CII seeks better ESG disclosures under accounting rules

Sep 22, 2021
Group urges FASB to make changes

The Council of Institutional Investors (CII) has urged FASB to make ESG-related disclosures one of its top priorities amid growing pressure for companies to enhance reporting around those issues.

Specifically, CII believes FASB could improve ESG-related reporting concerning human capital management, climate change and income taxes. CII was writing in response to FASB’s request for comment on its agenda. 

CII general counsel Jeffrey Mahoney writes that the group believes there is a ‘pervasive need for more information about human capital management’ in financial statements, including in footnote disclosures.

The group broadly agrees with feedback received by FASB, cited by Mahoney, that ‘investors request more granularity and disaggregation about... [the] breakdown of cost of sales and selling, general and administrative expense to understand a company’s cost structure by nature (such as labor)’ and many investors believe such disaggregated information ‘would allow an investor to better understand a company’s… operating results and future cash flows.’

The costs for a footnote disclosure of total workforce costs would be minimal and the potential benefits to investors would likely be significant, according to Mahoney.

‘CII believes climate change is a systemic risk, so it is critical that investors can access clear disclosures of the risks it poses to long-term value creation by the companies in which they invest,’ he writes. ‘We also believe that ensuring climate risk is properly disclosed is vital to maintaining our efficient and vibrant capital markets and to the long-term success of investors as well as issuers.’

CII agrees with feedback received by FASB that companies are releasing inadequate information about climate risk and when it would have a material effect on an impairment analysis, fair value calculation or estimate of expected credit losses. These inadequacies can lead to mispricing of assets and a misallocation of investment capital, according to the group.

Mahoney notes that FASB staff have identified six disclosures required under US Gaap that the board could make to improve the information disclosed on climate risk:

  • Presentation of financial statements – going concern
  • Risks and uncertainties
  • Intangibles – goodwill
  • General intangibles other than goodwill
  • Asset retirement obligations
  • Environmental obligations.

‘We believe prioritizing amending those required Gaap disclosures would improve the information about climate risk and help investors better evaluate potential return on investment and make more informed comparisons among investment opportunities,’ Mahoney writes.

He adds that CII is aware many investors are seeking more granularity and disaggregation of income tax information to better assess global tax risk. This might include jurisdictional or country-by-country information such as income taxes paid. ‘Such information could assist investors in analyzing a company and making capital allocation decisions,’ Mahoney writes.

The growing extent of investors’ interest in ESG disclosures was highlighted by the record numbers of environmental and social shareholder proposals gaining approval this proxy season. There were 40 percent more environmental proposals submitted this year than in 2020, with more than 60 percent being withdrawn as of June 2, according to an early proxy season analysis from Georgeson. More than half (33) of the withdrawn environmental proposals related to reporting on climate change.

Environmental proposals are generally framed in terms of corporate disclosures. For example, shareholders in DuPont de Nemours overwhelmingly backed a shareholder proposal asking the company to disclose its role in plastic pollution.

The proposal, filed by As You Sow, requests that DuPont’s board release a report each year disclosing ‘trends in the amount of plastic in various forms released to the environment by the company annually, and concisely assess[es] the effectiveness of the company’s policies and actions to reduce the volume of the company’s plastic materials contaminating the environment.’

There is also growing regulatory pressure around environmental reporting. SEC chair Gary Gensler said this summer that he has asked the agency’s staff to develop a mandatory climate risk disclosure rule proposal by the end of the year.

The SEC in 2020 also introduced amendments to Regulation SK including a requirement that, to the extent that such disclosure is material to an understanding of a company’s business, it must report a description of its human capital resources such as any human capital measures or objectives it focuses on in managing the business.

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