Disclosing (and Validating) Sustainability Reports

Sustainability reports are an increasingly prevalent topic of conversation in boardrooms. The intent is to provide stakeholders with information so they may ascertain whether a company has long-term viability. Therefore, businesses must voluntarily disclose the impact of social and environmental risks on its business model.

In the United States, the SEC (Securities and Exchange Commission) recently proposed a rule that requires registered companies to issue disclosures about climate change risk to investors.¹

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According to the SEC’s website, financial disclosure will focus on the following aspects:

1. The registrant’s governance of climate-related risks and relevant risk management processes
2. How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term
3. How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook
4. The impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements

They will also require the disclosure of:

1. Direct greenhouse gas emissions (GHG)
2. Indirect emissions from purchased electricity or other forms of energy
3. In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain

https://www.sec.gov/news/press-release/2022-46

How do you know if the information is true and verifiable? Implementing systems to monitor and report are important. However, multinational corporations should perform their own due diligence before disclosing a sustainability report.  That said, third-party verification of sustainability claims could provide a report with greater credibility.

International working groups like the Global Reporting Initiative (GRI) have developed guidelines to standardize sustainability reporting. The reporting guidelines contain standardized processes that include independent third-party audits and independent evaluation of sustainability reports.

However, most companies do not have unbiased, third-party audits performed on the claims made in sustainability reports. The information that companies report to investors could influence the value of the company’s stock. Fraudulent or unsubstantiated claims could cost the public millions of dollars, so SEC could exercise its investigative authority to investigate sustainability in the future.

Historically, the SEC has mandated certain practices in financial reporting through the Sarbanes-Oxley (SOX) Act of 2002.  Through SOX Section 404, the integrity of the financial record keeping ensures the validity of the data being reported.  If in breach of SOX, the fines can be up to $5 Million and/or 20 years in prison for the executive officers who sign off on the report.

Sustainability reporting is still in its early stages. The SEC has taken a keen interest in how to manage the risk that “greenwashing” poses to markets. Increased regulation is likely to come, and independent evaluation could become key to assuring the integrity of information within the report.

Learn more about independent verification with GRI