It is perhaps not surprising that we have already experienced setbacks for corporate transparency during the early days of the Trump administration.
Last week, the U.S. Congress voted to repeal Section 1504 of the Dodd-Frank Act, which required the disclosure of tax and other payments to host governments by extractives companies listed with the U.S. Securities and Exchange Commission (SEC).
It also looks increasingly likely that the implementation of Section 1502 of the Dodd-Frank Act, which requires companies to report on conflict minerals due diligence efforts, will be defunded. And it would not be surprising if Section 1502 were entirely repealed in the near future.
At the same time, avenues to improve the quality of company transparency on sustainability issues—such as the SEC’s consultation in 2016 on the future of Regulation S-K, which raised the possibility of enhanced sustainability disclosures in Form 10-K reports to investors on companies’ annual performance—are almost certainly closed off for the time being.
I believe that these and other similar developments raise three main implications for the future of corporate transparency on sustainability issues—and all three point to the increasing importance of taking proactive and strategic approaches to transparency.
First, there are lots of reasons why the trend toward increased transparency will continue, rather than decline:
- Transparency requirements continue to increase outside the United States and at the U.S. state level. For example, reporting requirements on payments to governments by extractives companies are taking hold in the European Union as the Accounting and Transparency Directives are implemented in member states, and similar developments are underway on conflict minerals transparency. Requirements at the U.S. state level continue, such as the California Transparency in Supply Chains Act.
- Stakeholder pressure for disclosure will increase. In an environment of declining regulatory requirements on transparency, the likely corollary is increased pressure from stakeholders. Companies should expect that civil society organizations will initiate well-organized campaigns against companies that retreat from their previous levels of transparency.
- There are good business reasons for disclosure. Over the past decade, we have witnessed a substantial increase in companies proactively using transparency to pursue business objectives. The voluntary disclosures from internet and telecoms companies on personal data requests from governments seeks to promote user trust, while many companies are using climate change reporting requirements to increase supply chain efficiency. Transparency on sustainability performance is often required by government and business customers worldwide.
- The internet isn’t going away. The hyper-transparency made possible by the internet leaves few hiding places and the ability to leak huge amounts of information (such as Snowden or the Panama Papers) makes proactive disclosures by companies a more attractive proposition.
Second, there is a need to reinforce and defend voluntary disclosure mechanisms to maintain progress on sustainability:
- If government requirements for transparency decline, then companies and their stakeholders need to invest in robust voluntary mechanisms. For example, repealing Section 1502 of the Dodd-Frank Act or removing federal procurement rules around human trafficking and forced labor could reduce the quality and availability of data available to companies, especially if their suppliers choose to scale back on their efforts. Collective industry and multistakeholder efforts (such as the EICC/CFSI and EITI) are vitally important countermeasures.
- Existing voluntary disclosures need to be defended. Recent growth in corporate disclosure on controversial topics—such as law enforcement requests for personal information from internet and telecoms companies—could face legal restriction by the new administration. It will be important to develop a strong narrative that defends the rights of companies to make these disclosures.
Third, these political developments are a warning sign that we in the business and sustainability profession would be wise to review our transparency models for conceptual robustness and alter course accordingly. A starting point is as follows:
- Pushing for issue-specific disclosure mandates based on SEC rules is not a sustainable strategy. The criticism that detailed disclosures on precise topics (such as conflict minerals) result in a large volume of information with limited value for “the reasonable investor” is real. Taking an issue-by-issue approach to mandatory disclosure overseen by the SEC is not a scalable model and is too easily dismissed by critics.
- For disclosures targeted at investors, the materiality principle is critical. An increasing range of sustainability issues, such as climate change, can be very material to investors. The case made by the Sustainability Accounting Standards Board (SASB)—that “the reasonable investor” will benefit from standardized, decision-useful information on material sustainability issues defined by the company, and that there is a role for the SEC in making this happen—is conceptually compelling. A recent report by the Task Force on Climate-Related Financial Disclosures makes a similarly strong case.
- Disclosure on issues of material significance to society but not of material significance to investors is essential—but they require disclosure mechanisms other than SEC requirements. There is more to life than return on capital employed, and it is perfectly reasonable to require companies to disclose information of material interest to society, even if not of material interest to investors. GRI (Global Reporting Initiative) and other reporting frameworks argue that society (or “the reasonable citizen”) will also benefit from standardized, decision-useful information on issues material to them. There is a strong long-term rationale to build these disclosure requirements into law, but using investor-oriented bodies (such as the SEC) to achieve these outcomes may not be the right approach.
The tide of history is on the side of transparency, and attempts to limit corporate transparency are futile—as well as being bad for business and the mission to create a just and sustainable world. Our advice is that companies should continue on the upward transparency path that existed prior to the Trump administration, while the broader sustainable business profession should continue developing transparency models that are sound, scalable, and conceptually robust.