When it comes to the environmental, social and governance movement, Securities & Exchange Commission Chairman Jay Clayton acknowledges the growing drumbeat for ESG reporting standards. But he cautioned against lumping all things ESG together because it could muddy the disclosure waters for investors.
(Related Article: In-depth Interview with SEC Chief Who’s Taking On Short-Termism and ESG)
On the human-capital side of ESG, however, his agency has been evaluating whether a revamp is needed. “Our current disclosure requirements date back to a time when companies relied significantly on plant, property and equipment to drive value,” Clayton told Directors & Boards in a recent in-depth interview.
To that end, last week the agency released proposed new rules to update risk disclosures.
Some highlights from the proposal include:
- clarify and expand its principles-based approach, by including disclosure topics drawn from a subset of the topics currently contained in Item 101(c);
- include, as a disclosure topic, human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business, such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the attraction, development, and retention of personnel; and
- refocus the regulatory compliance requirement by including material government regulations, not just environmental provisions, as a topic.
In a statement, Clayton said the new amendments would “modernize and improve our disclosure framework, including recognizing that intangible assets, and in particular human capital, often are a significantly more important driver of value in today’s global economy. The proposals reflect a thoughtful mix of prescriptive and principles-based requirements that should result in improved disclosures and the elimination of unnecessary costs and burdens.”
To make sense of it all, Laura Richman, counsel at law firm Mayer Brown, provides key takeaways on the SEC’s new proposals boards should keep in mind:
- The proposals would shift business descriptions from line-item, prescriptive requirements to a principles-based approach, which would give companies the flexibility to tailor disclosures to what is material to understanding their business. Companies need to remember, however, that if a topic is material for their business, they would need to discuss it, even if it involves a category that is not mentioned in the rules.
- The SEC has proposed human capital resources, including any human capital measures or objectives that management focuses on in managing the business, as a new topic for disclosure. Companies should consider what they would disclose if this provision is adopted as proposed, keeping in mind that such disclosure may generate interest among constituencies beyond investors, such as employees and customers. Some companies may want to submit comments on this aspect of the SEC’s proposal to add their viewpoints to the conversation on human capital disclosure.
- While the proposal would not generally make disclosure of strategy mandatory, it does specifically identify material changes to a previously disclosed business strategy as something that could be potentially material to the general development of the business and therefore reportable. If this rule is adopted as proposed, companies should recognize that the decisions they make regarding disclosure of existing strategy could expressly require updating in the future.
- The SEC’s proposed changes to risk factors reflect its concerns about the lengthy and generic nature of current risk factor disclosure. Although final rule changes have been adopted, companies may want to take some of the SEC’s suggestions into account as they prepare the risk factors sections of their upcoming annual reports.
- Companies should assess whether they will need to revise any of their disclosure controls and procedures if and when the SEC finalizes the proposed amendments.