The Sustainability Report Heard Round the World?
On March 9, 2018, UBS filed a Form 6-K with the SEC enclosing its EU-required corporate sustainability report. This filing marks a significant moment in the rapidly changing world of environmental, social, and governance (“ESG”) disclosures as it effectively declares climate and sustainability reporting to be material. As we have noted previously, increasing investor demands for information on ESG topics, including climate change, has rapidly blurred the line between financial and non-financial disclosures.
As a “foreign private issuer” under SEC regulations, UBS filed the March 9, 2018 Form 6-K containing its corporate sustainability report to provide material information that it had provided to investors in its home country, Switzerland, and to other international investors. Foreign private issuers are exempted from certain SEC requirements but are required to file annual reports through SEC Form 20-F and other material information through Form 6-K.
The EU Non-Financial Reporting Directive
The EU Non-Financial Reporting Directive, calls upon member states to create frameworks requiring companies with more than 500 employees to disclose non-financial information including (1) environmental protection, (2) social responsibility and treatment of employees, and (3) diversity on company boards. Adopted in 2014, the Non-Financial Reporting Directive entered into force this year, applying for the first time to reports filed in 2018. As a Swiss company, UBS is not itself subject to the EU Non-Financial Reporting Directive, but UBS’s subsidiaries that are incorporated in EU member states are subject to the laws of those member states implementing the Directive. Any of these subsidiaries that has more than 500 employees and either (1) meets the definition of a “public interest” company, such as a bank or insurance company, or (2) is a company listed on a stock exchange within the EU, is subject to the EU Non-Financial Reporting Directive and the implementing laws of the relevant member states. Recognizing the potential burden of requiring a parent company to file reports for all of its subsidiaries, the EU Directive allows a parent company to file one report on its behalf and on behalf of all subsidiaries, which is what UBS chose to do in its corporate sustainability report.
Applicability to Reporting in the U.S.
In the United States, disclosure of climate information under regulation S-K is governed by the SEC’s 2010 Climate Change Guidance. The SEC’s guidance directs filers to disclose material climate information which may include legislation or regulation, international agreements, indirect consequences of climate change regulation on a business, and physical impacts of climate change. In 2016, the SEC issued a “concept release,” seeking comment on potentially modernizing certain business and disclosure requirements in guidance associated with regulation S-K, including disclosure requirements related to climate change. However, since that time, the SEC has not indicated that it will in fact release updated climate change guidance for regulation S-K.
The SEC’s guidance does not require filers to disclose non-financial climate change information that does not rise to the level of being material. In recent years, a number of groups focused on environmental reporting have noted the gaps between material climate information reported by filers in their annual reports and the much broader information reported by the same companies under voluntary reporting regimes, including the Global Reporting Initiative (GRI) and CDP. Some companies have begun to provide more information in SEC filings in response to investor and marketplace pressure.
The UBS Filing
UBS filed its annual sustainability report under a Form 6-K prepared under the standards of the GRI to meet the EU requirements. The report covers a range of environmental and social factors, with climate change as a key focus area. The report states that “Climate change is one of the most significant challenges of our time.” It commits to aligning UBS’s reporting with the framework of the Task Force on Climate-Related Financial Disclosures (TCFD) because the company projects increasing investor demand for climate-related disclosures.
The report also sets out the four “pillars” of UBS’s climate strategy:
- We seek to protect our assets from climate change risks by limiting our risk appetite for carbon-related assets and by estimating our firm’s vulnerability to climate change risks using scenario-based stress testing approaches and other forward-looking portfolio analyses. So far, no material risk on our balance sheet has been identified.
- We support our clients’ efforts to assess, manage and protect themselves from climate-related risks by offering innovative products and services in investment, financing and research. We have developed several products that allow clients to identify the weighted carbon intensity of their investments and / or to align them with the Paris Agreement.
- We mobilize private and institutional capital toward investments that facilitate climate change mitigation and adaptation and we support the transition to a low-carbon economy as a corporate advisor and / or with our lending capacity.
- We continue to reduce our greenhouse gas (GHG) emissions and increase the firm’s share in renewable energy
The report also states UBS’s policies limiting its investment in coal-fired generation and coal mining activities as part of its climate commitment.
What does this mean for U.S. Filers?
The first question that UBS’s 6-K filing raises is whether it will mark a major turning point for environmental and climate disclosures in the United States. Much of the information contained in the UBS sustainability report falls outside of what has typically been considered material for reporting under regulation S-K. If other companies subject to the EU Non-Financial Reporting Directive make similar filings in the United States, it could shift investor expectations around ESG disclosures and create pressure on U.S.-based filers to include more information on climate and sustainability in their financial filings. This would be a significant development, particularly because most efforts to date by U.S. companies to assess climate risks under the TCFD framework have been communicated as investor relations reports and not included in regulatory filings.
The other significant question arising from the UBS filing relates to how companies should think about their voluntary reporting on climate and sustainability. As we have explained elsewhere, voluntary reporting standards tend to have very different views on both data quality and materiality than those applied to financial disclosures in the U.S. UBS’s report was prepared using the GRI, which is used by 72% of global companies who report on sustainability. The GRI Standards require that a reporting company conduct an assessment of materiality that is focused on significant environmental, social, or economic impacts that the company could potentially have on the environment and on the economy that will substantively influence the decision of any stakeholder. The GRI Standards also provide guidance that the threshold for data accuracy “can depend partly on the intended use of the information.”
The GRI framework’s focus on the impact a company could potentially have on the outside world, rather than on the impact directly to the company, reflects a fundamentally different conception of materiality. Under this definition a much broader set of non-financial risks may be considered material. Therefore, as investor expectations regarding non-financial information continue to evolve, companies may find themselves under increasing pressure to include such information in regulatory filings. This will present complex challenges as companies will have to grapple with substantial differences in the quality of financial, climate and sustainability data.
In the short run, all U.S.-based filers should carefully evaluate their voluntary environmental and climate disclosures with an eye towards the rapid blurring of boundaries between financial and non-financial information. Even if we do not see additional sustainability and climate information incorporated into SEC filings for U.S.-based companies in the near-term future, some investors are likely to carefully scrutinize voluntarily disclosed non-financial information and use it in assessing their portfolios.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.