Financial Reporting

ESG Investors Value Disclosure Outside of Securities Filings

The quality, consistency, and digestibility of ESG disclosures may be more important to investors than their appearance in SEC filings.
ESG Investors Value Disclosure Outside of Securities Filings
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When speaking of ESG, investor groups often sound like they are taking a hard line on the sustainability disclosures they want to see from CFOs and their companies. 

But ESG investors on a panel at the FEI’s Corporate Financial Reporting Insights Conference last week sounded more pragmatic and flexible than demanding.

Prior to any sweeping climate-risk disclosure rules from the Securities and Exchange Commission, investors are highly interested in the information disclosed in corporate sustainability reports (CSRs). Investment professionals are urging companies to use established frameworks from the Sustainable Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures.

But they also recognize it’s early days. They want to engage with companies about the ESG information and data they provide and understand how companies are framing and measuring an enterprise’s ESG risks. How investors get the information is not as important as consistent timing and an easy-to-digest presentation, FEI panelists said.

We typically engage with companies around their sustainability report separate and apart from what they’ve disclosed in their 10-Ks and 10-Qs. — Tanya Levy-Odom, BlackRock

“With respect to the 10-K filings, I understand that a number of companies are focused on climate-related disclosures in that context,” said Tanya Levy-Odom, director of investment stewardship at BlackRock. “We haven’t been prescriptive about where companies disclose their sustainability information; we typically engage with companies around their sustainability report separate and apart from what they’ve disclosed in their 10-Ks and 10-Qs.”

Levy-Odom’s team evaluates the corporate governance of companies in which BlackRock invests, including environmental and social factors material to business operations.

The CSR gives a company a lot more latitude to tell its story. In fact, Levy-Odom said, she hopes ESG disclosure requirements in securities filings don’t limit or inhibit companies from disclosing even more information “as opposed to less information going forward,” she said. 

Presently, the Securities and Exchange Commission requires the disclosure of “material” climate information in the management and discussion analysis of SEC filings. Materiality in that context follows the traditional accounting definition — “events or facts that would affect the judgment of an informed investor” are deemed material.

“More and more of what [the issuer] may not consider material to the numbers, the income statement and cash flow statements, investors want to know about.” — David Tsoupros, AllianceBernstein

But right now in the ESG investing space materiality equals what’s important to investors. “I think regulators are behind the eight ball as far as materiality, and the market is already determining that [certain ESG] factors are material to the way investors invest,” said David Tsoupros, a senior research analyst at AllianceBernstein’s U.S. Concentrated Growth Fund.

“More and more of what [the issuer] may not consider material to the numbers, the income statement and cash flow statements, investors want to know about,” said Tsoupros. Ideally, companies will disclose quantifiable, specific data comparable over time and across companies, he said.

Timing and Estimates

At this early stage of ESG reporting, though, the investors on the panel realize they may have to actively engage with a company to get the full sustainability picture. For example, Tsoupros said, because biodiversity is important to his clients, Tsoupros asked a company if it made products using palm oil. (Palm oil production according to some groups is a threat to some endangered species.)

“They gave me a lot of pushback on having to disclose that, but ultimately they did,” Tsoupros said. The disclosure was “palm oil is a percent of a percent of our manufactured products. … They’re telling me it’s not material, and that satisfies me.”

While timing can mean everything to some investors, the question of a sustainability report’s timing is not a big obstacle at present. ESG investors recognize that for publicly held companies the CSR is likely to come out after earnings, SEC filings, and proxy statements.

A company’s data on climate change “is not necessarily tradable over the course of a month, a quarter, or even a year,” Tsoupros explained, so it’s the consistency of timing that’s important. “If you tend to publish your CSR in June, I’d like to see that every year in June,” he said.

If complete information is not available or a metric is difficult to pin down, investors are accustomed to making decisions based on estimates, the panelists said. For example, a number of companies have started to publish climate transition scenario analyses, Levy-Odom said, which contain various estimates. To supplement the estimates, Levy-Odom has found it helpful to have a conversation with management about the thought process behind each scenario.

ESG investors may be relatively patient now, but they will have greater expectations, of course, as U.S. and global compliance standards develop and accounting tools for environmental reporting mature. After ESG disclosures, the next step is setting targets, said Tsoupros. “If it’s material for [their] business, we press our companies to set targets, the same way they budget and tell us what their financial outlook is,” he said.