The below are answers to frequently asked questions of a legal nature. If you have a question you would like to see answered in SASB’s legal FAQs, please email firstname.lastname@example.org.
Are SASB-type disclosures required under existing law?
Disclosure documents filed with the SEC are largely governed by Regulations S-K and S-X. Securities Act Rule 408 and Exchange Act Rule 12b-20 require registrants to disclose, in addition to information expressly required by SEC regulation, “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.” Items 101, 103, and 503(c) of Regulation S-K require a registrant to provide descriptions of the business, legal proceedings, and risk factors. Further, the Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, which is included in a company’s quarterly and annual reports filed with the SEC, requires a narrative explanation of the company’s financial statements to enables investors to “see the company through the eyes of management.” A company must describe “any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” The SEC has also cautioned against “boilerplate” or use of “generic language” in MD&A. See SEC Release No. 33-8350 (2003).
Taken as a whole, these requirements may require a company to make SASB-type disclosures. It depends on a company’s particular circumstances. SASB standards are designed to assist the company in making effective and complete disclosures that are decision-useful to investors.
Is SASB trying to redefine materiality or impose new regulations?
No. In developing its standards, SASB follows the test for materiality set forth by the U.S. Supreme Court, that is, a “substantial likelihood” that omission of particular information would be viewed by the “reasonable investor” as having “significantly altered the total mix of information made available.” TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976). But it is the specific company, not SASB, that must determine materiality; SASB’s development of a standard does not mean that the standard must be used by all companies within a particular industry.
Isn’t there a liability risk for companies making the SASB disclosures?
It is difficult to assess the likelihood, if any, of liability stemming from additional sustainability disclosure. However, it seems more likely that boilerplate disclosures on sustainability topics, which are often made now, would expose a company to liability risk than would the more specific and informative SASB types of disclosures. Also, sustainability information, if forward-looking and not historic in nature, may be protected from lawsuits by the safe harbor contained in the Private Securities Litigation Reform Act of 1995 under the federal securities laws.
Further, many companies currently make sustainability disclosures outside of their SEC filings, and the antifraud provisions of the federal securities laws apply to any public statements made by a public company, whether made in an SEC-filed report or not. It is likely that the rigorous controls and internal review process that typically accompany a company’s SEC filings would lead to more reliable sustainability disclosures than is the case for such disclosures made elsewhere.
Can information that is outside of the financial statements be material to investors?
Yes. Companies include information in their MD&A when such information is material to a company’s financial condition and operating results.
Some sustainability information would seem to be very long-range in nature. Why should such information be disclosed?
In promulgating the rules governing MD&A, the SEC did not specify a time period that should be considered in assessing the impact of a known trend, event or uncertainty that is reasonably likely to occur. As the SEC has stated (Climate change guidance at page 17), “As with any other judgment required by Item 303, the necessary time period will depend on a registrant’s particular circumstances and particular trend, event or uncertainty under consideration.” Further, the Supreme Court has stated (Basic v. Levinson) that a determination of materiality “with respect to contingent or speculative information or events . . .will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity.” Thus, sustainability issues, even those that might look well into the future, can be material and should be disclosed if circumstances warrant. The threshold for disclosure in MD&A is the reasonable likelihood test. The SEC has advised that the probability/magnitude test of Basic is inapposite for purposes of MD&A disclosure (1989 MD&A guidance, note 27).
Where should the disclosure go?
The most likely location for such disclosures is in MD&A. Other possible locations in the 10-K include the description of business, legal proceedings, or risk factors.
If the SASB standards relate to material items, why hasn’t the SEC required their disclosure or issued appropriate guidance?
The SEC has, on occasion, issued guidance on specific sustainability issues; for instance, in 2010 the Commission issued guidance regarding disclosure related to climate change. But it has generally been thought that the broad range of sustainability disclosures, such as those included in the SASB standards, are more appropriately addressed through existing disclosure requirements, such as those governing MD&A or other portions of the Form 10-K.
If a company begins to make SASB disclosures, might it be criticized because it hasn’t made these disclosures previously?
In general, SASB disclosures seem much more likely to be welcomed by investors and regulators rather than criticized as too late. Sustainability disclosures are an evolving area. As the SEC stated in its Climate Change guidance, “Improvements in technology and communications in the last two decades have significantly increased the amount of financial and non-financial information that management has and should evaluate, as well as the speed with which management receives and is able to use information.” In other words, MD&A and related disclosures tend to change and evolve over time, based on investor interest, availability and usefulness of information, as well as access to relevant and meaningful disclosure or accounting standards, such as those developed by SASB. Those standards enable companies to provide the capital markets with material, decision-useful, trustworthy information in a cost-effective way.
NOTE: Although this page may provide information concerning potential accounting and legal issues, it is not a substitute for advice from competent legal and accounting professionals. The information on this page is provided for educational purposes only. You should not act or rely on any information on this page without first consulting with an attorney or accountant. SASB is not responsible or liable for any errors or omissions in the content of this page.