New requirements for corporations on disclosing climate risks, hacks and more could affect your investments

Public corporations already divulge a lot of details about their operations, including a laundry list of risks and threats that could disrupt their operations. Yet more requirements could be coming.

That, plus a widening lens on how corporations are judged make investing even more complicated than it once was.

It's not just about products, profits and potential anymore. Aspects like governance, disclosures and reputation also matter. Here are some recent examples:

More details on climate risks

Corporations differ in how they impact the environment and are affected by it. That's why the federal Securities and Exchange Commission wants to see public companies explain in greater detail their climate risks and environmental impact.

The proposed additional disclosures for annual 10K reports and other documents could include more information on how climate change might affect a company’s business and strategy, how the company is governing for such dangers and more details about a corporation’s greenhouse gas emissions and climate-related goals.

“Many investors are concerned about the potential impacts of climate-related risks to individual businesses,” the SEC said in a fact sheet . Investors are seeking more information, too, and have "expressed a need for more consistent, comparable and reliable information," the agency said.

While many corporations already provide this information, current disclosure practices are “fragmented and inconsistent,” the SEC said. “The proposed rules would help issuers more efficiently and effectively disclose these risks."

But critics question whether new rules are necessary.

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“Thousands of companies already disclose their emissions and reduction targets under voluntary standards set by their own industries,” wrote Thomas Wade of the center-right American Action Forum. “No government involvement is required.”

The proposals, designed to further the Biden Administration's climate agenda, also could subject public corporations to $6.7 billion in aggregate additional spending over the next three years on consulting, legal and other services, estimates Verdantix, a research and advisory firm focused on sustainability issues.

The proposals are subject to a 60-day public comment period before SEC commissioners vote. If adopted in 2022, the new requirements generally would phase in over the next two to three years.

Faster hack disclosures possible

Another current SEC proposal would address cybersecurity threats to businesses. It would require public corporations to enhance and standardize disclosures related to hacks and breaches and provide more details on the strategies used to thwart them.

Of specific note, corporations would have to disclose information about material hacks or breaches within four business days.

The proposal, subject to a public comment period, also would require periodic disclosures regarding policies pertinent to cyber risks, management’s role in implementing them, the cybersecurity expertise of any company board members plus updates about previously reported incidents.

Although the SEC in a fact sheet said that such corporate disclosures have generally improved in recent years, as have management and government policies, “disclosure practices are inconsistent,” the agency added. “The proposed amendments are designed to better inform investors about a registrant’s risk management, strategy and governance and to provide timely notification of material cybersecurity incidents.”

Large corporations including Facebook, Microsoft, energy company Colonial Pipeline, meatpacker JBS and supermarket giant Kroger were victims of cyber attacks last year. In many instances, targeted companies had to make payments to hackers to safeguard or release imperiled data. Some victim corporations also suffered reputational damage.

Viewing firms through a wider lens

Big corporations represent many things to many people — investments, a source of jobs, partners for local communities, philanthropic supporters and much more. Among these many parties, stockholders have traditionally reigned supreme. After all, they are the owners of a public company.

But perceptions continue to evolve and a different view — one that attempts to satisfy many types of shareholders — could emerge, argues Peter Essele, an investment adviser at Commonwealth Financial Network. He cites the Russian invasion of Ukraine as providing an important example.

“For decades, shareholder primacy has reigned, which is the notion that corporations are only responsible for increasing shareholder value,” Essele wrote in a blog. “In that model, profits are maximized at all costs through open and free competition without deception or fraud. Put simply, corporations are solely motivated by profit potential. End of story.”

But when the war in Eastern Europe broke out, big corporations like BP and Shell divested at least some Russian assets or severed business ties, placing social responsibility over short-term profit, Essele wrote.

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If they listened only to stockholders, they would have focused primarily on profits and likely would have “weathered the negative public relations backlash" until it blew over, he said. Instead, many “aligned with long-term, sustainable value creation in an investment environment that places significant weight on intangibles like brand reputation.”

Essele sees it as the latest example of businesses shifting from a narrow focus on stockholders to a broader focus on all or most stakeholders. There are other signs, too.

For example, a record 529 shareholder resolutions were filed this year seeking to change corporate policies on environmental, social and governance issues, and more than 300 could progress enough to be voted on by stockholders at annual meetings, according to the Proxy Preview 2022 report. The 529 filings are up 20% from last year.

Hot-button issues include corporate policies on sustainable packaging, noxious emissions and pay disparities for women and minority-group members. Others involve climate-change policies, chemical footprints and corporate spending on political issues.

Does CEO character matter much?

One of the more interesting exchange traded funds to debut lately tries to profit from good reputations, specifically that of corporate CEOs and other senior executives.

ROC Investments, manager of the new Return on Character ETF (ROCI), argues that investors consistently undervalue the character of senior leaders, if they consider it at all. The fund defines character around four key traits — integrity, responsibility, forgiveness and compassion.

Those four pillars “are the same principles parents seek to instill in their children, and yet they are often found lacking in the financial world,” said Dan Cooper, founder and CEO of ROC Investments. “Far more than exterior characteristics like education, tenure, politics, age, industry or religion, it is these interior traits that determine character."

The investment firm cites academic research by consulting firm KRW International that claims to have found a consistent, measurable relationship between senior leadership character and an organization’s ability to execute, as seen in higher profitability, higher workforce engagement and lower corporate risk.

The fund's top holdings include Apple, Microsoft, Amazon, UnitedHealth Group and Berkshire Hathaway.

Reach the reporter at russ.wiles@arizonarepublic.com.

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This article originally appeared on Arizona Republic: Corporations could soon face requirements on climate impacts, hacks