Sustainability Accounting Standards and SEC Filings

Tom Riesenberg is Director of Legal and Regulatory Policy at the Sustainability Accounting Standards Board (SASB) and Alan Beller is a member of the SASB Foundation Board of Directors. This post is based on their SASB memorandum. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The Sustainability Accounting Standards Board (SASB), a nonprofit, non-governmental organization, was established in 2011 to develop standards for companies to make consistent, comparable, and reliable disclosures about sustainability or ESG (environmental, social, and governance) matters. The SASB standards are intended to address topics that fall within well-recognized (in the U.S. and globally) concepts of financial materiality for investors and, because of their relation to financial materiality, are intended to be decision-useful for investors.

Because the materiality threshold for companies that report in the United States is tied to a well-established case law definition, it was initially anticipated that use of the standards by such companies would be closely tied to filings with the Securities and Exchange Commission (SEC), such as the annual report on Form 10-K. But SASB’s outreach to investors convinced it to become less focused on SEC filings as the primary location for disclosures; most investors were found to care more about obtaining sustainability disclosure that is readily available, reliable, and comparable than they do about where it is located. Thus, the question of where the SASB disclosures should be made is left to reporting companies, and how it is playing out since the SASB standards were codified late last year is the subject of this article.


SASB concluded that, as long as a company puts in place appropriate controls and governance to ensure reliability, SASB would endorse the use of its standards in communications to investors other than SEC filings, such as in corporate websites, annual reports, sustainability reports, and elsewhere. And companies using the SASB standards are indeed putting such controls in place. For example, in Salesforce’s sustainability report, called the “FY19 Stakeholder Impact Report,” the company stated, “The SEC Reporting team reviews this report using the same procedures as they do with all other 1934 Securities Exchange Act filings.”

Another reason for SASB’s refocus was that it found that many companies are reluctant to use the standards in SEC filings. There are several reasons for this. First, while companies typically agree that some ESG and sustainability disclosures are required in SEC filings, many companies are not convinced that the majority of such topics or the detail called for in SASB standards in fact involve required disclosures. Second, while the governance and control environment around ESG and sustainability disclosures has generally improved, there is still concern at many companies that such disclosures may not be ready-for-prime-time, that is, in SEC filings; this is true even though companies have long been making ESG/sustainability disclosures outside of SEC filings, where the federal anti-fraud provisions would apply just as they would to any public statements. Third, the extreme time and other pressures around reporting cycles for periodic financial reports make many companies reluctant to increase financial and accounting burdens by adding periodic disclosure of ESG and sustainability items, especially where there is not necessarily a periodic aspect to such disclosures. Finally, the perceived (although likely overstated) additional liabilities under Section 11 of the Securities Act stemming from inclusion of ESG and sustainability disclosure in a Form 10-K, and thereby incorporated by reference in Securities Act registration statements, and the Section 11 liability that accompanies at least some forms of documented third-party assurance, tend to make corporate counsel queasy.

A Novel Approach

Viewed from the backdrop of these concerns, two recent corporate filings by companies that report in the United States are particularly interesting. The companies, Vornado Realty and Etsy, are among the handful of issuers that have concluded that an SEC filing is, in fact, the appropriate location for their SASB disclosures (most companies are posting the information on their website or including it in a sustainability report). But the companies took different approaches.

In April, Vornado, a $13 billion REIT, filed a current report on Form 8-K attaching a press release and a copy of the company’s 2018 ESG report. Most large companies issue such reports, often called sustainability or corporate social responsibility reports, on a stand-alone basis. Vornado’s filing is significant for three reasons.

First, the report included a detailed and thorough SASB report. This is important for investors. Many companies have for many years published sustainability reports covering a very broad array of sustainability topics, but their usefulness to investors has been questioned; indeed, just a few days before Vornado made its filing, the chair of the International Accounting Standards Board, Hans Hoogervoorst, gave a speech at a climate change reporting conference where he lamented that “greenwashing is rampant” in such reports. As noted above, the governance and controls urged by SASB would help ensure reliable information and accurate reporting. And, of course, SASB standards can drive accuracy by providing companies with a set of decision-useful, industry-specific metrics that they can use for disclosure of financially material ESG and sustainability topics.

Second, Vornado’s use of the SEC Form 8-K filing process in this context is to our knowledge a first. Form 8-K is a so-called “Current Report” that must be filed in certain circumstances but may be voluntarily used in other circumstances to provide a company a means to provide widely disseminated information to investors that becomes part of its SEC filing record. This approach allowed Vornado to make an SEC filing that fell outside the periodic financial reporting timing and time pressures. Also, Vornado stated that it made the filing under a provision of Form 8-K (Item 7.01) designed to allow companies to make information available on a broad rather than selective basis in compliance with Regulation FD of the SEC’s rules. The SEC allows Item 7.01 information (including exhibits, in this case the ESG report) to be deemed “furnished” rather than “filed.” Information in an SEC filing that is “furnished” rather than “filed” is not incorporated by reference into a registration statement and is not therefore subject to Securities Act disclosure liability which, as noted above, has been a potential obstacle to the inclusion of ESG and sustainability disclosures in SEC filings. The 8-K filing approach used by Vornado is an interesting, and novel, means of avoiding this potential liability risk.

Third, Vornado obtained an examination report from an independent third-party, the company’s auditor Deloitte & Touche. An examination is similar to an audit of financial statements; it provides a high level of assurance on information other than historical financial statements. This is more thorough than a review report, where the audit firm provides limited assurance, essentially stating that it did not find any material errors. To our knowledge, this is the first time that a company has included an examination report of ESG topics in an SEC filing.

10-K with a Twist

The second recent filing of note was made by Etsy Corporation, an online specialty goods marketplace. Like Vornado, it prepared a thorough SASB report. Unlike Vornado, it included that report in its 10-K filing—something which a small number of companies have done thus far—and engaged its outside auditor, PwC, to provide a review report on specified sections of the disclosures. An unusual twist was that the 10-K said only that “Etsy commissioned an external third party to perform attest procedures with respect to our carbon and energy metrics for the period from January 1, 2018 to December 31, 2018,” and then referred the reader to its investor relations website, which includes PwC’s name and a copy of the report. This approach may have been designed to potentially limit Securities Act liability exposure that might be applicable to PwC’s opinion.

So, in the sustainability disclosure world, these are significant developments. There are many signs that investors are demanding reliable, comparable, financially material, decision-useful, industry-specific ESG information. As discussed above, SASB’s current view is that companies might appropriately provide this information either within or outside of regulatory filings. But Vornado and Etsy appear to have decided that because SASB topics and metrics are targeted at financially material ESG information, many investors will expect to see such disclosures being made within the SEC reporting regime and with the seriousness, accuracy, and controls comparable to traditional financial information.

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