In April 2016, the Securities and Exchange Commission (SEC) issued a request for public comment regarding the modernization of certain business and financial disclosure requirements under Regulation S-K as part of its ongoing “Disclosure Effectiveness Initiative.” Under Regulation S-K, reporting companies must disclose non-financial information that is material to investors.
The SEC requested comment on several issues relating to the disclosure of public policy and sustainability matters, including information on what, if any, sustainability and public policy issues are important to informed voting and investment decisions and how the SEC could elicit meaningful disclosure of material information relating to these issues.
A number of organizations provided comment as to the materiality of environmental, social, or governance (“ESG”) concerns, noting a growing investor interest in ESG disclosure.
Human Rights Policies, Practices, and Impacts are Material
Information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or in making an investment decision. Recent developments demonstrate that human rights policies, practices, and impacts are increasingly material to investor decision-making processes.
Human rights policies, procedures, and risks are material to investors given the substantial financial consequences that can be incurred when companies fail to take proper account of human rights issues.
According to a report by Ernst & Young, 19.1% of investors would rule out an investment immediately and 63.2% would reconsider investing if there were significant human rights risks associated with the investment. Similarly, a study by Mercer Investment Consulting found that 26% of respondents found human rights to be “very important” to economic risk/return considerations.
To illustrate—On November 5, 2015, an iron mine tailings dam operated by Samaco Mineração S.A., a Brazilian mining company partially owned by BHP Billiton burst in the state of Minas Gerais, releasing torrents of toxic sludge that killed nineteen people and left thousands without clean drinking water. Preliminary investigations into the dam failure by Brazilian prosecutors found evidence of the company’s knowledge of safety concerns regarding the mine dating back to 2007. According to prosecutor Carlos Eduardo Pinto, the state found “repeated, continual negligence in the actions of a company owned by Vale and BHP”—“A dam just doesn’t break by chance.” This evidence includes the publication of a 2013 report commissioned by the Minas Gerais Environmental Ministry, which warned of design defects probable to lead to a rupture and suggested risk mitigation and additional geotechnical analysis.
Last March, Samarco reached a deal with the Brazilian government to provide USD$6.2 billion in cleanup costs over a three-year period. However, the total cost of the Brazilian mine disaster remains undetermined. BHP and Vale are still facing legal actions from Brazilian federal prosecutors ranging from USD$6.2 billion to $48 billion in liability.
In August 2016, BHP Billiton reported its worst-ever annual loss, much to the chagrin of shareholders, who saw dividends reduced by 77%. This staggering profit loss was exacerbated by a USD$ 2.2 billion impairment resulting from the deadly Brazilian mine disaster. In response, investors filed suit in U.S. District Court against BHP for securities fraud, accusing the company of “overstating its ability to manage safety risks” at the mine site, demonstrating that non-financial information relating to human rights risks and impacts is material and should be fully disclosed.
A large number of companies have also recognized the importance of and investor demand for human rights disclosures by voluntarily reporting on human rights policies, practices, and risks. Today, there exist a number of voluntary human rights reporting frameworks, including the GRI G4 Sustainability Reporting Guidelines, the Sustainability Accounting Standards Board (SASB) guidelines; and the UN Guiding Principles Reporting Framework. These frameworks have acquired significant investor and company-based support. For example, six global companies and over eighty investors representing more than $4.25 trillion dollars in assets support the UNGP Reporting Framework, and 78% of reporting companies use the GRI’s G4 standards for their corporate responsibility reporting.
However, while voluntary human rights information disclosed on company websites is beneficial to investors, it is not sufficient to address investor needs. Voluntary disclosure does not provide information consistent enough to compare across sectors or otherwise or robust enough in terms of quality, with a distinct lack of standard practice and auditing among companies. Given these shortcomings, voluntary disclosure of sustainability information does not fully advance the SEC’s mission “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”
The SEC Must Do More
The SEC has already provided for some human rights disclosure in its promulgation of Regulation S-K’s § 78m on conflict minerals, in response to the Dodd-Frank Act, and in certain disclosure guidance relating to climate change and cyber-security information; however, it must do more.
In response to the SEC’s request, the International Corporate Accountability Roundtable (ICAR) submitted comments maintaining that human rights issues are material to investor decision-making. ICAR’s 2013 report, Knowing and Showing: Using U.S. Securities Laws to Compel Human Rights Disclosure, also demonstrates how business policies, processes, and impacts on human rights are material to investment interests, and as such, must be reported in order to uphold the SEC’s mandate “to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation[.]”
It is clear that investors need and want to know more in relation to the human rights policies, practices, and impacts of their companies. Many corporations have already come to this realization, and are voluntarily reporting such information; those that haven’t are suffering the consequences. The SEC must do more to ensure that this material information is being disclosed.
To continue to pressure the SEC in relation to increased disclosure on economic, social, and governance issues, ICAR and a coalition of like-minded organizations hosted Senator Jeff Merkley to discuss Transparency, Long-Termism, and the SEC on Tuesday, September 20. The event was co-sponsored by the Center for American Progress Action Fund, the AFL-CIO, Americans for Financial Reform, Ceres, the Financial Accountability and Corporate Transparency Coalition, the Patriotic Millionaires, Public Citizen, and US SIF: The Forum for Sustainable and Responsible Investment.