Finally, the SEC Takes CSR Seriously
A decade ago, publicly-held companies selling securities in the United States simply had to submit
an annual 10-K (or 40-F if for non-US firms) to the US government, mail out a slick shareholder
report to its shareholders once a year, and if they could be bothered, issue a pretty corporate
social responsibility (CSR) report. The CSRs’ quality were all over the spectrum: some were
sincere, while others were coy marketing presentations that often crossed the line into
greenwashing. But now, companies like Google are taking a lead by reporting their carbon footprint
in their disclosure and financial statements. Meanwhile, the United States Securities and Exchange
Commission (SEC) is issuing new advice related to climate change. We should all welcome these
developments in corporate governance because the importance—and sincerity—of sustainability
reporting will increase.
Corporate officers and directors, long spooked by the US Congress’ passing of the 2002
Sarbanes-Oxley Act (which the SEC enforces), will become more serious when disclosing their firms’
environmental liabilities. For potential investors and activist shareholders, they may witness a
welcome development where a corporation’s annual report and CSR will be combined into one
Since the 1970s, the SEC has addressed environmental issues that were material to a company’s
performance, and therefore, stock price. The commission slowly has found itself vetting more
firms’ disclosure reports on issues related to pollution and labor practices, particularly within
the Management’s Discussion and Analysis (MD&A) section of that 10-K. This became especially
true for non-US companies headquartered in nations that ratified the Kyoto Protocol. Then on January
1, 2010, the US Environmental Protection Agency began to require large greenhouse gas emitters to
collect and report such data, and the growing confusion of what a company must report has catapulted
the SEC into taking even more action.
Three months ago, the SEC issued what they call an interpretive release—guidance to SEC
registrants—advising companies on how to disclose matters related to climate change. Broadly, a
company should consider disclosing within its annual and quarterly reports the following issues that
could affect its operations, and therefore, stock price:
- The effects of climate change-related legislation and regulation.
- Any impact of international accords or treaties focused on climate change.
- Business or regulatory trends affecting a firm’s business, such as an increased demand for
energy from alternative sources.
- Significant impacts of climate change (such as hurricanes—88% of all property losses that US
insurers paid between 1980 and 2005 were climate-related).
Enough legal-ese, you are probably thinking by now! So what does this all mean? According to Larry
Goldenhersh, CEO of Enviance, an environmental ERP software provider, companies will start taking
sustainability seriously as central to their operations and viability—not merely an afterthought.
True, this means that corporations will discuss the threat of melting polar ice caps and severe
drought if such changes have a material threat to their business.
But companies should not just see these disclosure requirements as a negative. Remember: all this
information must be disclosed so everyday investors like you and me can decide where we want to
invest our hard-earned money. There are opportunities, and not just for solar panel and wind turbine
manufacturers. Companies will reveal positive trends in the marketplace as well. Retail chains
selling more energy efficient products, engineering firms working on more retrofitting projects,
agricultural companies selling more crops for biofuels, and start-ups developing new innovative
technologies all have an opportunity to show how and why they are profitable—which means they
could gain more investment, giving them opportunities to create more solutions countering the
growing threats of climate change, drought, and dwindling energy stocks.
Best of all, for those of us who research companies to gauge if they are really serious about
sustainability, the chances of being misled by a slick CSR report will decrease. A company can crow
all it wants about how many trees they plant, but when you review that SEC-mandated annual report,
you will read how that company pollutes, what they are doing to stay compliant with environmental
regulations, and how technologies in which they are investing can create a cleaner, greener, future.