Sustainability Disclosures Making Headway in Reports

Companies are beginning to revamp their financial reports to incorporate sustainability disclosures in response to demand from investors.

Elisse Walter, a former chair of the Securities and Exchange Commission and a current director on the Sustainability Accounting Standards Board, spoke Monday at a Financial Executives International and Ernst & Young conference on financial reporting at Pace University in New York about SASB’s standards.

“What SASB is doing is trying to establish possible metrics for each one of these standards as you go from industry to industry, sector to sector, and trying to use metrics that are already out there, to have it be cost effective and not have to reinvent the wheel,” she said. “We are at a critical juncture where we will be moving from the provisional to the final standards and we really want to hear from the community what their reaction is to the standards so that we can effectively move into the next phase.”

SASB has found, as the SEC has, that some of the most valuable input comes during working group meetings rather than the public comment period.

“What has always been my experience at the SEC, and I was a rule writer for a long time, is that the public comment process can be extraordinarily helpful but often isn’t,” she said. “The people who are commenting have at their disposal the information that you need to make really informed decisions and certainly to inform a cost/benefit analysis. But it’s not necessarily in their self-interest to give you that information, and frequently they don’t when it’s not in their self-interest. It makes things much more difficult for the rule writer. SASB found, much to its great chagrin, that the public comment process was somewhat helpful but not nearly as helpful as what happened in the working groups where there actually was a dialogue back and forth of people giving their views.”

Walter acknowledged that investors are clamoring for more sustainability information. “They are very dissatisfied with the quality of the information, and they are doing things like issuing an increasing number of shareholder proposals, which I don’t think is the most cost-effective way to do this,” she said.

Walter noted that SASB is now in the process of forming an Investor Advisory Committee.

Former Financial Accounting Standards Board chair Leslie Seidman, who is now executive director of the Center for Excellence in Financial Reporting at Pace University’s Lubin School of Business, moderated a panel that included Walter, along with FASB vice chair James Kroeker and SEC director of corporation finance Keith Higgins. She asked Kroeker about some of FASB’s recent attempts to change the standards for a new definition of materiality.

“It turned out to be a lot more controversial than I ever thought it was going to be,” Seidman said.

Kroeker acknowledged that the proposals had encountered some unexpected resistance after FASB tried to align the concept of materiality with Supreme Court interpretations of the definition of materiality under the securities laws. “We are, because of the reaction, taking a step back and thinking about what are we missing here,” he said. “The objective wasn’t to get rid of important material things to an investor. I guess the concern would be if used irresponsibly it could foster that notion, but I think we have protections in the system through auditing, through boards of directors, through enforcement, to provide that counterbalance.”

Kroeker said FASB plans to host a roundtable later this year to bring together investors, preparers, auditors and others interested in the matter to have a dialogue and make sure the system works.

Higgins discussed the SEC’s recent guidance in May warning about the use of non-GAAP measures. “We had been concerned that non-GAAP measures appeared to be becoming less and less supplemental to an understanding of a company’s financial position and results of operations and instead supplanting GAAP,” he said. “We have a lot of investment in GAAP. We would have had to take a write-down on that. Non-GAAP measures increasingly became the headline, the number to go to, as opposed to what’s in the adjustments, what isn’t GAAP doing, and what does that mean about your business. Instead people were focused on the numbers. You saw press reports with no mention of GAAP or non-GAAP and the comparability across them. We’re very focused on it and you’ll be seeing that in comment letters. We’re trying to restore the balance and have non-GAAP be supplemental analytical information as opposed to just the shiny object that needs to be attained.”

Seidman encouraged the audience members to take a look at the SEC guidance. “It’s very practical, with lots of Q&As and specific examples of what’s acceptable and what’s not acceptable,” she said. “I thought it was very helpful guidance.”

Later in the conference, Seidman pointed to new research from the Financial Executives Research Foundation and EY on “Disclosure Effectiveness in Action: Companies Make Great Strides,” a report that provides before and after examples of changes that companies are making to improve their disclosure effectiveness.

One company making such a change is General Electric. GE senior vice president and CFO Jeffrey Bornstein gave a keynote speech describing how he revamped the company’s annual report to make it more dynamic and understandable for investors, including hiring English majors to go through the footnotes and help rewrite them. He wanted to make the report more forward-looking and easier to grasp by retail investors. That effort started in 2008 with a rewrite of the proxy statement.

“We made a lot of progress on the proxy, trying to make it more user-friendly and readable and to put the most relevant information earlier in the document, allowing people to navigate through those things that investors told us were the most important,” said Bornstein. “But when I took the job of CFO and I went through the first cycle of putting together our annual report 10-K, it took me two months to get myself prepared to issue the 10-K.”

He gathered the teams together at GE and worked on making the 10-K more forward looking and less of a pure compliance document, with more graphs, while also keeping the SEC and FASB in the loop about what the company was doing. There was some pushback internally about revamping the report, but GE succeeded in overhauling it, though Bornstein would still like to see more improvements and less redundancy in the Management Discussion and Analysis part of the report.

The revamped 10-K has been popular with investors. Before the changes, in 2014 the 10-K was downloaded less than 100 times. But in 2015 the revamped 10-K had 2,700 downloads and 8,700 this year.

GE also issued an integrated report uniting both the financial report and its corporate sustainability report, and it had 15,000 to 16,000 downloads. Bornstein anticipates more companies will be following GE’s lead and issuing integrated reports in the U.S.

“Based on the various inquiries we’ve gotten over the course of this year, I think you can see a lot more companies doing some form of an integrated report,” he said in answer to a question from Accounting Today. “We received so many calls from so many companies, how we organized around it, why we included what we did, how did we think about it, how did we inform the SEC what we were doing, what input did we get from other regulatory agencies or accounting bodies, what role did the external auditors play, in my case KPMG. My guess is you will see more of it, hopefully. If there’s real value, investors will start asking for it. If the investors see value in it, they’ll start pushing the other companies that they’re invested in for something similar.”

Seidman presented Bornstein and his colleagues at GE with a special award for Pacesetter in Financial Reporting for 2016.

In another panel session, Timothy Flynn, the former chairman and CEO of KPMG and currently chairman of the audit committee at Walmart, discussed how the retail giant is getting ready for FASB’s new lease accounting standards. “From the audit committee perspective, we had a review of the new rules around that and we’re in the process of developing a comprehensive work plan,” he said. “We have some 9,000 locations around the world. There’s a lot of real estate leases involved in those. It will be a very extensive process for a real estate intensive organization.”