Sustainability & Disclosure: New demands on corporate boards
By Virginia Harper Ho

It’s a new era of environmental, social and governance (ESG) disclosure and directors need to take notice.

Many investors are voicing concerns about the limited nonfinancial disclosure in companies’ annual reports and proxy disclosures, even for areas like material climate-related risks that have been the subject of Securities & Exchange Commission (SEC) guidance. And although most public companies produce sustainability reports for consumers and other corporate stakeholders, these reports often lack the quality, reliability and comparability investors need for financial analysis.

Majority votes in favor of climate-related shareholder proposals this proxy season are evidence that investor demand for information on material ESG risks is rising.

Recent reports by the Organization for Economic Co-Operation and Development and the G20’s task force on climate-related financial disclosure have also stressed the financial impacts of ESG risks and the importance of ESG risk oversight for corporate boards.

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In its recently proposed rules to reform Regulation S-K, the SEC does not address sustainability disclosure, and the Trump administration’s deregulatory policies mean that new disclosure rules are unlikely to fill ESG disclosure gaps. But stock exchanges and financial regulators in over 35 other countries, including the U.K., Australia, China, South Africa and the European Union, have already concluded that sustainability information is material to investors and encourage or require companies to disclose ESG information in their annual reports.

For the most part, these ESG disclosure reforms do not replace companies’ ability to judge what information is material to investors.

Instead, these governments use a comply-or-explain approach to disclosure where a securities regulator, stock exchange or other authority adopts a code reflecting corporate best practices. Companies can then elect to comply by following the code provisions directly or by explaining why they have elected not to.

In the U.S., the Sarbanes-Oxley rules that require public companies to adopt a code of ethics for senior financial managers and that require companies to have a financial expert on the audit committee work the same way.

The SEC could in time consider a flexible comply-or-explain approach to ESG disclosure reform. But corporate boards already face shifting expectations from global stakeholders and from shareholders. This new era requires corporate boards to take seriously investor demand for better ESG disclosure and to develop new competencies for monitoring ESG risk and performance.

Virginia Harper Ho is a law professor at the University of Kansas’ School of Law. She adapted this piece for Directors & Boards from a longer article she wrote for the Lewis & Clark Law Review, “‘Comply or Explain’ and the Future of Nonfinancial Reporting.”

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