Sustainability Reporting: The Lawyer’s Response

17 Min Read By: Nancy S. Cleveland


  • Sustainability management may conflict with corporate America’s focus on a single bottom line, but perspectives are changing.
  • There is growing pressure on businesses to evolve toward a triple bottom line approach: considering social, environmental, and economic impacts over a longer term and their implications for governance.
  • As practitioners are asked to review both mandatory and voluntary reporting disclosures, they must understand the drivers for that reporting to help clients respond to mounting social and business pressures.

With ever-increasing frequency, clients are seeking advice about reporting and communication on sustainability issues. “What are we legally required to communicate?” “What are we permitted to communicate?” “What can or should we say to stay competitive and protect business relationships, profitability, and our social license to operate?” “What standards should we use?” This article will help lawyers understand and advise clients on their sustainability communications pressures and needs.

Corporate sustainability is a business management practice. When used strategically, it enhances business value. As a practice, it involves assessing and managing risks and opportunities that arise from environmental, social, and economic impacts of the company and its industry. Assessment is done for short-, medium-, and long-term time horizons. This broader and longer-term perspective is essential to realizing value from sustainability management. 

As a practical matter, the concept of sustainability management may conflict with some aspects of current corporate law and behavior. These conflicts can be generalized by the reality that most of corporate America focuses on a market-imposed, short-term, single bottom line. But the marketplace is in flux. Perspectives are changing in response to climate change, population growth, constrained resources, globalization of supply chains, and more transparent and ubiquitous communications. The upshot is growing pressure on businesses to evolve toward a triple bottom line approach: considering social, environmental, and economic impacts over a longer term, and their implications for governance. As lawyers, we will be called upon to help navigate these shifting influences on business management and success. 

What’s Going On? 

Macro Drivers for Sustainability Reporting Pressure 

The drivers that are creating pressure on companies to address and communicate more and more about sustainability issues arise from a number of factors, including from a variety of external and internal stakeholders. There are four primary macro drivers that have had, and will continue to have, wide-ranging social, environmental, and economic impacts with the potential to affect businesses everywhere. Being attuned to, and mitigating the risks of, or adapting to those impacts is a key attribute of a sustainable company. 

Concern about climate change and greenhouse gas emissions: Rising levels of greenhouse gasses in our atmosphere are driving increases in average temperature on the planet. This warming leads to changes in our climate and natural systems, resulting in sea level rise, droughts, floods, severe weather, wildfires, and ocean acidification. Even 2°C of warming will have a significant adverse impact on human health and well-being. 

Population growth and resource constraints: World population is on track to reach 9 billion by 2050 and 10 billion by 2100. The global middle class is expected to triple by 2030. At today’s pace, global energy demand will increase by 57 percent over the next 25 years. Water use is expected to increase by 50 percent in developing countries and 18 percent in developed countries by 2025. Our current level of consumption utilizes 1.5 Earths to provide resources to meet current demand and absorb waste. These factors will drive prices of all commodities up and lead to serious problems without corrective actions and creative solutions. Businesses have significant risks and opportunities in this respect. See, World Business Council on Sustainable Development; Energy Information Agency; Geo-4 – Global Economic Outlook; Global Footprint Network

Organizational and global interdependence: Large companies used to have several hundred partners and suppliers; today they have thousands, and they are spread across the globe. Companies of all sizes are outsourcing noncore functions, partnering for some core functions, and building larger business networks in general. The greater the number of outside suppliers and service providers upon which a company relies, the more difficult it is to manage the associated risks across multiple geographies. This is true from both a supply chain and reputation management perspective. 

Social license and accountability to stakeholders: Public demand for transparency and accountability has increased markedly. An instant information society has emerged from widespread access to social media, the Internet, and cable news. A single individual now has the ability to communicate instantaneously and globally to influence public opinion on a topic or a business. Multiplicities of stakeholders are affected by and interested in how a company manages sustainability issues. Consumers and investors are increasingly factoring a company’s ethics, sustainability, and social responsibility into their buying and investment decisions. 

Stakeholder Perspectives 

Sustainability reporting serves the needs and interests of a wide and growing variety of stakeholders, ranging from investors, employees, customers, and suppliers, to governments, regulators, local community groups, and nongovernmental organizations. Stakeholder reasons for seeking information on sustainability issues, the information they seek, and the lens through which they view the reported information varies. The number and variety of information requests about environmental, social, and governance (ESG) activities is a significant burden for many companies. Accordingly, companies must balance how and to whom they respond. 

Investors and customers are the two stakeholder groups that garner the most attention. Companies are influenced by their own investors to pursue sustainability into their supply chains. As a result, understanding what is driving the investment community to care about sustainability activities and reporting is key. 

In many cases, institutional investors care about medium- and long-term value and whether the companies in which they invest are contributing to systemic problems or are conducting their business in a way that helps solve those problems. This is not to say that short-term financial returns are unimportant to institutional investors, but rather, that more and more institutional investors are taking into account a broader range of factors in their investment decisions. Company performance on ESG factors are being included because they are outperformance indicators. Robert G. Eccles, Ioannis Ioannou, and George Serafeim, The Impact of Corporate Sustainability on Organizational Processes and Performance, first published November 01, 2011 (dated 11/23/11). In the words of Thomas P. DiNapoli, New York State Comptroller and Sole Trustee of the New York State Common Retirement Fund: “Our goal is simple: we want long-term sustainable economic growth. And we have found from experience that comprehensively integrating environmental, social and governance considerations into the investment process is essential to achieving that goal.” Peter Ellsworth and Kirsten Snow Spalding, The 21st Century Investor: Ceres Blueprint for Sustainable Investing, 2013, Forward,

Pressures to Report; Understanding the Reporting Landscape 

Clients are measuring their reporting against that of their peers and competitors. They are gauging social pressure to demonstrate responsible corporate behavior. There have been significant reporting developments, both in terms of the growth in reporting and the number and quality of reporting requirements, standards, or frameworks. 

The arguments for not reporting are shrinking day after day for companies that have yet begun to report on their sustainability progress. Now that 53% of the S&P 500 and 57% of the Fortune 500 are reporting on their Environmental, Social, and Governance impacts, the non-reporters are now in the minority. We believe this minority will continue to shrink as it has in the past few years. The benefits of sustainability reporting will become increasingly obvious as more time passes and the long term benefits are easier to measure. 

Governance & Accountability Institute, Inc., 2012 Corporate ESG/Sustainability/Responsibility Reporting, Does It Matter? (Dec. 15, 2012).

Making Reporting Decisions 

Once a company decides to report to stakeholders about its sustainability activities, risks, and opportunities, legal questions arise. Public-facing information about sustainability often starts as a marketing initiative in response to customer interest or as a means of demonstrating social responsibility and philanthropy. This type of information can then become the basis of requests to “verify” information gathered by a rating systems that will report with or without company input or corrections. Other reporting systems, like the CDP (formerly the Carbon Disclosure Project), will request formal reporting and publicize a failure to respond or report. As soon as investors or rating systems get involved, or customer pressure takes the form of supply chain requests, the focus rapidly shifts from a marketing effort. Management begins to ask what the company is legally required to report and what the company should report to support reputation, stakeholder relationships, and business development. 

Mandatory Reporting Requirements 

1. SEC Filings. 

Companies subject to the Securities and Exchange Commission (SEC) filing requirements must disclose material information in their SEC filings, such as the Form 10-K. Various rules and regulations, including Regulation S-K, may require the disclosure of material sustainability information in the Form 10-K and other periodic SEC filings, depending on the circumstances. Securities Act Rule 408 and Exchange Act Rule 12b-20 require a registrant to disclose, in addition to the information expressly required by line-item requirements, “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.” 

Over the past several years, the SEC has struggled with how best to address evolving concerns with climate change and sustainability in the agency’s disclosure requirements. The SEC attempted to address the issue of climate change by publishing an interpretive release providing specific guidance as to how existing rules may require disclosure of information relevant to climate change. Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change (February 2, 2010). The interpretive release identifies how climate change disclosures may be required under particular disclosure items in Regulation S-K, depending upon a company’s circumstances. These disclosure items include Description of Business
(Item 101 of Regulation S-K), Legal Proceedings (Item 103 of Regulation S-K), Risk Factors (Item 503(c) of Regulation S-K), and Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 303 of Regulation S-K). The principles that the SEC articulated in the climate change interpretive release can be applied in other contexts related to sustainability in determining if a public company has any disclosure obligations with respect to such matters. 

The SEC’s interpretive release addresses four topics that companies should consider when evaluating the need for, and appropriate level of, disclosure related to climate change matters:

  • The impact of legislation and regulation regarding climate change, including the potential impact of pending legislation.
  • When material, the impact on their business of treaties or international accords relating to climate change.
  • Whether legal, technological, political, and scientific developments regarding climate change will create new opportunities or risks, including reputational risks.
  • The actual and potential material impacts of the physical effects of climate change on their business, such as the effects of severe weather, sea levels, arability of farmland, and water availability and quality. 

In other sustainability areas, Congress has recently amended the federal securities laws to impose disclosure obligations regarding certain types of human rights and other issues of interest to specific groups. Recent examples include disclosure regarding the sourcing of certain “conflict minerals” (Section 13(p) of the Securities Exchange Act of 1934 (“Exchange Act”), which was implemented by the SEC by rule), payments to governments by resource extraction issuers (Section 13(q) of the Exchange Act, which is in the process of being implemented by SEC rule), and business with certain governments, persons, and entities subject to specific U.S. trade sanctions (Section 13(r) of the Exchange Act, which was effective upon enactment). 

2. State and Local Requirements. 

Other requirements for reporting on sustainability issues may arise at the state or even local level, or come into play by virtue of the geographic scope of a company’s business. For example, the California Transparency in Supply Chains Act requires every retail seller and manufacturer doing business in the State of California and having worldwide annual revenues of $100 million or more to disclose their specific actions to eradicate slavery and human trafficking in their direct supply chains for tangible goods offered for sale. 

For a regulatory example, the insurance commissions in six states (California, Connecticut, Illinois, Minnesota, New York, and Washington) require insurance companies with direct written premiums of $100 million or more in their state to complete an annual climate risk disclosure survey. 

3. International Requirements. 

In spring 2014, the European Parliament passed a law requiring publicly traded companies with more than 500 employees to report on nonfinancial sustainability factors. The law will go into effect in 2017, and will require nearly 7,000 companies to include this new information in their annual financial reports – 4,500 more than are doing so today. The new law requires affected companies to report on ESG factors, including human rights impacts, diversity, and anticorruption policies. Companies will be expected to describe their business model and the outcomes and risks of their policies. Companies will also be required to include their supply chain in reporting. This will likely have a trickle-down impact, forcing smaller and medium-sized private companies and multinational companies upstream in the value chain to report even though the law does not apply them. 

Under Canadian securities laws, public companies must disclose all material information, including material information about environmental and social issues, and there are additional disclosure obligations under the TSX and TSX Venture Exchange timely disclosure policies. 

In October 2010, the Canadian Securities Administrator published Staff Notice 51-333, Environmental Reporting Guidance to provide guidance on continuous disclosure requirements relating to environmental matters under applicable Canadian securities laws and to assist issuers in determining what information about environmental matters needs to be disclosed and about enhancing or supplementing their environmental disclosures. The staff notice was motivated by the impact of environmental matters on reporting issuers, the changing regulatory landscape, and increasing investor interest in environmental matters. 

Quasi-Voluntary and Voluntary Reporting 

There are many stakeholder and other organizations that pressure companies for ESG information. Among the many means used to gather this information are a myriad of investment screening tools, rating organizations, and reporting frameworks that aggregate public information or provide vehicles for sustainability reporting. Below is a brief overview of the most prominent among these organizations, tools, and reporting frameworks. 

Investors use ESG screening to measure or assess how a company manages social and environmental impacts. This screening focuses on whether a company identifies and either mitigates risks or seizes opportunities with respect to ESG indicators. 

Investment screening tools are flourishing:

  • The Bloomberg ESG Valuation Tool and its ESG Score has experienced significant interest. This tool “enables users to apply a financially-based methodology to assess and value the impact of ESG factors on a company’s Earnings Before Interest and Taxes (EBIT) performance and share price.” PWC, Do Investors care About Sustainability? Seven Trends Provide Clues (March 2012).
  • MSCI has several screening tools/indices, including its ESG Impact Monitor.
  • FTSE4Good revamped and expanded its screening process. Companies are required to publicly disclose a broad array of sustainability information to gain and maintain listing on the index.
  • GS SUSTAIN is another index that incorporates ESG into its analysis. Like MSCI and FTSE4Good, GS SUSTAIN submits information it has gathered from the public realm for company review, correction, and supplementation. 

The CDP, a global not-for-profit organization, operates a reporting framework and rating system. The CDP holds the largest and most comprehensive collection of primary climate change, water, and forest-risk information. Investors representing more than a third of the world’s capital request corporate accountability on climate change through the CDP reporting framework. 

Global Reporting Initiative (GRI) is the globally-recognized “gold standard” for sustainability reporting. The framework includes reporting guidelines and sector/industry guidance. It requires a high degree of organizational transparency and accountability. The uniform indexed reporting structure provides stakeholders a capacity for year-over-year analysis and easy comparison of reports from different companies. When investors pressure companies to report, they most often request reporting using the GRI framework. 

On the leading edge of the reporting industry, and in support of an emerging interest in integrating financial and non-financial reporting, the International Integrated Reporting Council (IIRC) has developed the Integrated Reporting Framework. This includes guidance for how publicly traded companies can integrate sustainability into their annual reports so that the public can understand the value of sustainability initiatives and can effectively compare one company to the another. The stated purpose of integrated reporting is to show how a company creates value of the short, medium, and long term. 

Voluntary Standards to Support Mandatory Reporting 

The Sustainability Accounting Standards Board (SASB) is developing voluntary standards, which identify industry-specific, sustainability-related issues that may give rise to material information for companies to disclose. The intent is for companies to reference the standards as a guide when making sustainability disclosure decisions for mandatory filings to the SEC. The complete set of guidelines is scheduled for release in early 2016. See The SEC has not acted on incorporating the SASB standards into any disclosure requirements. 

The Lawyer’s Response 

The manner in which sustainability issues are reported or communicated to stakeholders and others must align with the type and purpose of the report or communication. Mandatory reporting should follow SEC or other governing requirements. Voluntary reporting should, on its face, be readily distinguishable from such mandatory reporting. Lawyers should recommend that language be used that reflects the standard and the audience for the reporting venue. Counsel will need to weigh litigation risks that voluntary reporting may carry for reported information that is significant, but not material, and therefore not included in mandatory reporting. 

This is of primary significance because of the ways in which differing concepts of materiality are incorporated into mandatory and voluntary reporting requirements:

  • Under the GRI reporting framework, information is considered material and should be included in a report if it “may reasonably be considered important for reflecting the organization’s economic, environmental and social impacts, or influencing the decisions of stakeholders.”
  • The IIRC deems information to be material if “it is of such relevance and importance that it could substantively influence the assessments of providers of financial capital with regard to the organization’s ability to create value over the short, medium and long term.”
  • For SEC reporting purposes and under the voluntary SASB standards, information is deemed to be material if there is “a substantial likelihood” that a “reasonable investor” would view the information as “significantly alter[ing] the ‘total mix’ of information made available.” TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976).

Disclosures under the U.S. federal securities laws are a mixed question of law and fact. The SEC has noted that the issuer is in the best position to know what is likely to be material to investors. “[A] corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact.” Richman v. Goldman Sachs Group, Inc., et al., 10 Civ 3461 (June 21, 2012, United States District Court for the Southern District of New York).

Companies are required to disclose material informa­tion only where the federal securities laws or other applicable legislation specifically impose such a duty to disclose. The analysis should focus on whether or not the information is material by securities law standards and whether there is a prima facie duty to disclose the information. 

Because a number of recognized standards for sustainability reporting outside of the SEC’s disclosure requirements reference different concepts of “materiality,” counsel must be cognizant of those varying definitions while remaining focused on the specific duties and obligations that are currently contemplated by the U.S. federal securities laws. Understanding these nuances enables lawyers to help clients clearly identify the importance ascribed to information by reference to the standard and audience. For example, a company could use the concept of materiality for investor-related information that is included in required reporting to the SEC. Other information should be identified using words like “significant,” “important,” or “key,” or as being relevant to stakeholders other than investors. The company could add disclaimers or cautions where appropriate. 

All reporting standards require that a company’s sustainability disclosures – even where there is no duty to disclose under the U.S. federal securities laws – be both accurate and complete. To effectively manage sustainability reporting and communication, companies must build appropriate reporting capacity (including disclosure controls and procedures) to identify and vet sustainability issues. The development and implementation of sustainability management systems will serve to provide a company with a process for measuring, monitoring, and improving sustainability reporting and performance. These systems should encompass an internal educational component to ensure awareness of sustainability activities and reporting needs.

Companies ask their lawyers to review mandatory reporting disclosures as a matter of course. Given the complexity of sustainability issues, there is also a role for lawyers in reviewing and advising on voluntary reporting. Counsel should help clients weigh liability risks against reputational, relational, and other benefits of voluntary reporting. Understanding the drivers for that reporting noted above should guide that review and inform giving advice that protects client interests, while enabling them to respond to real and significant social and business pressures.

By: Nancy S. Cleveland

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