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Investors will get the corporate sustainability disclosure they want

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As inauguration day approaches, our markets face a glut of uncertainty. Securities and Exchange Commission (SEC) Chairwoman Mary Jo White has announced that she will step down in January. With the appointment of a new chief and two additional SEC seats set to be filled by the incoming administration, it’s safe to say the commission’s agenda will be taking a new direction. But the curves and contours of that path remain largely unclear.

{mosads}Such ambiguity can make investors uneasy. Long-term investors, such as pension funds, mutual funds, insurance firms and sovereign wealth funds, have concerns that pending regulatory reform won’t align with their economic interests. These investors believe that broad macroeconomic trends such as climate change, resource constraints, population growth, globalization and technological innovation can—and do—materially impact the ability of corporations to manage risk and sustainably create value over the long term. Importantly, these investors are generally unsatisfied with the comparability and quality of the sustainability information being provided to them.

Before the election, the SEC sought feedback on ways to modernize disclosures to meet the needs of today’s investors. In a concept release, the SEC invited “feedback on the importance of sustainability and public policy matters to informed investment and voting decisions.” Two-thirds of the letters it received addressed sustainability matters. Moreover, 80 percent of those called for improved disclosure of this type of information. The volume and content of sustainability-related comment letters generated by the release shows strong support for addressing these needs.

Given the outcome of the election and impending new leadership at the SEC, there is uncertainty about how (or if) the disclosure effectiveness initiative will move forward. Government efforts to address these challenges are—and seemingly will remain—hamstrung by partisan politics. But against that backdrop of gridlock, markets continue to move. The users and providers of capital are busy shaping the future of finance through the fundamental economic mechanism of supply and demand.

For example, more than 1,600 organizations representing about $60 trillion in global assets have become signatories to the United Nation’s principles for responsible investment. In the U.S. alone, sustainable, responsible and impact investing assets have grown by 33 percent to $8.72 trillion from just two years ago. Meanwhile, 73 percent of institutional investors say they take environmental, social and governance issues into account in their investment analysis and decisions. Although investors are integrating sustainability considerations into investment decisions, the data they have access to is below par. In a recent survey, 71 percent of investors expressed dissatisfaction with the quality of sustainability data.

However, the long historical arc of our markets bends toward transparency. Corporations for their part have been making efforts to respond. Companies are overwhelmingly acknowledging the existence of—or the potential for—material impacts related to sustainability issues, according to research from the Sustainability Accounting Standards Board (SASB). In their SEC filings, 69 percent of companies are already addressing at least three-quarters of their industries’ most crucial sustainability topics, and 38 percent are already providing disclosure on every key topic, our analysis found.

On the other hand, the research also shows that less than 24 percent of reported sustainability topics are being disclosed using metrics, while more than half use boilerplate language, which is nearly useless to investors. Even in those cases where metrics are being used, they are non-standardized, and therefore lack comparability across industry peers. SASB’s mission is to help improve the effectiveness of these existing disclosures, while still holding true to the concept of materiality, by standardizing their format so that both companies and their investors can benchmark performance against industry peers.

We have plenty of reasons to believe the quality of this disclosure will improve, not just because investors will continue to demand it. It will improve because companies increasingly operate in a global marketplace, where many countries have signaled strong support for action on—as well as disclosure about—climate change, human rights, ethical governance and other sustainability factors.

It will improve because 87 percent of millennials believe “the success of a business should be measured in terms of more than just its financial performance.” It will improve because shifting consumer preferences increasingly require companies to provide products and services that promote sustainability through protection of natural resources, attention to personal health and fitness, advancement of social and economic equality, and an emphasis on ethical sourcing and production.

Not least of all, sustainability disclosure will improve because it simply makes good business sense. A growing body of research is emerging to support the idea that by measuring and managing performance on the most crucial sustainability factors, companies can achieve superior results, including return on sales, sales growth, return on assets and return on equity, in addition to improved risk-adjusted shareholder returns. This is why 80 percent of chief executives believe their company is approaching sustainability as a route to competitive advantage. They’re cutting costs, disrupting markets with innovative inputs, processes and products, attracting top talent and strengthening their brands.

In this light, SEC action on sustainability disclosure is not likely to be necessary. In fact, as stated in the SEC’s 2010 interpretive guidance on climate change, disclosure regarding sustainability impacts is already required by existing regulation when these “known trends” are material and reasonably likely to occur.

Regardless of what happens in terms of policy or regulation, powerful market forces are already in motion that will shape the future of both corporate sustainability performance and the disclosure of material information about that performance. From the establishment of the SEC in the 1930s to the founding of the Financial Accounting Standards Board (FASB) in the 1970s, investor needs—not regulatory agendas—have driven progress. That much is certain.

Jean Rogers, Ph.D., is the founder and chief executive officer of the Sustainability Accounting Standards Board, an independent 501(c)(3) organization based in San Francisco.

The views of Contributors are their own and are not the views of The Hill.

Tags accounting companies disclosure investors Securities and Exchange Commission Sustainability

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