Disclosing Sustainability Financial Value in 10-Ks

Lawrence Heim, Editor, PracticalESG.com, Director of Sustainability, CCRcorp: Greetings, everyone. Thank you for joining us today for what I hope will be a fascinating webcast, perhaps even a little controversial. We’re going to be pushing the boundaries to some extent on some existing beliefs and maybe stretching some thoughts about compliance and maybe even accounting standards. We’ll see how far this goes.

I’m Lawrence Heim, Editor of PracticalESG.com. I have today with me an esteemed and star-studded group of panelists. I suspect all these folks are known to each of our listeners. They’re very well known in the securities and sustainability space. We’ll start with Daniel Aronson, who is the author of The Value of Values. The name of the company I can never remember how to pronounce. He provides advisory services on exactly the kinds of things that we’re going to be talking about today: finding the business value, the business case, and then pushing that forward within your organizations. Daniel, pronounce the name correctly for me.

Daniel Aronson, Founder & CEO, Valutus: Valutus. I’m not sure if that’s the correct Latin pronunciation, not being a Latin scholar, but it’s the Latin root for the word value and values, so Valutus makes sense.

Heim: Excellent. We also have, retired BakerMcKenzie partner and one of the former board members of the PCAOB, Dan Goelzer. Thank you, Dan.

We have Rich Goode with PwC. I’ve known Rich for many years, and Kristina Wyatt, who is the CSO for Persefoni. Finally, but certainly not least, White & Case partner, Maia Gez. I’m incredibly honored to have you on this webcast with me. Let’s just jump into it and set the baseline. We’re here talking about determining the business or the financial value of corporate sustainability programs, and then turning around and trying to figure out how, and if, and why a company should take the next step in formally reporting those financial values, ultimately in their Form 10-K and maybe Form 10-Q. Dan, why don’t you set the baseline for where things are right now and why this may be a challenge?

Setting the Baseline: U.S. SEC Reporting Basics, including “Materiality” and Managerial v. Financial Accounting 

Dan Goelzer, Retired Partner, BakerMcKenzie, former Board Member, PCAOB: Thanks, Lawrence, and thanks for bringing this group together to discuss this topic. SEC reporting basics is probably a one-semester law school course, but rather than getting bogged down in that, let me just hit a couple points that I think people should keep in mind when they’re thinking about these issues, and particularly, value disclosure in Form 10-Ks. I think the bottom line is this: the SEC’s reporting system doesn’t specifically or expressly require sustainability value disclosure, although it’s a type of information that may be material to some of the specific disclosure requirements that the SEC has. Beyond that, the system is flexible enough that companies should feel free that where it’s important to tell their story, this is information they can include in their Form 10-Ks.

With that, I see the system as having three basic parts: rules, specific disclosure and requirements for filing. Those rules are usually cast in terms of material information; an overarching requirement to include anything else that’s material to prevent other disclosures from being misleading; and then a requirement to file GAAP (Generally Accepted Accounting Principle) financial statements. How might those things relate to value disclosure?

There are four specific requirements that have to be kept in mind. One would be the description of the business, including material information, which gives investors, and users an understanding of the business and how it operates and generates revenues. Again, depending upon what the business does, that certainly could relate to sustainability information, both value information and cost and commitments, and negative information. There’s a requirement to disclose material legal proceedings. This is more often a negative rather than a positive in terms of sustainability, although you might be able to imagine positive cases and specific requirements to talk about environmental proceedings brought by governments.

There’s a requirement to disclose risk factors, things that might make an investment in the company speculative or risky. This is more of a negative disclosure. Climate and other ESG factors are often included in risk factors today. Then most importantly, there’s the management’s discussion and analysis requirement, which, along with other things, would require the company to talk about known trends or uncertainties that management thinks may reasonably have a material favorable or unfavorable effect on liquidity, capital resources, operating results, and financial statement items in the future. The MD&A, I’ll touch on that just a bit more when we talk about the SEC’s climate release, but this is probably the most fruitful area to think about including value disclosures, because it does specifically include looking at positive effects on the financial statements in the future.

Second, I mentioned materiality. I’ve probably used the word materiality numerous times already, so maybe we should talk about what materiality is. The Supreme Court has said that information is material if a reasonable investor would consider it significant in deciding whether to purchase or sell a security or vote a proxy.

For present purposes, a couple of things to keep in mind. I think the reasonable investor is an economically motivated decisionmaker from a securities law standpoint. They are making decisions about their investment. Materiality under the securities laws doesn’t really look at impact on the environment, or society, or things like that. It looks at economic impact on the company, although, of course, the magnitude of the company’s external impact can have economic effects on the company. Double materiality isn’t what the SEC’s rules are thinking about in terms of materiality.

Another thing to keep in mind is that there’s no requirement that Form 10-Ks include all material information. Companies do have latitude to keep material information confidential as long as they’re not violating the disclosure requirements, or their filing isn’t misleading without a particular fact. The other side of that coin is there’s certainly no prohibition against disclosing information, material or arguably immaterial, in the filing beyond what the rules require if the company thinks that it’s important to tell their story to investors. That is what people should be thinking about in the context we’re talking about.

The SEC has given some guidance on sustainability disclosure, although in the context of talking about climate disclosure. These are things that I would recommend that people look at when they’re thinking about this subject. In 2010, the Commission put out a release on climate disclosure. It talks about some of the specific requirements I’ve mentioned already and the concept of materiality and when climate-related issues might therefore have to be disclosed in filings.

They give us an example of a potential requirement to limit greenhouse gas emissions, which might be a known trend or uncertainty, that would have to be discussed in MD&A. That’s a negative, I guess. In terms of the values we’re talking about, they also raise the possibility that demand for a company’s product might increase because it’s a low carbon emission product and regulatory changes or customer preference changes might lead to more demand for that product.

The SEC has recognized explicitly that there could be value disclosures or maybe have to be value disclosures in some cases, particularly in MD&A. Something else to look at, at least as a matter of academic interest, is in 2024 the SEC adopted very extensive rules on climate disclosure. Those rules, if they had taken effect, would’ve required disclosure about the company’s strategy and governance in the climate area, and in some cases GHG emissions, and would have required disclosure in footnotes in the financial statement about the effect of certain climate issues on financial statement amounts, positive or negative.

When the administration changed and the leadership of the SEC changed, the commission announced that it wasn’t going to defend the validity of those rules, which had been challenged in court. I think it’s safe to say that they won’t be taking effect anytime soon, at least anytime during the current presidential administration. I still think people thinking about this subject might want to look at those disclosure requirements and might be able to translate them to other ESG issues beyond climate change.

The third pillar of the disclosure system is you do have to file GAAP financial statements. Generally Accepted Accounting Principles are promulgated by the Financial Accounting Standards Board, although the SEC also has rules of its own that add certain things or make certain changes in the financial statements. In general, maybe others on the panel would have a different view, but I wouldn’t describe GAAP as particularly friendly to disclosing values, particularly those that would occur in the future, although I think there would be room to include in a footnote disclosure some of the kinds of issues that we’re talking about here.

In 2010, the FASB staff put out an educational paper that talks about all the ways that the FASB’s accounting principles might be implicated in ESG disclosure. That, again, is certainly something that people might want to look at. A simple example is that if a company announces it’s going to be carbon neutral by a certain date, management has made that decision, that may have a big effect on the depreciation schedule and residual values of some of its existing property plant equipment if they’re going to have to be replaced to meet that schedule.

I’ll tell you about the financial statements I just touched briefly on. I think others are going to discuss financial versus managerial accounting. Companies have to have a financial accounting system that captures the information to prepare GAAP financial statements. That system, because it isn’t required, may not do a good job of capturing sustainability values. Companies also have managerial systems, in other words, systems that gather information for management’s use in decision making. Those can, and maybe in some cases should, capture sustainability values, which then can feed into company disclosures.

Something to think about in that area is that managerial accounting isn’t necessarily consistent from company to company, while financial accounting is, which can lead to disclosure challenges for investors in using the information. I know that’s a longer and more of a monologue than I wanted to give, but I’ll just end by saying I think the three things people should take away are that there are no specific sustainability value disclosure requirements in the SEC’s rules. There are, however, cases where value information might be material and required to be disclosed, particularly in MD&A and companies should be thinking about that.

Then beyond that, you should be encouraged to think about whether sustainability values are material to telling your story to investors, and there’s nothing to prevent a company from including that information in its Form 10-K. The only caution I would give is, make sure you have business systems and internal control systems that are going to give you confidence that when you create financial values like that, they’re accurate, reliable, and can be defended and audited if that comes out. That’s my one semester course in SEC reporting basics.

Maia Gez, Head of Public Company Advisory Group, White & Case LLP: I was going to chime in on SEC reporting from outside counsel to public companies. When we think about the evolution 20 years ago when I started practicing, there was no such disclosure in Form 10-Ks. Then under the first Trump administration we had, the first introduction of ESG requirements with the human capital management disclosure to the extent material metrics and objectives related to human capital that are material to your business. That opened the door to companies putting in disclosure regarding human capital management.

At the same time, in many ways there was the sustainability reports, where there was a bifurcation of putting SEC materiality information into your Form 10-K and then keeping the sustainability ESG reporting information in a separate report with understanding that to the extent there was material information in the sustainability report, you would put it in your Form 10-K. The main point to keep in mind is, to the extent it is in your Form 10-K, you are subjecting that to your SOX certifications and your SOX controls, and materiality is not just what an investor is interested in, but what is important to making an investment decision. That includes both quantitative and qualitative information, but there’s a generally accepted SEC analysis and focus on what is material.

For the most part, there was a tendency to expand some of that over the last few years and now we are getting back to basics under SEC Chair Atkins. Some of the emphasis is back to the streamlined disclosure. Form 10-Ks got very long and almost to the point where investors might not know where to look to find the material information. There is an emphasis, if you look at the recent speeches, to focus on what is actually the SEC material information, and that should be what’s in the Form 10-K as opposed to piling on a lot of information that just might be interesting for investors.

Heim: That’s true. I think there is this conflict, if you will, between the sustainability professionals and practitioners, and what they want to report and their definition of materiality, versus what the reality is here in the U.S. relative to SEC and financial accounting standards. I think that’s where a lot of this friction, well, perhaps all of this friction, comes from. Now that we’ve set the baseline as to what the standards are and what the guardrails are, let’s talk a little bit about, what are companies doing? What are they doing right now? Maia, you touched on it a bit. Rich, why don’t you start us off in talking about what you’re seeing companies do in, formal reporting, informal reporting, that kind of thing?

What Companies Are Doing Now — Informal Reporting, Results from PracticalESG Compendium 

Rich Goode, Principal, ESG Services, PwC: Sure. In thinking about what I’d be talking about here today, I couldn’t help but recall the Mark Twain quote, “Reports of my demise have been greatly exaggerated,” when it comes to sustainability. If I could sum things up, in general, companies are making progress but not making headlines. There’s just a little bit of fear about getting “too far ahead of skis” and getting called out by whomever but understanding that reporting is a pendulum.

Where we have the stay in the California case, we have the delay in CSRD, the bottom line is ISSB, CSRD, CSDDD, “LMNOP,” all the regulations that companies are facing, one way or another, they’re coming. In the next year to three years you’ll be reporting on what you determine to be material climate risks with some form of assurance, meaning an independent third party looks at it and says, “Yes, this is reported fairly.” This delay, some companies are saying, “Great, call me when it’s on.” Other companies are saying, “Look, I remember during the throes — just a year ago, in the middle of CSRD, it was even hard to find a consultant who had time to help you.”

Now, suddenly it switched the other way. This rapid shifting pendulum is tough for companies to take. Many of my clients who are sort of among the Fortune 1000, if you will, are saying, “I need to continue to make progress because it was so frenetic and so difficult and so time-crunched, let’s continue to make progress.”

Great, where are you making progress? I would say, if you look in a couple of areas, let’s look at reporting and then look at strategy. The reporting piece is straightforward. We understand that we’re going to need to have our greenhouse gas inventory assured. We’re going to have to report on our climate risk, and whether it’s material, and the process we went through to do that. That’s essentially California rule in a nutshell, but the underlying, the greenhouse gas and the climate risk is part of CSRD and ISSB, so those are really no-regret moves.

For those companies who already performed a double materiality assessment last year, the good news is you don’t have to redo the whole thing based on new guidance. You can take your baseline and maybe take a more principles-based or top-down approach, so it’s slightly easier. Looking at things like controls around your climate-related risk, around your greenhouse gas accounting, is this truly material? My view, and many others, in terms of some of the investors I speak to, especially for, say manufacturing companies or companies who have a lot of property, plant, and equipment, consider outside plant, telecommunications companies, utilities. If you don’t say in your Form 10-K that you have a material climate-related risk, that raises more questions than saying if you did.

If you’re a software company somewhere in the middle of the country and have a largely remote workforce and outsource your data center to AWS, you probably don’t have a material climate risk. There’s nothing anywhere that says you must have one. For companies who have this, just looking at severe weather events, interruptions to supply chains, it’s not controversial anymore to say, “I have a potentially material climate-related risk.” You can even put some dollar values on that that would pass assurance. Looking at days of inventory, what would the disruption cost? You can model those things. Now, the tools exist to do this.

I would say the first part of the piece was reporting, getting ready, and building the underlying controls so that whatever regulation comes your way, you are ready. I know my topics, I know where my data is, and I know how I’m going to report.

The other, and to me, the more interesting piece and potentially valuable piece, we’re talking about value, is looking at your business through a lens of sustainability. If a company’s job is to maximize revenue, reduce costs, and manage risk, that’s what sustainability helps with. I often say sustainability is an overused “s word,” and I prefer strategy because that’s what the companies are trying to do.

Looking at those core things through the lens of sustainability, what happens if I have a serious disruption in my value chain? Where are my suppliers manufacturing products that I depend on? I’m working with a Fortune 500 company, who’s my principal supplier, and they’re located in Wisconsin. Great.

No climate risk, but that’s not where the manufacturing happens. It’s happening in Malaysia, it’s happening in Australia, it’s happening in Indonesia, it’s happening in places where there is significant climate risk. The clients that we’re working with are now saying,

“Look, we’re undertaking regulatory compliance activities with you. That’s one of the things we do a lot of, but let’s take it one step further and look at, instead of just modeling where my key locations are, let’s model my tier one suppliers, or maybe just the critical ones. Not 10,000 suppliers, maybe 100 suppliers, maybe only 20. Where are they making our products? What ports do they come into? Where are they stored? In what warehouses?”

Sometimes we do this work under privilege, we take the regulatory compliance piece and carve that out. That’s going to be published and assured, but under privilege, we could basically say, “Here are the locations we’re worried about. Here are the alternative suppliers.” Or, “Over the next three years, we’re going to quietly close out of all these relationships or these leases and go other places.” Because ultimately, when it hits the fan, you’ll be one of the only companies in your industry prepared.

Just a quick story around that. We had one company say we have a resilient sourcing strategy. They had three different suppliers for this key ingredient. It turns out, if you go one step deeper on the supply chain, all those three suppliers were sourcing from the same plantation in South America. One location, three companies, the company’s entire supply chain.

They had no idea about this. Just asking the questions, going a little deeper, you’re making your strategy more resilient, and you’re being better prepared for resilience. Sustainability is gone from corporate responsibility, ESG back to sustainability. It doesn’t matter what you call it. It’s less about the reporting. The reporting should be the result of all the things you’ve done.

Looking at how we’re having more severe weather events, even on the NOAA website, it showed in the 1980s, we had on average four $1 billion weather events per year. Last year, we had one every three weeks.

There’s something at work here, and the good news is you don’t have to believe in climate change to say, “I should investigate my business and my supply chain to potentially make it more resilient.” That ultimately builds and preserves business value, and that’s something that’s hard to argue with.

Aronson: I wanted to pick up on the notion of value and also on the difference between what you have to report and what you should use. If you need to break in first, go ahead, but I wanted to pick up on that whenever you’re done.

Heim: Actually, I was going to just make a quick comment and then transition, Daniel, to you. Rich, you were talking about overusing the “s word” and using the word strategy. I think you said that the very first day we met in person 10 years ago, or probably — it was more than 10 years ago. That’s still an important concept. Absolutely an important concept. Now, Daniel, one thing we’ve talked about a lot here in the past two parts of the discussion are about the downsides, the risk, quantifying the risk, disclosing risk, disclosing the downsides.

But there’s opportunities, there’s the upsides, there’s the revenue, there’s cost management, there’s all these really good things that are absolutely business fundamentals, the business value. Let’s shift to that and talk about where are these opportunities for value? What are some of the things that you’re seeing? We got double versus financial materiality. We’ve already touched on the different accounting standards, and then you introduced an excellent idea just a second ago. Why don’t you start us on that conversation?

Where Sustainability Generates Meaningful Business Value — Double v. Financial Materiality, Managerial Accounting v. Financial Accounting 

Aronson: All right. I’m going to make three points in three minutes. The first one is what Rich said, and the risks, absolutely correct. In fact, we have gone about 1,000 suppliers deep and 1,000 facilities deep with a multi-billion-dollar company in calculating their risk and so forth. You can, and you should do that, not just because you have to report on all of those. There are millions of things that companies track that they’re not required to report. Are they required in their Form 10-K to put their productivity trends, capital utilization, or their competitive strategy? No, but they’re required by good business to track and manage things. That’s the difference between managerial accounting and financial accounting, and that’s the difference between required sustainability reporting and valuable sustainability management.

Second thing, there is value in doing this, and there are a couple different ways of doing this. There are a couple different ways this happens. One is you can be positioned to take advantage of where the world is going, and you need to understand and manage that. In about a week, we’re actually introducing our new thing that helps you look at the evolution of your customer base so that you can, as Wayne Gretzky used to say in hockey, “Skate to where the puck is going, not where it is now.”

The other thing is that you can be aware of where things are going for your competitors, and when they fall, you can take off. If you are the only one who’s figured out that it’s not just where your facilities are and where your suppliers are, but where your customers are, where your shipment points are, that are vulnerable, then you can reduce your vulnerability, which means your competitors stumble, and you take off. The third thing is, people think of this as something in the future, but there’s a tremendous cost of inaction, and there’s a tremendous cost of blind spots. I like to say, blind spots in, blunders out.

Yesterday, Reuters reported $2.3 billion worth of fines for companies operating in Indonesia. $2.3 billion U.S. dollars in fines for operating illegally forested areas. That’s a lot of money. If you are not seeing these risks, if you’re not quantifying these risks, if you’re not lowering your vulnerability to these risks, then you are not doing your fiduciary duty.

Heim: Anyone else want to chime in? Add to the conversation? I’ll throw in a little bit here. In terms of creating value, one of the tricky areas is risk management/risk reduction. It’s always difficult to take the concept of risk and put a positive dollar on it. If you save, if you reduce your risk, that’s great, but how much are you reducing? What’s the dollar value of that?

I spent several years in the insurance industry and traditional risk management in the environmental practice. I’ve written about this many times, and it’s something that sustainability professionals need to understand. It’s critical to understand how risk management functions within your company. The benchmarks they use, the valuation methods they use, the approaches that they use.

Again, I’ve talked many times about the World Business Council for Sustainable Development. They did a study a while back, and I believe they updated it not too long ago, that exposes this gap between sustainability professionals’ view of risk, and the values of risk reduction that they come up with and present to executives, versus their internal risk management departments, who that’s their purpose. There’s this massive gap, and it creates tremendous lack of credibility through the eyes of the executive teams because the sustainability professionals come up with these billions and billions of dollars of risk that we’ve reduced, but it has no linkage to the company’s own risk management functions, benchmarks, and methodologies.

Gez: One of the things that’s going through my mind as I listen through this and listen to everybody. I think we’ve evolved. Let’s be frank. Last year, with Form 10-Ks, there was a significant reduction in ESG and sustainability disclosures in Form 10-Ks. I think the question is that we went from ESG to sustainability to now strategy and for us to really crystallize for companies is, is there anything new here? Risk management is age old. Risk factors are one of the first primary things in a registration statement. What is the risk in buying this security? The risk that I think Rich and Daniel were talking about, when you talk about suppliers, supply chain risk, if it’s going to doom your business, that needs to be a risk factor.

That’s basic “A, B, C.” That is part of your risk factor. To say suddenly that we’re discovering new risks that a Fortune 100 company didn’t disclose since 1933-1934, whenever the first registration statement or all this time, we need to make sure that we are not saying this is completely the start of something that’s not new because at the end of the day, risk factors and what would doom a business should have been there all along.

I think that’s the struggle now, it is just making sure that we tie to the risk factor section that’s already in existence and the risk management section that’s already there, and the strategy that companies have already been having to build and to build shareholder value through this whole time in any event.

Heim: You know Maia, John Jenkins and I wrote about that a year or two ago, about this idea that risk is risk, and that it’s very dangerous for a company to all of a sudden think that they’ve come up with the new risk when it’s just really the same risk, but you’re adding a different tag to it or a different topic to it.
I’m hoping that that’s not what we’re doing. I think my point was less about the disclosure element right now and more about, from a managerial perspective, if somebody’s going to claim a dollar value internally of reducing risk, as I’ve had to do in previous lives within companies, justify my existence within the company economically and say, “oh, I’ve helped reduce the environmental risk of this company.” You have to understand how risk works within your company in order to credibly assign a value to that and not get laughed out of the conference room.

Aronson: Let me both agree with that and also push back. The agreement is, yes, this is not new. It’s not that nobody had any idea that there would be natural disasters. Some of the origin of risk management when you used to sail ships across the ocean was some of them might get lost because of natural disasters, but also blind spots.

The blind spots are ones that have made us not pay attention to obvious risks. For example, let’s take the case of WeWork. I went through WeWork’s registration document. There is a giant risk section in there, but as I wrote in my book, there is not word one about what happens if you can’t put people within 6 feet proximity of each other.

It’s not that no one had thought, “Hey, you know what? There’s this thing called pandemics.” Bill Gates was talking about it. It was already a huge topic. WeWork put not word one about that. Across the world, this is after SARS, MERS, swine flu, bird flu, one of the world’s largest insurers after all of that, offered an insurance policy for pandemic-related disruptions in your supply chain.

How many companies bought that policy globally? One. This is after swine flu, bird flu, MERS, SARS, all of that, which had affected people’s Asian supply chains. We are not saying, as sustainability professionals, I personally am not saying, we’re inventing new risks. What I’m saying is, when you look differently, you see different things.

Kristina Wyatt, CSO, Persefoni, former SEC Counsel: I would also just add with regard to climate in particular, and Daniel and I have talked about this quite a bit, that I think that there’s certainly a difference between sticking a mention in your risk factors to climate change and doing the kind of rigorous analysis that Rich was talking about in terms of really trying to understand the risks that your company is subject to.

When I was most recently at the SEC, a lot of companies that we were asking about their potential climate-related risks and disclosures, or in most cases, lack of disclosures, came back with summary statements that, “climate isn’t material to our company,” but there wasn’t really a huge amount of evidence that they had done the rigorous analysis to understand how climate might impact their businesses.

I do think that climate-related risks are different than many other types of disclosures that companies might make, where the companies typically understand better the risks and opportunities that they face, or the disclosure item that they’re responding to, whether it’s properties or human capital or their business description. Those things are generally well understood.
What we’ve been finding, particularly over the course of the last year — as we’ve worked with companies to prepare to comply with California’s SB 261, the Climate Risk Disclosure Law that’s based on the TCFD and the ISSB standards — what we found is that while many companies have done a rigorous analysis and have thought about how climate might impact their business, whether it’s physical climate risk or transition risks, there are also many companies that had just never done the analysis. There was an “a-ha” moment for many of them.

It doesn’t necessarily mean that they have Material, with a “capital M,” Material in the Supreme Court context, as Dan was talking about that would require disclosure, but there was certainly an increased awareness that they can do the analysis to understand, for example, how their properties may be subject to climate-related events that could cause them to be out of commission or have to shift their operations or where their supply chains might fail them, such that they stand to really conduct that assessment to build the business resilience that can help them to thrive in the future.

I think that the initial impetus of companies to just say, “oh, climate isn’t material to us,” is doing themselves a poor service in terms of really assessing those risks and trying to build business resilience.

Heim: This conversation we’re having is very emblematic, I think, of the difficulty perhaps between sustainability professionals and securities professionals. I personally learned that when I came on board here as a sustainability professional, I came into a very specific securities practice.

We’ve talked a whole lot about risk, risk of investment risk. I want us to shift our thinking to the business value. Again, this is more from a sustainability professional’s perspective. This comes out of some work that we did that I’ll talk about later, where we analyzed 100 publicly traded companies and how, and if, they disclosed in their MD&A the dollar value, the positives, and the upsides of their sustainability program.

I’d like to see if we can continue to focus on the value side, not so much on the risk side, for the rest of the conversation. Kristina, I’m going to throw it to you. Why should companies report the upside, the positives, and the value in their Form 10-Ks, Form 10-Qs?

Why Companies Should Report Sustainability Value in 10-K/Q — Formalize Reporting to a Single, Credible Standard (Financial Accounting v. Non-Financial Framework), Materiality (Financial v. Operational Metrics), Control the Narrative, Meet Investor Needs, Take Conversation Away from Anti-ESG, Defend Budget and Jobs 

Wyatt: I think I’d like to take this back a step from what they report in their Form 10-Ks and Form 10-Qs and start with why companies should conduct the analysis to better understand their risks and opportunities. When we think about the value of understanding those risks and opportunities, part of that is understanding where, as Rich was saying, understanding where the puck is going.

Thinking about where you stand competitively with regard to others in your industry, your customer’s demands, where you stand to create value through your sustainability practices and also building business resilience, ensuring you have alternative sources of supply that you integrate sustainability into your enterprise risk management program so that you just have a stronger business that stands to grow in the future, mitigating risk on one side, and taking advantage of opportunities on the other side.

I think that out of that exercise, which many more companies are doing now than were doing a year ago, driven in large measure by California SB 261 that companies have been preparing to report to as of January 1st, 2026, which is  now Stayed pending litigation in the 9th Circuit, but still many companies have started to do that analysis.

That analysis is based on the well-worn, well-known framework of the Task Force on Climate-Related Financial Disclosures (“TCFD”), which is now incorporated into and subsumed by the ISSB (the International Sustainability Standards Board) which has been adopted by 40 countries around the world.

What we’re seeing is what used to be a fragmented voluntary reporting landscape is financed way to a much better harmonized structured approach that companies can follow as they assess their climate-related risks and opportunities and build programs to ensure that they’re properly overseeing those climate risks and opportunities, and are properly applying strategies to take advantage of opportunities to mitigate risks. They’re integrating these risks better into their enterprise risk management programs so that climate can be better understood and managed within their companies.

Then the last thing becomes the assessment of what do we need to report, whether it’s in the TCFD-based or ISSB-based report or within your Form 10-K? I think that that initial understanding of where those opportunities and risks are and how you’re managing them is the starting point. It starts with the substance and then looking at what should to be in the Form 10-K.

Getting back to Dan Goelzer’s excellent summary of where the SEC has been, if we look at the climate rule that’s sitting in litigation in the 8th Circuit that came out in 2024, that’s fine, but also looking back to the 2010 guidance that really breaks down, look, within our existing regulatory framework, we should think about whether these risks and opportunities ought to be disclosed in our risk factors, in our business description, in our MD&A, and in our litigation sections. That guidance continues to be useful, but it’s much more useful once you’ve started to go through that exercise of understanding risks and opportunities, rather than just having a binary check box that says, “Not material. Let’s not worry about disclosing.” Or, “Let’s just stick a quick risk factor item in our disclosure,” without really starting to dig in and understand the risks and opportunities that a company might have related to climate and starting to integrate those risks and opportunities into the company’s enterprise risk management program.

Heim: Yes, those are excellent points. Maia, I’m going to turn this over to you next because that touches on, and we’ve discussed a few of these things already, but what are the barriers? If there are companies, and our research showed that in our research cohort of about 100 publicly traded companies here in the U.S., U.S. only, 27% of companies did disclose numerical, actual dollar values, benefits of their sustainability programs.

Only 34% did the same within their sustainability reports. There are some, but not very much. It tends to be on the risk side because that’s what’s mandated on the investment risk side. Maia, let me turn it over to you and talk about more of these barriers that companies are facing if they want to disclose additional things beyond just the accounting standards, beyond FASB, and beyond SEC.

Barriers: Accounting Topics, Lack of Data (Attribution of Material Financial Matters to Sustainability Initiatives), Inadequate Controls on Sustainability Data/Reporting, Fear of Risk, Corporate Inertia 

Gez: Yes, and the main barrier, which we kicked off the conversation with Dan, is when you present opportunities or value or positive information, you’d better be sure it’s accurate, and making sure that you are not being misleading to investors about the potential positives. When it comes to ESG, sustainability, strategy, it means different things to each company.

First and foremost, identifying what that is to the company, let alone being able to put numbers and accuracy, and the work behind being able to really put disclosure around positive information. I also want to react to — I think Daniel was mentioning — COVID and the coronavirus, and how there was just no prediction of that.

We were talking about ESG before that and the focus was on ESG and environmental and social, and then we had the coronavirus, which was beyond proportion to what anyone would’ve thought. It did have, real impact, and it wasn’t how we were analyzing it and assessing, and planning behind ESG beforehand.

Similar to now where we have AI and have enormous value that companies are exploring and push from the business side to assess what the opportunities are and how to capitalize it. Five years ago, we were not talking about AI. We weren’t where we were. There’s a certain level of lack of predictability and understanding of what we are identifying here in terms of our value and then being able to disclose that accurately.

That is the main hurdle when it comes to disclosing value. We know from our prior financial statements where our revenues and costs come from. We know that information, but things that are unknown. Do we know if there’s going to be a new AI ChatGPT coming out that will get rid of our need for a whole group of employees, there’s a lot of debate behind the workforce reductions and why.

The challenges and the opportunities being presented now are things that companies couldn’t predict. That’s what makes it challenging and why when it comes to looking at our Form 10-K and talking about value, companies are under pressure to go with what they can provide in good faith, reasonable basis, and actually document behind what the value is.

One final point on the double materiality versus financial materiality, but as we talk in the classic debate, TSC Industries, Basic, Inc. v. Levinson. When we talk about materiality, quantitative and qualitative, that would pick up. If you have one supplier that would do away with your company, that would pick that up. Or the value that something could bring to your company if it is material also from a qualitative standpoint. We aren’t just looking at how the accountants look at it when we put together our business section and our strategy section of our business of how we’re going to bring value to our investors on the issues that we do know about and can identify and be accurate, and not misleading.

Aronson: Can I just say that I think a problem is, there isn’t much incentive.  There are risks to changing your disclosures and creating new measures that haven’t been seen in your Form 10-K before. Unless there’s some senior person internal to the company that really wants to see it happen, nobody gains much by creating a new disclosure like this.

Heim: I’m glad you brought that up because I do wonder about that. We have other users of this information; we have ratings agencies and some of these other folks. To the extent that they are actively making decisions about the company based on sustainability, theoretically they’re looking at the ESG reports, but there’s no dollar value.

I think companies have lost control of the narrative, the real financial value narrative by being quiet and not including those. Now, there’s certainly risk. Because we’re running out of time, I want to go ahead and transition that to our final topic, which is all about how do you fight this? How do you push and gain the senior executive’s attention and change his mind about these things as some companies are indeed already doing?

Fighting No: How to Make Your Case for Reporting Sustainability Value in 10-K/Q 

Heim: Subsequent to our study, we recently published a guidebook that we call Fighting No, and it’s a sustainability practitioner’s guide to counter-punching all these barriers that we discussed here. We took the top 10. This was developed between me and TheCorporateCounsel.net, so securities lawyers.

We’ve put together this quick compendium about how to push past the inertia and make it valuable. We have that available as a member resource along with that Compendium [of Sustainability Financial Disclosures] I discussed. Daniel, why don’t you take us home with your views as to how you “fight no” and push for the case for reporting, if you want to call it, voluntarily, sustainability values, the upsides, not the risks but the upsides, in your financial statements, Form 10-Ks, annual reports?

Aronson: The first thing is, who benefits? One individual who benefits directly is the sustainability personnel, whoever’s in charge of sustainability because being able to push and say, “look, this thing matters for the business,” if you don’t put it in the reporting, most people’s exposure to sustainability, the most common way that they’re exposed is because it’s in some sort of reporting, ESG reporting, sustainability reporting, Form 10-K, whatever. When you don’t do that, you make it look different.

But that’s not going to win over the skeptical executive. However, there are a few things. One is that if you look, you can see results of investors caring about whether a company’s sustainability efforts matter for value creation. There’s a lot of research on this, I won’t recap it, but it turns out that it does matter. If it looks like you’re doing sustainability unconnected from value, investors downgrade their perception of your stock, your equity and so forth, things that matter to executives. If it looks like you’re focusing where it does matter, there’s a bunch of recent research on this, in addition to the stuff people might have heard from years ago, that they increase the value.

That makes sense because these things are becoming bigger issues. If you use the Panama Canal and water levels cut the ability to go through that by 15%, that’s going to affect you. If you see that your customers’ needs are going to change so that you can generate new products and services, that’s an opportunity. If your competitors don’t, that’s a chance to take share.
We do this for everything. Sustainability is not some sort of crazy it’s-not-related-to-the-business topic. When we see changes in transportation, like automobiles, planes, or when we see changes in technology, we go, “hey, let’s create new products for that.” Sustainability generates that. The other thing is that there’s certainly regulatory risks to reporting. If you put it in there, it forces you to do the analysis, maybe you need to not report everything, or to be very careful with what you say in the report.

As Kristina was saying, do the concrete analysis, put numbers to it, even if they’re just for internal use. We’ve helped companies do that, and it’s valuable even if it doesn’t make it out to financial accounting. The managerial accounting aspect is critical.

Heim: Thank you so much, Daniel, and thanks to everyone. We’ve reached the end of our time. I wish we had more time. As usual, when you get really well-qualified, excellent panelists, you wish you had all day to continue to explore these things, but unfortunately, we’ve run out of time. I want to say thank you to Daniel, Kristina, Dan, Maia and Rich for spending an hour with everyone today.

On a personal note, I wanted to say thank you to all the listeners and all the readers of PracticalESG.com. I am pivoting outside the company, beginning tomorrow. I want to say thank you to all my colleagues at CCRcorp. It’s been an intense learning experience, not only from the startup of PracticalESG but also, as I mentioned earlier, learning more about securities law, and securities disclosures. Thank you, everybody. Happy holidays and good luck.