Beyond the balance sheet: non-financial, material disclosures and the quest for sustainability.

• Author: Monterio, Brad J.

Disclosure needs have evolved beyond traditional financials over the past two decades to better meet today's needs of investors, analysts, regulators and other stakeholders. Consider the recent growth in non-financial disclosures about material, decision-useful environmental, social and governance (ESG) factors; as well as the rise in corporate social responsibility (CSR), sustainability and integrated reports.

Stakeholders--those with a vested interested in the actions, performance results and impacts of companies--want more three-dimensional information that indicates a company's overall contribution to society's sustainability. This is causing corporates to move beyond simply reporting on financial performance to include information about environmental impact and use of natural resources, labor practices, compensation models, community engagement, social programs, business models, strategy, plans for future growth and economic value, and so much more.

In short, this enhanced information set is intended to help stakeholders more accurately determine whether a business should have a "license to operate" and is sustainable for the long term.

Millions of small private businesses that are supply chain partners with publicly traded companies are increasingly being required to disclose sustainability information to government agencies and public companies (e.g., disclosures about conflict minerals, human trafficking, child labor). This is not merely a "big company" or public company issue. And California CPAs in these businesses need to take notice.

A Paradigm Flip: Value Outside the Financials

This quest for sustainability information is supported by Ocean Tomo's 2010 study, Intangible Asset Market Value, which found that more than 80 percent of a company's value today is seen outside of the financial reports in these other areas. This is a paradigm shift from just three decades earlier, indicating a comparatively rapid change within the much longer, 100-year history of financial reporting. The move toward non-financial disclosures is occurring on a global scale, with capital markets worldwide seeing similar, increased demand from stakeholders for material disclosures that include extra-financial information.

The growth in non-financial, sustainability disclosures benefits stakeholders by giving them a more comprehensive set of inputs to make decisions. However, this burgeoning area also introduces challenges, particularly for regulatory bodies charged with protecting the public interest. In the United States, the SEC serves this role, ensuring that the investing public has real-time access to reliable and relevant material information for investment decisions.

SEC Oversees Material Disclosure, Both Financial and Non-financial

As described on the SEC website, "The mission of the SEC is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation ... The laws...