FSA Flashcards
SASB
2011: address the need for a shared understanding of how non-fin info impact perf; develop industry-specific stds; disclose material decision-useful sust info.
US Supreme Court def of materiality
Collection, mgt and report of sust info: relevant, reliable, comparable; decision, RM, strategy
Identify, quantify and comm sust factors that are material to fin cond and op perf
Business reporting
The information that a company provides to help investors with capital allocation decisions about the company
Sustainability
The concept of sustainability, or sustainable development, was defined in the Brundtland Report (Our Common Future) as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
Changing Valuations
In 1975, only 17 percent of the assets in the S&P 500 were intangible; in 2010, the number was 80 percent.
Sustainability Issues Are Business Issues
Approximately 90 percent showed a non-negative relation between sustainability criteria and corporate financial performance.
80 percent of CEOs believe that their company is approaching sustainability as a route to competitive advantage; just 14 percent of investors believe the companies they invest in are doing so
Existing, Evolving, and Emerging Regulation
2014 the E.U. adopted an amendment to its general accounting directives
SEC has issued specific guidance on a handful of sustainability issues—most notably climate change in 2010. The SEC also launched a Disclosure Effectiveness Initiative in 2013 with the goal of improving the quality of disclosures and issued a related Concept Release in April 2016
United Nations-supported Principles for Responsible Investment (UNPRI) Sustainable Stock Exchange Initiative
2017, the London Stock Exchange Group released “Your Guide to ESG Reporting,”
“universal owner” approach (fiduciary duty)
Consider not only portfolio-level returns, but also the opportunity to stimulate wider economic growth, which is also in the best interests of their beneficiaries.
“universal owner” approach
Consider not only portfolio-level returns, but also the opportunity to stimulate wider economic growth, which is also in the best interests of their beneficiaries.
Uniform Prudent Investor Act (UPIA) 1994
Fiduciaries, who have a duty of prudence, benefit from considering material sustainability information as sustainability becomes increasingly relevant to a company’s performance, for both risk management and growth opportunities.
Securities Act of 1933
regulates the sale of securities to the investing public. Before a company can offer securities under federal jurisdictional means, Section 5(c) of the Securities Act requires companies to fully and truthfully disclose information about the company in a registration statement filed with the SEC.
Disclosure as the Basis of the Securities Acts: to protect investors by promoting full disclosure of information thought necessary to informed investment decisions
Securities Exchange of 1934
regulates the stock exchanges and provides ongoing reporting requirements of companies that register securities with the SEC
gives the SEC the power to establish rules to regulate speculation and market manipulation on the stock markets.
Rule 10b-5, 1942, prohibits the making of misleading, untrue statements or engaging in fraud or deceit in the purchase or sale of any security.
Section 12 of the Exchange Act prohibits trading of securities on a U.S. stock exchange unless they are first registered, and the information requirements are similar to the Securities Act’s disclosure requirements for new securities issues
Section 13 of the Exchange Act contains the periodic reporting requirements
The Exchange Act gives the SEC authority to establish accounting principles for the companies that register securities (the “registrants”). In 1938, the SEC commissioners voted to allow the private sector to establish generally accepted accounting principles (“GAAP”) to guide the preparation of financial statements; oversee AICPA - FASB.
SEC
protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation
Sarbanes-Oxley Act (SOX) of 2002
SEC oversight power over the newly formed Public Company Accounting Oversight Board (“PCAOB”).
PCAOB
Protects investors and the public interest by working toward useful independent audit reports and by establishing standards for audits and auditors
Early Statements on GAAP
1932, the American Institute of Accountants (“AIA”) recommended five generally accepted principles of accounting to the NYSE.
1938, the AIA’s Committee on Accounting Procedure (“CAP”) began to publish Accounting Research Bulletins (“ARB”) - give the SEC authoritative support for the GAAP
1939, an AIA committee recommended that the auditor’s report contain the language “present [financial information] fairly … in conformity with GAAP
APB
1959, the AICPA established the Accounting Principles Board (“APB”) to reduce variation in accounting practice
Decision-Usefulness Enters the Lexicon
1966, the AAA (American Accounting Association) published A Statement of Basic Accounting Theory (“ASOBAT”) that deemphasized the asset valuation purpose of financial statements and instead focused on their decision-usefulness
Effectively linked decision-usefulness to the information required to make investment decisions: using discounted future cash flows as the most relevant attribute of assets and liabilities.
FASB
Dissatisfaction over APB’s inability to propose and support for accounting principles
1970, the APB affirmed the decision-usefulness objective
1971, the AICPA formed two special committees to address consternation over the APB’s inability to propose standards: the Trueblood Committee and the Wheat Committee
1973, in Accounting Series Release No. 150, the SEC recognized the FASB as the authoritative source of GAAP shortly after the FASB’s formation
Trueblood Committee
Propose the objectives of financial reporting, based on the underlying belief that identifying objectives would help improve financial reporting
Seconded the decision-usefulness objective of ASOBAT
Wheat Committee
identifying ways to improve the establishment of accounting standards
1973 FASB
SFAC No. 1, 1978 (Statements of Financial Accounting Concepts)
primary purpose of financial reporting as “provid[ing] information to help present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.
SFAC No. 2, 1980
Characteristics of decision-useful information:
relevance (timeliness, predictive value, and feedback value)
reliability (free from error and bias and faithful representation)
neutral (not favoring one’s economic interest)
comparability
material / large enough magnitude to affect decisions
benefits > costs
SFAC No. 8, 2010
replace 1&2
characteristics are: Relevance -> materiality; Faithful representation (complete, neutral, and free from error)
To enhance the relevance and faithful representation of the information: Comparable; Verifiable; Timely; Understandable;
November 2014, the FASB announced a tentative decision to revise the description of materiality in SFAC No. 8 to state that materiality is a legal concept
TSC v. Northway 1976
Exchange Act 14(a) and Rule 14a-9 in that it omitted material facts
There must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ”total mix” of information made available.
Court: a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder
-> information needs only to be likely to be considered by the reasonable shareholder.
Basic v. Levinson
Court: emphasized that materiality is a question of law applied to the specific facts of a case.
Denied merger speculation
Been false or misleading – in violation of Section 10(b) of the Exchange Act and Rule 10b-5 – and that shareholders were injured by selling their shares at prices artificially depressed by those statements.
probability/magnitude test
Exchange Act Section 10(b) and Rule 10b-5
prohibit: (1) the use of deceptive devices or schemes, (2) the making of a material misstatement or omitting information such that the statements made are not misleading, and (3) committing a fraud or deceit, in the sale or purchase of securities.
Exchange Act 14(a) and Rule 14a-9
omitted material facts
Reese v. Malone 2014
Rule 10b-5 suit, alleging that British Petroleum (“BP”) and certain executives made materially false and misleading statements about their knowledge of corrosion in an oil pipeline, which later experienced a large spill
Court: facts demonstrating public interest in the withheld information demonstrate its materiality; disclosure that BP may have ignored significant warning signs would have altered the total mix of information made available to investors.
Staff Accounting Bulletin No. 99, SEC
not use financial thresholds or rules of thumb to make ultimate materiality determinations
NRDC’s Rule-Making Petition
Natural Resources Defense Council
1971 asking the Commission to expand civil rights and environmental disclosure under the federal securities laws.
The federal district court ordered the SEC to work on two critical factual issues regarding materiality: prevalence of “ethical investor”; other avenues
SEC to conclude ethical investing was not an important or significant type of investing: <1% of the total value of stocks and bonds in the United States in 1974 was invested using ethical investing principles; SHP between 2-3% support from voting stockholders during the 1970s
decided to adhere to an economic understanding of materiality; could not require disclosure solely for the purposes of changing corporate behaviour… contradicts with some occasion
In 1978, it issued new requirements for disclosing attendance statistics, as well as the committee structure of the board of directors to increase the corporation’s accountability to society. In 1992, it expanded disclosure of executive compensation in response to public outcry over compensation levels.
Regulation S-K Requirements for Form 10-K
Description of business 101 (101(c)(1)(xii) expressly requires disclosure regarding certain costs of complying with environmental laws)
Legal proceedings 103
Risk factors 503
MD&A Section Disclosure 303
discuss its overall financial condition, results of operations, and management’s view of known trends and uncertainties that are reasonably likely to have a material effect on results of operations and financial condition
disclose “known trends or uncertainties that the registrant reasonably expects will have a material impact on net sales, revenues, or income from continuing operations.”
focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition.
The Commission’s 2003 interpretive release reminds issuers of three main goals of MD&A disclosure:
- To provide a narrative explanation of a company’s financial statements that enables investors to see the company through the eyes of management;
- To enhance the overall financial disclosure and provide the context within which financial information should be analyzed; and
- To provide information about the quality of, and potential variability of, a company’s earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance.
1989 Interpretive Release
distinction between required disclosure and voluntary forward-looking information to be included in MD&A.
In determining whether a known trend or uncertainty is reasonably likely to have a material effect, the Commission advises management to ask two questions:
(1) Is the known trend, demand, commitment, event, or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required.
(2) If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event, or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant’s financial condition or results of operations is not reasonably likely to occur.
The Securities Act and the Exchange Act contain safe harbors for “forward-looking statements” that predate the Private Securities Litigation Reform Act of 1995 (PSLRA)
“meaningful cautionary statements identifying important factors that could cause actual results to differ meaningfully from those in the forward-looking statement.
Four points regarding the focus and content of MD&A:
- material information
- KPIs
- known trends and uncertainties that are reasonably likely
- Analyze the information that is disclosed
SEC’s Climate Change Guidance
- The impact of legislation and regulation
- International accords
- Indirect consequences of regulation or business trends
- Physical impacts of climate change
Consequences of Inadequate Disclosure
Exchange Act Section 10(b) and Rule 10b-5 - material omissions and misrepresentations
Exchange Act grants authority to the SEC to bring civil actions for aiding or abetting antifraud violations of the securities laws
SEC can provide comments to a company regarding the adequacy of its disclosures. The company must respond
(sanctions and delisting)
SOX 2002
1) the material accuracy and fair presentation of the disclosures in the report,
(2) that the issuer has established and maintained effective disclosure controls and procedures, and
(3) inadequacies in, or material changes to, internal controls over financial reporting.
disclosure requirement of Exchange Act Rule 12b-20.
Disclosure Effectiveness Initiative SEC
MD&A disclosure is more about principles-based requirements than about line-item, rules-based requirements
making disclosure more effective, not only about reducing the amount of disclosure.
dual goals of streamlining requirements for companies, including emerging growth companies, and focusing on useful, material information for investors.
1991, the AICPA formed the Special Committee on Financial Reporting (also known as the Jenkins Committee) because of concerns about the relevance and usefulness of business reporting
include valuable non-financial information; captures drivers of long-term value creation (forward-looking statement)
Association for Investment Management and Research (“AIMR”), now CFA
Financial Reporting in the 1990s and Beyond 1993: inancial statements are one component of a comprehensive business reporting model that serves users, and the report encouraged management to “disclose and discuss their strategies, proposed tactics and plans, and expected outcomes.”
FASB Business Reporting Research Project - 2001 Improving Business Reporting: Insights into Enhancing Voluntary Disclosures.
leading companies in select industries voluntarily included some non-financial information that was useful to investors
Sustainability Accounting and the Accounting Profession
AICPA explains that “accounting for sustainability involves linking sustainability initiatives to company strategy, evaluating risks and opportunities, and providing measurement, accounting and performance management skills to ensure that sustainability is embedded into the day-to-day operations of the company.
IMA”) describes the relationship between sustainability and accounting as identifying “where connections can be made between non-financial reporting, financial value, and the sustainable worth of the entity.
SASB’s Conceptual Framework defines sustainability accounting as the measurement, management, and reporting of corporate activities that maintain or enhance the ability of the company to create value over the long term
External Reporting
financial reports do not generally offer enough information on their own to make adequate projections of a company’s future performance
financial accounting has not developed techniques and standards to fully capture the difference between market value and book value, sustainability accounting can help account for that uncaptured value.
Internal Decision-Making
costs and benefits are difficult to quantify
Sustainability accounting metrics can enhance or be incorporated into managerial accountants’ performance evaluation systems to promote goal congruence and coordination, communicate expectations, motivate unit managers, provide feedback to top-level decision-makers, and inform benchmarking efforts
2008 IMA report (The Evolution of Accountability: Sustainability Reporting for Accountants)
The management accountant who fails to identify the factors contributing to the sustainability of the organization is not providing management with a full picture of the organization’s value or of the breadth of risks that need to be addressed in maintaining and enhancing the organization’s value.
Voluntary Sustainability Reporting
2014, 71 percent of the top 100 companies in 41 countries reported on sustainability factors and 95 percent of the largest 250 companies in the world produced a sustainability report.
CSR report and Form 10-K tend to be issued months apart
2015 survey of investment professionals, 61 percent of respondents thought that public companies should be required to report annually “on a cohesive set of sustainability indicators in accordance with the most up-to-date reporting framework
Disclosure Overload
more than 500 sustainability issues are currently tracked by dozens of entities, relying on 2,000 indicators
2013 study of highly rated sustainability reports revealed that 90 percent of known negative events were not reported by the company
Supreme Court definition and proprietary definitions fall into three categories
whose perspective is considered, what kinds of decisions are affected, and the threshold for disclosure
The securities law definition of materiality
takes the perspective of the reasonable investor. Information is material if it is important to investors in their decisions to buy, hold, or sell a security, or how to vote on a corporate matter. The threshold for disclosure is whether the information would have assumed significance in the deliberations of the reasonable investor.
proprietary definitions of materiality
consider what matters to a broad range of stakeholders, including local communities, customers, employees, and interest groups. While the decisions and assessments affected are not specifically identified, they might include the company’s attractiveness as an employer, or how prospective customers view the company.
Proprietary definitions of materiality (GRI)
The Materiality Principle states that the report should cover Aspects that: reflect the organization’s significant economic, environmental and social impacts; or substantively influence the assessments and decisions of stakeholders
SASB For companies
Opportunity for competitive advantage Improved access to capital Enhanced reputation Increased efficiency and waste reduction Improved employee loyalty Lower cost of capital Expanded revenue growth Improved risk management
=> A minimum set of cost-effective disclosure topics that are likely to constitute material information for companies in an industry;
A standard for disclosing those factors in a decision-useful way for investors;
A method for understanding and improving performance on sustainability-related value drivers; and
A way to comply with Regulation S-K.
SASB For investors
Increased transparency
More effective allocation of capital
Improved market stability
Greater market liquidity
=> Comparable data for benchmarking and evaluating company performance;
Standardized, decision-useful information in a trusted, convenient channel (e.g., Form 10-K); and
Data to inform analysis and understanding of sustainability risk at the portfolio level.
State of Sustainability Disclosure in SEC Filings
69 percent of companies are already addressing at least three-quarters of the sustainability topics included in their industry’s SASB standard, and 38 percent are already providing disclosure on every SASB topic.
less than 24 percent of these sustainability disclosures use metrics.
SASB standards characteristics
- Focus on the U.S. capital markets;
- Surface information likely to be material;
- Yield decision-useful data;
- Be cost-effective for corporate issuers;
- Identify industry-specific disclosure topics.
SASB Standards
The standards have a median of five topics and 13 metrics per industry, 78 percent of which are quantitative.
SICS™
similar business models, face similar growth and innovation opportunities, operate in the same legal environment, rely on similar resources, and produce comparable products and services, as well as comparable impacts on society and the environment.
“Total mix”
“Total mix” does not imply that investors are entitled to the totality of information that could be made available, but rather asks what impact a given piece of information has on the bigger picture from the reasonable investor’s point of view.
Simply adding content—of any amount—to the “total mix” does not necessarily “significantly alter” it. At the same time, even a seemingly small or statistically insignificant fact is considered material when it is decision-useful to the reasonable investor.
Identifying Industry-level Disclosure Topics
Evidence-Based Research: Sources of Evidence; Evidence of Interest; Evidence of Financial Impact
Stakeholder Consensus: Industry Expertise (IWG); Independent Oversight (Committee on Metrics Quality, a subcommittee of the Standards Council); Public Comment Period
Evolving with the Marketplace: Provisional Standards Release; Reviewing Provisional Standards; Updating the Standards
Evidence of Interest (five-factor test) - Materiality Risk Assessment
- Financial impacts and risk
- Legal, regulatory, and policy drivers
- Industry norms and competitive drivers
- Investor/Stakeholder concerns and social trends
- Opportunities for innovation
Evidence of Financial Impact
Revenue
Market size/share
Pricing power
Recurring costs
Cost of goods sold (COGS)
Research and development (R&D)
Extraordinary expenses
Capital expenditures (CAPEX)
Assets & Liabilities
Tangible assets Intangible assets Contingent liabilities and provisions Pension and other liabilities Cost of capital
Risk premium
Availability of capital
Industry divestment risk
“reasonable likelihood” test to assess potential impacts
A reasonable likelihood that the known trend, demand, commitment, event, or uncertainty will occur; and
A reasonable likelihood that the occurrence will have a material effect on the registrant’s financial condition or results of operations
IWG
feedback on the disclosure topics and accounting metrics identified in the initial research phase of the provisional standards-development process.
Exposure Draft; at least 75 percent consensus
Committee on Metrics Quality, a subcommittee of the Standards Council
ensure that SASB fulfilled its goal of producing decision-useful and cost-beneficial metrics to measure corporate performance on sustainability topics
- Does the metric capture company performance on the relevant sustainability topic, either directly or by proxy? Can it be used to define an industry benchmark, with sufficient range of performance and ability to track performance over time?
- Does the metric support financial analysis of performance? Does it enable analysts to translate company performance into effects on traditional financial analysis of performance, on a fundamental or comparative basis?
Public Comment Period
topics that may not be material
topics not included in the standards that may be material
correct, improve, or add to accounting metrics
Additional or alternate accounting metrics
Assessments of how costly
Rules of Procedure - Review of Provisional Standards
The review process involves research, consultation, agenda setting, updates and public comment, and, finally, ratification of updates.
A robust governance structure will oversee all reviews, proposals, and updates, ensuring due process, transparency, the inclusion of stakeholder views, and technical rigor.
Provisional SASB standard
- SASB provides disclosure guidance, which includes a brief overview of the types of companies in the industry and an overview of how to include information about those topics in SEC filings
- List of the disclosure topics, along with associated accounting metrics, including technical protocols for each metric. The technical protocols describe how to properly capture and disclose the data from the metric.
Components of a Standard
Disclosure Topics and Accounting Metrics: Disclosure Guidance; Disclosure Topics; Accounting Metrics; Technical Protocols
Technical Bulletins and Interpretations
Disclosure Guidance
performing their own materiality assessments, determining the scope of disclosure and the format of reporting, reporting activity metrics for normalization
Normalization of Metrics
Activity metrics capture basic industry-specific data about a company that may assist in the accurate evaluation and comparability of disclosures
SASB standards specific to their primary industry
If a registrant generates significant revenue from multiple industries, SASB recommends that it consider the materiality of the sustainability topics that SASB has identified for those industries and disclose the associated SASB accounting metrics.
Consolidated entities are recommended to calculate metrics for the whole entity, regardless of the size of the minority interest, but data from unconsolidated entities does not need to be included.
Disclosure Topics
- Applicable to investors
- Pertinent and relevant across an industry
- Focused on driving value creation
- Expected to bring benefits that exceed the costs
- Actionable by companies
- Reflective of the views of stakeholders
Accounting Metrics
Relevant, Useful, Applicable to most companies,
Cost-effective, Comparable, Complete, Directional, Neutral
Technical Protocols
which data are encompassed by the scope of the metric and which data are not
Other Sustainability Issues
Product Alignment and Safety
Resource Intensity and Efficiency
Financing and Responsible Lending
Climate Change
climate change manifests differently in nearly every industry.
SASB’s industry-specific approach provides key insights on the ultimate source of GHG emissions. It focuses on pressure points and signals for market-based approaches to mitigation and innovation
Energy management and Scope 2 emissions
80/20 rule: The most cost-effective climate change data addresses the largest sources of emissions
Financed emissions
Sustainability accounting standards must focus on these key, industry-specific factors to:
Cost-effectively empower corporate leadership to better manage performance on the sustainability issues most likely to impact value creation.
Improve the completeness of material information made available to investors by enabling companies to disclose material sustainability data in a decision-useful way.
Corporate Use
Cross-functional Nature; Alignment with Sustainability Reporting
Cross-functional Nature
Collecting data about a company’s finances;
Engaging an independent auditor to review the data;
Assessing legal requirements and implications concerning disclosure;
Presenting the statements to the board and management for approval;
Communicating the results to investors, creditors, and other users.
Roles
CEO and CFO
Sign SEC filings and certifications about the accuracy and completeness of the information disclosed as well as the effectiveness of internal controls and disclosure controls
Participate in annual assessments of sustainability information for materiality (this includes but is not limited to previous disclosures.)
Develop and communicate a business-specific strategy for incorporating sustainability into core activities, decision-making, and performance evaluation
Legal Counsel
Fully understand sustainability disclosure requirements and provide relevant information and analysis when companies are determining what information to disclose
Help manage legal risks related to the omission of material information, informed risk management, and informed decision-making to fulfill duties of care, as subpar performance on material sustainability factors can pose a risk to a company’s financial condition or operating performance
Review all of the company’s communications on sustainability, such as corporate social responsibility and sustainability reports, to ensure consistency and the appropriate use of “materiality” to describe sustainability information
Chief Sustainability Officer
Participates in both new and established processes for collecting and reporting sustainability data for sustainability reports and 10-K disclosures
Establishes collaborative relationships with the internal audit and/or finance teams
Contributes to assessing the materiality of sustainability information by helping identify how sustainability impacts the company’s business performance
Chief Audit Executive and Internal Audit
Systematically evaluate the organization’s risk management, control, and governance processes
Work closely with the independent assurance provider
Work with the audit committee of the board of directors to keep the board informed about the policies and procedures surrounding the controls
Provide data control and risk management oversight to inform management about the company’s sustainability performance
Independent Assurance Provider
Assesses the data quality of sustainability disclosures, including the design and operation of the internal controls, for purposes of getting comfort over management’s assertion
Board of Directors
Accepts or assigns to the audit committee responsibility for overseeing the preparation of certain aspects of SEC filings, and reviews and approves filings before they are submitted
Oversees the internal audit to ensure appropriate controls are in place, that the team is objective and competent, and that it has the necessary training and support
Oversees the external assurance provider, assesses its independence, and reviews its activities and the final report
Engages in other relevant activities, including discussion of financial statements, the contents of MD&A, the company’s risk assessment, and sustainability’s role in business strategy
Establishes sustainability committee to oversee relevant disclosures
Investor Relations
Crafts and presents the company’s message to the investment community
Communicates investors’ opinions to management
Communicates with a range of roles, including finance, communication, marketing, and securities law/compliance
Places earnings in the context of near- and long-term goals and/or strategies, which may be informed by the consideration of material sustainability information
Provides perspective on the company’s sustainability performance, effectively and convincingly communicating the value of initiatives to shareholders
Managers of Business Units
Use unit-specific knowledge and understanding to inform measurement, management, and reporting of sustainability data
Information Technology
Helps decision-makers consider the architecture (technology, platform, software, etc.) that will support reliable, accurate, and complete reporting that meets management’s expectations for disclosure in a statutory filing and/or allows for effective measurement and management of performance
Alignment with Sustainability Reporting
- Use “material” to describe only sustainability information inside SEC filings.
- Have legal counsel review sustainability reports
- Include material sustainability information in SEC filings.
Operational Considerations
also Regional Considerations
If a registrant generates significant revenue from multiple industries, SASB recommends that it consider sustainability topics that SASB has identified for those industries and disclose the associated SASB accounting metrics where relevant.
consolidated entities calculate metrics for the whole entity, regardless of the size of the minority interest, but data from unconsolidated entities does not need to be included. A registrant should disclose, however, information about unconsolidated entities when it is deemed necessary for investors to understand the effect of sustainability topics on the company’s financial condition or operating performance
Internal Controls (collecting data)
SOX CEO CFO (Sections 302 and 906 of SOX): SOX certification does not explicitly cover internal controls over non-financial information, the certification requirements place a higher standard of accountability on sustainability disclosures in SEC filings than may exist in other communication channels
COSO Internal Control
COSO Internal Control
Integrated Framework specifically references non-financial reporting objectives, which allows companies to integrate sustainability reporting objectives into their existing internal control framework
Sustainability strategy
ad hoc strategy for improving its performance on one or more sustainability topics; often address managing risk or responds to requests from stakeholders
Sustainable business strategy,
plan to improve its performance managing the financial and non-financial capitals that impact its ability to create value over the long-term.
first step is identifying the proper metrics, ranslating business information into business strategy for value creation
Incorporating SASB metrics into this process and other existing strategy frameworks
- analyses will be more complete, which can prevent unwelcome surprises for the company and its shareholders
- effectively differentiate themselves from their peers, helping to attract customers and investors
Performance Management - Four stages of value creation
- Minimizing costs
- Optimizing efficiencies
- New products and/or technologies
- New business models and differentiated value proposition
10-K Preparation Process
December
Hold planning meeting and update controller’s questionnaire
Review prior year Form 10-K
Review new regulatory developments/rules and peer practices and industry trends
Consider changes to known trends, uncertainties for MD&A
Determine information necessary to ensure disclosures are complete and accurate
January Draft the following sections: Business section Risk factors Compensation discussion and analysis Exhibits Executive officers review business section Request compensation data
February (and potentially March for filers with later deadlines)
Disclosure committee meets to review Form 10-K drafts
Disclosure committee meets to evaluate disclosure controls and internal controls
Submit for audit committee and compensation committee reviews
Gather board signatures
File with SEC via EDGAR
Sustainability in Form 10-K
303, MD&A, disclose material events, trends, and uncertainties
101, Description of Business, disclosure regarding certain costs of complying with environmental laws.
103, Legal Proceedings
503(c), Risk Factors, aspects of the registrant’s business or operations that give rise to material sustainability risks and the potential costs and consequences; related incidents experienced, relevant insurance coverage; occurrence
Executive overview
Results of operations
Environmental and product liabilities
discussion of prospective matters and forward-looking information
The SEC provides a likelihood test for assessing the materiality of events, trends, or uncertainties, and compels MD&A disclosure if the Company cannot conclude
- that the event, trend or uncertainty is not reasonably likely to occur, or
- assuming the occurrence of the known uncertainty, that it is not reasonably likely to have a material impact on the company’s financial condition or results of operations
Private Securities Litigation Reform Act (PSLRA) - Safe harbour for forward-looking statements
(1) accompanied by meaningful cautionary statements, or
(2) immaterial, or
(3) unsupported by allegations that the statement was made with actual knowledge that the statement was false or misleading.
Assurance
Review by external, independent professional(s) to opine on the credibility of the data
Audits are likely the most well-known assurance services among public corporations and the investment community
Attestations
can cover a range of non-financial subjects, including but not limited to sustainability. When sustainability assurance is conducted in accordance with a PCAOB attestation standard, the assurance engagement is the same as an attest engagement. However, sustainability assurance is sometimes provided by professionals who are not certified public accountant.
only 30 percent of U.S. assurance engagements covered the full sustainability report in 2013
Independence - AICPA and PCAOB
Independence of Mind: The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity and to exercise objectivity and professional skepticism
Independence in Appearance: The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised.
AICPA issued sustainability attestation guidance
(AT-C Section 205) or review (AT-C Section 210) engagements on sustainability information
AT-C 105 replaced 101, outlines the attributes required of suitable criteria.
The International Federation of Accountants (IFAC) has also issued a standard for assurance engagements
Suitable criteria - Assurance
Criteria are the benchmarks against which the practitioner evaluates the subject matter. For the purposes of an attestation engagement, suitable criteria are those criteria that meet certain characteristics (such as relevance, objectivity, measurability, and completeness), as defined by the standard.
Investor Use
own unique strategies, risk tolerance, investment objectives, time horizon, and available capital
Industry Analysis
- Providing additional value drivers or risk factors; and
2. Providing factors that impact existing value drivers, risk factors, and valuation models.
Portfolio Construction
- Sectors are a key driver of risk
- Sectors exhibit differentiated correlations to the broader market
- Sectors produce a wider dispersion of returns
- Sectors are dependent on economic cycles
Criteria for reported information as defined by FASB and SASB
Relevant
Complete
Neutral
SEC’s guidance on the duty to disclose known events, trends, and uncertainties in the MD&A
Disclosure is required if management cannot determine if the known event, trend, or uncertainty is not reasonably likely to occur
Disclosure is required if management cannot determine if a material effect from the known event, trend, or uncertainty is not reasonably likely to occur
Timeline trends that are driving increased demand for sustainability disclosures
FASB issued its report about non-financial disclosures in 2001, the SEC released climate change guidance in 2010, the E.U issued the ESG disclosure directive in 2014, and investors representing nearly $2 trillion called for improved climate change disclosure from oil and gas companies in 2015
three elements of disclosure controls and procedures
Information is communicated to management
Information is timely
Information gives the CFO comfort over her/his filing certification
