Well, it didn’t take long for the Division of Enforcement to focus everybody’s attention on the SEC’s recent guidance on the use of key performance indicators (KPIs) in MD&A, did it? A Fried Frank memo focuses on how that guidance may influence the use of ESG metrics in MD&A. While the guidance itself only references ESG metrics in a footnote, this excerpt says that what it had to say about them is consistent with recommendations of some well-known sustainability frameworks:
Although the Metrics Guidance is largely silent with respect to ESG metrics as a specific category, it does note that some companies “voluntarily disclose environmental metrics, including metrics regarding the observed effect of prior events on their operations.” In a footnote, the Metrics Guidance provides examples of metrics to which the guidance is intended to apply, which include a number of ESG metrics, such as total energy consumed, percentage breakdown of workforce, voluntary and/or involuntary employee turnover rate and data security breaches.
While the Metrics Guidance addresses ESG metrics only via footnote, it is consistent with the recommendations in certain voluntary sustainability frameworks that require both qualitative and quantitative disclosure associated with ESG metrics. For example, SASB’s Conceptual Framework notes that sustainability metrics should be accompanied by “a narrative description of any material factors necessary to ensure completeness, accuracy and comparability of the data reported.”
In addition, the TCFD recommendations note that reporting companies should provide metrics on climate-related risks for historical periods to allow for trend analysis and, where not apparent, should provide a description of the methodologies used to calculate the climate metrics. Similarly, both SASB and TCFD emphasize the importance of having effective disclosure controls and governance, as well as verifying ESG data (by third-party auditors, if possible).
As the memo also points out, many companies have been criticized by stakeholders for using ESG metrics that aren’t “easily comparable, decision-useful and verifiable.” The new guidance on MD&A key performance indicators heightens the stakes for these ESG disclosures, and companies that don’t respond appropriately may face a bigger downside than complaints about “greenwashing.”
-John Jenkins, TheCorporateCounsel.net February 24, 2020
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