I write frequently about risks of calling out ESG/sustainability matters as financially material. Such a decision really needs to be thoughtful with consideration of unintended consequences. The risks escalate when a company reports ESG/sustainability as material in its financial disclosures – making the materiality determination subject to regulatory obligations and legal scrutiny. Among the complicating factors is the lack of GAAP accounting standards for many of these topics. This means companies are essentially left to their own to decide how to account for material ESG/sustainability matters – and that can be problematic.
While not related to ESG/sustainability, an SEC enforcement action last week provides some food for thought here. Here’s an excerpt from SEC’s press release:
“When soliciting prospective investors in the Series D round, GrubMarket emailed them financial information, including an investor presentation and financial statements, which prospective investors incorporated into their investment analyses and decisions. At the same time, GrubMarket was using a different set of financial information, including in its tax filings, that reflected significantly lower historical revenues for other corporate purposes. In doing so, GrubMarket should have known that the financial information it was using to solicit prospective Series D investors, which overstated the company’s historical revenues by $550 million over a five-year period, was unreliable. Even so, GrubMarket did not inform any Series D investors about the significant discrepancy in historical revenues until after the fundraising round closed.”
In short, the company presented one set of financially material information to investors while using a different set “for other corporate purposes”.
Is it possible that, absent appropriate accounting standards, companies are doing the same for climate or other ESG/sustainability matters included in financial statements? I doubt such a thing would be intentional – but that may not be relevant.
Just remember – if you consider and report ESG/sustainability matters as financially material to your company, you have to be all-in and comply with related regulatory obligations.
Members can learn more about ESG/sustainability disclosures here.
If you aren’t already subscribed to our complimentary ESG blog, sign up here for daily updates delivered right to you.
