What Will Result From the SEC’s Current Disclosure Reform Initiative?

The following post comes to us from Betty Moy Huber, co-head of the Environmental Group in the Corporate Department of Davis Polk & Wardwell LLP, and is based on an article by Ms. Huber that first appeared in the American Bar Association’s Environmental Disclosure Committee newsletter.

The SEC is in the midst of what could be a sweeping reform of its disclosure regime. During the course of this year, the SEC’s Division of Corporation Finance, or Corp Fin, will be seeking broad input from companies and investors on how the SEC can improve its disclosure rules. This initiative follows on Corp Fin’s lengthy December 2013 report on this topic. Arguably, the SEC’s disclosure reform initiative could not have come at a better time for sustainability and environmental groups who have been working for years to achieve better corporate sustainability disclosure. These groups are savvy, dedicated, and have trillions of institutional investor (and other) dollars backing them. With social media, they have become well organized and effective advocates for their cause. In addition, investment banks are taking note and becoming interested in better and more uniform sustainability disclosure in their capacity as underwriters as well as investors themselves. Further, shareholder proponents have submitted a record number of environmental and sustainability shareholder proposals in recent proxy seasons. But will these sustainability groups succeed in finding common ground with the SEC and, if necessary, convince the SEC that sustainability issues are material or otherwise a priority?

This post describes the relevant aspects of the SEC’s current disclosure reform initiative, highlights what sustainability activists have been doing of late to achieve better disclosure, and speculates on the odds of whether or not the SEC will require better sustainability disclosure in the future.

SEC Disclosure Reform Initiative

The U.S. Congress, pursuant to the 2012 Jumpstart Our Business Startups (JOBS) Act, required the SEC to review its disclosure requirements set forth in Regulation S-K and to issue a report outlining how to simplify and modernize the securities registration process to facilitate access to markets for emerging growth companies. Corp Fin released this report in December 2013. The December 2013 report highlights the following themes relevant to environmental and sustainability disclosure, which themes will undoubtedly guide the SEC’s disclosure reform initiative:

  • A preference for principles-based disclosure requirements (that is, broad disclosure requirements grounded in materiality) as opposed to (arguably) less flexible and dynamic specific line item disclosure requirements;
  • A push to reduce repetitive disclosure, for instance streamlining or using cross-references to address identical disclosure that often appears verbatim numerous times throughout a disclosure document, in the case of environmental and sustainability disclosure, such as in the legal proceedings, risk factors, and business sections; and
  • A goal to discourage disclosure of “immaterial information” that, like repetitive disclosure, can obscure more pertinent material information.

Corp Fin’s December 2013 report also calls out the following specific areas of Regulation S-K for potential further review: (1) requirements governing risk factors; (2) requirements relating to a registrant’s business and operations; and (3) corporate governance disclosure requirements.

Corp Fin, at the direction of SEC Chair Mary Jo White, is currently seeking information from companies and investors regarding the recommendations contained in its December 2013 report as well as ways in which disclosure overall can be improved. While the SEC has shown frustration with certain other Congressional mandates, it appears to have embraced this directive to assess Regulation S-K as an opportunity to overhaul its disclosure regime, which reportedly has not undergone a comprehensive review since 1996. The SEC’s stated goal is for investors to tell it what type of disclosure information investors want, when they want it, and how companies can best present it. From there, Corp Fin will aim to present specific recommendations for updating Regulation S-K and generally addressing disclosure overload. According to the SEC’s February 2014 Draft Strategic Plan: Fiscal Years 2014–2018, areas of focus will include a review of operational and risk management disclosures, each of which are relevant to environmental and sustainability issues. A key uncertainty coming out of Corp Fin’s December 2013 report, however, is whether the SEC will launch a comprehensive or targeted reform of disclosure issues. While that report recommended a comprehensive, sweeping review, SEC Commissioner Daniel Gallagher, a key leader in this disclosure reform initiative, has urged for a targeted approach, recognizing the real risk that a comprehensive review could be derailed due to resource constraints, competing priorities, or a perceived need for perfection. In any event, disclosure reform is undisputedly a SEC priority.

How Are Sustainability Groups Seeking Better Disclosure?

Various investors and nonprofit groups are working together toward better sustainability disclosure. Most prominent is the Sustainability Accounting Standards Board, or SASB, on whose board of directors former SEC Commissioner Elisse Walter sits. SASB, using the U.S. securities law definition of “materiality,” is developing disclosure guidance standards for 88 different industries to govern their respective disclosure in SEC filings. SASB, which briefs the SEC quarterly on its work, appears cognizant of how its standards could fit nicely into the SEC’s disclosure reform process. Other groups include various environmental and sustainability investors and pension funds representing over $11 trillion in assets under management, including CalPERS, CalSTRS, Walden Asset Management, and Trillium Asset Management, whose collective efforts in this regard are, to a large extent, led by Ceres, a leading sustainability nonprofit organization. Dissatisfied with the SEC’s lack of follow-through on its own 2010 Climate Change Disclosure Guidance, Ceres released a detailed report in February 2014 entitled Cool Response: The SEC & Corporate Climate Change Reporting—SEC Climate Guidance & S&P 500 Reporting—2010 to 2013, which report recommends that the SEC undertake further efforts to improve climate change disclosure. The report also contains various recommendations to issuers, including a relatively buried, but poignant, message to issuers that, at least in Ceres’ view, climate risk is now a major concern of the “reasonable investor” (whose needs dictate what is “material” under U.S. securities law). In short, these groups are pushing forward their conviction that sustainability disclosure is material and what all reasonable investors need to know to make an informed investment decision.

Will These Groups Succeed?


One could argue, yes, for the following reasons. First, both SASB and the SEC essentially agree on the definition of “materiality” (i.e., the U.S. securities law definition) and both want better disclosure. In addition, Corp Fin specifically named investors (in which group Ceres and its affiliates clearly sit) and standard setters (in which group SASB squarely falls) as constituencies it wants to be involved in the disclosure reform process. Further, in support of its emphasis on a principles-based approach, Corp Fin acknowledged the key role that SEC disclosure guidance documents could serve to flesh out specific disclosure issues. Coupled with the fact that the SEC believes the disclosure reform process should also include a review of existing SEC disclosure guidance (which would include the SEC’s 2010 Climate Change Disclosure Guidance), this focus on guidance documents could serve as a favorable hook for sustainability groups to open the discussion to climate change matters, a key issue for them. Moreover, the SEC noted on numerous occasions that it could update its existing industry guides as part of this disclosure reform process. Any review of these outdated guides could provide SASB with an excellent opportunity to propose its industry-specific standards as stakeholder-drafted, turnkey replacements. Finally, the SEC’s draft 2014–2018 Strategic Plan highlights the SEC’s guiding principle that all investors should have “equal access” to information regarding their investments. Is it fair and equal when companies are increasingly engaging with certain shareholders regarding sustainability issues in connection with shareholder proposals or similar concerns, but not with others? Would requiring better sustainability disclosure help ensure equal access?

In addition, sustainability groups may have an interesting legal argument to wield. The SEC adopted its specific environmental line item requirements in Regulation S-K (Items 101(c)(1)(xii) and 103 of Regulation S-K) in 1973 to comply with the National Environmental Policy Act of 1969, or NEPA. NEPA generally requires federal agencies to consider the environmental impacts of their decisions that could significantly affect the environment. Sustainability groups might effectively argue that a comprehensive reform of securities disclosure rules requires the SEC to consider again environmental impacts pursuant to NEPA and thus, consider environmental and sustainability disclosure concerns. Indeed, Corp Fin, in its December 2013 Report mentions its 1973 rulemakings were part of the SEC’s consideration of NEPA’s impact on the disclosure regime.

To ultimately succeed, however, these groups may need to demonstrate that their concerns are shared by mainstream (and not simply niche) investors and that the disclosure they seek is not just what some people might find of interest. In support of the argument that their concerns may be mainstream, it is undeniable that companies are now taking the concerns of these investors seriously. It is now commonplace (and, in many instances, prudent) for companies and/or their boards to engage with shareholders and proxy advisory firms on environmental and sustainability issues, particularly in connection with shareholder resolutions. For example, investors filed in 2014 a record number of climate change proposals supported by Institutional Shareholder Services, a leading proxy advisory firm, recommending that shareholders vote “yes” for climate change resolutions. Shareholder support for environmental and sustainability proposals increased to 21 percent in the 2013 proxy season, with similar increases expected for this current 2014 proxy season. Notably, in January 2014 FirstEnergy, one of the country’s largest energy companies, agreed to work toward reducing its carbon emissions in exchange for shareholder activists, including As You Sow and the New York State Comptroller, agreeing to withdraw their joint climate change proposal. Many companies (including some Fortune 500 companies as well as certain currently privately held companies anticipating a public float in the future) have joined SASB’s various industry working groups to have a hand in shaping these disclosure standards. And as to whether Ceres represents mainstream investors, its president, Mindy Lubber, is rumored to be in the running for the top post at the White House’s Commission for Environmental Quality, a decidedly conventional position.

What could also be compelling is the SEC’s interest in better harmonizing global securities markets. The SEC has acknowledged the increasing globalization of the securities markets as a reason to examine its disclosure regime and perhaps seek more global uniformity. In this regard, according to its draft Strategic Plan 2014–2018, the SEC, as the overseer of the U.S. Financial Accounting Standards Board, will consider whether a single set of high-quality global accounting standards is achievable. It should be noted that in February 2014 the European Parliament and the European Council agreed on proposed legislation requiring certain large European Union-listed companies and other designated public interest entities (such as financial institutions) to disclose environmental and social information. As a result, to the extent the SEC disclosure review will seek more uniformity between U.S. and European standards, environmental and sustainability concerns may very well be a focus.


On the other hand, one could easily argue that these groups have a tough battle ahead of them. The SEC, and in particular, the current Director of Corp Fin, Keith Higgins, have strenuously criticized what they call “information overload” in SEC filings and the obfuscatory effect of too much disclosure. In particular, in a March 2014 address at the Thirteenth Annual Institute on Securities Regulation in Europe, Director Higgins criticized the “follow the leader” approach to reporting whereby if one company includes new disclosure in its filings, other companies tend to copy and include similar disclosure in their filings, without giving adequate thought as to whether such disclosure is even relevant to their particular facts and circumstances. Indeed, due in part to the “follow the leader” effect, environmental disclosure has grown in length over the years, with companies sometimes including three or four separate environmental risk factors, as well as the same environmental disclosure replicated several times, but in different places, in the same document. Sustainability groups could have a difficult time convincing the SEC to require more sustainability disclosure if the agency already believes that there may be too much of it already.

In addition, SEC commissioners have voiced significant frustration with calls for politically motivated disclosure, particularly with respect to the SEC’s conflict minerals and resource extraction rules, which rules Congress required the SEC to promulgate under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In fact, SEC Commissioner Gallagher went so far as to call these rulemaking mandates “distractions” and “ill-advised anomalies.” He further directed that the SEC should not allow its disclosure regime to be used “to advance policy objectives unrelated to providing investors with [material] information.”

SEC Chair White gave perhaps an even more critical speech in October 2013 entitled “The Importance of Independence,” highlighting these concerns. She described how the SEC, during its 1970s adoption of the environmental disclosure requirements in Regulation S-K, received investor requests for disclosure of more than 100 different “social matters” covering a “bewildering array of special causes.” The SEC, according to Chair White, ultimately declined to require disclosure on any of these issues, stating that disclosure of such “non-material information” would have rendered disclosure documents unwieldy, at a cost that would not provide a commensurate benefit to investors. In short, SEC Chair White—specifically choosing environmental disclosure as her example—cautioned against the perceived need to appease those who seek to effectuate social change through the SEC’s powers of mandatory disclosure.

If the SEC views the calls for sustainability disclosure to be politically motivated, unnecessary, or obfuscatory in any particular context, then the SEC may not have much patience for investors advocating for the same. For instance, as Ceres detailed in its February 2014 report, the SEC has not followed through with the commitments and other next steps outlined in its 2010 Climate Change Disclosure Guidance, including leveraging its ability to comment on filings, hosting a public roundtable to discuss climate change disclosure, and the like. In addition, as the SEC is currently busy issuing the remaining reports and rules required of it by the Dodd-Frank Act (having about 60 more rules or reports left to issue, which process could take several more years), it simply may not have the bandwidth to focus on environmental and sustainability disclosure issues, assuming it has the will to do so.

Potential Timeline

Whether and when the SEC will determine if stricter sustainability disclosure is warranted will depend on a variety of factors including whether the SEC decides to conduct a targeted or comprehensive reform. That said, it would be realistic to expect some answers by June 2016 when Commissioner Gallagher’s term expires, and certainly within the next five years before Chair White’s term expires in June 2019. Public companies and other stakeholders should pay close attention to discern whether their sustainability disclosure (and companies’ underlying corporate governance control) will need to be improved.

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