Earlier today, the Securities and Exchange Commission (SEC) released draft new regulations on how companies should report information on climate change (see SEC Fact Sheet and article in The Hill). The new rule would enhance and standardize disclosure on both the impact of climate change on the company and the extend that the company is contributing to climate change.
The new rules are part of the general trend to enhanced disclosure on Environmental, Social, and Governance (ESG) issues. The SEC took an earlier step in 2020 toward enhanced disclosure when they finalized a rule amending Regulation S-K to require disclosure of information on a company’s human capital (see earlier posting.)
As important as these new disclosures are, I am not sure that the ESG movement will necessarily get us to where we need to be. As I noted in an earlier posting, the driving interest in the new requirements for disclosure of human capital was focused on ESG issues of diversity and inclusion – not on economic performance such as improving innovation and productivity. And the focus of these efforts seems to be on outputs (i.e., the impact, costs, and risk) rather than inputs (i.e., intangible assets). Likewise, the climate change disclosures focus on the interaction between companies and the natural environment.
The attention to EGS issues is useful to the broader debate on intangible to the extent it hones in on the guiding principle of standardization: that the disclosures be consistent, comparable, and reliable. The only way to achieve these goals is for the disclosures to be mandatory. Voluntary disclosures leave information gaps that undercut reliability and do not allow the enforcement of standards of uniformity required for consistency and comparability. The question of mandatory disclosure is one that has bedeviled regulators since the beginning. Remember that there was a time when the disclosure of even basic financial data such as revenues, expenses and profits was opposed on the grounds it was proprietary. But as I noted back in 2005 in our paper on Reporting Intangibles, without such information investors and managers are flying blind.
The new rules will be out for public comment. I suspect there will be a great deal of discussion. To the extent that we can untangle the issues of mandatory disclosure from that of climate change policy, it should provide some insight as to how to proceed with additional disclosure on information on intangibles.