For years, investors have been advocating for public companies to disclose key ESG metrics in a manner that investors view as comparable, decision-useful and verifiable, whether in SEC filings (which many investors prefer due to the rigor associated with the SEC reporting process) or voluntary sustainability reports. All of the leading voluntary ESG frameworks, including those promulgated by the Sustainability Accounting Standards Board (“SASB”), the Global Reporting Initiative (“GRI”) and the Task Force on Climate-Related Financial Disclosures (“TCFD”), require disclosure of key ESG performance indicators and metrics. The SASB framework, in particular, was initially intended to be used in SEC filings, and encouraged inclusion of ESG disclosure in the MD&A.  Public companies, however, typically include their ESG disclosures in voluntary sustainability reports as opposed to their Exchange Act filings for a variety of reasons, including concerns regarding: (i) whether ESG metrics are material to an understanding of the company’s business and require disclosure; (ii) whether internal or external review of ESG metrics (e.g., by internal audit or disclosure teams) is adequate to make disclosure of such metrics “ready-for-prime-time” in SEC reports, (iii) the risk that inclusion of ESG metrics in Exchange Act reports would unnecessarily increase the financial and accounting burdens associated with periodic reporting, and (iv) heightened liability risk associated with disclosure of ESG metrics in materials filed under the Exchange Act or incorporated by reference in registration statements filed under the Securities Act of 1933 (notwithstanding the fact that statements in voluntary sustainability reports have under some circumstances already been cited as grounds for general anti-fraud claims).
Some investors and other stakeholders maintain that the absence of a mandatory disclosure regime has resulted in companies not providing easily comparable, decision-useful, and verifiable ESG data and metrics in their voluntary reports, opening companies up to accusations of “greenwashing.” However, to date the SEC has largely declined to mandate disclosure of line-item ESG metrics, and has instead confirmed support of a principles-based disclosure regime based on materiality. In proposed MD&A amendments also published by the SEC on January 30, the SEC makes no mention of ESG disclosure.  Without mandated SEC disclosure of ESG metrics, many public reporting companies will continue to provide this disclosure in voluntary sustainability reports that are not filed as part of the Exchange Act record. However, those companies that do choose to report ESG performance metrics in their MD&A disclosure will be required to follow the Metrics Guidance.