If you’re feeling uncertain or confused about the future of sustainability reporting in the United States, you’re not alone. With the business world’s adoption of sustainability reports moving full steam ahead—and increasing hunger for such information and transparency from global consumers and investors—the new Trump administration is going in a completely different direction. This blog explores the current state of sustainability reporting and an exploration of recent U.S. political developments that have changed the conversation.
The growth of sustainability reporting over the last few years has been explosive. By “sustainability reporting,” I mean voluntary disclosure by U.S. and international businesses providing data about environmental and social impacts and practices in connection with the business’ operations. The disclosures are aimed at a broad public audience including investors, consumers, and the media, for whom environmental and social impacts are real costs and factors that should be accounted for to the consuming and investing public.
The growing popularity and visibility of sustainability reporting in recent years is connected to global action on climate change and greenhouse gas emissions (such as the Paris Climate Change Agreement), and the public’s increased sensitivity to environmental, labor and social issues. The sustainability discourse is also related to increased concerns about poor labor conditions in the developing world—as demonstrated by the Fashion Revolution movement, which popularized the slogan and hashtag “Who Made My Clothes.” The Rana Plaza fire tragedy in 2013, killing more than 1,100, horrified the world and spurned increased demands from fashion consumers for transparency about garment workers’ working conditions, and inspired collaboration in the fashion industry aimed at improving global labor conditions.
In the United States, sustainability and ESG (“environmental, social and governance”) disclosures have been, for the most part, voluntary (one notable exception – the Dodd-Frank Act required U.S. publicly traded companies report on their use of conflict minerals). Despite the voluntariness of this type of reporting, 81% of S&P 500 companies published sustainability reports in 2015. And 2016 saw additional movement, both in the private and public sectors, in the direction towards renewable energies. Sustainability continues to be a rising issue of importance in the finance world, evidenced by an increased number of “green bonds.” Shareholder support for climate change disclosures also increased significantly in 2016.
Globally, the impositions of mandatory sustainability reporting requirements has also been growing. The EU has passed legislation requiring non-financial disclosure statements on environmental matters, human rights, anti-corruption, and social and employee- related matters. France passed its own legislation requiring businesses to “comply or explain” with respect to ESG and greenhouse gas emissions. In July 2016, Singapore’s stock exchange (“SGX”) made it mandatory for all listed companies to report on environmental, social and governance practices beginning with financial years ending December 31, 2017 and onward. By doing so, the SGX joined Johannesburg Stock Exchange (“JSE”) in South Africa in requiring such disclosures. Additionally, the United Kingdom now requires certain large businesses to publish reports on slavery and human trafficking issues within their supply chains pursuant to the UK’s 2015 Modern Slavery Act.
In 2016, it appeared that a mandatory reporting regime—by way of the Securities and Exchange Commission—may have been on the horizon. In April of last year, the SEC solicited public comment on “modernizing” disclosure requirements, including the possibility of requiring company information relating to sustainability and public policy issues. In response, the SEC received significant feedback in favor of mandatory sustainability disclosures. Former SEC Chair Mary Jo White saw the future of sustainability reporting as an important frontier for the SEC.
Then, after perhaps the most notable event of 2016—the election of Donald Trump as the next president of the United States— Chair White resigned, effective January 2017. On January 4, president-elect Trump nominated Sullivan & Cromwell’s Jay Clayton to replace her, hailed by the Wall Street Trump as a “180” from the current chair. The SEC (along with other key elements of the federal government, such as the EPA) is now expected to take a much more “hands off” approach (putting it mildly) to regulating climate change and sustainability, signaled by Mr. Trump’s own statements about “undoing” regulations that, in his opinion, have “stifled investment.” Trump has also signaled an interest in dismantling the Dodd-Frank Act which, as previously mentioned, requires conflict mineral disclosures.
So what does all this mean for consumers and businesses interested in the future of sustainability reporting? Although Washington, D.C. leaders will be moving in the opposite direction, the growth of sustainability reporting in the business community shows no signs of slowing down. For companies with global operations, they will have to be mindful of sustainability reporting requirements imposed in other jurisdictions. The fact that 2016 was the hottest (temperature-wise) year on record continues to underscore global concerns about climate change. Companies on the fence about sustainability reporting will have to pay careful attention to increasing demands from investors, and the consuming public for increased transparency on sustainability and climate change. And when industry leaders (and competitors) make sustainability a priority—such as Kering’s CEO Francois-Henri Pinault in luxury fashion—it’s apparent that the U.S. government’s priorities will be clashing with those of many businesses, international organizations, and consumers, in the U.S. and worldwide.