More than 18 months have passed since most registrants to the Securities and Exchange Commission (SEC) began adhering to new revenue recognition rules known as ASC 606, and the change took affect for private companies earlier this year. Meanwhile, the SEC has proposed changes to requirements related to M&A transactions and continued the debate surrounding disclosures related to a company's effect on the environment.
To find out how registrants are handling these complex issues, Toppan Merrill commissioned Mergermarket to speak with three leading experts on SEC disclosure policies for their insights.
Toppan Merrill question: Public companies and investors are increasingly aware of the impact that environmental factors can have on a company’s bottom line, reputation, and effect on the planet. There are no official disclosure rules regarding the “E” in ESG, however, and the SEC has backed companies who have faced pressure from shareholders to disclosure more information. What do you see as the current best practices
when it comes to disclosure in this area? Should companies begin preparing for a disclosure regime that mandates information about environmental impact, treating it as an inevitability? Leading industry experts weigh in...
Andrea Basham, Cleary Gottlieb:
It's an interesting question, especially in the context of the other disclosure topics we've been discussing, because as you said, it's an area that the SEC and Congress have not really addressed directly since Dodd-Frank, when Congress required the SEC to impose rules requiring companies to make disclosures regarding the use of conflict minerals in West Africa and disclosure around resource extraction. I think the market generally saw that as a way for Congress and the SEC to back-door companies into disclosure for political reasons and not necessarily for investor-protection reasons.
What we're seeing today is private ordering, right? It's shareholders and other market participants who are placing demands on companies, and everyone is waiting to see how the market will evolve, because we don't have a set of disclosure rules that companies need to comply with. So our advice to clients on best practices is to talk to their shareholders – not every shareholder necessarily, and obviously there are companies in certain industries for whom this is going to be much, much more important. The more they engage ex ante and really understand what shareholder demands and expectations are is really important.
I think a lot of companies, especially if under less shareholder pressure, are taking a wait-and-see approach. We have a lot of third-party providers now who are coming up with sustainability scores and giving companies grades on their disclosure, and at some point, not all of those third-party scoring systems will survive. It remains to be seen which ones investors will look to, and I think companies are being thoughtful and careful not to put the kitchen sink of ESG disclosure into their Ks and Qs. Some companies have acted outside of the SEC reporting regime and put sustainability reports on their websites as a way to say to investors, “Look, we're listening, but we're not going to make this a huge part of our formal disclosures quite yet. We'll give you some of this information you want because we do recognize it's important and we want to make sure you know we're listening.”
Jeffrey Cohen, Linklaters: Companies definitely give this issue some thought, and ultimately the nature of their disclosures depends on the personality of the company, including its investor profile, as Andrea mentioned. There are companies that worry about this kind of thing, and there are companies that don't. I'm skeptical that there will be any legal developments in this regard in the short term and probably the medium term. We have a pro-company SEC, and we have had several pro-company SECs through different administrations.
Nevertheless, I do think we will see more disclosure related to environmental impact by companies. There is and will be pressure from shareholders, depending on the shareholder makeup of the company. And certainly a lot of companies are increasingly making disclosures in this area because they have a material impact on their businesses. For instance, some utilities companies need to worry about the extent to which their product will be made illegal or further regulated, or the extent to which subsidies for competing products such as renewables will jeopardize their business. So of course they need to disclose that – but those are business issues that need to be disclosed.
"We have a lot of third-party providers now who are coming up with sustainability scores ... and at some point, not all of those scoring systems will survive."
Andrea Basham, Cleary Gottlieb
In my view, real ESG disclosure would be to say, "Okay, we are concerned about the environment. And the fact is that our product does some harm to the environment, and here is that harm quantified." I don't think you're going to see that anytime soon – not until it's required, and that's going to take a different SEC.
There is a third category that could motivate companies to make environment- related disclosures, and that is: What if it affects people's willingness to invest? There are pockets of social investing, and sometimes these funds explicitly focus on companies that do not harm the environment. If there was enough money in those kinds of funds, then it could become material to companies’ stock prices. But we're not at that point, and I don't see us getting there in the immediate future.