December 15, 2020

SEC Commissioner Makes Case for Marrying XBRL & ESG

Last month, I blogged that former SEC Chief Accountant Wes Bricker is working on an initiative at PwC that would translate sustainability reporting standards into an XBRL taxonomy. He isn’t the only one who sees promise in that coupling. In recent remarks, SEC Commissioner Allison Herren Lee – who has made it clear she wants to work on standardized ESG disclosure – said she might also support expanding XBRL to ESG reporting and other non-financial data. Here’s an excerpt (also see this blog from shareholder proponent Jim McRitchie pronouncing his opinion that N-PX data tagging would be the most important SEC rulemaking for advancing corporate sustainability):

What kind of data are we talking about here? The most basic information that an investor might want: how their money is being voted in corporate elections, and whether their shares are being voted in their best interest or in accordance with their instructions. We could bring much greater clarity and transparency to investors regarding how their voting rights are being exercised with the simple expedient of finalizing this rule and adding a requirement, as discussed in the proposal, to tag the Form N-PX voting data.

N-PX filings are voluminous in nature but would likely require relatively few, straightforward data tags. Thus we could potentially take a large body of important information and dramatically increase its usability through a relatively simple taxonomy.

Another area that could benefit from structured data to support usability and comparability is in the area of climate change and other ESG risks and impacts. As you all know, climate and other ESG-related metrics are of ever-increasing importance to investors, surpassing even traditional financial statement metrics for many. Of course, there are currently little to no standardized climate or ESG disclosure requirements. Indeed much of that disclosure occurs voluntarily and outside of SEC filings altogether. As I have said elsewhere, developing standardized climate and ESG disclosure requirements should be a top priority for the Commission. As we consider this, we should also consider how to make the data disclosed under such requirements as usable as possible, including through tagging requirements.

Much of our structuring requirements so far have been backward looking – requiring us to consider how to structure information that is currently disclosed in a non-structured manner. As we consider new climate and other ESG requirements, we would have the opportunity to simultaneously consider how to make those requirements amenable to structuring. Instead of an ex post facto application of structuring requirements, the two could develop in tandem.

Finally, I’ll just mention briefly, MD&A and earnings releases. As commenters including XBRL have pointed out,[18] disclosures under MD&A may benefit from some simple block tagging that could greatly enhance comparability of certain relatively consistent types of information disclosed in MD&A. And earnings releases, particularly given their often market-moving nature, appear to be another well-suited candidate for tagging.

ESG CAMs: Coming Soon to an Audit Report Near You?

I blogged a little while back ago about the PCAOB’s analysis of the “critical audit matter” disclosure requirement. Although most CAMs related to goodwill, revenue recognition, other intangibles and business combinations, there have been 3 so far – all for foreign private issuers – that cover the impact of climate change on financial statements. In this recent speech, PCAOB Board member Robert Brown predicts that there will be more to come. Here’s an excerpt:

In one report on Form 20-F, the auditor discussed management’s estimates that were inconsistent with the 2050 “net zero” commitment.” The auditor also observed that deprecating the assets in line with net zero targets would result in additional reductions to net income that were not reflected in the financial statements. The report also discussed how the auditor challenged management’s assertion that carbon-emitting equipment could be used in alternative ways after a net-zero target date that supported management’s estimate of operation until 2070.

Another audit report discussed how climate change and the global energy transition impacted the capitalization of exploration and appraisal costs. The auditor also focused procedures on the risk that oil and gas price assumptions could lead to material misstatements of the financial statements. Another audit report described the effect that long-term price assumptions incorporating the potential impact of climate change could have on asset values and impairment estimates.

Considering the increasing frequency that environmental trends, events, and uncertainties, including the lower commodity prices and margins resulting from a COVID-19 economic environment, can affect material accounts or disclosures in a public company’s financial statements, I expected to see more auditor reports describing them in the future.

”Shares Outstanding” XBRL Tags: Watch Those Zeros!

The SEC recently announced that DERA Staff has observed that some periodic reports show significant differences between the number of “Entity Common Stock Shares Outstanding” that’s XBRL-tagged on the filing cover page and the number of “Common Stock Shares Outstanding” that’s XBRL-tagged on the balance sheet. While there could be some differences due to the cover page number being as of “the latest practicable date” and the balance sheet being as of quarter-end, some filers have been disclosing three additional zeros in one value compared to the other – without any explanation in the filing about a significant change to capital structure. Make sure to check your scaling before you submit your filing!

Liz Dunshee