For professional investors and analysts, the consideration of non-financial information when conducting financial analysis is nothing new. However, the demand for information beyond revenues, profits and other traditional accounting metrics has increased significantly in recent years. this year, Investors with over $130 Trillion in Assets Question 15,000+ Companies Worldwide Disclose specific environmental information so that it is possible to evaluate how the environmental information has affected investment.
Companies are now reporting more non-financial environmental, social and governance (ESG)-related data than ever before. that’s right, Analysis of 50 Fortune 100 companies White & Case LLP found that all 50 of its 2022 reports filed with the U.S. Securities and Exchange Commission (SEC) contained environmental disclosures. When a company discloses nonfinancial information in its Form 10-K annual report or certain other SEC filings, it is subject to the SEC filing review process.
SEC Application Review Process
The SEC’s Corporate Finance Division Submission review process As a key component of everyday responsibilities. The SEC selectively reviews corporate filings made under the Securities Act of 1933 and the Securities Exchange Act of 1934 to determine compliance with applicable accounting and disclosure requirements. The goal is to ensure that companies provide investors with critical information to make informed investment decisions.
Under the Sarbanes-Oxley Act of 2002, the SEC is required to review all companies at least once every three years. To manage this workload, the SEC strategically schedules application reviews throughout the year. Many of the largest companies by market capitalization review at least some aspects of their returns annually, but for smaller companies, their returns may only be reviewed once in his three years. .
SEC officials issue comment letters to companies asking for responses within 10 business days when they believe companies can enhance disclosure. Ordinary people can Visit these comments and reply letters To understand the SEC’s concerns and how companies are trying to address them.
(ESG) There is no guarantee that disclosures are complete and accurate
The SEC application review process has several important limitations, at least two of which are frequently misleading. First, the SEC will only disclose filing reviews that receive at least one comment. It did not disclose which filings it considered without comment. Therefore, the public cannot know whether the SEC has reviewed an application without comment without going through the hassle. Freedom of Information Act (FOIA) requirements. Second, the SEC can fully examine an application as a whole or only a portion of a particular application, but the scope of its examination is not disclosed to the public.
What do these restrictions mean for ESG-related disclosures? The SEC typically begins filing reviews with annual reports. However, the company has filed significant ESG-related information in his DEF 14A power of attorney, which the SEC may or may not review. In fact, DEF 14A petitions receive comment letters less than one-third as often as 10-K annual reports. Additionally, if ESG-related disclosures fall entirely outside the scope of SEC filings (e.g., a company’s sustainability report on his website), the SEC may not be responsible for considering those disclosures. I have.
Stakeholders should therefore not assume that no news is good news. Because the SEC has not reviewed the disclosures, there may be no record of SEC comment letters related to ESG disclosures. And even though some have reviewed ESG-related information, that doesn’t guarantee that disclosures are complete or accurate, the SEC said. Securities laws do not require companies to disclose material ESG matters. As then-SEC Commissioner Alison Helen Lee explained, it’s a “myth” or “misconception” that that’s the case. In a lecture in May 2021.
Where can the SEC be most effective?
Our literature analysis suggests that while the SEC does a good job of enforcing compliance with clear accounting and disclosure rules, it may issue comment letters where disclosure relies heavily on a company’s professional judgment. suggested to be low. Given the subjective nature of many ESG-related disclosures and the lack of a generally accepted reporting framework, it is not clear from a compliance oversight perspective how rigorous the SEC’s oversight of ESG disclosures is.
Instead, academic research suggests that public dissemination of the SEC’s comments and company responses could help companies reach consensus and converge on disclosure standards. This ultimately takes time and may not keep up with the growing demand for ESG-related information.
We will continue to send ESG-related comment letters
it is not surprising CFA Institute, black rockpraised by other investment professionals. SEC Efforts to Request Climate-Related Information It can be found in the company’s registration statement and annual report.
As a result, we expect the SEC to increasingly comment on ESG-related disclosures to ensure compliance with relevant requirements. The message is clear. This reporting area may not be entirely new, but it’s evolving rapidly and it’s up to all of us to keep up.
If you like this post don’t forget to subscribe enterprising investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect those of the CFA Institute or the author’s employer.
Image credit: ©Getty Images / qingwa
Professional Learning for CFA Institute Members
Members of CFA Institute are empowered to self-determine and self-report the Professional Learning (PL) credits earned. enterprising investor. Members can easily record credits using their account. Online PL Tracker.