06 December 2009

When will the SEC mandate CSR/ESG reporting?


Climate Change is real, and only a strange fringe continues to think that it will not have a direct impact on corporate performance. Potential impacts on corporate performance, good and bad, must be reported by US listed companies to ensure that investors can include that information in their investment decision making.

Current SEC reporting requirements already provide the framework for CSR (Corporate Social Responsibility) or ESG (Environmental, Social and Governance) reporting. These rules need to be confirmed by the SEC. Hopefully the SEC will provide interpretation that will demonstrate that avoidance of reporting of these issues is no longer an option. And where the SEC leads, other regulators will follow.

In addition to mandating CSR/ESG reporting, the SEC should also expand the scope of XBRL reporting to include the MD&A, the specific area of existing reporting that would logically include CSR/ESG information. Of course, existing taxonomies are inadequate, but that too can and should be solved.

Already Required

I focus on the SEC (Securities and Exchange Commission) in the United States not because other regulators are not requiring CSR / ESG reporting, but because most other reporting requirements fall far short of what the SEC is able to require, and does require already for all other areas of corporate reporting.

It is my contention that CSR/ESG reporting, and specifically reporting about the potential impact of Climate Change, is already mandated by the SEC for the MD&A (Management Discussion and Analysis) as specified in Reg S-K, section 303.

Doctors can, and perhaps should, prescribe SEC regulations for patients with serious insomnia. But for the sake of this discussion, here is a link to the relevant extract from the SEC's Reg S-K. You can skip it if you want, but the underlined sections matter in this case.

Known Trend? Uncertainty?

In the regulation above, there are two phrases that matter:

  • Known Trend
  • Uncertainty

Climate Change as a Known Trend:

Now we get to the heart of the matter. Scientists, the IPCC, and dare I say it, government officials and politicians around the world agree that Climate Change is happening, they disagree on the speed or impact. Does this make Climate Change a "Known Trend"? Certainly it is to the IPCC and the its authors. Equally, it clearly is a known trend to the wider scientific community studying the ice caps, retreating glaciers, and dare I say it, to the cabinet of the Maldives Islands in the Indian Ocean, who recently held a cabinet meeting under water to highlight their own concerns that their country will be swamped due to sea level rises (but maybe that was a publicity stunt from a country that lives on its tourist trade).

So to a significant and growing number of individuals, organizations, communities and governments including the United States government, Climate Change is a "Known Trend". And if it is a known trend, companies must report on the potential impact this may have.

Climate Change as an Uncertainty:

But wait, you say, what about the recent noise about the release of e-mails indicating the possibility of scientific fraud? What if the Climate Sceptics are right? What if this is all a big hoax or a mistake?

There are certainly many individuals who do not accept the idea that 1) Climate Change is happening or 2) that it is in part being caused by human activity. Good for them. It is important that there be contrary opinions and voices, to ensure that ideas are fully explored from all angles.

Not accepting the idea that Climate Change is happening do not make it so - it makes it an "uncertainty", and therefore is subject to reporting requirements, even if the company simply reports "We have reviewed the materials available, and do not accept the idea that Climate Change is happening. Therefore we do not expect it to have any impact on our liquidity or operations."

Is Climate Change the new Y2K?

Y2K was a special event, with a clearly defined period in which the potential impact would occur. Is Climate Change the new Y2K?

Yes and No.

Yes, Climate Change is the new Y2K in that there is a growing consensus of potential impacts, remediation activity, and time horizons. There are also specific actions that can be taken by companies to limit the potential impacts on their business activity due to Climate Change (not least being impact on operations of legislation or regulation).

No. Y2K was defined by a very specific event and the immediate time periods around that event, and risk assessments and planning could be completed, remediation put in place, to address risks specific to the event and time period. Climate Change has the potential to have a far wider range of impacts over an undefined range of time.


Y2K does provide a framework for mandating reporting. The SEC required companies to discuss the potential impact of Y2K, with boilerplate responses being specifically forbidden. The SEC could, in light of existing Reg S-K reporting requirements, determine Climate Change to be a "known trend or uncertainty" or sufficient magnitude to required comment in the MD&A - Boiler Plate responses again being forbidden.


The change of administration and the appointment of a new Chairman of the SEC opened a window of opportunity for communication with the SEC on matters of reporting. And organizations have been taking advantage of that opportunity.

Earlier this year, the SIF (Social Investment Forum) met with and wrote to the SEC recommending the introduction of requirements for regulated companies to report on CSR/ESG issues in their regulatory filings. A copy of the SIF letter can be found here. Read my supporting letter here.

Pressure is mounting, with organizations such as CALPERS, the GRI and others also communicating directly with the SEC advocating for CSR/ESG reporting.

So the SEC is hearing the message, and there is a returning trickle of information suggesting that the SEC is beginning to move.

When exactly will be SEC move? I do not know.


Over two years ago I predicted that a new administration would require CSR/ESG reporting by companies. I suggested that it would take place in the first or second year of the new administration, regardless of who the candidates were or who won. I stand by that prediction, even though the first year of the new administration is rapidly coming to a close.

While the number of registrants mentioning "Climate Change" or "Global Warming" has more than doubled between 2007 and 2009, the number is still well under 10% (due to double counting where both are mentioned). In 2007, approximately 380 registrants included the words "Climate Change" or "Global Warming" in their 10K filings with the SEC, and a further 80 registrants include those phrases in their 20-Fs. For calendar 2009, the numbers are 648 and 335 respectively.

So my revised prediction is:

We will see, within the next year, and very possibly with the next months, a mandate form the SEC for CSR/ESG reporting.
  • Mandated CSR/ESG reporting will be required for 10-K and 20-F filings for years ending 31 December 2010. This means 10-Ks/20-Fs filed with the SEC in early 2011.
  • While not audited, auditors will have a requirement (as they do today) to read the information provided and determine that nothing written in any way contradicts or disagrees with information provided the audited financial statements.

Specific Recommendations:

  1. The SEC should release an interpretation as soon as possible clarifying and confirming that Climate Change rises to the standard of a Known Trend or Uncertainty for MD&A reporting.
  2. The SEC should carefully consider which, if any, existing CSR/ESG standard to suggest or recommend. Each standard has its strengths and weaknesses.
  3. Currently there is no requirement for the MD&A section of SEC reports to be tagged in the XBRL format. This should be changed with a requirement for the MD&A (and the included CSR/ESG information) to be tagged and included in the XBRL versions of reports.
  4. Other securities regulators should release interpretations supporting and requiring companies under their jurisdictions to provide comparable reporting.
  5. Listed companies should actively prepare themselves for mandated CSR/ESG reporting to the SEC, probably with a mandate to report in their 2010 year end 10-Ks or 20-Fs.

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