and comments on the contents of a registration statement for the sale of securities in a public offering. The Division of Investment Management would be the appropriate team to contact if an investor is concerned about ESG issues. Companies are not required by law to disclose environmental, social, and governance (ESG) performance. While

What are the anti fraud rules that securities professional must follow in order to prevent fraud?

The Securities Act of 1933, Section 17(a) and Rules 10b-5 and 14e-3 require that professional securities traders act with honesty and integrity to prevent fraud.

What is the Securities Exchange Act of 1934?

The Securities Exchange Act of 1934 regulates how securities are traded, ensuring an equal playing field for all investors. It also specifies the duties and obligations of brokers, dealers, transfer agents, and clearing agencies.

Which organization is responsible for promoting sustainable investing?

US SIF: The Forum for Sustainable and Responsible Investment, formerly known as the Social Investment Forum, is a professional association and advocate for sustainable and responsible investing.

What is disclosure controls and procedures?

Disclosure controls and procedures are policies and procedures that pertain to the process of making certain information open to company management for review, as well as requiring appropriate documentation. Policies and procedures must be put in place regarding the confidentiality, accuracy, timeliness of records, internal verification of data consistency, professional review standards of errors or omissions, and proper authorization for dissemination of information.

What is a professional review?

Professional review includes professional inspection, professional examination, professional inquiry and professional investigation. Professional review is the evaluation of company data by people or processes that are aimed at increasing the likelihood that business disclosures are accurate and professional in appearance. Professional review policies must be documented thoroughly to ensure adherence with the intent behind the professional review procedures.

What does professional inspection look like?

An example professional inspection might include a professional auditor inspecting company records to ensure they are complete and accurate. A professional auditor would follow a professional review policy, which may require the professional auditor to sign off on reviews with their name, title and date of examination.

What are professional organizations doing?

Professional organizations are taking steps towards requiring disclosure of ESG performance and creating standard measures for such disclosures. The Council of Institutional Investors (CII) is a professional organization that represents more than 130 public employee retirement funds and other institutions that own over $3trillion in assets under management. In a May 2012 letter to the SEC, CII called for further regulatory encouragement of professional review policies and professional investigation within the financial industry.

Does The SEC Require Social Media Disclosures?

The SEC does not require companies to disclose ESG performance. Environmental, social and governance factors are becoming a larger concern in the business world as time goes on and currently do not have to be disclosed by law.

What does the SEC say about Section 302 of the Sarbanes-Oxley Act?

The SEC does not currently require corporate disclosure of ESG (environmental, social and governance) performance. Section 302 of the Sarbanes-Oxley Act – which was signed into law in 2002 by President Bush – required all companies to disclose “material” business risks related to environmental, health and safety issues as well as any other risks that might have a negative effect on the business.

However, the SEC has never defined ESG issues as material to a company’s business in any ruling. As such, they are not required to be included in financial disclosure reports filed with the commission by law. Lobbying groups have pressed for further requirements but so far, no progress has been made to do so.

“What we found is that this hasn’t been a priority for the commission,” said Melanie Fein, senior vice president at ACORE, an organization that promotes corporate sustainability. “Companies are not required to disclose material non-financial information about their ESG practices.”

While there are no laws requiring companies to include ESG performance in SEC filings, there is a growing trend among companies to voluntarily disclose their personal ESG performance and stakeholder relations.

“Materiality … is not static,” said the SEC in its 2012 statement on disclosure and reporting obligations regarding climate change. “Over time, scientific information and technological capabilities may influence the significance of an impact.”

As such, shareholders are increasingly asking companies to address ESG issues in financial reporting. Some professional groups – such as the Sustainability Accounting Standards Board (SASB) and International Integrated Reporting Council (IIRC) – are developing standards for corporate sustainability reporting.

The SEC has not yet made any formal rulings on ESG disclosures, but it has requested comment on how it should address these issues through the disclosure process.

“The Commission is open to comments on whether and how issuers may satisfy their existing reporting obligations by disclosing information regarding environmental, social, and governance matters,” said the SEC in its 2013 statement on Disclosure of Climate Change-Related Risks. “We specifically seek comment on the costs and benefits of such an approach.”

What is required by the Sarbanes-Oxley Act of 2002 in regard to the certification of the accuracy of public companies SEC filings and the adequacy of internal controls?

The requirements of the Sarbanes-Oxley Act of 2002, is a professional set of guidelines enforced by professional organizations such as the SEC.

The SEC does not require companies to disclose their ESG performance or that of its subsidiaries in its filings with the Securities and Exchange Commission (SEC).

Does this mean that companies can skirt environmental and social factors and therefore not be held accountable for them?

In a word, no. The SEC does see the benefit of ESG disclosures and they encourage companies to consider their benefits as well as carefully manage the risks that may come from disclosure. In fact, the SEC requires that all professional organizations review their Code of Ethics to determine if it includes prohibitions on “conduct that is illegal or unethical with respect to the professional’s financial duties as an accountant, auditor, investment professional, through a comprehensive review.” In addition, professional organizations must require its members to report if they become aware of acts that violate professional ethics as well as take steps to prevent further violations.

Caveats, disclaimers, climate related risks & corporation finance

At ESG | The Report, we believe that we can help make the world a more sustainable place through the power of education. We have covered many topics in this article and want to be clear that any reference to, or mention of corporation finance and/or climate related financial disclosures, an esg disclosure regime, disclosure rules regarding climate related disclosure, insure adequate disclosure, environmental protection agency, financial accounting standards board, mandatory climate disclosure rules, market participants, financial system, risk management in the financial markets, substantial likelihood, public companies address, reasonable investor or other market participants, broad statutory authority, sustainability accounting standards board task force on climate related information, sustainable accounting standards board, disclosures related, adequate disclosure, climate risks, environmental impacts, investment or voting decision, new esg disclosure regime, environmental sustainability, addressing inevitable costs, existing rules of a disclosure regime, supply chain management aspects of financial institutions, capital resources or the federal register, harvard law school forum on corporate governance, sustainability efforts and risk factors, qualitative disclosures, securities law, public input to the house appropriations committee, securities exchanges regarding civil liability, asset managers, adverse consequences, proxy statements on investment decisions, underlying data, world economic forum, business roundtable on supply chains, public company filings, esg metrics or an esg task force on climate risk in the context of this article is purely for informational purposes and not to be misconstrued as investment advice or an endorsement. Thank you for reading, and we hope that you found this article useful in your quest to understand ESG and sustainable business practices. Long live planet earth.