Economy and Society: SEC preps businesses for new ESG disclosure standards


Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.


ESG Developments This Week

In Washington, D.C., and around the world

SEC preps businesses for new ESG disclosure standards

In a speech last month, SEC Commissioner Caroline Crenshaw provided companies under the SEC’s jurisdiction with significant insight as to what they should expect from the SEC’s proposal for new disclosure standards and how they should start planning to meet those expectations. Among other things, Commissioner Crenshaw suggested that the SEC will tacitly, if not overtly change the definition of materiality:

“In March of this year, the Commission sought public comment on climate change disclosure. We received hundreds of responses; many of which also addressed disclosures concerning other ESG risks. An overwhelming number of comment letters state that investors view ESG information as material to financial performance and that investors need consistent and reliable disclosures of ESG information to inform their investment decisions. According to commenters, ESG related information helps investors assess the long-term sustainability or value of an investment. And this makes sense if you think about the position investors are in today.”

Commissioner Crenshaw also discussed the types of issues that might confront companies and how they should work to incorporate their ESG disclosures into their financial statements and internal accounting practices:

“With ESG now front and center, the reliability of corporate ESG risk disclosures, and their potential impact on and connectivity to financial statements, is critical. As you know, corporate internal controls play a crucial role in ensuring such risk disclosures are consistent and reliable. The term “internal accounting controls” refers to an organization’s plan, methods, and procedures related to safeguarding a company’s assets and ensuring the reliability of corporate financial records. These controls broadly include systems designed to ensure transactions are authorized and recorded in a way that maintains accountability for assets and allows for financial statement preparation in conformity with GAAP. They also include procedures that control access to assets and the systems designed to test the effectiveness of internal controls. The concept of accounting controls is intentionally broad, because a company’s system for tracking its assets and recording transactions – regardless of their form – is vital to accurate financial reporting. And it is vital to identifying risks to the financial statements so leadership can manage them and prepare GAAP-compliant financial statements and disclosures accordingly. At the end of the day, management is responsible for establishing and maintaining an effective system of internal controls that reasonably safeguards corporate assets from risk. So as you think about and discuss ESG risks during this conference, I encourage you to think about them in the context of your internal accounting controls and audit functions.”

Finally, Crenshaw addressed climate change and the related matters that should draw companies’ attention:

“I would like to hear how public companies are assessing whether and how climate change risk impacts revenues and expenses, both now and in the foreseeable future. In particular, I am interested in understanding how companies are evaluating whether climate risk impacts their business. Some issues that I would think companies are considering as part of this process include whether assets are at risk of depreciating more quickly or becoming “stranded” in response to climate change; whether supply chain or transportation networks are at greater risk of being impacted by extreme weather events; or whether existing revenue streams depend on the status quo, such that new regulations pertaining to deforestation or carbon emission could potentially reduce income. No matter where public companies come out on these topics – or how they assess climate risk – I would like to understand the underlying internal accounting controls that guide decision making. On a related note, if climate change presents risks to a company, or at least requires disclosure, I’m interested in understanding how that company evaluates climate change risk. For example, do companies rely on third party service providers, and if so, do they evaluate the controls that the service providers have in place over information and disclose to investors the identity of the service provider, in the same way you disclose your auditors and underwriters?” 

ESG in theory and practice

Several weeks after COP26 summit agreements to divest from fossil fuels and push toward a zero-carbon future, Japan appears to be backtracking:

“Government officials have been quietly urging trading houses, refiners and utilities to slow down their move away from fossil fuels, and even encouraging new investments in oil-and-gas projects, according to people within the Japanese government and industry, who requested anonymity as the talks are private.

The officials are concerned about the long-term supply of traditional fuels as the world doubles down on renewable energy, the people said. The import-dependent nation wants to avoid a potential shortage of fuel this winter, as well as during future cold spells, after a deficit last year sparked fears of nationwide blackouts.

Japan joined almost 200 countries last month in a pledge to step up the fight against climate change, including phasing down coal power and tackling emissions. However, the moves by the officials show the struggle to turn those pledges into reality, especially for countries like Japan which relies on imports for nearly 90% of its energy needs, with prices spiking partly because of the world’s shift away from fossil fuel investments….

To achieve net-zero emissions by 2050, the world needs to stop developing new gas, oil and coal fields, the International Energy Agency said in May. Japanese officials are echoing concerns highlighted by Australia last month, which said Europe’s gas supply squeeze is proof that nations need to continue to add more production.

Japan’s trading houses, including Sumitomo Corp. and Marubeni Corp., are aggressively divesting from fossil fuels amid an uncertain future for the energy sources and pressure from shareholders. These companies, formally known as “Sogo Shosha,” have traditionally been among the biggest investors in oil and natural gas assets in order to bring the fuel to resource-poor Japan.”

In the States

Report argues New York City’s ESG tax hits hardest upstate

As part of its push to move toward sustainability (and thus to meet municipal bond investors’ ESG demands), New York City has pledged to go green and recently signed two contracts to make that possible. According to a recent note from the Empire Center for Public Policy, most of the costs of the project, but none of the benefits, will hit upstate:

“A pair of recently inked contracts to fuel more than one-third of New York City’s electricity grid with renewable energy will raise monthly electricity bills for upstate ratepayers up to 9.9 percent once the projects are on-line. 

Both downstate (ConEdison) and upstate (National Grid) customers will bear the project costs equally based on load share, but upstate customers—who tend to have lower electricity bills—are expected to experience roughly double the percentage increase. 

That’s according to a petition just filed by the New York State Energy Research and Development Authority (NYSERDA), which is now seeking to have the contracted projects approved by the Public Service Commission. 

The projects seem headed for approval, since Governor Hochul signed off on them and her office issued a press release Tuesday trumpeting their expected contribution….”

The Empire State note also discussed recent refusals by the New York State Climate Action Council to be more transparent about who would pay for further plans to meet sustainability goals and how those goals would be met:

“In related news Tuesday, the New York State Climate Action Council (Council) held a virtual public meeting at which it discussed a strategy to continue dodging — in its long-awaited “draft scoping plan” to be issued later this month—the question of who will pay the hundreds of billions of dollars required to achieve the CLCPA’s climate goals. 

A draft plan circulated in advance to the Council members (but not the public) prompted member concern regarding the need for an analysis of “energy affordability and impacts to consumer pricing.” But the “proposed resolution” to that concern was to point to the Council’s cost-benefit analysis. As we recently noted, however, that analysis makes no attempt to estimate ratepayer impact on the grounds that it’s currently unclear what specific policies will be adopted to achieve the law’s climate goals.”

In the spotlight

ESG and business schools, again

This week, The Financial Times has two stories about ESG at business schools and whether the latest increase is meeting current demand. One story deals with specifically with European Business Schools and the impressions they give with respect to ESG education:

“As environmental, social and governance standards become ever more important criteria by which business schools are judged, the Financial Times’s ranking team analysed how European institutions are faring compared with their global rivals, as well as assessing how students are funding their degrees, alumni seniority and favoured sectors of employment….

Executive MBA and MiM graduates who studied outside Europe rate their business schools’ delivery of environmental, social and governance topics more highly than those from European institutions. Only MBA graduates from European schools rate them higher on the subject than their peers elsewhere.

MBA and executive MBA programmes taught in Europe dedicate a larger part of their courses to ESG compared with schools in the rest of the world. The average proportion of core MBA teaching hours dedicated to ESG in Europe is 75 per cent higher than the rest of the world, where only 12 per cent of the degree is related to ESG topics.”

The second piece made the case that in spite of European business schools’ dedication to ESG education, they are still failing the business community, which needs even more ESG capacity:

“Business is undergoing profound change. Urged on by regulatory reforms proposed by the European Commission, the continent’s executives are at the forefront of promoting purposeful, responsible and sustainable business. European business schools should be at the vanguard but risk being left behind.

Many schools have been slow to recognise the extent of reform required to their curricula. They have introduced electives on topics such as environmental, social and corporate governance and sustainable business but, for the most part, their core courses remain unchanged.

The recent final report from The British Academy Future of the Corporation programme highlights the extent to which business is embracing purposeful profit — making money by solving rather than exacerbating problems for people and planet. It argues that businesses should be supported and held to account, and sets out policies and practices.

Business school research and teaching should be the source of education for the coming generation of managers and entrepreneurs. But shareholder primacy remains at the heart of schools’ programmes, which are focused on economic theories, financial models and management studies. Courses start from the presumption that the purpose of a business is to maximise shareholder wealth and everything — accounting, finance, marketing, operations management, organisational behaviour and strategy — follows from that.”