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SEC Decision Raises the Bar For Corporate (Issuer) Disclosure on Sustainability Risks — Another Huge Step in Bringing ESG Reporting to Mainstream Investment Management and Financial Analysis…

Friday, January 29 2010 — An important shoe dropped this week – this one, a size 15 or more – in the rising and accelerating importance of ESG & Sustainability corporate key performance indicators and related factors to investment management and financial analysis, as well as for corporate senior executives, boards, and management specialists (e.g., investor relations officers, legal counsel, corporate secretaries, ESH managers, marketing officers).


On January 27, 2010 the SEC Commissioners approved an “Interpretive Release” (guidance) on existing disclosure requirements related to business risk on the issue of climate change. (The vote was 3-2 along political party lines.)


Note that despite the scare headlines from some pundits, the SEC did not make statements on, recognize, or endorse positions (pro or con) on climate change. It did not create new legal requirements or modify existing requirements. It did not refine the definitions of materiality to include “climate change” or “global warming.”


The SEC decision, says Chair Mary Schapiro, “…will help public companies in determining what does and does not need to be disclosed…will provide clarity and enhance the consistency of disclosure…the discussions, debates and decisions taking place in the USA and elsewhere on this topic have implications under our existing, long-standing disclosure rules…”


Four critical areas were addressed by the Commission:


  • The Impact of Legislation and Regulation (disclosure issue: how will these affect the company? Investors? Stakeholders?)
  • The Impact of International Accords (the EU already has “carbon” regulations; in the USA “Cap & Trade” legislation is being considered by the federal government and a number of states have regulatory regimes; global accords could soon follow – key disclosure issue: how would/do these affect the company? What should investors know?)
  • Indirect Consequences of Regulation Business Trends (disclosure: what legal, technological, political and scientific developments may create new risks or opportunities for the company? Remember the Chinese symbol for crisis is also for opportunity – leading-edge companies will move ahead with Sustainability disclosure.)

Physical Impacts of Climate Change (disclosure focus: the company should evaluate the actual or potential material impacts of environmental matters on their business. Note that the SEC has mandated certain environmental disclosure over the past 30 years.)
The request to the SEC to consider the guidance for public companies came from investors – Mindy Lubber, president of Ceres and director of the Investor Network on Climate Risk (INCR) led the campaign for broadening climate change-related disclosure by public companies (INCR is a network of 80 institutions with USD$8 trillion AUM). Commenting on the SEC decision, she said:


“Today’s vote is a clarion call about the vast risks and opportunities climate change poses for US companies – and the urgency for integrating into investment decision-making…”


More than a dozen investors managing $1 trillion+ AUM requested the formal guidance along with Ceres and the Environmental Defense Fund in 2007, amplifying the request with supplemental filings in 2008 and again in 2009. (Note:  EDF is typical of the “influencers” that we are profiling in INSIGHTS-edge if they are not asset owners or managers or ESG financial researchers or coalitions of investors.)


One of the signatory member institutions is CalPers, the largest state pension fund in the USA ($200+ billion AUM).  CEO Anne Stausboll said this about the SEC decision:  “We’re glad SEC is stepping up to the plate to protect investors…ensuring that investors are getting timely, material information on climate-related impacts, including regulatory and physical impacts, is absolutely essential…investors have a fundamental right to know which companies are well positioned for the future – and which are not…”


You can learn more (and watch the Commission meeting) at:


Other shoes dropping – clunk! — In December 2009 the SEC Commission approved new rules to enhance the information that shareowners receive related to risk, executive compensation and corporate governance matters.  “Good governance is a system in which those who manage a company – officers and directors – are effectively accountable for their decisions and performance…but accountability is impossible without transparency,” Chairman Schapiro said.  The Commission also beefed up rules related to disclosure and information about present and nominated candidates for the board.


Cluck:  On September 22, 2009 the US Environmental Protection Agency issued the Final Mandatory Reporting of Greenhouse Gases Rule – this requires annual reporting of GhG emissions by large sources and suppliers in the USA emitting 25,000 metric tons or more per year.  ESG and Sustainability aggregators such as Trucost provide these data to analysts, investors, regulators and others. (Gases covered by the Rule include: carbon dioxide, nitrous oxide, hydro fluorocarbons, per fluorocarbons, sulfur hexafluoride, and other gases.)  This action followed a US Supreme Court ruling that GhGs are air pollutants covered by the Clean Air Act, which USEPA and the states enforce.


Clunk:  On December 7, 2009 the USEPA Administrator signed two finding regarding GhGs – six Greenhouse Gases were determined to threaten public health; and, “well-mixed” GhGs from new motor cars and new engines contribute to GhG pollution which threatens the public health.  The latter a prerequisite to finalizing the EPA’s proposed emission standards for light-duty vehicles.


Connecting the dots for you:  There is a large and growing universe of Sustainability and ESG (Environmental – Social – Governance key corporate performance indicators) research and advisory organizations that provide analytics and services to asset owners and managers.  These organizations are now influencing literally trillions’ of dollars in AUM.  A growing number of mainstream investors, including US Public Sector retirement funds, Sovereign Wealth Investors, Sustainable and Responsible Investor (SRI), high-wealth individuals, and others, are adopting ESG and Sustainability investment guidelines.


Recent events underscore the importance of the need for senior corporate management and boards – and especially function managers — to get up-to-speed and ahead of the curve on ESG and Sustainability reporting.  The SEC action this week and the previous actions by USEPA will have profound effects on the corporate disclosure – now and in the future.  That’s why we developed the Institute’s  INSIGHTS-edge as a tool for corporate managers, investment managers, analysts, advocates, and stakeholders.


The Big Story – today it’s the terrible loss of life and widespread injuries in Haiti following the earthquake.  For much of 2010, as in other years, there will be a number of Big Stories that briefly dominate the news and pass by as the 24/7 news cycle moves on to other stories.  But one Big Story that at times dominate the news and [that] will be covered almost continuously will be about Wall Street and the rage that the American People feel towards the investment bankers, commercial bankers, brokers – everyone who did “this” to them (our neighbors), to us, to the nation.


Think of RAGE this way:  At its root it is about the apparent lack of Responsibility and Accountability [effective Governance] and Ethical behavior on the part of Wall Street leadership brought the economy to the brink of financial disaster.  We may have moved back from the edge of that steep cliff – some of us, anyway – but there are still 7 million plus Americans who have lost jobs; millions more are underemployed or have quit looking for a job; 3 million home mortgages have been foreclosed; small business is being starved for capital; and now, commercial real estate is following the disaster that occurred in the resident real estate market…need we go on?


And who is to blame?  In the minds of many Americans, Wall Street leadership.  Government regulators who took their eye off the ball are a close second. If you define the public as voters, constituents, investors, employees, borrowers, homeowners, public officials, entrepreneurs – then all have been impacted by the risky and at times reckless behavior of the leaders of the nation’s largest financial services organizations.  The rising public outrage is finally being heard loud and clear in the halls of congress and in the White House. (We have been hearing in conversations with family members and friends and business associates – where is the public outrage? It’s here.)


Here are some of the reasons why Wall Street will continue to be the Big Story long into 2010:


  • The Financial Crisis Inquiry Commission hearings are getting underway.  The first chieftains of finance were in Washington today being questioned by members of Congress.  There will be much, much more drama to come in these proceedings, which will continue out to year-end when a report is due. C-Span and the financial and news channels will have much content to share through the months of 2010.
  • Once the commission’s report is out at year-end, as in the case of the September 11 Commission, we will be hearing about the findings for a long time to come.  Short term, the answers to questions raised – and the long introductions to the questions by lawmakers (speeches, really) will be the stuff of The Big Story all through 2010.
  • The public rage will fuel the debate about the appropriate measures needed to effectively regulate Wall Street firms, commercial banks, and other market players (like hedge funds and derivative instruments).  There is comprehensive draft legislation moving through the Congress and fierce lobbying by financial firms is underway as well.
  • President Obama and members of Congress are proposing special taxes on the big banks that received government funds as the crisis deepened (a number of firms have paid the funds back) – the $120 billion number of the starting point (the amount the US government is said to have lost in the rescue effort to date).
  • The Big Story within this Big Story:  2010 Wall Street bonuses.  Buckle your seatbelts – with big banks (those “too big to fail”, and receiving federal funds with almost no strings attached) are about to announce the bonuses paid to their leaders, and to the rank & file.  The numbers will be in the tens of billions – because the banks are reporting profits once again. (Thanks to government aid, critics say – but that will be another part of The Big Story.)  The President and Congress have talked up a possible 50% tax on the bonuses paid by banks that received federal funds.  Wall Street firms will not understand the rage at the grassroots level as struggling families hear about multi-million dollar payouts at banks that were on the brink of failure (or so it was presented as rationale by the Bush Administration for the rushed bailout) now flush with cash for bonuses.
  • There will be many lawsuits filed (in addition to those working through the system right now) against Wall Street organizations – public employees’ pension funds are among the prominent plaintiffs, aided by the state attorneys general.  The crisis commission revelations are sure to fuel a number of these legal actions.

That’s a beginning list of why The Big Story of 2010 promises to be a long string of stories about what happened and why in 2007-2009.  And who did what to whom.


Remember the public rage – RAGE – this is about the failure of Responsibility (to stockholders and stakeholders, as fiduciaries), Accountability (to employees, stockholders, customers, various stakeholders, and to the nation), lack of effective Governance (and oversight) by boards and executives, and un-Ethical behavior by a number of capital market players.  (Some large investment bankers now stand accused of marketing Collateralized Debt Obligations to investor-customers while themselves shorting the same instruments – one more element of The Big Story coming to light as emails are surfacing).


We’ll stop here with the thought expressed by Sir Winston Churchill as events during WW II seemed to be turning in favor of the western allies in November 1942  “Now this is not the end.  It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” When we look back, we may see the Big Story of 2010 as the beginning of real changes in the capital markets and in financial services regulation.


Again paraphrasing the Great Orator, WC:  “Never have so few done so much damage to so many in such a short period of time.”  Stay Tuned to The Big Story in 2010 – underlying all, the public outrage at what and how much has been done to the many by the few.


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Contents - By Governance & Accountability Institute, Inc 2007 - Please credit author and if you use this content.