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FISCH
on research by JILL FISCH Saul A. Fox Distinguished Professor of Business Law; Co-Director, Institute for Law and Economics
JILL FISCH Corporate shareholders are increasingly interested in learning more about the societal impact of the companies in which they invest. Companies have addressed this interest by increasing their sustainability disclosures, but most such disclosures are voluntary and vary substantially among companies. Responding to the rise in attention to sustainability issues, a new article by University of Pennsylvania Law School professor Jill Fisch proposes an alternative way that companies can inform shareholders about their corporate sustainability practices within the framework of required Securities and Exchange Commission (SEC) disclosures. “Making Sustainability Disclosures Sustainable,” recently published in the Georgetown Law Journal, argues that the SEC should require companies subject to its jurisdiction to include a “sustainability discussion and analysis” (SD&A) in their annual reports.
Fisch is the Saul A. Fox Distinguished Professor of Business Law and Co-Director of the Institute for Law and Economics. She is a widely cited and internationally-known scholar whose work focuses on the intersection of business and law.
“Currently, there is no consensus on a precise definition of ‘sustainability[,]’” writes Fisch. “Use of the term is often traced to a 1987 United Nations report defining sustainability as ‘[actions that]… meet the needs and aspirations of the present without compromising the ability to meet those of the future.’” For example, sustainability might refer to the impact of corporate practices on the environment, or a company’s practices relating to executive compensation or board diversity — generally, issues that implicate a larger societal impact.
As investors have grown more focused on sustainability, the SEC has begun to consider “whether it should require increased sustainability disclosure as part of its ‘Disclosure Effectiveness Initiative.’” With limited exceptions, federal securities law does not require companies to “disclose specific categories of sustainability information[,]” Fisch explains. “Instead, the SEC has taken the position that such information needs to be disclosed only to the extent it relates to an existing disclosure requirement or is necessary to prevent a required disclosure from being misleading.” Commentators and regulators typically characterize reports on sustainability as “nonfinancial” reporting. Thus, apart from the few piecemeal requirements imposed by federal environmental law, consumer law, employment law, and some state law, any reporting on sustainability issues is undertaken voluntarily by companies that are so inclined.
As a result, sustainability reports are non-standardized and difficult to compare. In addition, “sustainability reporting varies widely in quality, and its accuracy is rarely audited or monitored, reducing its effectiveness as a tool for improving accountability.” Indeed, investors have repeatedly expressed dissatisfaction with the current state of affairs.
Fisch’s proposal would work toward resolving the problems of the existing regime. The annual sustainability discussion and analysis (SD&A) that Fisch envisions would require companies subject to SEC jurisdiction “to disclose, at a minimum, the three sustainability issues that are most significant for the firm’s operations, to explain the basis for that selection, and to explain the impact of those issues on firm performance[,]” she writes.
“[This approach] would subject sustainability disclosure to the same regulatory framework that applies to other securities disclosures,” meaning that “[t]he SEC staff would review and comment on issuers’ SD&A disclosures as part of its review of securities filings and would have the authority to bring enforcement actions against issuers and individual directors for failure to comply.” In addition, shareholders would be able to sue companies that include fraudulent misrepresentations or omissions within SD&As, just as they can with other financial disclosures required by the SEC.
Importantly, SD&A disclosures “will be prepared by disclosure attorneys rather than marketing personnel and subjected to the same verification requirements as traditional financial disclosures,” which would reduce the risk that companies would report only positive information and omit less flattering facts. Sustainability disclosures would thus become more reliable and more useful to investors.
Requiring and standardizing sustainability disclosures as Fisch suggests would allow investors to better understand the social, political, and ethical considerations associated with their investment decisions. Further, Fisch notes, “[b]eing able to assess an issuer’s sustainability practices is critical to evaluating the effect of sustainability practices on economic value.”
“In light of the worldwide debate over sustainability practices and investor claims regarding the necessity of quality sustainability disclosures for an adequate evaluation of issuer operations, it is necessary for the SEC to reverse its position that sustainability disclosure is not properly included within financial reporting,” writes Fisch. “SD&A disclosure represents a valuable first step that would enable investors and researchers to weigh those questions with minimal burden on corporate issuers.”
